In Defence of Marxism

"Asia's astonishing bounce-back"—this is the kind of headline that has started to appear in recent months. Having apparently shrugged off the effects of the stock markets crash in 1997, they are now anxiously looking for signs of revival in Asia and Europe as proof that the world has avoided recession. Once more the advocates of the so-called New Economic Paradigm proclaim the triumph of the free market. However, such triumphalism lacks any semblance of a scientific basis. The serious representatives of capital look with growing concern at the prospects for the world economy.

Let us begin with the recovery in Asia. The claims of a recovery are clearly exaggerated, and leave out of account the fact that the two decisive economies of the region are in deep crisis. On the exaggerated hopes of the bourgeois of a recovery in Asia, Stratfor comments in a tone even more caustic than usual:

"Asia is certainly doing better. After all, it could hardly be doing worse. However, in our view, we are experiencing two phenomena. First, we are seeing a cyclical upturn in a secular down turn. Nothing moves in a straight line and an upturn in Asia's general depression was inevitable, just as there were several upturns in the U.S. depression of the 1930s. However, key Asian nations like Japan and China have failed to solve their deep structural problems during the past year. Those structural problems severely limit their capital formation capabilities, in that each upturn creates money that is used for alleviating short-term debt problems, without creating long-term capital." (Stratfor Weekly Analysis, July 6 1999.)

In other words, what we are seeing in Asia is not the beginning of a lasting recovery, but only the kind of temporary rally which can be observed in the course of an economic downturn. The crisis in Asia, as we shall see, is by no means over. But the continuation of the boom in the USA has meant that the effects of this have been more long drawn-out than could have been expected. This and this alone is what is propping up the world economy at the present time. But precisely that is what is worrying the strategists of Capital.

How to explain the partial recovery of at least some Asian economies? The assertion that the capitalist economy moves in an uninterrupted cycle of booms and slumps requires no special comment. Even the deepest slump will be followed at a certain moment by a recovery. Thus, it comes as no surprise that after the crisis in the Summer of 1997, some of the Asian economies are showing signs of at least a partial recovery. As long as the American economy keeps growing and absorbing foreign exports, the Asian economies have the possibility of exporting their surplus of unsold commodities, a process greatly assisted by the devaluation of their currencies which makes their exports cheaper than before.

The other element in this equation is what Marxists call the law of combined and uneven development. Marx and Engels long ago explained that capitalism develops as a world market. This brilliant prediction is now completely demonstrated by the phenomenon of globalisation. But this does not mean that the unevenness of capitalism is abolished, or that booms and slumps take place simultaneously throughout the world economy. Capitalism does not develop at the same pace and in the same way in all parts of the world. Neither does the economic cycle take place in an absolutely smooth and synchronised way in all parts of the world economy. On the contrary. The most characteristic feature of capitalism is the anarchy of the productive forces. This remains true despite the dominance of the big monopolies, the intervention of the IMF and the Central Banks and the much-vaunted phenomenon of globalisation.

Even in the epoch of high-tech computerised economic and financial transactions, these processes require time to work their way through the world economy. It took one year for the devaluation of the Thai currency to work its way through to Russia. Russia defaulted on its debt in August 1998. In turn, the Brazilian devaluation took place in January 1999—one and a half years later. In Asia itself, the effects were more immediate, provoking one collapse after another, and generating an upsurge in the class struggle in South Korea, a serious political crisis in Malaysia and above all the beginnings of a revolution in Indonesia.

Deep-going processes affecting the world economy can take some time to work their way through. The effects of the slump in the USA in 1929 took some time to reach Europe. The French economy, which was relatively backward, only began to enter into a slump three or four years later, when the USA was already coming out of the slump. Such unevenness can be seen in every capitalist crisis, and this one is no exception. The phenomenon of uneven development, long ago explained by Marx and Lenin, is also understood by some bourgeois economists. Thus, Stratfor correctly points out that it is incorrect to speak of "Asia" as if it were a single homogeneous economic entity:

"The second phenomenon we are seeing in Asia is a differentiation between countries. It is no longer reasonable to think of Asia as a single entity when discussing economics. It was once reasonable, at least in the sense that almost all Asian nations were heading in the same direction upward. Today, they do not even share a general direction. Some seem to be truly recovering, like South Korea. Others are moving sideways. Some are still slumping. But most important is that, in our opinion, the two engines of Asia, Japan and China, despite recent stock market rallies and promising economic numbers, will not move forward without massive internal restructuring which is not under way. They are still trapped in the structural problems that caused the problem in the first place and because they are the powerhouses of Asia, the general trend will follow them in spite of divergences by individual countries. In our view, that trend remains downward. Thus, Asian demand will increase, but it is not clear that it will increase dramatically or that it will increase permanently." (Stratfor Weekly Analysis, July 6 1999.)

Despite all the clamour about the alleged recovery of Asia, the real position is not so rosy as the propagandists of the market would want us to believe. The partial recovery of South Korea and some other Asian economies does not mean that they have returned to the golden age of the "tigers". The recovery is quite feeble in comparison to the past. They have not even made up for the fall in production over the past two years. The economies of East Asia are still operating well below capacity. Unemployment remains high and there are still huge stocks of unsold goods. And even this recovery is far from guaranteed. A downturn in America—or even a devaluation of the Chinese currency—would throw the whole area into new and even deeper turmoil.

Although there has been growth in South Korea, Thailand and Malaysia (and even some growth in Indonesia) in the first half of this year, the two main economies of Asia—Japan and China—remain entangled in insoluble contradictions. But without a serious and lasting upturn of these economies, the future of Asia must remain shrouded in uncertainty and subject to every vicissitude of the world economy, especially the USA. This is the only thing that maintains the present recovery—weak as it is. And this is not going to last.

A Crisis of Overproduction

The crisis in Asia is a classical crisis of overproduction. In its issue of 20th February 1999, The Economist wrote:

"Thanks to enormous over-investment, especially in Asia, the world is awash with excess capacity in computer chips, steel, cars, textiles, ships and chemicals. The car industry, for instance, is already reckoned to have at least 30 percent unused capacity worldwide, yet new factories in Asia are still coming on stream."

The uncertain prospects of Asia are grasped by the most serious bourgeois commentators. The Economist (21/8/1999) comments:

"The obvious risks to this recovery come from outside South-East Asia. Since a stirring Japanese economy has helped provide some demand for everything from electronics to tourist services to timber, a reversal there would be bad news. If China, which has kept growing through the downturn, were to have a crisis of its own, accompanied by a sharp devaluation of its currency, the yuan, regional confidence would at the least, take a knock. Should America's economy—and especially its demand for electronics—falter, it would also deliver a sharp blow. And then there is the financial havoc that might be caused by a Wall Street collapse."

This pessimistic outlook is shared by other strategists of Capital. In its third quarter forecast (26/7/1999) Stratfor underlines the point:

"In the last few weeks, major media have announced the end of the Asian economic meltdown. On the whole, this is not at all the case. Only two senses exist in which this view is correct. First, Asia has already melted down. Therefore, the meltdown is over. That is far from saying there is a real recovery in Asia. Put differently, the Asian crisis is over, in the sense that it is no longer a crisis, but a long-term, intractable malaise. Second, there is recovery in some countries, but not in Asia as a whole. In fact, our view continues that the two largest economies in Asia, Japan and China, are heading more deeply into unrecoverable depressions."

These are the thoughts of the most far-sighted capitalist analysts on the perspectives for Asia.

China in crisis

The fact that China continues to grow at a fast pace—about eight percent—is taken as a positive sign. In fact, it is a serious problem. A large part of the goods which are being churned out by Chinese industry cannot be sold, either inside China or in the rest of Asia. Massive overproduction now exists in China. This is shown by the fact that Beijing has placed caps on the production of a range of consumer goods, after price floors and export subsidies failed to halt plummeting prices.

The ban which began on September 1, includes products ranging from video compact disk players, microwave ovens, refrigerators, and air conditioners, as well as bicycles, toothpaste, plastic bags, candy, salt, apple juice, and liquor. In addition, an embargo has been placed on any further construction of luxury apartments, hotels, department stores, and office buildings. Stratfor comments: "The decline in demand extends to real estate, and China is facing a glut in that market as well. According to the Associated Press, the once booming coastal city of Shanghai has office-vacancy rates of up to 70 percent. The boom that has dotted Shanghai's skyline with cranes and new buildings has gone bust, and if Shanghai cannot attract business tenants, China's interior can only be in full economic reversal."

Stratfor comments: "China's domestic market is stagnant, with citizens worried about looming unemployment stashing their money under mattresses rather than spending it. With a glutted market, China's producers are slashing prices, thus threatening to make those unemployment fears come true by driving themselves into bankruptcy. Beijing has already attempted to slow the deflationary spiral, imposing price floors on some products.

"China is stuck in a crisis of overproduction and underconsumption. Consumer confidence has collapsed, and with it domestic demand. Meanwhile, despite generous tax subsidies on exports, China has been unable to export its way out of the crisis." (Stratfor, August 1999, our emphasis.)

The conclusion is inescapable. Hit by a deep depression and a collapse in domestic demand, China will probably be forced to resort to devaluation. But a devaluation of the yuan would spark off a new wave of competitive devaluations in Asia which would shatter the present feeble recovery and send new shock waves throughout the world economy.

However, it is not clear that even a devaluation of the yuan can solve China's problems. Beijing has so far resisted the devaluation because of the effect on China's foreign debts and the Hong Kong dollar. There has been some improvement in exports in the last two months, and they will try to put off the evil day as long as possible. But the outcome seems unavoidable. The trade dispute between China and America is growing increasingly bitter. The right-wing Republican majority in Congress, forever inclined to isolationism, is determined to block China's entry into the World Trade Organisation. Protectionist tendencies will inevitably increase in the event of a slump, or even a downturn in the US economy. In such a climate, competitive devaluations will be on the order of the day.

A big question mark now hangs over the future of capitalism in China. Unlike in Russia, the Chinese bureaucracy has kept power firmly in its hands. Terrified of a revolutionary explosion by the workers and peasants, it is entirely possible that the bureaucracy will swing back to a policy of state ownership and centralised planning. Already foreign capitalists are losing faith in the Chinese miracle. For the first time in twenty years there has been a fall in foreign investment., although it remains high in absolute terms: 45 billion dollars in 1998 and about 30 billion in 1999. But relative to the size of the Chinese economies even such sums are wholly insufficient to solve the fundamental problems. The authorities are well aware of the potential for social unrest and revolutionary developments. They are under pressure to close state owned industries, but fear the consequences of mass unemployment. The private sector is in no position to absorb the millions of workers who would be made unemployed.

In the event of a serious slump in world capitalism, this process will be enormously accelerated. Stratfor draws the necessary conclusion:

"China is running out of options. If devaluation does not work, there is still the potential for internal currency controls—an option potentially catastrophic for China's foreign joint venture partners and foreign companies registered in China, using Chinese banks, and trading in yuan. And along with greater state control, there is the opportunity for recriminations. China has already declared war on corruption, prosecuting some 244,000 "economic crimes" in the first half of 1999—a 28.6 percent increase over the first half of 1998. Beijing's piecemeal attempt at economic reform without social disruption has failed. Now comes the crackdown and an attempted return to central control." (Ibid.)

Japan—the recession continues

The collapse of the Japanese model in itself represents a fundamental turning-point. For practically the whole of the post-war period, Japan acted as one of the main motor forces of the world economy. Now Japan has been in crisis for a decade. Japan already finds itself in a deflationary crisis—the first advanced capitalist country to experience such a phenomenon since the 1930s. This is a stern warning to all the others. For the last three years, consumer prices in Japan increased at an annual rate of only 0.8 per cent. This is not a reflection of growing productivity and lower costs, but of weak demand and excess capacity (over-production). The situation in relation to producer prices is even more dramatic. These have fallen for seven out of the past nine years. Average wages in manufacturing in Japan fell 3.2 percent in the year to July (1999).

Bourgeois economists have elaborated a system to measure a country's economic performance by comparing its present economic growth with a figure which is supposed to represent its average historical sustainable growth rate. Despite its somewhat arbitrary character, this method may give a rough idea of the problems facing Japan. Japan's output gap is now eight per cent—a very large figure, and bigger than any other advanced capitalist country since the 1930s. Thus, the biggest economy in Asia is stuck in recession. Any serious shock will push it over the brink. In the given conditions, this would mean a deep slump, characterised, as in the 1930s, by falling demand, falling prices and falling bank lending, leading to a slashing of productive investment and general economic stagnation and decline.

Of particular concern to the rest of the world—and the USA in particular—is the threat of a collapse of the Japanese financial system. Since Japan is the biggest lender in the world, the calling in of loans could precipitate a general collapse of the world financial system, with catastrophic effects. The heavy dependence of the world economy on the USA creates an extremely lop-sided position which threatens to destabilise the whole. Precisely because the US ruling class realises that it cannot maintain this situation indefinitely, Washington has put heavy pressure on Japan to "take some of the strain" by reflating its economy to absorb more exports from Asia. Repeated injections of capital by the state—amounting to about one trillion dollars over the last six years—has turned Japan into one of the most indebted countries on earth. Yet despite all the huge amounts of money that the government has poured into the economy, Japan still remains mired in recession, as Stratfor admits:

"Japan reports preliminary figures showing its economy contracted once again last quarter, ending what appeared to be a recovery. As we have argued, Japan has been experiencing a mid-term bounce in a long-term decline. The essential problem is the low rate of return on capital. In other words, its profits are too low to fully capitalize on its economy; it cannot attract outside investment, nor does it have the structural means for integrating large-scale investment. The only way out of this dilemma would be an agonizing restructuring of Japan's economy, including massive bankruptcies, unemployment and misery. This would last for a generation." (my emphasis, AW)

This is really the most extraordinary perspective. The country that was the powerhouse of world capitalism, the mightiest, most successful and prosperous nation in Asia is now faced with a future of "bankruptcies, unemployment and misery" for a whole generation! Given the colossal strength of the Japanese proletariat, that is a finished recipe for revolutionary developments in Japan in the coming period.

Heavy pressure is being put on Japan to reflate its economy at all costs. The reason for this pressure is that the Americans realise that the whole world economy now depends exclusively upon them—a clearly untenable situation. They would like Japan to take part of the strain, absorbing some of the excess products which are swamping the Asian markets at the present time. But such advice is easier to give than to put into practice. Over the last few years the Japanese have spent approximately one trillion dollars in a vain attempt to stimulate their economy. Practically the only effect has been to plunge Japan into debt. This cannot go on indefinitely. The existence of huge debts will create an objective barrier to the further expansion of public spending and credit, which, in any case, has failed to achieve the expected results. The fate of Japan should provide a sombre warning to those left reformists who think it is possible to find a way out of capitalist crisis by going back to the discredited theories of Keynesianism.

Despite the injection of vast sums of public money, the Japanese economy is still extremely fragile. In the first seven months of 1999, despite the fact that nominal interest rates in Japan are close to zero, bank lending fell by a record 6.5 per cent. The reason for this apparent paradox is very simple. Japanese banks and companies are already heavily in debt, so why borrow more? Moreover, if Japanese companies invest new sums of money in expanding productive capacity, where will they sell their goods? 40 per cent of Japan's exports went to Asia. That market has now collapsed. With no serious recovery in sight, it makes no sense to demand of the Japanese capitalists that they increase production.

True, some economists are hoping that the huge sums of public investment will pull Japan out of recession. They point to the fact that the Japanese economy this year has registered some growth. But we are talking about a figure of only 1.5 percent in an economy that in the past frequently experienced rates of growth of 10 percent or more. This is a miserable figure. To put this in its context, the 1,5 percent growth rate means that Japan's GDP is still lower than it was in 1997! The present feeble rally does not presage a new upswing in Japan, but only a temporary rally before a new fall.

Although it is possible that the present rally may last for a few months, it must eventually end in a new and even steeper downturn. Quite apart from the fact that it has an entirely artificial basis in state expenditure and public indebtedness, which cannot be continued indefinitely, there are objective reasons for Japan's economic difficulties which cannot be easily solved. The low rate of return on capital and the collapse of its main market in Asia means that Japan's economy is unlikely to experience a serious recovery in the near future. On the contrary, it is more likely to contract not only relative to the global economy but also in real terms. The general picture is that of a downward spiral. However, this is also not a straight line. Within the general picture of downswing, there can be temporary rallies, like the present one. This is quite normal and inherent to the nature of capitalist cycles. The downswing itself can give rise to opportunities for buying and selling because economic contraction produces a fall in prices. As prices fall, apparent buying opportunities both for consumers and businesses, appear to present themselves, as Stratfor explains:

"Indeed, demand waits for further declines, then clusters at the low point, creating temporary bounces in economic activities. These bounces cannot be sustained, because they increase the utilisation of extremely inefficient enterprises. This reduces the aggregate rate of return on capital, shutting down effective demand. The main trend resumes.

"Put simply, there is real demand in Japan but it waits until prices reach their low points. Japan is turning into an economy where increases in scavenging activities constitute the main engines of growth. When scavenging is satisfied, the economy resumes its main trend: contraction. That is now happening in Japan. The cyclical bounce appears to be over, and the main trend toward contraction resumes. There is no immediate prospect for a shift in this situation."

Is there a way out of this impasse? Stratfor considers the options before the Japanese capitalism and reaches the following interesting conclusions:

"If depression is unacceptable, then Japan has no viable policy. Japan must keep interest rates near zero. If it raised interest rates, necessary to induce capital formation and foreign investment, it would trigger a wave of bankruptcies while driving up the value of the yen. That, in turn, would cut into exports, slashing cash flow and destabilizing the banking industry once again. If it keeps interest rates low, then it discourages capital formation and encourages inefficiencies in the economy."

It is quite amusing to follow the twists and turns of the bourgeois economists in this situation. The threat to the deep slump on a world scale has induced them to engage in all kinds of acrobatics and somersaults in which the positions which they held so vehemently yesterday have been gaily abandoned in favour of new nostrums which hold just as little water as the old ones. Thus, Paul Krugman, a prominent economist at MIT demands that the Japanese expand their economy by printing money. "Japan needs an irresponsible monetary policy". Like the "daring young man on the flying trapeze" these so-called experts fly through the air with the greatest of ease, in their frantic efforts to find a way out of the impasse. In the old days the Roman Catholic Church used to say "all roads lead to Rome". Now the bourgeois economists can draw the conclusion that all roads lead to ruin.

It cannot be excluded that the economic collapse may start in Japan, not the USA. This would particularly be the case in the event of the collapse of the Japanese banking system which would shake the world to its foundations.

America—the key to the world economy

The key to the world economy, however, remains the USA. The dependence of the rest of the world on the transatlantic giant is now total. The boom in the USA has lasted for a record period of about eight years, and, defying all predictions to the contrary, seems set to continue. At present there is a major consumer boom, full employment and a soaring stock exchange. These are precisely the kind of symptoms one would expect to see at the peak of a boom. Does not all this invalidate the Marxist analysis?

In every boom in history, there have been illusions that the magical formula had been discovered which could put an end to the boom-slump cycle forever. Now this claim is made once more by the supporters of the so-called New Economic Paradigm. What are these people saying? It is alleged that the present economic cycle has an entirely different character to past cycles. Phenomena such as globalisation and information technology are said to have transformed the economy in such a way as to make recessions a thing of the past. The combination of high growth driven by higher productivity, accompanied by low inflation, high profits, near full employment and a booming stock market, will, it is claimed, provide the magical recipe that will create a virtuous cycle of never-ending growth.

It is true that the present cycle of about eight years is long by post-war standards. However, in the first place, the capitalist cycle historically has always been somewhat elastic. In Marx's day it was approximately ten years, so that the present boom is by no means unprecedented from an historical perspective. Secondly, the reference to an eight year expansion is somewhat misleading, since the present boom got off to a very slow start. Initially, as we pointed out, there was very little productive investment. Only in the last four or five years (basically since 1995) has productive investment in the USA picked up significantly, and then, as we shall show, it has been limited to only one sector of the productive process—information technology (IT). Very great claims are being made for information technology. Indeed, in the longer term, there are very big implications here, especially for a future socialist planned economy on a world scale. But as far as the present, there are no grounds for ascribing any miraculous or even particularly revolutionary qualities to it.

In every cycle there are always new inventions which provide new fields for investment. Already in the pages of the Communist Manifesto, Marx and Engels explained that the capitalist system can only exist by constantly revolutionising the means of production. This cycle is no different. But the grand claims made for information technology hardly bear close examination. It cannot be seriously maintained that the impact of this technology will be more revolutionary than, say, the use of steam power in the Industrial Revolution, or the railways at the end of the nineteenth century, or other inventions like the steam ship, the telegraph, the telephone, radio, electricity, or the internal combustion engine, mass production, chemicals, plastics, aeroplanes, television, and a host of others. The impact of almost all of these was greater than information technology, or certainly not less. In fact, despite all the grand claims about information technology, there is no real evidence that it has had a big effect on the US economy as a whole.

In quantitative terms, the amounts of money invested in information technology cannot be compared with, say, the amounts invested on the railways in the USA in the last decades of the 19th century. As a driving force for the US economy, the new technology does not begin to compare with it. Let us look at the figures. Business investment has gone up in the USA over the past six years by a considerable amount, from 13 percent of GDP to about 18 percent, but is, in fact, confined to a very narrow part of the US economy, namely information technology—or, to be more accurate, computer manufacturing. To put things in their context, this sector amounts to just over one percent of US manufacturing output.

The enormous potential of the new technology is not in doubt. Production planning is made easier; inventories can be reduced; delivery lead-times can be slashed; the nature of distribution itself undergoes a transformation; it points the way to all kinds of innovation in production; and, last but not least, there is easy access to up-to-date information for all. This has profound implications for the future of society, and not only in the field of production. But we limit ourselves here to the present use of IT within the narrow confines of capitalism and the profit-driven market economy. In principle, the new technology should increase the flexibility of capital goods and make capital investment more productive, thus encouraging greater investment and the substitution of capital for (scarce, expensive) labour. However, in real life, things are not quite so simple! Henry Ford once observed: "I am not in business to make cars, but to make money." The aim of the modern captains of industry is no different. As Marx explains, the first capitalists who enter a new field of investment can make huge super-profits. Bill Gates, now the richest man on earth, is a good example of this. But soon all the others pile into the same field in a desperate scramble for profits. The rate of profit soon evens out to the average. This stage has now been reached in the USA where the earlier fabulous profits in IT have given way to stagnation and even decline.

Marx explained the fundamental law of capitalist economics: namely, that the profits of the capitalist are only the unpaid labour of the working class. For this very reason, the switch from labour to machinery (although in itself progressive and necessary) eventually gives rise to the following contradiction: that the capitalist cannot squeeze an ounce of surplus-value from machinery. Only human labour power has the magical property of producing new value. For this reason, the introduction of labour-saving machinery, which logically ought to lead to a reduction of the working-day, the prior condition for the genuine emancipation of human beings from wage-slavery, in practice always leads to an increase of exploitation and specifically to an increase of the hours worked (absolute surplus value) or the intensity of work (relative surplus value), or both.

It is true that the new technology has given rise to a notable increase in productivity in the sector concerned. It could hardly be otherwise! The main purpose of all new technology is to increase productivity through an economy of labour-time. Otherwise there would be no point investing in it. In the past decade, value-added per worker in the information technology sector has gone up at an annual average of 10.4 percent: a very considerable increase. But what is not clear is that this has had an effect in boosting productivity in the US economy as a whole. The statistics rather give the opposite impression: that the last period has seen no improvement in productivity in the US economy taken as a whole. Investment in computers in the USA increased 14 times in the course of the 1990s. But other investment rose hardly at all. The boom in IT has therefore been the exception, not the rule. This fact reveals the extent to which growth in the USA is dependent on a single sector, and must stand or fall together with it.

Robert Gordon, professor of economics at Northwestern University, states:

"The productivity performance of the manufacturing sector of the US economy since 1995 has been abysmal rather than admirable. Not only has productivity growth in non-durable manufacturing decelerated in 1995-99 compared to 1972-92, but productivity growth in durable manufacturing stripped of computers has decelerated even more." (The Economist, 24/9/99.)

The advocates of the New Economic Paradigm claim that the gains in productivity represent a "secular trend" in the US economy. In fact, it appears that productivity growth is now reaching its limits. This is shown by the most recent figures. After a big increase in the first quarter of 1999 (3.6 percent) it fell back sharply to a mere 0.6 percent in the second quarter. This exposes the hollowness of the assertion that the New Economic Paradigm means that productivity is set to increase almost indefinitely. In reality this assertion is based on no empirical evidence whatsoever.

In every boom we see the same irrational enthusiasm of those involved in the chase after super profits, which, for the majority, turns out to be an illusion. At a certain moment, over-investment leads to over-production. As Marx explains:

"The ultimate reason for real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Marx, Capital, vol. 3, pp. 472-3.)

This stage has already been reached in Asia which is afflicted by a general over-production of goods: computers, chips, cars, steel, textiles, videos, televisions, etc. This in turn leads to a general fall in prices, and not only in Asia. The collapse of the Asian market and a flood of cheap goods on world markets (particularly the USA) puts further pressure on prices in the USA itself, where the market is becoming increasingly crowded. It is at this stage in the cycle that the contradictions of the capitalist system of production begin to manifest themselves. The new technology has by no means abolished these contradictions.

Limits of capitalist accumulation

Despite appearances to the contrary, in the foundations of the system, the old inescapable laws are quietly but firmly asserting themselves. As capital accumulates, the proportion of constant to variable capital increases, giving rise to a change in the technical composition of capital. In absolute terms, variable capital may increase (more workers may be employed). But the proportion of living labour in relation to constant capital will decline. However, the increase in the productivity of labour is accompanied by a decline in the share of variable capital (wages). And although nominal and real wages may rise, the rate of exploitation increases.

The frantic race after profit inevitably leads to overproduction. Overproduction always makes its appearance at the peak of the boom, preceding the collapse. Firms try to get rid of their unsold stocks of goods. There is a frantic bout of price-cutting, discounting, even selling at prices below the cost of production (dumping). At the same time, production keeps expanding, driven by competition, further aggravating the problem of overproduction. This is particularly the case with the new technology, which relies heavily on the rapid production of new models, more powerful computers, etc. But in a situation where most families already possess at least one computer, this process must eventually reach its limits. The profits obtained by upgrading existing computers do not justify the high costs of research and development, new plant and so on.

There are signs that we are approaching this phase in the cycle. Already in the USA we see the existence of low capacity utilisation. It is not possible to raise prices, given the existence of huge stocks of cheap products in Asia and competition between the US manufacturers themselves. On the other hand, with near full employment and even labour shortages in some areas, wages will tend to rise. In the past few months, the price of oil and other raw materials have started to recover. On the other hand, the strong dollar which helped to keep prices down has begun to falter. Profit margins are under assault from all sides. In this context, the threat of a rise in interest rates threatens to provide the coup de grace which will puncture the boom and lead to a collapse of investment.

The new technology and new production techniques may aggravate the problem of overproduction, but they certainly cannot avoid it. The big computer producers rely heavily on a rapid turnover. And since each producer is engaged in a fierce struggle for market share, they are constantly expanding potential supply, a process which must eventually produce a glut of computers on the market and falling prices. This can already be observed in practice, and must express itself at a given moment in falling profits. On the other hand, new methods of production, such as just-in-time production, which are intended to match production and sales exactly through inventory controls, have signally failed in their objective. In theory this method avoids the building-up of stocks which leads later to a cut-back in production. In practice, however, it does not work. The level of stocks kept by a firm is lower, but stock-building turns out to be just as volatile as ever, and therefore just as capable of depressing growth as before. Swings in stockbuilding were, in fact, a major factor in the 1990-2 recession in both Britain and America, accounting for three-fifths of the drop of America's GDP. In a socialist planned economy it would be possible to ensure that supply and demand balanced out, avoiding wasteful and destructive crises of overproduction. Under the anarchy of capitalist production, such crises are a necessary and unavoidable condition of existence—the New Economic Paradigm nothwithstanding.

The rate of profit

Contrary to the grandiose claims made on its behalf by the theorists of the New Economic Paradigm, there is nothing either miraculous or even very special about information technology. Of course, it is a wonderful development of human knowledge and technique, pregnant with marvellous possibilities for a future world socialist planned economy. But for the capitalist system it is just another field of investment and a way of getting rich quick. And some have got very rich very quickly indeed. As always, those capitalists who are the first to enter a new field of investment can make super profits far above the average rate of profit, at least for a time. But after a while others follow suit. They all pile in, invest, build new plant and produce and sell until prices begin to fall and the rate of profit averages out and falls to a more normal level.

The profits of the capitalists can only come from the unpaid labour of the workers. The increased organic composition of capital inevitably leads to the tendency of the rate of profit to fall. This tendency has been observed by many bourgeois economists, who were, however, unable to explain it. Marx was the only one to provide a scientific explanation of this phenomenon. But Marx also explained that the law was by no means absolute, but only a tendency that manifested itself in the long run. There could be whole periods when the tendency might not be observed because of countervailing tendencies in the capitalist economy. As a matter of fact, the capitalists can put up with a falling rate of profit, as long as the mass of profit is maintained. But at a certain stage the mass of profit starts to fall. At this point there is a collapse of investment, and a slump commences.

The question is therefore not why there are crises in capitalism, but rather why the capitalist system is not always in crisis. There are, in fact, a series of methods whereby crises can be postponed. The whole history of capitalism is a history of attempts to overcome its fundamental contradictions. Capitalism, as Marx explained, is indeed capable of solving its contradictions in the short run—but only at the cost of reproducing them later on a far bigger and more explosive scale. This remark is very relevant to the present situation in world capitalism.

In the third volume of Capital, Marx details the various ways in which the capitalists can counteract the tendency of the rate of profit to fall. The tendency can be combatted by various means: a) the cheapening of commodities, b) increased exploitation of labour (through absolute and relative surplus value), c) increased turnover, d) world trade (especially with colonial countries). All these factors have been in play in the present boom. The application of new technology has led to a cheapening of the elements of production (e.g. computers). There has been a lengthening of the working day and a remorseless pressure on the workers through speed-ups etc. The new technology itself has greatly added to this exploitation. Things like mobile phones, pagers, laptop computers enable the boss to enslave the workers (including the white collar workers) completely and keep them at his beck and call twenty four hours a day. The working day can be increased almost without limit. Turnover has increased. The exploitation of the world market ("globalisation") permits a huge increase in production and sales. Trade with the underdeveloped countries allows the advanced capitalist countries to exchange less labour for more.

Cheapening of elements of production

First, let us consider the cheapening of the elements of production. This is related to the productivity of labour. A relatively smaller number of workers produce a bigger amount of commodities. This remains true even when the number of workers increases in absolute terms. Let us quote a specific example. NAISTAR of Indiana is a major engine producing company and one of the top 10 manufacturers in the USA. Since 1995 the company spent 285 million dollars on improvements in one plant (on computer based new equipment). The results were as follows: in 1994 900 workers produced 175 engines a day. In 1999, 1,900 workers produced 1,400 engines a day. That is to say, the workforce doubled, but production went up eight times.

The increased productivity is achieved partly—but only partly—through the use of new technology. Machinery wears out through use (or disuse), but also through what Marx called moral depreciation—that is, obsolescence. Under modern conditions, machinery and plant become obsolete even more quickly than in the past. Given the huge sums involved, the capitalists must ensure that their machines are utilised to the fullest extent. This is the objective reason for the extension of the working day and the remorseless pressure on the workers to work harder. Having once spent such huge sums, the overriding concern of the capitalist is to recover their outlay and make a profit. The ways in which this is done have not varied substantially since the days of Karl Marx. Merciless pressure is exerted on the workforce to work harder, to strain every nerve and muscle and to work long hours of overtime in the cause of surplus value. In this way, profits can be made, at least initially.

The essence of productivity is to achieve an economy of labour time—to achieve a shortening of the time needed to produce a commodity. But the increase in productivity leads to further contradictions. Marx explains:

"The productiveness of machinery is, as we saw, inversely proportional to the value transferred by it to the product. The longer the life of the machine, the greater is the mass of the products over which the value transmitted by the machine is spread, and the less is the proportion of that value added to each single commodity." (Marx, Capital, vol. 1, 15; 3b.)

New value cannot be added by machinery (constant capital), but only by the labour of the working class (variable capital). By reducing the element of living labour, the application of new machinery thus has the effect of cheapening the price of commodities. If productivity rises, a smaller amount of labour is expended on the production of an individual commodity, which thus encapsulates a smaller amount of value. Thus, its price will fall. This phenomenon can be observed in every capitalist cycle, and the present one is no exception. Incidentally, the cheapening of the price of commodities also has the effect of holding down wages, since a smaller amount is necessary for labour to reproduce itself.

For example, the continuous fall of the price of integrated circuits means that the price of a top-of-the-range mobile phone has dropped from $1,000 to $350 over the past four years. Similar examples can be cited across the entire range of new technology. The Financial Times points out that "in 1996 and 1997, the last years for which detailed data are available, falling prices in IT-producing industries lowered inflation in the US by an average 0.7 percentage points, contributing to the remarkable ability of the US economy to control inflation in a period of historically low unemployment." (The Financial Times, 1/9/99.)

This has important implications for the economy as a whole. For workers as consumers it means that a whole range of goods that were previously inaccessible because of high prices now become normal household goods. This benefits the capitalists in two senses. Firstly, the market for their products is considerably widened. Secondly, the cheapening of commodities also contributes to the cheapening of that most precious of all commodities, labour power, holding wages in check. Real wages increase to the degree that prices fall, and the illusion is created (assiduously cultivated by the defenders of the system) that workers are better off than is really the case. All this, in turn, tends to counteract the tendency of the rate of profit to fall.

At the same time, the capitalists boost their profit margins by increasing absolute and relative surplus value. One of the most crying contradictions of the present period is that the application of new technology which ought to signify a reduction of the burden of work has meant precisely the opposite. One scientist recently expressed this phenomenon in graphic terms: "There are more time-saving devices now than in the whole of history. And there is no time." Workers are working themselves to death, not only in the factories but in offices, hospitals and classrooms. All the charm has been taken out of work which everywhere is being transformed into mindless drudgery. Under capitalism, in Marx's words, the introduction of new technology becomes a recipe for "lengthening the working day beyond all bounds set by human nature".

In all capitalist countries, but especially the United States, the working day has been lengthened in the last period, with obligatory overtime, weekend working and the abolition of breaks and reduction of holidays. The result has been a colossal increase in sweated labour, stress and agony of toil. Where work at least for some was once a pleasure and a means whereby men and women realised their potential as human beings—albeit to a limited extent—it has become transformed into an absolute nightmare. The obsession with so-called productivity (i.e. profitability) has taken over not only the production belt but also the hospital, the doctors' surgery and the classroom.

From the capitalist's point of view, this is all good news, since the cheapening of the elements of production is one of the principal devices whereby the rate of profit is maintained or increased. But this also has a downside. Since the profits of the capitalist class consist of the unpaid labour of the working class, the wholesale replacement of labour by machinery must inevitably lead to a loss of surplus value, as Marx explains:

"Now however much the use of machinery may increase the surplus labour at the expense of the necessary labour by heightening the productiveness of labour, it is clear that it attains this result only by diminishing the number of workmen employed by a given amount of capital. It converts what was formerly variable capital, invested in labour power, into machinery, which, being constant capital, does not produce surplus value. It is impossible, for example, to squeeze as much surplus value out of two as out of twenty four workers. If each of these twenty four men gives only one hour of surplus value in twelve, the twenty four men give together twenty four hours of surplus value, while twenty four hours is the total labour of the two men. Hence the application of machinery to the production of surplus value implies a contradiction which is immanent in it, since, of the two factors of the surplus value created by a given amount of capital, one, the rate of surplus value cannot be increased except by diminishing the other, the number of workmen. This contradiction comes to light as soon as, by the general employment of machinery in a given industry, the value of the machine-produced commodity regulates the value of all commodities of the same sort, and it is this contradiction that in its turn drives the capitalist, without his being aware of it, to excessive lengthening of the working day, in order that he may compensate the decrease in the relative number of labourers exploited, by an increase not only of the relative but of the absolute surplus value." (Marx, Capital, vol. 1. 15; 3b.)

How well these words explain what every worker knows! That the present boom has been at the expense of the nervous systems and the muscular stress and strain of the working class. All the smart talk about the alleged "productivity explosion" ultimately boils down to this. However, this increase in productivity (which was in any case limited to just one sector of the economy) has now reached its limits. This was always a question of extracting extra surplus value out of the sweat and strain of the workers, and this has physical limits. The Economist (25/9/99) spells out the position quite blatantly:

"If companies were caught on the hop by the unexpected, and unforeseen strength of the American economy, one way to keep pace with demand (especially in a tight labour market) would be to work existing employees harder." (Our emphasis.)

Thus, the whole issue of productivity boils down, as always, to the old remorseless pressure on workers to produce more in a shorter space of time. This phenomenon can be seen everywhere. Work has become a nightmare, an agony of toil devoid of all enjoyment or human satisfaction. The greed of Capital for surplus value is insatiable. The introduction of new technology is therefore not a means to reduce the burden on working people but on the contrary, a pretext to squeeze the last ounce of unpaid labour from them. But the emergence of near full employment, and in some cases even labour shortages means that it will no longer be so easy to impose further intolerable burdens on the shoulders of the workers. Having already gone through the process of downsizing, outhousing, flexibility, just-in-time-production and the rest of it, the capitalists will find that they cannot squeeze the workforce any further without provoking massive labour unrest.

Commodity prices and the colonial revolution

Another way in which the rate of profit can be increased is through the exploitation of the ex-colonial countries. The systematic plundering of the colonial countries has always been a feature of capitalism from the sixteenth century onwards. But today this super-exploitation has reached new and unprecedented levels. The fact that the peoples of Asia, Africa and Latin America have, through their heroic struggles, attained formal independence does not signify an end to exploitation and oppression. On the contrary. On a capitalist basis these countries are more enslaved today, more dependent on imperialism, than what they were fifty years ago. The only difference is that the old direct military-bureaucratic rule has been replaced by indirect domination through the mechanism of the world market and debt.

The domination of world trade by a relatively small number of big multinational companies armed with vast resources and backed in the last analysis by the armed might of the USA and other imperialist powers, means that they can exert pressure to reduce the price of raw materials and other exports of the Third World countries. Even without this, the exchange of goods between the underdeveloped and advanced capitalist countries is always unequal. To use Marx's expression, more labour is exchanged for less. It is a game the poor countries cannot win. They are condemned to fall ever more deeply into debt. And then they are compelled to borrow from their masters, paying huge sums of interest, which guarantees that they sink ever deeper into misery. To the western capitalists, however, this is an extraordinary stroke of good luck. The low price of raw materials is just another way in which the elements of production are cheapened, and the rate of profit increased. If this means starvation and destitution for millions of human beings, so be it. That is no concern of ours. They should learn to administer their affairs better and follow the good advice of the IMF!

To a certain extent, the post-war economic upswing in the advanced capitalist countries was paid for by the former colonial countries. The imperialists derived vast super-profits from the exploitation of the poorest countries on the planet. The collapse of oil and other commodity prices in the early 1980s was one of the reasons behind the boom of the 1980s and the long-term surge in U.S. stock prices. Marx long ago explained that the development of world trade—particularly trade with the colonial countries—serves to cheapen the elements of production and thus increase the rate of profit. The decline in the cost of commodities decreased the cost of production and the cost of living in the industrialized countries, facilitating capital formation while easing pressure caused by consumer demand.

The fall in commodity prices was achieved at the expense of the poorest people on earth. Through the world market and the unequal terms of trade, the advanced capitalist countries exchanged more labour for less. This has led directly to the third-world debt crisis, which in turn subjects the colonial peoples to a new form of looting in the form of high interest rates. The blood, sweat and tears of hundreds of millions of men, women and children are coined into gold for wealthy parasites, while the substance and wealth of nations are drained away in a futile and never-ending struggle to service the debt. This is a finished recipe for a new and explosive stage in the colonial revolution in the next period. Yet it is presented as a boon by the apologists of Capital.

US imperialism is the mightiest economic and military power the world has ever seen. But it has not used its power wisely. On the contrary. Guided by the basest motives of self-interest and short-term gain, it has used its muscle to compel the whole world to dance to its tune. The insane race after deregulation under the banner of so-called "liberalisation" has introduced a new and explosive element of instability into the world economy. The big monopolies, with the enthusiastic backing of Western governments, have demanded that third-world governments dismantle all tariffs, throw open their markets, privatise their industries and utilities. In this way, the colonial countries have been placed at the mercy of imperialism. Their economies have been plundered; their national industries dismantled. The true face of this "liberalisation" is barefaced robbery and the total enslavement of the peoples. This is a harsh and bitter medicine which will have serious consequences later on. And the USA will have to pick up the bill in the end. But they do not see the long term. Why not enjoy the carnival of money-making as long as it lasts?

"Low commodity prices, of which oil prices are the most important," writes Stratfor, "propelled the American economy upward while cushioning the decline in Asia. These low prices also had the inevitable counter-action of severely harming commodity-exporting countries. From Venezuela to Saudi Arabia to Indonesia, the effect of low oil prices on national economies was becoming catastrophic by the beginning of 1999."

The deadly threat posed by falling commodity prices stirred the main oil producing countries into action. Even old rivals like Saudi Arabia and Venezuela managed (at least temporarily) to agree to restrict oil production in an attempt to boost the price of oil. This seemed to have worked. In the first few months of 1999, oil prices have nearly doubled. This can be explained only partly by the actions of oil-producing states to cut production. Such attempts in the past always broke down in the end because each state put its own interests first. These countries rely heavily on oil exports to pay their debts and keep basic services running. Therefore they always ended up by secretly selling oil on the world market. There is no reason to think that this time it will be any different.

The real reason for the (temporary) rally in oil prices is the hope that the recovery in Asia will continue and increase the demand for oil. In addition to this, the instability in Central Asia has raised doubts with regard to the earlier optimistic forecasts for oil production in that region. Such considerations enter into the calculations of those who control the speculative movements in world commodity markets. But such capital can flow out of a given commodity just as quickly as it flowed in. It is therefore highly likely that the present upswing in oil prices will be followed by a new downswing. This will have far-reaching effects in countries like Iran, Venezuela, Mexico, Indonesia, Saudi Arabia and also Russia—all of which are already experiencing social and political instability related to the sharp swings in the price of oil.

At least temporarily, the falling trend of world commodity prices has been reversed. Oil prices have risen steeply and some other commodity prices have also risen (although most other mineral commodity prices have not kept pace with oil.). From a low point in February of under $10 a barrel, the price of North Sea Brent has risen to just over $18 a barrel at the close of trading in London. This is the highest price for oil since December 1997. That means that oil prices have risen by about 80 percent in about four months. The joint effect of production cuts and the expectation of an Asian economic recovery were the main forces driving prices up. But since Asia's recovery will neither be as strong nor as long-lasting as expected, the boom in oil prices will be followed by a new fall. Oil and other commodities will be hit by falling demand. On the other hand, it is unlikely that the oil producing countries will be able to agree to keep production low when all of them depend on exports of oil as their main or sole source of income.

It is in the nature of the capitalist economy to move in cyclical swings which bear an entirely anarchical character. Commodities can be sold above or below their value. That is the normal way that the market works through the play of supply and demand. In the modern epoch, these swings are made more convulsive by the intervention of the big monopolies which engage in speculative activities on a vast scale. The advent of globalisation and the abolition of controls on the movement of capital which has been carried out with enthusiasm by the bourgeois in the name of "liberalisation" over the last ten or twenty years, has merely created a vastly expanded scope for turbulence and shocks on a global scale. The chain of devaluations in Asia two years ago was one manifestation of this madness. The violent swings in the price of oil and other commodities is yet another. Thus, the present increase in the price of oil can be rapidly followed by an equally steep fall in the next period, as Stratfor warns:

"Part of the explanation [for the rise in oil prices] is cyclical. There is no doubt that oil, at below $10 a barrel, was oversold. In real terms, adjusted for inflation, it was at the lowest level since the 1930s. That was unreasonable. OPEC, Asia and Central Asia notwithstanding, those prices were clearly too low. But the important question is whether the rising prices represent a fundamental shift in the economic geometry of the globe. It is interesting to us that the increase in prices has been confined to the oil patch, at least as a matter of magnitude. That indicates to us that the long-term collapse in commodity prices a dominant factor in the global economy for a generation is not yet over." (Stratfor Weekly Analysis, July 6 1999.)

The chief representatives of US Capital, Alan Greenspan and the Federal Reserve, are still worried about a re-emergence of inflation. This seems strange because inflation in this cycle has been at record low levels—one of the main arguments used by the New Economic Paradigm people to defend the view that the days of booms and slumps are over. But there are special reasons why America has so far managed to keep inflation low, and these may not last much longer. In general the phenomenon of falling prices (deflation) on a world scale is related to overproduction and low demand. The crisis in Asia has aggravated this tendency and produced a knock-on effect. Cheap imports from Asia have had the effect of dampening prices in the USA, making it impossible for American manufacturers to raise their prices. Falling commodity prices have had the same effect until recently. The dollar's high exchange rate also had the effect of further cutting the price of imports. But now all these phenomena are turning into their opposite. Oil prices are rising sharply and other commodity prices are firmer, while the dollar is beginning to slide, especially against the yen, which on August 18th passed Y112—the lowest level since January. Taken together, these factors mean that input costs of US firms are now rising. This means that the Federal Reserve will be tempted to raise interest rates. This has serious implications for the US stock market and the American economy in general.

'Small is beautiful'

The myth has been assiduously cultivated that the capitalist system is based on the entrepreneurial spirit of a host of small businesses. The development of information technology is specifically cited in this respect. It is true that many of the most innovative elements in technology have come from small businesses or even individuals with bright ideas. But this is nothing new. In the past also, a similar phenomenon can be noted. Individual geniuses like Edison, Marconi, or Stevenson developed new techniques. But as soon as the new technology enters the realm of the market, ever larger sums of capital are needed to develop and market it. The new technology is taken over by big capitalist concerns which alone have access to the huge sums of money required. Thus, the heroic age of the small business and the lone innovative genius soon gives way to the domination of the monopoly, which is the inevitable outcome of competition between small producers.

Like all new technology, IT is expensive, involving enormous layouts of capital, particularly in the initial stages. Thus, a new state-of-the-art factory in the USA involves the expenditure of one or two billion dollars, and it becomes obsolete within three to five years. It is clear that such enormous sums of capital are only available to the big monopolies and people like Bill Gates. Thus, all the talk about small being beautiful stands exposed for the empty demagogy it is. More than any other period in history this is the age of the monopolies.

Whereas in the early stages small capitalists can make money (the proverbial inventor with his business in a garage), this becomes rapidly unviable. The small business is displaced by the big firms which dispose of the necessary sums of capital to take the process of accumulation further. Those capitalists with large accumulation of capital have bigger accumulations of profit than smaller ones, although the latter may enjoy a higher rate of profit. Big capitals always displace smaller ones. As Marx explains:

"Under competition, the increase in the minimum of capital required for the successful operation of an independent industrial establishment in keeping with the increase in productivity assumes the following aspect. As soon as the new and more expensive equipment has become universally established, smaller capitals are henceforth excluded from these enterprises. Smaller capitals can carry on an independent activity in such lines only during the incipient stage of mechanical inventions." (Marx, Capital, vol. 3, 25, 4.)

The present period has seen a massive increase in the concentration of capital, that is to say, a massive increase in the wealth and power of a small minority at one extreme and an equal increase in poverty, misery, degradation and disease at the other extreme. This trend, predicted by Marx and steadfastly denied by bourgeois sociologists for decades, is now an undeniable and monstrous fact. In the first half of 1998 alone, take-overs in the USA involved the astronomical amount of 949,000 million dollars. This was no less than 20 percent of all economic activity. In the first half of 1999 a further 570, 000 million dollars went on mergers. Nor are these activities confined to America. In the same period in the EU mergers worth 346,000 million dollars were registered. And this tendency shows no sign of slackening. Worldwide merger activity in the first three quarters of 1999 leapt by 16 percent over the same period the previous year, reaching a new high of a staggering $2.2 trillion, according to Thompson Financial Securities. In the latest quarter, most of these takeovers took place in Europe.

This process of the concentration of capital also represents a colossal concentration of wealth and power in a few hands, and a corresponding increase of social inequality. In 1992 there were just 12 billionaires in the USA. By 1998 that had increased to 170. Now there are more than 200. Bill Gates has a personal income that exceeds the annual personal income of 120 million Americans. Fabulous wealth has been coined from the exploitation of working people. The share of total income earned by the richest 20 percent of Americans grew from 48.9 percent in 1993 to 49.2 percent in 1998. Yet for 25 years the standard of living of American workers did not increase at all, and the poorest sections saw their living standards actually decline. And even though real wages have now started to increase, the share of the working class in the total wealth produced continues to decline, as these figures show.

The colossal sums of money involved in takeovers do not represent productive investment. This activity does not develop the productive forces. On the contrary. The end result of these mergers is invariably the same: closures, sackings, downsizing—that is to say, the wholesale destruction of the productive forces. It is like the bed of Procrustes, where the unfortunate guest has his arms or legs cut off to fit the bed. Likewise, the productive forces which have outgrown the narrow limits of the nation state and private property are ruthlessly cut down to size. The wholesale downsizing of the last two decades is merely a reflection of the revolt of the productive forces against the straitjacket of the profit system. The increasingly parasitic nature of modern capitalism is graphically revealed in the domination of finance capital.

Domination of finance capital

Over the past decade the power of the banks and monopolies has reached unprecedented levels. This reaches its most perfect expression in the power of the central banks which has enormously increased over the last 20 years. The old idea of the reformists and Keynesians of managed capitalism found its expression in so-called fine tuning whereby governments manipulated the economy using such instruments as interest rates. Now all this has changed. The central banks demand complete independence to control interest rates. Thus, in Britain, the Blair government immediately handed over control of interest rates to the Bank of England. Likewise the governments of the European Union have handed over a large part of economic policy to the unelected officials of the European Central Bank (ECB). This would have been unthinkable 15 years ago. Never before in history have the banks wielded so much power. This represents a complete abandonment of the old Keynesian policy. It will add a new and convulsive dimension to the crisis of capitalism.

In the past, when all currencies were tied to gold, a measure of financial discipline was imposed by the gold standard, it was not possible to play about with the exchange rate. All currencies had to be backed up by the universal equivalent—gold. This provided some kind of objective standard and avoided the dangers of inflationary increases in the money supply. After the Second World War, the link with gold was maintained, albeit indirectly through the gold exchange standard. The dollar was accepted as the universal medium of exchange (with the pound sterling in a subsidiary position). This reflected the real relationship of forces that emerged between the capitalist powers after the War. US imperialism emerged from the war with its productive base largely intact, and two thirds of the world's available gold supplies in the vaults of Fort Knox. Thus, the dollar was literally as good as gold, and was accepted as such by other countries. The plentiful flow of dollars in Marshall Aid and through other channels was initially a useful lubricant for world trade and played a role in fuelling the upswing of 1948-74.

However, the policies of Keynesianism ("managed capitalism"), deficit financing, the Korean and Vietnam wars, and other unsound policies, led to an orgy of inflation—as predicted by the Marxists at the time (See "Will There be a Slump?" by Ted Grant). Before the war there was little or no inflation—as was the case in Marx's day. In fact, prices in Britain in 1932 were about the same as in 1666! Since then, prices have risen in Britain 4,000 times, and in the USA by more than 1,000 times. By the early 1970s all the advanced capitalist countries were facing the prospect of Latin American-style hyper-inflation. Keynesian economic policies—like credit in general—carried the capitalist system beyond its normal limits, but only at the cost of inflation. In the end the ruling class had no alternative but to reject these policies and resort to a wholesale attack on the welfare state, carrying out a policy of privatisation and ruthless cuts in state expenditure in an attempt to return to the policy of balanced budgets and sound money of the past. This is the real base of monetarism and its political reflection Thatcherism which have been dominant for the past twenty years.

The abandonment of the bankrupt model of "managed capitalism" was not the result of a mere caprice or malevolence on the part of the ruling class. Now the utopian left reformists dream of a return to the good old days of Keynesianism. They demand, not socialism, but "capitalism with a human face". They imagine that it is possible to control capital and eliminate its unpleasant features. In reality, the bourgeoisie was compelled to abandon Keynesianism because it threatened to engulf all the economies of the Western world in Latin American-style inflation. Along that road no way out is possible.

However, the attempt to go back to the old discredited orthodox policies of balanced budgets and "sound money" has produced new and insoluble contradictions. The turn towards monetarism in the 1980s produced the deepest recession since the Second World War in the USA and Britain. By these means, it is true, they have largely succeeded in squeezing inflation out of the system, at least temporarily. The present average inflation rate in the OECD economies is just above one per cent (at least officially, although in practice the underlying rate of inflation is much higher). But this has been achieved through the destruction of a large part of the productive apparatus, deep cuts in state expenditure and attacks on living standards which, by cutting the market, merely aggravates the crisis. By the end of the 1980s, world capitalism was already heading in the direction of a deep recession. The main reason why the recession of 1990 to 1992 did not turn into a deep slump was the boom in Asia. This temporarily saved the system. However, this process has now reached its limits.

No more than Keynesianism could the new dogma of monetarism solve the problems of capitalism. True, they have partially (and temporarily) succeeded in squeezing inflation out of the system. But at what a price! By cutting state expenditure, they also destroyed a big part of the market, leading to a deep recession in Britain and other countries. Despite the present boom they have not succeeded in returning to the golden age of the post-war upswing. The persistence of high levels of unemployment in all the main capitalist economies even in a boom is a symptom of the underlying sickness of the system. The present boom has been accompanied by a merciless onslaught on living standards, hours and conditions. It is a boom at the expense of the working class. All governments—whether right, "left" or centre—are continuing the same policy of cuts in public expenditure. What will happen in the next slump?

Prices in the advanced capitalist countries are now only increasing by about two percent a year. However, in the first place, this does not mean that inflation has been conquered, as is often asserted. Prices continue to rise, but at a slower pace. Even if they should succeed in reducing inflation to zero, it should be remembered that the absence of inflation does not mean that the boom-slump cycle has been abolished. In Marx's day there was a ten year cycle of boom and slump, although inflation was practically non-existent. Likewise, the biggest slump in history, the 1929 crash, took place at a time when prices were stable. Secondly, the bourgeois economists are not convinced that inflation has been entirely eliminated. The soaring prices of shares and assets is also a kind of inflation, and a very dangerous one. In the USA, economists fear that a weakening dollar and the recovery in the price of oil and other commodities in recent months can lead to a revival of inflationary pressures. This, in turn, can lead to a rise in interest rates which will puncture the boom and lead to a slump. As The Economist recently observed: "Far from being dead, inflation may have taken on a new, more dangerous guise." (The Economist, 25/9/99.)

The argument that the absence of inflation signifies the abolition of the boom-slump cycle is entirely bogus and shows a complete ignorance of history. Inflation was also low in the 1920s, before the collapse of 1929, and in Japan in the 1980s, before the slump from which the economy has never recovered. In private, the strategists of Capital are deeply worried. The problem is that the above-mentioned factors give rise to precisely the "irrational exuberance" which Alan Greenspan warned against three years ago. Now Greenspan has fallen silent. No doubt he is afraid that to speak his mind again could bring about a sudden collapse of confidence. By failing to take action, the Fed has become a silent accomplice of what is in fact a reckless and dangerous exercise. America is seized by an illusion that everything is for the best in the best of all capitalist worlds. The New Economic Paradigm is merely a pseudo-academic reflection of this irrational belief. The mad carnival of money-making proceeds apace, apparently unstoppable. It is party time for all! And in the midst of this merry-making, there is no place for sour faces and words of warning. Eat, drink and be merry, for tomorrow the price of shares will rise again! So it was, so it will ever be.

The degeneration of the capitalist system expresses itself in all kinds of ways, not least in the character and conduct of its leading representatives, both political and financial. In the good old days, bankers were supposed to be respectable men, dedicated to the cause of sound money and balanced budgets. But in the epoch of the senile decay of capitalism, when the central banks have accumulated unprecedented power in their hands, the conduct of the central bankers is anything but responsible. There has been no shortage of warnings: "By every standard method of valuation," writes The Economist, "Wall Street is now more overvalued than it was on the eve of the crashes of 1929 and 1987." In the past it was said that the role of the Fed was to take away the punch bowl just when the party was getting into its swing. But this is no longer the case. While publicly paying lip service to financial probity and austerity, Alan Greenspan has been prepared to tolerate the creation of the biggest orgy of financial speculation in history, although he must realise the dangers involved. He is like the emperor Nero fiddling while Rome burned. In fact, by raising interest rates by a paltry quarter of a percent, he has poured petrol on the flames. Thus the old motto is shown to be true: "Whom the gods wish to destroy, they first make mad."

Marx on Credit

The fundamental barriers to the development of the productive forces in the modern epoch are private ownership of the means of production and the nation state. However, for a time, capitalism can partially get round these barriers by a series of means, such as the development of world trade and the expansion of credit. Marx long ago explained the role of credit in the capitalist system. It is a means whereby the market can be taken beyond its normal limits. In the same way, the expansion of world trade can provide a way out for a time, but only at the cost of preparing even more catastrophic crises in the future:

"Capitalist production is continually engaged in the attempt to overcome these immanent barriers, but it overcomes them only by means which again place the same barriers in its way in a more formidable size.

"The real barrier of capitalist production is capital itself." (Marx, Capital, vol. 3, 15; 2-3.)

The circuit of capitalist production depends, among other things, on credit. The solvency of one link in the chain depends upon the solvency of another. The chain can be broken at numerous points. Sooner or later, credit must be paid off in cash. This fact is all too frequently forgotten by those who become indebted during the process of capitalist upswing. In the first phase of capitalist expansion, credit acts as a spur to production: "the development or of the productive process extends the credit, and credit leads to an extension of industrial and commercial operations." (Marx, Capital, vol. 3, p. 470.)

This, however, is only one side of the coin. The rapid expansion of credit and debt pushes the market beyond its normal limits, but at a certain point this must turn into its opposite. During the boom, credit appears to be limitless, like the Horn of Plenty in ancient Greek mythology. But as soon as a crisis appears, the illusion is shattered. Returns are delayed, commodities are unsaleable in glutted markets, and prices fall. The development of the world market does not alter this fundamental process, but merely gives it a vastly greater scope in which to manifest itself. The accumulation of debt in the last analysis makes the crisis even deeper and more prolonged than what it would otherwise have been. The recent history of Japan is more than sufficient to confirm this. After a decade of boom characterised by rapidly increasing assets and share prices, the bubble was finally burst by a sharp increase in interest rates. The situation was very similar to that of the USA at the present time. On December 25th, 1989 the Bank of Japan raised interest rates, caused the sharp fall in the Stock Exchange, but since land prices still continued to rise, a new interest rate rise was necessary. Finally interest rates were raised to six per cent and by the end of the year share prices had fallen sharply by 40 per cent. Thereafter, the Bank of Japan kept interest rates high. At that time the Bank of Japan was praised by economists for its prudent handling of the economy. But the result was to prolong the recession for a decade.

With globalisation, and the abolition of the restraints on credit and financial transactions, the scope for expansion has never been greater, but neither has the potential for a worldwide crash. However, it is not the case that crises are caused by fictitious capital, stock exchange swindles and excessive use of credit. Marx explains this in the third volume of capital:

"Let us also disregard these sham transactions and speculations, which the credit system favours. Then, a crisis could only be explained as the result of a disproportion of production between the consumption of the capitalists and their accumulation. But as matters stand, the replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class. The ultimate reason for all real crises always have remained the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Marx, Capital, vol. 3, p. 472.)

The expansion of world trade and the opening up of new markets in Asia also provided a temporary boost, but only at the cost of provoking an even bigger collapse. This is the shape of things to come. The truth of Marx's penetrating analysis of the nature of capitalist crisis is shown by what happened in Asia. The perspective was presented of a vast market of billions of people which would provide an inexhaustible reservoir of demand for western goods, services and investments. Initially, the promise seemed to be realising itself. The Asian market provided a large and expanding market for the West, which, apart from anything else, prevented the recession of 1990-2 from turning into a depression.

But now all the old illusions lie in ashes. The supposed market in China, as we predicted eight years ago, was not as big as they had thought. Under capitalism, a market is not the same thing as size of population. If that were the case, Bangladesh would be a very important market. The reason it is not is because a market depends upon purchasing power. The purchasing power of the great majority of Chinese is very low. This fact soon began to dawn on foreign observers. Articles began to appear in the western press with titles like "How not to sell 1.2 billion tubes of toothpaste." The illusion of the capitalists that what was at stake was the absolute consuming power of the population of China, that is real human needs (for toothpaste, and much more besides) was dashed against the reality of the limited purchasing power of the masses in China and the rest of Asia.

The central contradiction of capitalism is that the greed for surplus value drives them to develop the productive forces to a point where the mass of commodities cannot be absorbed by the market. At this point overproduction appears. For a time they can get round this contradiction by investing in what Marx calls department one, that is, the production of the means of production, machinery, factories, research and development etc. But the contradictions will always reappear, since at a certain point the investment in plant and machinery must manifest itself as a mass of commodities.

Asia is a classic example of this process taking place in almost laboratory conditions. The chase after a new and potentially lucrative market attracted a huge volume of investment in Asia. This led to the setting up of new factories with modern machinery to take advantage of the low wages of the workforce in China and other Asian countries. This development was welcomed by the Marxists because it has led to the strengthening of the proletariat. The revolutionary implications of this are only now beginning to dawn on the strategists of Capital. The general strikes in South Korea are an indication of what will happen tomorrow in China, Japan and every other country in Asia, as the reality of the crisis of capitalism is burned on the consciousness of the masses.

From a strictly economic point of view, Asia is now a living proof of Marx's assertion of the inevitability of overproduction. The root cause of the collapse in Asia was not the huge indebtedness, corruption and inefficiency that are so frequently cited by western economists (previously these economies were held up as models of efficiency and proof of the superiority of market economics!). These factors were merely outward manifestations of a deeper problem. If the Asian market had continued to expand, generating ever greater sales and profits, nobody would have paid the slightest attention to the debts, frauds and imbalances. Such things are present in every capitalist boom and they are present in the US economy at the present time. Only when it becomes clear that the economy is heading for crisis, when overproduction appears (usually in the form of excess capacity under modern conditions), demand and prices begin to fall and profit margins decline, does the world of money suddenly wake up to the fact that the entire edifice is a hut built on chickens' legs. Consequently, it is not the absence of confidence that causes a crisis, but the existence of crisis that causes a collapse of confidence, which manifests itself in a run on the currency (the Thai baht), financial scandals and stock market crashes.

The dramatic impact of these phenomena captures the imagination of millions, and are therefore assumed to be the real cause of the crisis. But it is in the nature of modern bourgeois thought (in philosophy as much as in economics) to confuse appearance with reality and to resort to subjective explanations which really explain nothing at all. Why exactly does confidence collapse? Why should the crisis in Thailand have occurred when it did and not one year earlier? Why were the frauds and imbalances in Asia only visible at this point in time? We look in vain to the bourgeois economists for answers to these questions. And when the present boom in the USA collapses, they will be equally unable to explain why the famous "confidence" which presently keeps America afloat in defiance of all the laws of economics will evaporate like water on a hot stove. The reason is not hard to find. Lenin once said that a man on the edge of a precipice does not reason. If the economists were to look for an objective cause for the crises of capitalism, they would have to admit what cannot be admitted—namely that the problem is inherent to the system itself. However, to defend such a subversive idea would not be advisable, since the inescapable conclusion is that what is required is a fundamental change of society.

'The fundamentals are sound'

One of the key arguments of the advocates of the New Economic Paradigm is that there is still plenty of demand for the products of the new technology; look at all the households that still do not have the Internet or a mobile phone! And then digital television is just around the corner. Such arguments are childish in the extreme. They assume precisely what has to be proved—namely that demand (in the sense of real demand—i.e. purchasing power) is capable of being expanded indefinitely. That there are plenty of people in the world who would like to receive the blessings of Internet, a mobile phone, a new car, or even a bowl of rice, is self-evident. That they possess the necessary wherewithal to obtain access to the said blessings is another matter entirely! The whole point about capitalist production is that individual capitalists, in pursuit of profit, produce without any consideration for the limits of the market. Until the market becomes saturated with goods that cannot find a buyer.

The demand may still exist—in the sense of human needs and desires. (In this sense, there can never really be overproduction). But such things are of no concern to the capitalist who is engaged in the production, not of use-values, but solely of exchange-values, which can only be realised in the act of exchange. Whether this can, in fact, be realised is another matter altogether. For a time the natural limits of the market can be extended through credit. But eventually the limits of this are reached, and at this point, credit turns into its opposite. A cursory glance at the debt situation in the United States suggests that the present credit binge cannot go on for much longer. The market is seriously over-extended. This must lead to a situation where the overshoot is corrected—a very painful process! Like a piece of elastic that is stretched beyond the limits of its tolerance, credit will bounce back and deliver a stinging slap in the face.

"Since the aim of capital is not to minister to certain wants," Marx explains, "and since it accomplishes this purpose by methods which adapt the mass of production to the scale of production and not vice versa, conflict must continually ensue between the limited conditions of consumption on a capitalist basis and a production which forever tends to exceed its immanent barriers." (Marx, Capital, vol. 3, 15; 2-3.)

The question is not whether there are possible new fields of investment based on new technology. It is whether the capitalists can make a profit out of investing in these new technologies that would justify their outlay. And the question is not whether there exists a general (potential) demand for the new products. It is whether there is sufficient purchasing power in society for the capitalists to sell their commodities, and thus realise their value in fact. So far the demand in the USA has remained strong, mainly on the basis of credit and a booming Stock Exchange. How long this can last is another matter.

The argument that the American economy is fundamentally sound and that the present consumer boom can go on indefinitely is entirely false. Those who make such unwarranted assertions entirely leave out of account the unprecedented levels of debt in the American economy. From an already high level of 85 percent in 1992, total household debt in the USA has now risen to an astronomical 102 percent of personal disposable income. One of the most profitable industries in America at present time is the credit-card business. Consumer debt service payments stand at record levels. In other words, people are spending more than they can afford, and this is especially the case with the poorest households in America. This has extremely serious implications for the future in the event of an economic downturn.

What is true of personal debt is also true of company debts. These also stand at record levels as a percentage of corporate sector GDP. In one year alone, 1998, non-financial businesses increased their debts by more than 400 and billion dollars. This would not have represented such a serious problem if the money had been invested for productive purposes. But this was not the case. The bulk of it was actually being used to finance share buy-backs! To such an extent has speculative fever gripped the American economy.

Commenting on this situation, The Economist (25/9/99) wrote "despite the booming economy, non-performing bank loans have risen, and the default rate on corporate bonds is running at its highest level since the early 1990s." This shows the entirely unsound basis of the whole process. The only thing holding it all up is the Stock Exchange boom, which sooner or later must come to an end. The Economist continues: "But share prices can fall, whereas debt remains fixed in value. And only income can service debt: financial assets cannot pay interest bills unless the assets are sold. If everyone is forced to sell, share prices tumble further."

Marx explained the role of credit in capitalist economy as a means whereby the capitalists can push the market beyond its normal limits. In a period of boom, everyone chases after credit, which appears to be endowed with magical properties. It is a necessary part of the process of capital accumulation, and nobody is unduly concerned at higher levels of indebtedness. In the mad scramble for profit, credit seems to play a fundamental role in driving the economy forward: "Credit expansion and asset-price booms tend to be self-reinforcing. Faster credit expansion boosts economic activity, profits and hence asset prices. In turn, rising asset prices flatters balance sheets and so allow households and firms to borrow more. In this way, a credit boom fuels a speculative bubble." (The Economist, 25/9/99.)

However, with the onset of crisis, the entire process goes into reverse. Now debts are called in. Banks are no longer willing to give the easy credit. Mortgages are foreclosed. People need money to pay their debts. There is a sudden rush out of stocks and shares and into hard cash. All this is reflected in rising interest rates which exercise a depressing effect on consumption and profit margins and therefore deepen the slump still further. The spell of limitless credit is suddenly broken, the carriage turns back into a pumpkin, and Cinderella is obliged to return home in rags, only to find that her house has been repossessed by the bank. As Warren Buffet wittily expressed it: "Until the tide goes out you don't know who's swimming naked."

The rapid expansion of credit has played a big part in every period of capitalist expansion, at least since the Industrial Revolution. However, under modern conditions, it has grown to hitherto unheard-of dimensions. Thus, in the asset and price bubbles in Japan, Britain and Scandinavia in the 1980s, the rapid growth in credit was one of the major causes of the seriousness of the subsequent slump. What initially fuelled the boom eventually was one of the main causes of its undoing. In the upswing, credit and fictitious capital serve to lubricate the system, only to undermine it later.

The lopsided character of the American economy at present time is further manifested in a massive growth of the private sector financial deficit. This is the amount for savings of firms and households, minus total investment. In the early 1990s there was a four per cent surplus. At the present time, the deficit stands at five per cent of GDP. To make an historical parallel, in 1987, there was only a small deficit of 0.8 percent of GDP.

When the boom busts, people will try to pay their debts, reduce borrowing and save more. This is the classical phenomenon of hoarding, which Marx deals with in some detail in Capital. Everyone wants cash, nobody wants to spend, so consumption falls and markets shrink. This necessarily produces a general fall in prices and profits. In order to secure a share of a shrinking market, the capitalist is compelled to resort to heavy discounting and even to sell his commodities at a loss. This in turn leads to a fall in investment. But since investment is the motor-force behind every boom, this leads directly to a slump. The depth of the slump is greatly aggravated by the speculative excesses of the previous period, just as a hangover is directly proportionate to the amount of alcohol consumed during the party the night before. The present speculative boom in the USA represents a party of some considerable dimensions!

The Stock Market

There has been a speculative element in every boom, starting with the 17th century. In the Dutch tulip mania (1630) a single rare bulb could fetch as much as 5500 Florins—or 50,000 dollars in modern currency. In the subsequent crash many people were ruined. The story was repeated almost a hundred years later in the South Sea bubble (1720), when a company of adventurers offered to take over Britain's national debt in exchange for a monopoly of the South Sea trade (trade in South America). There was the famous example of the share offered in the Times newspaper advertised as "For an Undertaking which shall in due time be revealed." It sold very well. During this mad speculative fever, share prices rose from 130 to 1,000 pounds in seven months. Then it burst. Among many thousands who lost money when the bubble burst was the famous scientist Isaac Newton who commented bitterly: "I can calculate the movements of heavenly bodies, but not the Madness of people." Before the crash of 1929 there was the notorious Florida land scandal. Fabulous sums of money were paid for what was basically swamp land. As always, the speculative orgy ended in tears.

Fictitious capital, as Marx called the paper "wealth" generated by speculation, has thus played a role in every boom in the history of capitalism. During the period of upswing, there is a feverish demand for capital and an irrational search for quick profits and easy money, As Marx explains, the ideal of the bourgeois is always to get money from money (M-M1) without the painful necessity to get involved in production. This is the origin of gambling on the stock exchange and other forms of speculation. During periods of boom, large amounts of fictitious capital are generated and accepted as valid, although they lack any real base. In the USA in the present boom this phenomenon has reached the most extraordinary proportions. Not only have the prices on Wall Street been inflated to the point where they bear no relation to the real value or profitability of the companies quoted, but staggering quantities of fictitious capital are circulating in world money markets as derivatives and similar speculative devices.

That they are heading for a major fall is evident to all but the blindest admirer of the casino society. Commenting on the danger of a stock market crash, The Economist (21/8/99) writes:

"Two important—and related—uncertainties could cloud this picture. One is the stock market. If Wall Street shrugs off the higher interest rates entirely, as it did in June, an orderly slowdown will be harder to achieve. Conversely, a big correction in the stock market could precipitate an uncomfortably sharp slowdown. The other unknown is how foreigners will behave. America's trade deficit rose to a record $24.6 billion in June, and the country is heading for a current account deficit of 4% of GDP this year. As the economies of Europe and Asia perk up, foreign investors who are financing this sizeable deficit may demand substantially higher interest rates to do so.

"The recent slide of the dollar and the strengthening in bond yields could be but the beginning if foreign sentiment turns sharply," warns The Economist. "America's much-needed economic slowdown could occur much more suddenly than anyone expected. And Alan Greenspan would then no longer seem a demi-god."

It is quite amusing to read the comments of so-called experts who allege that there is no cause for concern because the capitalists have learned from the mistakes of the past. This brings to mind Hegel's remark to the effect that anyone who studies history can only draw the conclusion that nobody has ever learnt anything from it. On the contrary, the capitalists of today are busy repeating precisely the mistakes of the past, and in so doing, are preparing an even greater catastrophe.

In its sheer magnitude the present speculative binge on Wall Street has no real precedent in the history of capitalism. It puts the speculation of 1929 entirely in the shade. In the space of 12 months, Internet shares rose by more than a 1000 percent. Yet to date, not one of the companies quoted has made any profit at all. It is similar to the boom in share and property prices in Japan in the 1980s, when they increased four times over, and then collapsed. The danger of a collapse on Wall Street was pointed out almost three years ago by Alan Greenspan, Chairman of the Federal Reserve. In December 1996, he warned of the irrational exuberance on the stock market, which at that time stood at more than 6,000. But Greenspan and the Fed have done nothing to halt the massive inflation of values on Wall Street. On the contrary, after the collapse in Russia in August 1998, US interest rates were lowered, fuelling a further outbreak of speculative fever. The Dow Jones now stands at around 11,000. This has produced a kind of euphoria and the conviction among a large number of people that the spectacular rise of the stock market can go on forever. In reality, it is preparing a massive collapse.

So far the stock market has shrugged off the small increases in the rate of interest, which the Fed has raised at a snail's pace. Greenspan no longer warns against the "irrational exuberance" of the stock markets. The reason for this silence is not hard to understand. It is not that this hard-headed representative of big business has been convinced that the danger has passed. Quite the opposite. He knows that the situation is more parlous than ever, and that the slightest shock can bring the whole unsound structure tumbling to the ground. An uncautious word from the President of the Fed could cause a financial panic. And Greenspan does not want to go down in history as the man who caused Wall Street to crash!

There are those who argue that, since the Stock Exchange has nothing to do with the real economy, a collapse on Wall Street will have no serious effect. This is entirely false. Although the stock market has a law of its own, separate and apart from the laws of the real economy, it is not the case that there is no connection between the two. Although the link is not direct and automatic, it nevertheless exists. For example, although the price of shares on Wall Street seems to bear no relation to the real value of the companies quoted, in the last analysis the dividend on shares must depend on the profits of the companies—that is to say, ultimately, on the amount of unpaid labour that can be squeezed from the working class. The rising price of shares is an anticipation of rising profits and bigger dividends. When this anticipation is negated by the facts, share prices will fall as fast as they rose. Up till now the capitalists have maintained profit margins by increasing productivity, but this has already reached its limits.

It is difficult to obtain conclusive evidence of profitability trends, which tend to go up and down, but there are certain significant indicators that the real state of affairs is far from satisfactory. In 1997 70 percent of US company profits came from 200 firms. In 1999, 70 percent of company profits came from just 50 firms. This partly reflects the growing number of mergers, but this cannot explain the whole picture. It also seems to indicate that profits are already beginning to fall, except for a small group of companies linked to the IT sector. This is a very narrow base upon which to rest the whole US and world economy. It also fits in with the general picture of a stagnation or decline in productivity. The position is clearly untenable. Once this fact begins to register, it will have dire consequences for Wall Street. Once the holders of shares realise that the anticipated fat profits will never materialise, they will begin to unload their shares, thus triggering off a fall in prices. The presence of a large number of inexperienced day traders will make matters considerably worse. The fall will turn into an avalanche.

The stock exchange therefore, in a crazy, distorted manner, reflects the movement of the real economy and in turn can have a big impact on it. The present consumer boom in the USA depends to a large extent on rising share prices and debt. Once the bubble of asset inflation is burst, this will have a shattering effect on so-called consumer confidence. Demand will slump as the shareholders take stock of their losses and struggle to settle existing debts. This is very definitely a problem for the real economy! At the present time almost fifty percent of Americans hold shares, either directly or indirectly. This compares to about 25 percent in 1987, when the last big stock market crisis occurred. The number of shareholders in the USA is more than ten times bigger than in 1929. To imagine that a stock market crash in these circumstances will have no effect on the real economy is sheer fantasy.

At the present time the booming Stock Exchange in the USA has attracted large amounts of foreign capital. This is in spite of the fact that the US economy is heavily in debt and running a big trade deficit with the rest of the world. Here we have a self-evident contradiction. If any other country was in a similar position, capital would flow out and its currency would fall. Both Wall Street and the dollar seem to be defying the law of gravity, to the delight of the supporters of the New Economic Paradigm. However, in economics as in everyday life, what goes up must eventually come down. Sooner or later the massive imbalances in the US economy must give rise to concern among foreign investors who will demand an extra premium for the risk of leaving their money in America. That means higher interest rates.

So far the Fed has kept interest rates low, or raised them by a puny quarter of a percent, the equivalent of a sly wink to the speculators who gleefully took the hint and immediately sent the Dow Jones soaring to new heights. In private Greenspan and the others must be deeply worried about this situation. They know that the present carnival cannot go on. If the Fed does not wish to act, the international money markets will eventually force them to do so. A falling dollar will concentrate their minds like a good hanging and compel them to raise interest rates to a level that corresponds more closely to the realities of the American economy. At that point the whole unsound edifice will begin to collapse like a pack of cards. The effect will be like a tyre hitting a six-inch nail.

All serious economists agree that the biggest danger facing America and the world economy now is a crisis of deflation. Such a thing has not been seen since the 1930s—except in Japan over the last ten years. It is the mirror image of a crisis of inflation but in reverse. It is a downward spiral in which falling prices, falling demand and a collapse of bank lending all combine to drag the economy down into depression. In these conditions, falling prices are not the expression of a healthy economy with rising productivity (as, for example, in the long period of capitalist upswing that preceded the First World War) but on the contrary, a sick manifestation of lack of demand and a collapse of business confidence and investment. Given the present state of affairs, where profit margins are already declining, a significant rise in interest rates will seriously reduce profitability. This will set in motion a chain-reaction throughout the economy. Falling profits cause a fall in stock market prices, which then reacts upon the market as a whole. Hit by falling share prices and rising debt, consumers put off spending in anticipation of further price falls, thus reducing the market still further. Overwhelmed by bad debts, the banks refuse to lend any more money and raise real interest rates to punitive levels, thus further reducing the rate of profit. Having gone beyond its natural limits through the rapid expansion of credit in the previous period, the capitalist system is brought violently back into line. With no prospect of profits in sight, the capitalists stop investing. Rising unemployment further depresses demand. The economy enters into a deep slump.

Bourgeois economists tend to identify the business cycle with the expansion and contraction of credit. Hence the tendency to attribute every slump exclusively to a rise in interest rates. Actually, this is not the cause but only a symptom. The same is true of stock market crises. While it is not true that a crisis in the Stock Exchange—or any other manifestations of the operations of finance capital—is the cause of capitalist crisis (the real underlying cause, as Marx explains, is overproduction), nevertheless, such financial crises can signify the sudden collapse of a boom and greatly magnify the effects of a slump, depending on how far the market has been taken beyond its limits (by speculation, fictitious capital and the expansion of credit during the upswing. But in the present cycle, this process has reached unheard-of dimensions. And, as The Economist recently warned:

"The longer the party continues, the worse the eventual hangover, because imbalances, such as the level of debt, will be even bigger."

Parallels with the 1920s

Contrary to the belief of the New Economic Paradigm people, the present boom is far from unique. In the boom that preceded the 1929 crash there was a similar period of fast growth and investment, at that time fuelled by new technology and production techniques such as the automobile and Fordism, radio, the aeroplane and electricity, all of which carried productivity to new and unprecedented levels. Indeed, the seven years up to 1929 saw a higher growth rate in the USA than in the present boom, 4.7 percent, with unemployment at less than 4 percent and no inflation. This was also a period of high profits and a booming stock market, all of which led people to believe that the good days were here to stay. All this ended in the biggest crash in history, followed by a deep depression on a world scale. There are many parallels between the present situation and the 1920s.

Here is what John. K. Galbraith writes about the boom which preceded the 1929 slump:

"Throughout the 1920s production and productivity per worker grew steadily; between 1920 and 1929, output per worker in manufacturing industries increased by about forty three percent. Wages, salaries and prices all remained comparatively stable, or at least underwent no comparable increase. Accordingly, costs fell, and with prices the same, profits increased. These profits sustained the spending of the well-to-do, and they also nourished at least some of the expectations behind the stock market boom. Most of all, they encouraged a very high level of capital investment. During the twenties, the production of capital goods increased at an average annual rate of 6.4 percent per year; non-durable consumer goods, a category which includes such objects of mass consumption as food and clothing, increased at a rate of only 2.8 percent. (The rate of increase for durable consumer goods such as cars, dwellings, home furnishings and the like, much of it representing the expenditure of the well-off to well-to-do, was 5.9 percent.) A large and increasing investment in capital goods was, in other words, a principle device by which the profits were being spent." (J.K. Galbraith, The Great Crash, pp. 192-3.)

The limits of this boom were reached at the point when demand could no longer keep up with production. Before the bottom dropped out of the stock market, overproduction had already begun to appear in the USA:

"As noted, the Federal Reserve indexes of industrial activity and of factory production, the most comprehensive monthly measure of economic activity then available, reached a peak in June. They then turned down and continued to decline throughout the rest of the year. The turning-point in other indicators, factory payrolls, freight-car loadings, and department-store sales, came later and it was October or after before the trend of all of them was clearly down. Still, as economists have generally insisted, and the matter has the high authority of the National Bureau of Economic Research, the economy had weakened in the summer well before the crash.

"This weakening can be variously explained. Production of industrial products, for the moment, had outrun consumer and investment demand for them. The most likely reason is that business concerns, in the characteristic enthusiasm of good times, misjudged the prospective increase in demand and acquired larger inventories than they later found they needed. As a result they curtailed their buying, and this led to a cutback in production. In short, the summer of 1929 marked the beginning of the familiar inventory recession." (Ibid., pp. 191-2.)

In other words, it was a crisis of overproduction that caused the stock market crash. And many of the more serious strategists of Capital think we are now heading in the same direction:

"Consumers have been on a borrowing and spending binge, and household saving has turned negative for the first time since the 1930s. Firms are also borrowing heavily. As imports soar, America's current account deficit is headed for a record 4 percent of GDP. The property market is also starting to look frothy; prices of prime residential property in many big cities are soaring. Last, but not least, money supply growth seems excessive. These are all classic symptoms of a bubble." (The Economist, 25/9/99.)

What stage of the cycle?

All the factors mentioned above have been present, in one degree or another, in the US boom, and have combined to produce a classical upward spiral which has lasted a surprisingly long period of time. But now this upward spiral is approaching its limits. The US economy is beginning to display the classical symptoms of "overheating". At the peak of the boom, when the economy is working flat out, it is no longer possible for the capitalists to make the same super profits as before. There is a tendency to over-produce, which puts pressure on prices and profit margins. At the same time, the appearance of near full employment (in the USA they are already complaining about shortages of labour in certain key areas of the economy) the workers' bargaining power is increased and wages tend to rise. For this reason, every decline in unemployment in the USA is met with gloom by the stock market. The message for American workers could not be clearer: what is good for you is bad for the capitalists and stock market sharks!

The only way to prolong the boom would be through further substantial increases in productivity. But this is no longer a realistic option. The increase of productivity has been mainly brought about in the last period by merciless pressure on the muscles and nervous systems of the workers, sackings, downsizing, forcing a smaller number of workers to perform the same work as far larger numbers. But this has already reached its limits. They have gone too far along this road already and are provoking a backlash everywhere. It will therefore not be possible for the employers to boost their profit margins by such means in the next period.

Unemployment in the USA is at its lowest level for 30 years. However, this fact does not take into consideration the large number who work in part-time or casual employment, many of them precisely in the IT sector. These workers have few rights and can be sacked immediately on the onset of economic difficulties. This means that in the next recession, unemployment in the USA will very quickly soar to a high level. But at this stage, the economy seems to be working flat out, with no signs of slowing down. For the past three years the growth of US GDP has averaged 4 percent a year. Non-farm productivity has increased by two percent a year in the same period, while prices (except in the Stock Exchange and in the property market) have remained low.

All this is used as a justification for the so-called New Economic Paradigm. But in fact the reason why prices have been held down in the USA has nothing new about it, as we have seen. It does not require any novel explanation or paradigm to explain it. Rather, it is attributable to the classical factors present in every cycle. Moreover, the observable symptoms suggest that the present cycle has now reached its limits and is approaching its end. In fact, full (or near-full) employment), high rates of growth and a booming stock market—and also overproduction—are precisely the kind of thing which one would expect to see at the peak of the cycle, just before the collapse.

"Still," writes the Economist, "it is clear that the labour market is tighter than ever and on an unsustainable track. More than 300,000 jobs were created in July, much more than most analysts had expected and three times more than the growth of the labour force could normally sustain. The number of unemployment claims is at its lowest in this economic cycle, and virtually every Federal Reserve district has noted widespread labour shortages." (The Economist, 21/8/99.)

In the recent period, the main fear of capitalist economists has been the danger of debt deflation, that is to say, a downward spiral of falling asset prices, rising debt to asset ratios, forced asset sales, increase in bad debts, and a collapse of bank lending. These were indeed the classical symptoms of slumps in the past, aggravated, as we have explained, by the speculative binge. These are the dangers which the now faces the US—and the world—economy. All the factors that made for the upswing will turn into their opposite at a certain point. And this point is probably not very far away. A year ago that crown prince of speculators George Soros was warning of the danger of a crash in world financial markets which could pose a mortal threat to capitalism. Now other voices have taken up the same theme. Not only is the arch-Keynesian J.K. Galbraith warning of another 1929, but the father of monetarism, Milton Friedman has said exactly the same thing. Thus, the serious representatives of Capital—with a little delay—have come to the same conclusions as the Marxists.

Of course, it is not possible to be exact about the timing of the cycle. To demand such a thing is to understand nothing of the nature of economic prediction. Engels pointed out long ago that economics cannot be an exact science because, among other reasons, the delay in statistics means that our picture of the economy is always out of date. The same point was recently made by The Economist: "They [the central bankers] operate in a world of huge uncertainty with no reliable maps or compasses. Because of lags in the publication of statistics, they do not know precisely where the economy has got to even today, let alone where it is going." (The Economist 23/9/99) All economic predictions therefore have of necessity a conditional character. It is not possible to determine with exactness the tempo of events. Indeed the length of the present cycle has been extended in a most surprising way. But the underlying processes can certainly be explained and understood, and the outcome of the present situation can be determined with a fair degree of certainty.

Samuel Brittan of the Financial Times argues that a Stock Exchange crisis around the turn of the century could inflict even more damage than the Wall Street crash of 1929. In an article which appeared in the Financial Times on 22 July 1999, under the title "Bubbles do burst", he writes:

"Some commentators and policymakers are being misled by the absence of inflationary pressures in the goods and services markets. But this is a deceptive sign frequently seen in past bubbles." And he goes on to quote Stephen King, chief economist at HSBC, who is not only convinced that a crash is inevitable, but has attempted to show how it will happen:

"