“Where were the Marxists in 2008, when the demise of Lehman Brothers almost brought about the collapse of capitalism?” asks a puzzled Ralph Atkins, the capital markets editor of the Financial Times. Well, unlike Mr. Atkins and his coterie of free-marketeers, we were not in a state of total bewilderment. We had predicted such an eventuality. As capitalism plunged into a deep slump, we were explaining to an ever-widening audience that the crisis, which bourgeois economists denied could ever happen, was a stunning confirmation of the correctness of Marx’s ideas. These ideas, which had been repeatedly declared out-of-date by capitalist apologists, were shown to be shockingly relevant, in total contrast to bourgeois economic theory and especially the discredited efficient market hypothesis.
In 2008, capitalism suffered what many have since recognised as the deepest crisis since the 1930s, and in terms of its scope, possibly in history. The initial collapse in world trade was far worse than in the first year of the Great Depression. Bourgeois strategists were in a state of abject panic. “Global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely”, wrote Martin Wolf, chief economist at the Financial Times. “Within Europe the decline in the industrial output of France and Italy has been worse than at this point in the 1930s. The declines in the US and Canada are also very close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.” (FT, 16/6/09)
Some dared even to compare the slump to an almost fatal cardiac arrest. But the sickly patient, with the help of state bailouts, was then transferred from its deathbed to intensive care. All things being equal, they believed that capitalism would recover from this crisis as in past cyclical recessions. A rebound from a slump was seen as inevitable. However, things are not always equal and the character of crises is not always the same. It was a mistake to view this crisis as simply a repetition of the previous one. Again, it is wrong to judge the state of an organism simply from its outward appearance. We have to uncover its real nature, its evolution, and above all its deep-seated inherent contradictions, and see how these contradictions work themselves out in practise. This means adopting not a mechanical approach, which dominates the outlook of the bourgeois, but a dialectical approach.
Situation Prior to 2008
Even in the period prior to 2008, the boom in capitalism was largely artificially sustained, which shows how the contradictions were manifesting themselves even at that stage. Capitalism could no longer sustain itself as in the past. Investment in productive capacity was increasingly replaced with out-and-out speculation and gambling. “Manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth”, explained Lawrence Summers, the former treasury secretary under Bill Clinton. Strangely, exceptional measures only produced modest results. The capitalist system was not functioning as before. Even then, this proved to be unsustainable and only succeeded in preparing the way for a devastating crisis.
The 2008 catastrophe was certainly no ordinary crisis. Given its depth and severity, there would certainly be no quick recovery, which even the serious bourgeois economists were forced to recognise. Credit, which served to prolong the pre-crisis boom, now turned into a mountain of debts. The slump in fact marked a fundamental turning point, as did the crash of 1929, and served to usher in an entirely new epoch for modern-day capitalism, more akin to the Great Depression of the 1930s. This was therefore no “normal” crisis where, with a few clever adjustments, everything would return as before. Such a crisis did not correspond to economic textbooks or computer models.
Ever faithful, since the summer of 2009 bourgeois commentators were desperately searching around for signs of the “green shoots”. But they were disappointed at every turn. One false dawn after another was proclaimed. These learned ladies and gentlemen failed to understand anything, least of all the nature of this capitalist crisis. They ascribed the crisis to all manner of things - everything but the fact that this was a symptom of a dying social system. Marxists, on the other hand, understood full well that the old “normality” had vanished and that capitalism had entered a long drawn-out “secular” death agony, when crisis is the rule, not the exception.
No “Final” Crisis
Unlike the Third Period Stalinists, who declared that 1929 was the “final crisis” of capitalism, Marxists recognise no such thing as a “final” crisis. “The crises of capitalism are not numbered, nor is it indicated in advance which one of these will be the ‘last’,” explained Trotsky (Trotsky, On France, p.71). The capitalist system can limp along, no matter how deep the crisis, causing ever-increasing misery and degradation. Unless it is overthrown by the working class, the further continuation of capitalism will plunge humanity into chaos and barbarism, with new crises and catastrophes.
Of course, recoveries, however anaemic or partial, can certainly occur even in periods of deep crisis, such as at present. This does not contradict the general analysis of a sick declining capitalism, causing greater and greater misery. Even a dying organism occasionally shows some spasmodic flicker of life. This happened in the 1930s, during the “Roosevelt recovery”, but this did not alter the fundamental character of the period, which was one of crisis, depression and mass unemployment. In any event, the 1934-37 recovery in the US did not last long, despite illusions to the contrary, and was followed by a further collapse. “Hopes arose that the process of economic growth interrupted by the crisis would again be re-established. But sooner than one could have expected, the hour of a new crisis struck”, explained Trotsky at the time. “It started from a lower level than the crisis of 1929 and is developing at a more rapid tempo. This demonstrates that it is not an accidental recession nor even a conjectural depression but an organic crisis of the whole capitalist system.” (Trotsky, 29th November 1937, our emphasis)
We have used this description of Trotsky’s – organic crisis of capitalism - many times to describe the nature of the present epoch. This should not, of course, be confused with Marx’s term, the organic composition of capital, which simply refers to the relationship between living labour and dead labour (the ratio between constant capital and variable capital). The organic crisis of capitalism is a description of a deep historic crisis that reflects an unraveling of the inherent contradictions within the system, namely a system in terminal decline.
Cyclical Explanation of Crisis
We underline this point because there are those, even so-called Marxists, who see things in terms of economic cycles and profit cycles. They explain the severity of the present crisis as “rooted in the weaknesses and imbalances of the preceding boom”, not because capitalism has reached its limits. While there was wild speculation in the past period, this does not explain the nature of the crisis. Such an explanation is superficial and ignores the deep-seated historical nature of this crisis of the capitalist system.
This view is very much linked to the ideology of reformism, which recognises these “weaknesses and imbalances” in capitalism and seeks to rectify them. The reformists welcome a cyclical explanation of crisis, as opposed to a historical crisis of capitalism. For them, a cyclical crisis means that the boom years will again return and everything will work out fine. That is why the reformists, as well as those who have abandoned revolutionary politics, are attracted to Kondratiev cycles. This theory is little different from the strange ideas of Henry L. Moore, whose theory of eight-year “generating cycles” was linked to the orbit of Venus, which intersected the sun and the earth, producing economic crisis. Another economist, W. Stanley Jevons, blamed economic crisis on the existence of spots on the sun.
All cyclical theories of equilibrium assume that no matter how bad things get, there was always a natural tendency towards restoring the balance. For them, capitalist development is a case of swings and roundabouts. “Well, there are problems, but at the end of the day everything will be fine, so why bother with this socialist revolution nonsense?”
In the 1930s, the Great Depression was a result of the complete breakdown and impasse of the world capitalist system, which proved no longer capable of developing the productive forces as before. This had the same character as the present crisis: an organic crisis. In the 30s, the “solution” to capitalist crisis was through world war and the mass destruction of the productive forces. Today, with the present balance of class forces and the existence of nuclear weapons, such a world war “solution” is ruled out. With world war off the agenda, this means that all the contradictions will be internalised and we face years, if not decades, of savage austerity and crisis – at least until the working class takes power. A Kondratiev “summer” is ruled out.
Weakest Recovery in History
Despite the current euphoria in the press about the current feeble “recovery”, the world economy remains in a state of crisis, very far from the hopes envisaged by the strategists of capital. Even the bourgeois strategists recognise this fact. A recent gloomy editorial in the austere Financial Times opened with the words: “For the past five years, the world economy has been in crisis.” (FT, 19/4/14) The “recovery”, such as it is, is the weakest recovery in history - yes, in history, which speaks volumes about the real nature of the crisis.
Today, following an initial spurt, the Japanese economy has slowed to a snail’s pace, and threatens to go into reverse as in the previous twenty years. Europe continues to languish in either stagnation or outright recession, with the German powerhouse showing alarming signs of exhaustion and European unemployment at historically high levels. There is little room for improvement. “We’ve gone from an acute crisis to a chronic crisis”, explained Philippe Legrain, a former adviser to the President of the European Commission (FT, 8/4/14). The Euro crisis is simply moving from the periphery to the core as concerns spread to France and Italy.
Even in the United States, the situation is far from satisfactory, where growth has once again slowed and the proportion of those employed recently hit its lowest level since 1978, as millions of able-bodied men and women leave the labour force and disappear from the unemployment figures. 20 million are either unemployed or under-employed, with between 37m and 50m living on the poverty line. US growth since 2010 has yo-yoed between a depressing 1.8 per cent and 2.4 per cent, a poor performance compared to previous recoveries. GDP in the US is more than 10 per cent below what was predicted on trends before the slump. In Britain, it is not far off 20 per cent below such trends.
With the stagnation in the western economies, the capitalists looked desperately to the BRIC economies to pull them out of this malaise. But these economies are now also experiencing a slowdown. Household debt in Brazil, China, Singapore, Thailand, and Turkey has increased more than 40 per cent since 2008. According to the IMF late last year, the “projected shortfall in Brazil, India and China is similar to the hits to output rates that advanced economies have suffered in the post-crisis period.” (FT, 9/10/13) The Financial Times explained that “the reason to be fearful is that the world looks set to face years of sub-par growth. The emerging market growth spurt of the past 30 years is coming to an end.” (FT, 19/4/14) With all exits blocked, the system is at best trapped in long-term stagnation, which will be accompanied by a devastating and lasting impact on living standards. That is until the next world slump.
Out of desperation, the capitalists have been reduced to taking unprecedented measures, not simply to avoid another Great Depression, but just to keep the capitalist system going. One has only need to consider that the present meagre growth has been achieved only as a result of the biggest programme of monetary support in history. So much for the virtues of the market economy and free enterprise, which are supposed to be shining examples to us all! These are uncharted waters. The ailing capitalist system is being propped up artificially by a Central Bank life support machine, which has poured trillions of dollars into the financial system. However, the more these unprecedented measures are used to prop up the system, the less impact they have, like a drug addict who needs a bigger and bigger hit in order to get the same high. Five years ago, it took just over $1 of debt to generate $1 of growth in China. In 2013 it took nearly $4 of debt to generate $1 of growth – and one third of the new debt now goes to pay off old debt. China’s growth rate has fallen to the lowest in over 20 years, weakening imports and causing havoc for Brazil, South Africa, Indonesia, Chile, Colombia, Russia and Peru. Most of this “new” money ends up in high-risk speculative deals and ventures, not in productive investment, causing all kinds of new contradictions.
In the USA, Quantitative Easing (QE), originally pumping $85 billion into the banking system each month, has had dubious results and is being gradually and cautiously reduced. The balance sheet of the Federal Reserve has now reached staggering proportions. In Europe, faced with the dangers of deflation, the European Central Bank is thinking about embarking on its own version of printing money by buying bonds. The Germans, however, are reluctant due to fears of inflation, and it is they who hold the purse strings.
In the end, all attempts to take this monetary morphine away from the ailing capitalist system have caused grave upset, especially in the emerging markets. In its twice yearly Global Financial Stability Report, the IMF noted that “the scaling back of certain extraordinary policy supports has not been accompanied by adequate preparations for a new environment of normalised, self-sustaining growth.” (FT, 10/4/14) As soon as they announced that the tap of cheap money was to be turned off, all the “hot” money started to disappear, causing devaluations and turmoil in its wake.
Again, interest rates have been kept artificially low to encourage growth. In Britain, official interest rates are at a 300-year low, with little prospect of them rising anytime soon. In the main capitalist countries, they are at near zero levels. This is unprecedented and shows the depth of the current crisis and how qualitatively different it is from more recent crises. Now the European Central Bank is threatening to move to where no central bank has ever gone before, cutting one of its key interest rates below zero to promote growth. The idea of paying a bank to park your savings appears bizarre, but is a reflection of the unconventional times we are in.
According to a new book by James Richards, a former general council for hedge fund Long Term Capital Management, which collapsed spectacularly in 1998, we are already living in a new depression. For Richards, the US economy is like a climber on a ridge at 28,000ft with a crevasse on the one side and a shear cliff on the other. Pressing on becomes even more difficult but turning back – and abandoning QE – means facing up to the pain avoided in 2009. This is not a bad analogy. Whatever they do will be wrong. Their fate is not in their hands.
In addition, the OECD and the IMF have warned that the capitalist world risks slipping into years, if not decades, of much slower (“sub-par”) growth and higher unemployment, unless governments push ahead with sweeping structural reforms. With depression-type growth and some 50 million already unemployed in the main capitalist countries, the reports hint of worse to come. Present unemployment does not have a temporary character, as in the past; it is not merely cyclical unemployment, but structural unemployment, the most deadly expression of the decline of capitalism. Capitalism is so bankrupt and diseased that is cannot put to use the productive forces, including human labour power, at its disposal. If, at the dawn of capitalism, ignorant and starving workers broke machines, today it is the capitalists who are the Luddites who destroy machines and throw people out of work, not as a temporary measure, but permanently. Long-term unemployment has become a running sore everywhere. Now they talk glibly of a “New Machine Age” of smart technology that will eliminate swathes of jobs, causing shock waves of unemployment, falling wages and declining living standards. Such is the nightmare being prepared by the death agony of capitalism.
In the 1930s, Trotsky made a critical point in stressing the difference between “an organic crisis” of the whole system and normal cyclical crises, which have been part and parcel of the capitalist system from its inception. The boom/slump cycle of capitalism is the natural rhythm of the system, as with the inhaling and exhaling of oxygen and carbon dioxide from the human body. Cyclical oscillations are inevitable, which are processes that follow the cyclical pattern of production and exchange under capitalism.
Frederick Engels gave a classic description of the normal boom and slump cycle in his book Anti-DÜhring:
“The enormous expanding power of large-scale industry, compared with the expanding power of gasses is mere child’s play, now appears to us as a necessity for both qualitative and quantitative expansion that laughs at all counteracting pressure. Such counteracting pressure comes from consumption, sale, markets for the products of large-scale industry. But the capacity of the market to expand, both extensively and intensively, is controlled directly by quite other and far less effective laws. The expansion of the market cannot keep pace with the expansion of production. The collision becomes inevitable, and as it can yield no solution so long as it does not burst the capitalist mode of production itself, it becomes periodic. Capitalist production brings into being a new ‘vicious circle.’…
“The stagnation lasts for years, both productive forces and products are squandered and destroyed on a large scale, until the accumulated masses of commodities are at last disposed of at a more or less considerable depreciation, until production and exchange gradually begin to move again. By degrees the pace quickens; it becomes a trot; the industrial trot passes into a gallop, and the gallop in turn passes into the headlong onrush of a complete industrial commercial, credit and speculative steeplechase, only to land again in the end, after the most breakneck jumps – in a ditch of a crash. And so on again and again.”
This is an excellent description of the boom/slump cycle. Capitalist development takes this cyclical form as the anarchic nature of production always increases to a point when it hits the barrier of limited consumption. As Engels explained, the laws of production act more vigorously than the laws of consumption. The massive investments which take place during a boom pour out an increasing amount of commodities which, at a certain stage, begin to outstrip the ability of society to consume, thereby leading to a crisis of over-production - over-production of both consumer and capital goods for the purpose of capitalist production. The purpose of capitalist crisis is to eliminate this over-production and prepare the way for a new boom.
Under capitalism, every boom contains within itself the seeds of a new crisis. “In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed”, explained the authors of the Communist Manifesto. “In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity - the epidemic of over-production.” Such slumps are unique to the capitalist system, and are in contrast to the crises of under-production in pre-capitalist societies.
Over-production arises from the contradictions of the market economy and the division of society into mutually conflicting classes. The working class, the producer of all values, cannot buy back the products it produces, which at a certain point become a barrier to further economic development and crisis. The capitalists manage to get around this fundamental contradiction, at least temporarily, by reinvesting the surplus value extracted from the labour of the working class and thereby creating new markets. However, this in turn creates greater productive capacity overall and serves to exacerbate the new crisis when it comes.
“The conditions for immediate exploitation and for the realisation of that exploitation are not identical”, explained Marx. “Not only are they separate in time and space, they are also separate in theory. The former is restricted only by the society’s productive forces, the latter by the proportionality between the different branches of production and by the society’s power of consumption. And this is determined neither by the absolute power of production nor by the absolute power of consumption but rather by the power of consumption within a given framework of antagonistic conditions of distribution, which reduce the consumption of the vast majority of society to a minimum level, only capable of varying within more or less narrow limits… But the more productivity develops, the more it comes into conflict with the narrow basis on which the relations of consumption rests.” (Marx, Capital, vol.3, pp.352-353)
“Let us likewise ignore”, states Marx, “the fraudulent businesses and speculative dealings that the credit system fosters. In this case, a crisis would be explicable only in terms of a disproportion in production between different branches and a disproportion between the consumption of the capitalists themselves and their accumulation. But as things actually are, the replacement of the capitals invested in production depends to a large extent on the consumption capacity of the non-productive classes; while the consumption capacity of the workers is restricted partly by the laws governing wages and partly by the fact that they are employed only as long as they can be employed at a profit for the capitalist class. The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them.” (Marx, Capital, vol.3, p.615, our emphasis).
We experienced such a crisis of over-production in 2008-9, when the world capitalist economy experienced a devastating slump. They managed to delay this slump for decades by all manner of means, but in the end the capitalists simply compounded the slump when it eventually arrived. Like King Canute, they were incapable of holding back the tide. World trade collapsed by 30 per cent in a matter of months, and industrial production plummeted. There are many reasons for the crisis, but the fundamental reason for the crisis was that production had completely outstripped the ability of society to consume the commodities pouring onto the world market, despite the massive expansion of debt and cheap credit.
The Credit System
Credit certainly allowed the capitalist system to go beyond its limits for a time, until the house of cards came tumbling down. Credit is not created in a void but has to be repaid, with interest. It has its limits, like everything else. As Marx explained: “If the credit system appears as the principle lever of over-production and excessive speculation in commerce, this is simply because the reproduction process, which is elastic by nature, is now forced to its most extreme limits… At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production.” (Marx, Capital, vol.3, p.572).
At a certain point, the whole process goes into reverse as debts are repaid and consumption reigned in. This process enters into a downward spiral until the whole business has unwound. The limits of the capitalist system are reached and a massive economic recoil comes into operation, as Marx and Engels described.
The normal boom/slump cycle takes on an acute form, brought on by the ravages of old age. In contrast to its youth, the breathing of a capitalist system in decline becomes erratic and even convulsive. The effects of the slump become pronounced and painful, like the wheezing of an aging asthmatic. As a consequence, the recovery also becomes painful and anaemic, and cannot match the recoveries of the past. The growing impasse of the capitalist system was revealed by its inability to recapture the growth rates, profitability, investment levels or productivity that was characteristic of the 1950s and the so-called Golden Age. Every decade since that time has see a decline in rates of growth. In the 1950s, world trade – which played a key role in propelling production forward in the upswing – grew at an annual rate of 12.5 per cent. In the pre-crisis period, the average growth slowed to 6 per cent through most of the 1990s and 2000s. Last year, the fourth year of “recovery”, it was a down to a mere 2.1 per cent, and has failed to rebound. Given the slow growth and weaknesses everywhere, this is hardly surprising. But it is a clear indication of the organic crisis from which capitalism suffers. The diseased arteries of the system have become increasingly blocked.
For decades, world trade expanded, on average, at twice the rate of global output. It was the key to the post-war economic upswing that was to last some 25 years. But following the collapse in world trade in the slump of 2008-9, trade has become feeble and anaemic. This has provoked a heated debate amongst bourgeois economists over whether the march of globalisation is finally coming to an end. The IMF forecast world trade growth this year at 3.6 per cent, while the WTO forecasts a rise of 4.7 per cent, both of which are clearly overly optimistic. Even the latter is forced to warn that “geo-political risks have introduced an additional element of uncertainty to the forecast.” Delta Economics, a London-based analyst firm that monitors trade, predicts the growth of world trade this year, measured in current prices, at a mere 1 per cent. “2014 is not going to be a good year for trade,” said Rebecca Harding, Delta Economics’ chief executive. This is an alarming picture following five years of “recovery”, and is a clear reflection of the complete impasse of world capitalism, as was the case in the inter-war period. Globalisation has reached its limits. Globalisation now manifests itself, as we predicted, as a global crisis of capitalism.
While in the 1930s, protectionism served to squeeze world trade, this has not been the case today, at least openly. There are disguised barriers and subsidies at all levels, which have added to trade frictions, not least between China, the US and Europe. Currency manipulation is also high on the agenda, with the United States attacking China, following a sharp depreciation of the renminbi since the start of 2014. Talk of “currency wars” is not far from the surface. But protectionist tendencies are certainly emerging and could come to the fore in the next slump.
“In the current European and world unemployment crisis, conjunctural events are bound up with the organic processes of capitalist decay”, explained Trotsky. “We have more than once repeated that the conjunctural cycles are inherent in capitalist society at every stage of its development. But at different stages these cycles have a different character. Just as in a person’s declining years a surge of vitality is as uncertain as it is brief and every illness affects the whole organism, so the conjuctural cycles of imperialist capitalism, especially In Europe, show a tendency towards the prolongation of crisis relieved by comparatively short upturns.” (Trotsky, Writings 1930, pp.125-6)
“Capitalism in its death agony, as we know, also has cycles, but these cycles are declining and diseased”, he explained. “Only the proletarian revolution can put an end to the crisis of the capitalist system.”
“The upturn in the business cycle can be neither considerable nor of long duration, for we now are confronted with the cycle of a capitalism which is irremediably diseased. The new crisis, after a brief upturn, will be found to be more devastating than the present. All the problems will rise up anew with redoubled force and sharpness…” states Trotsky. “But today the economic upturn is no more than a hypothesis. The actuality is a deepening of the crisis, the two-year term of military service, the rearmament of Germany, the danger of war.”
It was the advent of the Second World War, in fact, that cut across this perspective and provided an escape route for capitalism. It still took the betrayal of the revolutionary wave following the war by the reformist and Stalinist leaders to allow capitalism the opportunity to recover.
A whole series of factors came together following the Second World War that allowed capitalism not only to stabilise, but to experience a colossal upswing that was to last 25 years. World trade was the driving force behind this extraordinary development, which allowed capitalism to temporarily overcome its fundamental contradictions, namely the constraints of the nation state and private ownership of the means of production. Capitalism went far beyond its limits. However, the contradictions of capitalism, which had been partially suppressed, had not been removed.
Finally, capitalism in 1974 experienced its first simultaneous worldwide slump. This represented a turning-point, which marked the end of the “Golden Age” and the beginning of a new downturn in capitalism. All the old contradictions now came to the surface, producing a crisis of over-production and mass unemployment everywhere. This marked the emergence of a new organic crisis that threw up barriers to capitalist development.
Nevertheless, capitalism was still able to stagger along, attempting to overcome its contradictions by every means possible. Credit was the main method, but by no means the only one, to propel the system forward. Credit in the United States alone grew from one trillion dollars in 1964 to 50 trillion in 2007. Capitalism had always managed to overcome its limitations, but only by creating greater and greater barriers in the future.
Eventually, the capitalist system exhausted itself. The longer it managed to put off its internal crisis, the bigger it would become when it finally arrived. All the factors that had propelled the system forward had turned into its opposite. All those factors that pushed capitalism ahead were factors that combined to drive it downwards in an uncontrollable spiral.
The strategists of capital, although alarmed by the depth of the 2008 slump, assumed that, as with all other post-war recessions, a strong recovery would set in. But that was in the past. The prospects for world capitalism are more like the experience of Japan in the 1990s, which entered a prolonged tortuous stagnation that continues to this day.
But the capitalists could not understand what had happened. The years of prolonged boom and upswing have gone forever. That was a product of a unique set of circumstances, which cannot be repeated. Instead, we are faced, at best, with prolonged stagnation and deepening crisis. The contradictions of capitalism, far from being resolved, are being compounded. The system has changed from a relative fetter to an absolute fetter on the development of the productive forces and the advancement of society.
Even before the 2008 slump, despite a 30-year rise in the rate of profit, the capitalist system could only develop at a very meagre pace, despite the speculative bubbles, mountains of credit and debt, and oceans of cheap money. This is a clear indication of the exhaustion of the capitalist system, which has reached its limits long ago and can only sustain itself artificially and with exceptional measures. This organic crisis, which reemerged in 1974, continued with ups and downs, right through until today.
“Capitalist production constantly strives to overcome these immanent barriers [to its further development], but it overcomes them only by means that set up barriers afresh and on a more powerful scale. The true barrier to capitalist production is capital itself.” - Karl Marx
Shockingly, labour productivity has also lagged behind in this so-called recovery. Economists refer to it as the “productivity puzzle”, which reflects their utter confusion. In Britain, it has reached extreme levels, where productivity per hour worked has actually fallen over the last five years. This is only the third time of such a fall in the last 100 years; the other two occasions were in the aftermath of the two world wars. The world economy has faced a similar crisis.
The crisis of productivity in the United States, the world’s richest country, has provoked heated debate over why it has fallen. The argument rages over the weak demand in this weak recovery or the fact that the factors driving innovation are running out of steam or have stalled. The debate was sparked by Professor Robert Gordon of Northwestern University, who posed the question whether the big innovations of the 19th and 20th century such as efficient transport and domestic labour-saving devices were now all in the past. America’s technical progress has been clearly slowing down since 1970, an effect of slowing innovation.
“The most disquieting development is what is happening to productivity”, states the Financial Times. “A report by the Conference Board think-tank out this week showed that, for the first time in decades, there was a decline in the world’s ability to turn capital and labour inputs into goods and services. Were this slowdown to continue, the consequences for living standards would be gloomy: efficiency and innovation are the most important drivers of economic growth in the long run.” (FT, 18/1/14)
Paul Krugman, the economics Nobel laureate, noted in the 1990s that “Productivity isn’t everything, but in the long run it is almost everything.” In fact, all economy can be reduced to an economy of labour time. The more productive a society is, the richer or wealthier it will become. Increased productivity arises from technological advance and investment in the labour process. Capitalism has produced a revolution in terms of productivity of labour, but that has now reached its limits. The fact that capitalism is facing a productivity crisis brings into question the whole justification for the market economy. Rather than continually investing the surplus extracted from the working class back in to production, capitalism has become more and more a barrier to itself.
Another article which reviewed the Conference Board productivity report underlined the seriousness of the situation: “The story for both labour productivity – output per hour worked – and total factor productivity is the same. Declining growth rates are a result of a long history of falling productivity growth in advanced economies which is no longer more than offset by huge rises in the efficiency of emerging economies.”
It continues: “In emerging economies, while productivity trends are still significantly better than the 1970s and 1980s, the worrying signs are that sustained spending on capital goods is not producing the same improvements in efficiency as 10 years ago, suggesting that capital is not being allocated to the best possible areas. The Conference Board estimated that total factor productivity stalled last year in China and declined in India, suggesting even the largest emerging economies are struggling to make the advances in efficiency previously so easily found.” It concludes: “Were this slowdown to continue, the consequences for living standards would be gloomy.”
As regards “the best possible areas”, capitalism has always invested its capital wherever it can make the greatest profitable returns. The capitalists are in business for no other reason. That is the logic of capitalism.
“Cooling of the Sun”
This has led some on the left to imagine that the crisis of capitalism can be explained by the tendency of the rate of profit to fall. While this tendency exists, it is only a tendency. Some periods experience a fall in the rate of profit, while others experience a rise, depending upon the counterveiling factors. This tendency acts over an extended period of time. We agree with Rosa Luxemburg when she said that if the fall in the rate of profit were to be responsible for the demise of capitalism, this “would take as long as the cooling of the sun.” Over the last 30 years prior to the 2008 slump, there has been a rising rate of profit. While an important tendency within capitalism, this does not explain the cause of capitalist crisis, which is the crisis of over-production.
Although there has been a recovery in profitability since the collapse of 2008-9, investment, the key to any sustained growth, is at rock bottom. In some countries, such as Britain, it has fallen substantially. The reason for this is not profitability (which has risen) or access to funds (the capitalists are sitting on hundreds of billions), but the lack of profitable markets (or “demand” as the bourgeois like to say). Excess capacity (over-production) is widespread, a left-over from the heightened optimism and massive investments made in the pre-crisis period.
Normally, after a slump, with the destruction of over-production, the rate of profit, which collapsed during the slump, increases and acts as a stimulus to new investment. The worn-out means of production are replaced with new machinery and equipment, and this provides the basis for an expansion of production. The slashing of wages and the deterioration of terms and conditions in the workplace, together with an eradication of the surplus stocks, assist to restore or partially restore the rate of profit. This prepares a new cyclical upturn, but also plants seeds for a new slump in the future. This is the so-called process of “creative destruction”. However, by driving down wages they destroy the purchasing power on which the realisation of profit depends.
Usually, a crisis would eliminate this over-production, but this has not been the case this time around. Despite the deepest crisis since the 1930s, the destruction of paper values, as well as plant and machinery, has failed to completely eradicated the “excess capacity”, which is synonymous with over-production of capital and the limits of the market. That is why there is talk of “zombie” banks and companies, artificially kept afloat by cheap credit. As a result, the capitalist system is weighed down by over-capacity and a lack of markets to sell their goods. This failure of the system is also a reflection of the present snail-pace growth of world trade. The slowdown in the emerging economies, especially China, is a symptom of this crisis as well as a factor that serves to exaggerate the problem.
Those who argue that the crisis was caused by the falling rate of profit need to explain why the recovery in the rate of profit over the past period has not led to a real recovery in investment and a return to sustained growth. “Profits as a share of US gross domestic product have risen from less than 4 per cent in the mid-1980s to a postwar peak of 11 per cent last year, a statistic that would gladen the heart of a 19th-century robber baron”, states John Plender. “The share of wages has fallen consistently since the early 1970s.” (FT, 11/1/14) According to the American-based Bureau of Economic Analysis, US pre-tax profits peaked in the 3rd quarter of 2006 at $1,865bn, a year before the credit crunch. The rate of profit gradually declined throughout 2008, but in the 4th quarter of that year the mass of profits fell to $861bn. This coincided with the slump and the collapse of world trade, as we explained. However, by the first quarter of 2009, pre-tax profits bounced back to $1,130bn, and by the 4th quarter had reached $1,548bn. By the 3rd quarter of 2010, they had almost reached the pre-crisis 2006 high of $1,845bn.
That being the case, why is it that capitalism is still in deep crisis, with anaemic growth at best and falling investment, the live-blood of any recovery? With record profits, the theory that capitalist crisis is caused by the tendency of the rate of profit to fall is shown to be wrong. It is a one-sided, mechanical explanation that contradicts the dialectical method of Marx, who viewed capitalist crisis not as a single cause but as a concatenation of contradictions. As he explained, “The law operates therefore simply as a tendency, whose effect is decisive only under certain circumstances and over long periods.” (Marx, Capital, vol.3, p.346) As we explained, the essence of capitalist crisis is the simultaneous overproduction of capital and consumer goods for the purpose of capitalist production, i.e. for the purpose of producing profit. When there are no markets, there are no sales and therefore no profits. Why should the capitalists invest under these conditions of organic crisis?
The attacks on living standards and the massive austerity have served to drive down consumption and investment, without which there can be no meaningful growth. In the past, capitalism would develop by investing the surplus extracted from the unpaid labour of the working class. In this way capitalism would overcome a deep-seated contradiction: that the working class cannot buy back the products it creates. But living standards are under attack across the board. Low wages make high profits possible, but at the same time they make the realisation of such profits impossible because they reduce the demand for goods. Furthermore, capitalist governments cannot increase public spending due to the crisis of state finances, and wages cannot be increased (which are being cut everywhere) as this will eat into profits. Without investment (which comes from the unpaid labour of the working class) and with falling living standards, the system is caught in a massive blind alley. Capitalist production depends upon accelerated accumulation (investment). An inability to perform this function must call forth inevitable crisis. Falling accumulation has a disastrous knock-on effect in preventing the continuous cycle and process of production, realisation (sales) and investment. When accumulation ceases, profits cease.
Capitalism is forced to create its own market in the form of investment into capital goods, which in turn acts as a spur to economic development. Marx divided up capitalist production into two departments based on capital goods and consumer goods. The complex inter-relationship between Department 1, the production of means of production (capital goods, machinery, buildings, etc.) and Department 2, the production of the means of consumption (consumer goods), serves to expand the economy. Apart from the tiny part of the surplus consumed by the capitalists, the rest is ploughed back into the economy. The whole historical justification of capitalism has been the development of the productive forces. If production does not increase then the market will continue to stagnate. The two Departments of production are interdependent. A fall in one must ultimately mean a fall in the other. The capitalist system works when every factor interacts on every other factor, which requires constantly rising production, investment and increased markets in a spiral of development. But today, the opposite process is taking place, with over-capacity and shrinking markets, with have the inevitable consequences of stagnation and depression.
The law of “accumulation for accumulation’s sake”, that drives capitalism forward, ceases to function. The general crisis of capitalism is reflected in the inability of capitalism to develop the productive forces as in the past. The capitalist curve of production, which Trotsky talked about, is on a downward trajectory. The epoch is now characterised by short booms or anaemic recoveries and deep slumps and protracted depressions.
Whatever the capitalists do will be wrong. All attempts to restore the economic equilibrium will simply serve to destabilise the social and political equilibrium. They are trapped between the devil and the deep blue sea. That is why we have entered the most disturbed period in history, a period of convulsions - economically, politically, socially and in terms of world relations. Each of these convulsions feed back on one another in a continuous loop.
Today, more than five years after the devastating slump, the prospects under capitalism look bleak, to say the least. We have a weaker recovery than in either the 1920s or the 1930s. At the same time, living standards are being cut to the bone and austerity is everywhere. The road of austerity is “going to be prolonged, fitful, and tortuous”, states Janan Ganesh. “The economic recovery does not spell the end of it, or even the beginning of the end. At best, it marks the end of the beginning. If this makes our fiscal crisis sound like a daunting historical challenge, it should.” (FT, 15/10/13).
Some serious bourgeois commentators, such as Lawrence Summers, a former US Treasury Secretary under Clinton, have drawn some alarming conclusions. In an article entitled Why stagnation might prove to be the new normal, he talks about a “secular stagnation” facing capitalism. According to the dictionary, the word “secular” means lasting an indefinitely long time or even a century. Even if the economy accelerates this year, he says, “this provides no assurance that it is capable of sustained growth at normal real interest rates. Europe and Japan are forecast to have grown at levels well below the US. Across the industrial world, inflation is below target levels and shows no sign of picking up – suggesting a chronic demand shortfall.” (Financial Times, 16/12/13)
Summers gave his speech about “secular stagnation” at the IMF’s research conference. This new epoch of stagnation, openly talked about by bourgeois commentators, is simply another term for a new depression, and a reflection of the organic crisis of capitalism. James Richards believes we are already in a depression where slow economic growth is structural. “The system is going wobbly”, he says, in a strange understatement. Among other more far-sighted strategists of capital, previous optimism has been replaced with grave pessimism, again a further reflection of the deep crisis of capitalism. This was reflected in a comment by Martin Wolf, the chief economist of the Financial Times, who pondered how a return to the 1930s was possible. “I did not know. Now I do”, he said bluntly. The seriousness of the situation (the new “normality”) has finally dawned on the most serious bourgeois representatives. They have been compelled to accept that they are in a crisis of the system very similar to the crisis in the Thirties.
Similar sentiments were made by the head of the IMF, Christine Lagarde: “The global economy is turning the corner of the Great Recession (they can’t bring themselves to use the word slump), although overall growth remains too slow and weak,” says Ms Lagarde. “Unless countries come together to take the right kind of policy measures, we could be facing years of slow and sub-par growth – well below the solid, sustainable growth that is needed to create enough jobs and improve living standards into the future.” (FT, 3/4/14) In all honesty, there is not a cat’s chance in hell of capitalist countries “coming together” with the “right kind of policies”. It is wishful thinking in the extreme, as witnessed by the dithering over European policy.
But a new spectre is haunting Europe – the spectre of deflation and falling prices, which characterized the 1930’s Depression also. The serious bourgeois economists are extremely alarmed as inflation in the eurozone in March 2014 fell to 0.5 per cent. In Spain, consumer prices actually fell by 0.2 per cent over the same period. It was the sharpest fall in prices since 2009. The general trend is clearly down, suggesting a chronic shortfall in demand, which they fear could end in a downward spiral.
Deflation – described as an “ogre” by Christine Lagarde - will simply add to their problems in encouraging people to put off spending and investment, as well as increasing the burden of debt. As prices fall, the nominal value of loans stays the same while revenues decline. Debtors are forced to use more of their income to service their borrowings. This dampens consumption, pushing prices further down. Investment is also postponed as companies hold on to their cash reserves, as the cost of holding cash falls. If they have debts, deflation will tend to increase the pressure for businesses to deleverage faster, forcing them into a downward spiral. As Luis Garicano, professor of economics at the LSE, stated: “We are in a territory where the models and analysis used by policy makers don’t seem to be working. And that is very worrying.” (FT, 3/4/14).
“None of us [in Europe] have ever experienced deflation”, says Graham Secker, head of pan-Europeaan equity strategy at Morgan Stanley. “Nobody believed deflation would happen in Japan until it did.” (FT, 3/3/14)
“For the eurozone”, explained the economist Wolfgang Munchau, “German deflation is a nightmare. If the periphery wants to become more competitive, it needs lower inflation than Germany. But if Germany, too, is deflating, then either the competitive adjustment will not happen; or the whole of the eurozone goes into deflation; or more likely, both.” (FT, 24/2/14)
They are especially frightened because interest rates are close to zero and threatening to become negative. But this strategy is futile, forcing depositors to horde cash in a safe-deposit box instead of paying into an account. Ironically, the Keynesian medicine of deficit spending, which could boost demand and lift prices, is ruled out in heavily indebted states where the threat of deflation looms largest. The only notable exception, which seems to be going for broke is Japan. Billions are being pumped into the debt-ridden economy, but with little effect except possibly pushing up interest rates, endangering a government default.
Crisis of the Productive Forces
Not surprisingly, bourgeois commentators give all kinds of reasons to explain the crisis, except the real one. Of course, different elements certainly play a role in the crisis. On the surface, the slump was seen as a financial crisis. But the lack of finance was caused by the crisis not the other way round. But there is something more fundamental that work. The laws of capitalism are no longer operating as in the past. Accumulation is drying up. Globalisation (extension and intensification of the world market) is coming to a halt and threatening to go into reverse. All the factors that contributed to the boom years have turned into their opposite.
Marxism sees in the development of the productive forces the key to the development of society and of history. Whilst capitalism is able to develop the productive forces, this can provide a relative stability to the system. That was the situation in the past, but this is no longer the case. Today, we have the opposite whereby the crisis has meant social instability on a world scale. “The world has entered the age of insecurity”, explains Philip Stephens in the Financial Times (21/2/14).
More than five years after the collapse of Lehman Brothers, the world capitalist system remains in a blind alley. It is is a deep malaise from which it cannot escape. This has serious consequences. As Marx explained long ago, no social system ever leaves the scene of history until it has exhausted itself and proves incapable any longer of developing the productive forces. As soon as this happens, society enters into a period of social revolution. This is precisely the situation that exists today on a world scale. There is a crisis of the productive forces, rebelling against the constraints of private ownership and the nation state. Capitalism has exhausted its historic mission and has become a gigantic fetter on the economic and social development and human advance in general.
Private ownership of the means of production, rather than advancing, has become an enormous obstacle to social progress. The mode of production and individual appropriation have come into conflict with the needs of social production. Existing property relations, namely, have become historically obsolete. In general, they have become a barrier to further advance. “From forms of development of the productive forces”, explained Marx, “these relations turned into their fetters.” The productive forces are in out-and-out revolt against capitalist property relations. Historical materialism explains that, “no social order ever perishes before all the productive forces for which there is room in it have developed; and new, higher relations of production never appear before the material conditions of their existence have matured in the womb of the old society itself.” These conditions are not only matured but are over-ripe and have placed the world revolution on the agenda.
The blind alley of capitalism is reflected by the fact that it cannot utilise fully the productive capacity that it has brought into being. In the booms of the past, the system could only use 80 per cent of productive capacity. In times of slump, the system can barely use 65 per cent capacity. Today, it hovers towards the lower end. This is illustrated by the figures for the United States, where capacity utilisation fell to 66.9 per cent in 2009 and rose to 79 per cent in 2013. This once again reflects the complete impasse of the capitalist system.
Marx himself sums up the whole contradiction:
“Capitalist production constantly strives to overcome these immanent barriers [to its further development], but it overcomes them only by means that set up barriers afresh and on a more powerful scale. The true barrier to capitalist production is capital itself.” (Marx, Capital, vol.3, p.358)
The capitalist system is in a state of terminal decline. The system is only one big shock away from a new world slump. This shock can be anything. That is why the capitalist commentators are alarmed by the events in the Ukraine. If this situation escalates and Russia retaliates against any sanctions, cutting of energy supplies to Ukraine and Europe, then this could have profound consequences. The Middle East war in 1973 led to the quadrupling of oil prices. This, in turn, triggered the world slump of 1974. Today, a large hike in energy prices and the chaos caused could have the same effect.
Even without this, there is growing pessimism and despair everywhere. “Another decade of western economic malaise - or, God forbid, another financial crisis - is likely to see more radical solutions and politicians emerge”, states Gideon Rachman in the Financial Times. (10/12/13)
This insoluble historical crisis is paving the way for revolutionary events and massive changes in consciousness worldwide. What is absolutely clear is that there is no way out on the basis of capitalism, which is set to plunge humanity into an epoch of revolution and counter-revolution. Only with the revolutionary overthrow of the system can we advance, putting behind us the nightmare of capitalist crisis and all that means. Only when we eradicate the contradictions emanating from capitalism can we fully use the world’s resources to eradicate the plague of hunger, poverty and squalor and create a life worthy of human beings. It would mean for humankind, in the words of Engels, “a leap from the realm of necessity to the realm of freedom.”