On Monday 27th October the stock markets of the world were shaken by a sudden collapse in share prices. The chaotic scenes on world's stock exchanges exactly ten years after "Black Monday" caused a general panic in financial and government circles, barely concealed by appeals for calm. What was the meaning of these events? And what do they mean for the future? Do they herald the onset of an economic collapse like the notorious Wall Street crash of 1929? Or is it just a minor "correction" as the apologists of capitalism maintain? The answers to these questions will decisively affect the lives and living standards of every man, woman and child on the planet. The purpose of this document is to provide the answers.
A Global Crisis
The main thing to note is that this was a truly global crisis. In the space of two weeks the stock markets crashed one after the other like a row of dominoes. In New Zealand, the first market to start trading after Wall Street closed, share prices tumbled by almost 10 per cent by the end of the morning's trading. In Sydney, the blue chip index plunged by 7 per cent at the opening. The falls were severe, especially in Asia and the so-called "emerging" economies of Latin America. Hours after markets in Hong Kong resumed a plunge that has triggered a worldwide sell-off, the Mexican stock market suspended trade twice and then shut down for the day after falling 13.3%, its sixth-largest drop ever. The Mexican peso also plummeted nearly 10% against the dollar after two years of comparatively stable exchange rates. Brazil's Bovespa index took the worst pounding in the region, falling 15%. It was the steepest one-day decline in five years for the largest of Latin America's emerging markets. Like many of the Asian markets that have been ravaged in recent weeks, Brazil also has a substantial current-account deficit. The Argentine Merval index closed 13.7% lower, and the Buenos Aires exchange halted trade on 17 of the 32 shares on the index. Thus, the first effect of the crisis is to place a large question mark over the lives of millions of poor people in the so-called Third World. These people have been promised the hope of a better future through hard work and "private enterprise" thanks to the wonders of the "market".
Similar promises have been made to the people of Eastern Europe and the former Soviet Union, which remains in the grip of a deep slump after seven years of "market reform" accompanied by an economic catastrophe with no historical parallel in times of peace. In the space of six years, the Russian economy has collapsed by a staggering 60%. The mass of the population have been reduced to beggary. There are 2,2 million cases of tuberculosis, a disease linked directly to poverty and malnutrition. These are some of the joys bestowed on the Russian people by "free market economics." Even in Eastern Europe, where the economy seemed to be picking up after a similar collapse, there is the beginnings of a new crisis in the Czech Republic, the strongest of these economies, and a slowdown in the others. The latest stock exchange crash has placed a dark cloud over Eastern Europe also.
But it was in Asia that the financial crash started, and has had its most dramatic consequences. It was initially triggered by international currency speculators taking bets against the Thai baht. Thailand, not long ago regarded as an "Asian tiger" was considered to be an easy target by the big international speculators who make fortunes by gambling on the money market like a gigantic global casino. Bangkok was coerced to consider raising interest rates to stem the outflow of foreign capital. But the baht quickly fell, followed by a host of finance houses overwhelmed by a mountain of bad debt. Once the run started it was unstoppable. The speculators walked away with an estimated $30bn in their pockets and an appetite for more. Here we have the reality of the "free enterprise system"! A gang of speculators armed with huge quantities of money decide that the economy of a given country is not as fit as it should be, and begin to unload its currency, forcing it to devalue. This is a highly profitable enterprise, enabling these gentlemen to "earn" billions of dollars without producing anything, just by lifting up a telephone. What better proof can one ask of the parasitic nature of present-day capitalism? According to the United Nations, the real figure for world unemployment and underemployment (including millions who eke out a living selling things on street corners and the like) amounts to no fewer than one thousand million people. At least one hundred million children are born, live and die on the streets without ever having a roof over their head, and the same number have no school. Yet the personal wealth of the richest ten people in the world would be sufficient to solve the problem of world poverty. Such is the real situation of the world in the last decade of the twentieth century.
According to the fashionable economic theory ("trickle-down"), all that is required is to allow the rich to get richer and the poor will automatically benefit. From this standpoint, the activities of financial speculators ought to be encouraged, as sooner or later it will lead to a healthy and thriving economy in which everyone will benefit. This "theory" has aptly been described by the American economist J. K. Galbraith as the idea that the rich do not have enough money and the poor have too much! In reality monetarist economics is an expression of the fact that for a whole period after 1945, the capitalist system went beyond its limits and now has to pull back, returning to a more "normal" capitalism, characterised by no state intervention, no welfare state, and , supposedly, "sound finance" and a "strong currency". In pursuit of this chimera, Thatcher not only liquidated large parts of the welfare state, but also destroyed one quarter of Britain's manufacturing industry. Britain has been increasingly turned into a parasitic rentier economy, dominated by the City of London, that is to say by banking and finance capital, the most degenerate and parasitic section of the ruling class. It is this section that is most enthusiastic in its pursuit of speculative gain, presented under the label of "liberalisation", "globalisation" and, of course, "free enterprise". The recent events provides us with a text-book example of how it operates.
A glance at the national debt figures shows that, under the surface, all was not well with the "tigers". In 1995, Thailand's external debt was equivalent to more than one-third of gross national product. In Indonesia it amounted to more than one-half, in the Philippines to almost one-half and in Malaysia to almost 40 per cent. These countries desperately needed foreign funds to service the debt but they could only be attracted by high interest rates which, in turn, would hold back economic growth. As long as these economies were achieving rates of economic growth in double digits and their stock markets were booming. the warning signs could be ignored. "Confidence" reigned supreme. But In fact the values in the stock exchange were inflated. Already in 1995, all the stock markets of the Asian countries were trading on price/earnings ratios averaging well over 20 times the earnings of the listed companies. While publicly maintaining the hype about the "tigers", inside the boardrooms of the big banks and monopolies, the comments were increasingly pessimistic. As one observer put it:
"More and more money men suddenly realised than Asian stock markets should not have been booming for the past two years," said Hans Briens, senior consultant for the Hong Kong-based Political and Economic Risk Consultancy. "They suddenly realised that these economies are not so strong and they are filled with a lot of corruption, nepotism, inadequate banking systems, etc."
Having brought Thailand to its knees, the men of money looked around for other targets close at hand. These were not hard to find. Paradoxically, the stock market and the currency which suffered most was Hong Kong, despite the fact that this was the one place in the region with "no big problems of indebtedness and a stock market rather conservatively trading in line with the collective corporate strength of its component parts. It was this very strength that caused the problem. Alone among stock markets, the Hong Kong Stock Exchange had the liquidity, and until just over a week ago, the strength, to be used as a milk cow for fund managers scrambling to get together the cash to pay off investors who wanted to get out of the region." (The Independent, 28/10/97.)
This shows the insane character of capitalism. The big monopolies (the "speculators") use their muscle to bring down a currency which they regard as weak, and even undermine an economy like that of Hong Kong which, by capitalist criteria, is supposed to be "sound". They act like predatory vultures or ravening wolves thirsting for easy profits. In the words of one of the currency speculators: "we were like wolves on the ridgeline, looking down on a herd of elk." This is how the destinies of millions of people are daily disposed of under capitalism!
The panic which spread with lightening speed to Stock markets around the world was caused by the attempt of Hong Kong's Monetary Authority to defend the HK dollar against speculators, leading to a collapse in the former colony's stock market. Shares around the world followed Hong Kong down, with the emerging markets of Latin America hit hardest last night as investors flew from what became transformed from "emerging markets" into a risky proposition. These gyrations on the stock exchange is an expression of the underlying nervousness of the bourgeoisie. Once the speculative mania is set in motion, nothing can stop it: "'What we are seeing is a huge balloon jabbed from every angle,' Edmond Warner, head of global strategy at NatWest Securities, said. 'Hong Kong might have been smoothed but for the fact that it comes straight after Thailand and Malaysia. In the US we have the real fear of higher interest rates and we have the big, high-fashion technology stocks, with stratospheric ratings being pummelled. In the UK we have confusion over EMU. We have contagion.' (The Guardian, 28/10/97, our emphasis.)
Bourgeois Can't Explain
Bourgeois economists, powerless to explain the real economic processes, resort to meaningless expressions which explain nothing at all. It is supposed to be all a matter of "confidence"--as if this was something entirely separate from the real economy, to be shaped at will by skilful politicians and bankers. They do not wish to accept that crises are an inevitable product of the capitalist system, and therefore attribute them to entirely subjective phenomena taking place in the minds of investors. in reality, in however distorted a way, even a stock exchange crisis is an expression of objective processes taking place in the real economy.
In an indirect way, Alan Greenspan admitted that the crisis in Hong Kong was not the cause of the panic, but only an accidental phenomenon:
"Mr Greenspan said that declines in confidence in the [Asian] region do have some direct effect on US corporate profits, but not enough to explain the recent behaviour of the US financial markets. If it had not been for developments in South-east Asia, the Fed chief declared, something else would have triggered a re-evaluation" (The Guardian, 30/10/97) In other words, the real cause of these events must be sought elsewhere. But where?
To answer this question, we must proceed from fundamental considerations. In a broad historical sense, the capitalist system had already ceased to play a progressive role even before the First World War. However, as Lenin and Trotsky explained many times, until it is overthrown by the working class, the capitalist system will always find a "way out" of the crises which it inevitably engenders. There is no such thing as a "final crisis" of capitalism in that sense. For reasons already explained by our tendency (see "Will There be a Slump?"), capitalism experienced a new period of upswing following World War Two which lasted for a generation, at least in the advanced capitalist countries. This fact set its stamp on the relations between the classes and the psychology of the working class of Europe, the USA and Japan for a whole period.
In reality, in this period, the capitalist system went beyond its own limits, through credit, indebtedness, Keynesian deficit financing and so on, and in particular through the development of world trade which partially and for a temporary period permitted the bourgeois to overcome the limits of the nation state. However, we now enter into a new and very different period, a period of storm and stress and convulsive crises in the economy, society and politics. All the factors that combined to produce the upward spiral of growth will dialectically turn into their opposite. Above all world trade, which acted as a powerful spur to growth and investment, no longer has the same effect, as we pointed out in a previous document ("A New Stage in the World Revolution"). Everywhere the capitalists are attempting to claw back the reforms of the past, cutting state expenditure and attempting to establish balanced budgets. They understand that, to continue down the old Keynesian road, they would be faced with an explosion of inflation. That is the reason why, despite all the propaganda that "inflation has been defeated", they remain terrified of inflation. However, the policy of slashing state expenditure only creates new problems, since it also signifies cutting the domestic market, thus paving the way for even deeper slumps in the future. Thus, the bourgeoisie is trapped on the horns of an insoluble dilemma. Whereas in the period of upswing, whatever mistakes they made did not matter, now whatever they do will be wrong. We are thus faced with a prolonged period of capitalist crisis which will inevitably give rise to revolutionary opportunities in one country after another, as the case of Albania showed.
Booms and slumps
Nevertheless, the existence of the organic crisis of capitalism does not mean that always and everywhere there must be a fall in production. On the contrary. The capitalist system always moves in a cycle of boom and slump ("the business cycle"). Recently, it has become the fashion to assert that the cycle has been abolished. The advocates of the so-called "New Paradigm" claim that the present boom in the USA is based on entirely new phenomena--information technology, "globalisation" and world-wide "liberalisation"--which they imagine will lead to permanent growth on the basis of increased productivity, low wages and interest rates and little or no inflation. In fact, as the serious bourgeois economists are well aware, this is just a pipe-dream. The normal cycle of capitalism is alive and well, and about to take its revenge on the doubters. The present gyrations on the stock exchanges are merely a reminder of this fact, like the first tremors which presage an earthquake.
The present cycle has already lasted seven years in the USA. This is quite long by post-war standards. Actually, the length of the cycle of boom and slumps is historically rather elastic and has varied at different times. In Marx's day it was a ten-year cycle. However, it was shortened in the post-war period to about five or six years. The last cycle lasted a little over seven years. There is therefore reason to suppose that the present cycle will not continue much longer, despite indications to the contrary.
At the peak of every cycle, the mood of the bourgeois is always characterised by wild euphoria. They begin to believe that the boom can really go on forever. Expressions to this effect are usually most prolific just before a collapse. The prospect of big profits, especially from speculative activity, creates a wave of greed which engulfs even the most "respectable" bankers and holders of pension funds. They then throw caution to the wind and plunge into the carnival of speculation like a drunken man, with no thought for the future. Such events always end up in the same way, with a collapse. After each collapse, they swear they will learn the lesson "next time", like a drunk with a bad head the morning after. But all history proves that they never learn anything. The present situation shows just that.
The USA over the past seven years has managed to achieve a relatively high rate of growth--partly at the expense of the working class and partly at the expense of its rivals. But the feverish increase in share prices on Wall Street was out of all proportion to the growth of the real economy. For almost a year now, Alan Greenspan, chairman of the Federal Reserve, has been warning of 'irrational exuberance' on Wall Street, but financial markets have continued to rise strongly around the world, ignoring growing evidence of a dangerous speculative bubble in the making.
"Some market pundits have argued that a 'new paradigm' has come into effect in the world economy, led by advances in technology, globalisation and productivity, to justify the sort of sky-high valuations which have become the norm on Wall Street and in some other markets.
"This was strongly rejected by Mr Greenspan in a recent testimony to the House of Representatives, in which he intimated that it was foolish to believe the normal rules of supply and demand had been suspended.
"If yesterday's sharp fall in stock markets around the world translates into a more general collapse in investment confidence, it would have serious repercussions for the world economy. The extent to which this happens largely depends on how much of the speculative gains of the past few years have been financed by debt. With interest rates at near record lows in the US, and the stock market rising strongly, there was every incentive to borrow to invest.
"In the most frightening of scenarios, a significant part of the recent gain on Wall Street would have been fed by borrowed money; the resulting negative equity could lead to a string of collapses and a credit squeeze. If the stock market fall continues, there is bound to be a knock-on effect to consumer confidence." (The Independent, 28/10/97.)
When Greenspan issued warning, the value of shares on the Dow Jones was a record 5,000. At the time of the crisis it had reached an astonishing 8,200. Such a staggering piling up of paper "values" bears no relation whatever to the real growth of the US economy. A stock exchange collapse was therefore rooted in the situation. This actually occurred on Monday the 27th of October, although it was preceded by a series of spectacular crashes in Asia, which reflected the fact that the period of rapid economic growth in that area was reaching its limits. This in itself is an extremely important element in the equation. It underlines the fact that the crises in the stock exchange are not entirely inexplicable events motivated by subjective elements, but are, in the last analysis, symptomatic of processes unfolding in the real economy.
What sort of Crisis?
In Capital vol. 3, (chapt. 30) Marx explains that "The last cause of all real crises always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive forces in such a way that only the absolute power of consumption of society would be their limit" Thus, the final cause of the crisis of capitalism is over-production and the limited purchasing power of the masses. But there are crises and crises. That is why Marx refers to "every real crisis." In actual fact, the line of capitalist development can be broken at any number of different places, and there are all kinds of crises, including crises in the stock exchange which are not directly caused by the central contradictions of the mode of production. Moreover, not every crisis on the stock exchange leads directly to recession.
The classic case of the latter was the Wall Street crash of 1929. In this case, all the conditions had been prepared for a slump, and the stock exchange crisis acted as a powerful detonator for the general collapse. However, that is not always the case. For example, the stock exchange crisis of 1920 served to squeeze out a large amount of fictitious capital that had been accumulated during the First World War and the inflationary boom that immediately followed it. This is what the bourgeois economists mean by a "correction". Depending on the given situation, such a "correction" can even play a positive role and act as a spur to a further development of the economy, as actually occurred in the 1920s. Something similar happened after the stock exchange crisis of October 1987. It is therefore necessary to take the recent events in context and deal with the processes at work in the real economy.
One of the most striking features of the present cycle is the staggering amounts of fictitious capital that has been injected into the system. Trillions of dollars are floating around the world, not for productive purposes but for speculation. The last few weeks have shown how these colossal sums ca be brought to bear on, say, the currency of a particular economy which is perceived to be weak and a devaluation can be forced by massive selling. This is just what occurred with the Thai baht, provoking a series of crises and devaluations in other Asian economies in a chain reaction which eventually provoked a wave of panic selling in stock exchanges in the USA and Europe. Thus, the much-vaunted "globalisation" of the financial system turns out to be the source of new contradictions and instability, and one that can easily spark off a massive financial crises on the lines of 1929 or worse, with unforeseen consequences for the world economy. The recent developments were only a little foretaste of what the future has in store.
Marx explained that the ideal of the bourgeois was the notion of obtaining surplus value from thin air, of "money begetting money" (M--M), without the painful necessity of resorting to production. In the modern epoch, they have done their best to realise this dream through massive and unparalleled speculation, and not only on the stock exchange. We have the spectacle of the looting of state assets through "privatisation". By these means the bourgeois obtain valuable utilities for trivial sums of money which they then proceed to milk for profit, spending little or nothing on new investment. On the other hand we have an unprecedented spate of take-overs, indicating that the process of concentration of capital predicted by Marx has reached unheard-of limits. These take-overs are also not generally accompanied by new productive investment, but are invariably followed by closures and lay-offs.
The massive increase in fictitious capital is shown by the incredible inflation of values on the stock exchange. In the USA the total value of shares ($10,900 trillion) exceeds that of the US GDP ($8,000 trillion). But sooner or later this process must end in a massive deflation of share prices in which someone must lose. That someone is invariably the small investor. The big monopolies will make sure they sell before the collapse (and usually bring it on by so doing). They even intervene when markets are falling, to buy up shares at bargain prices. Thus, the small investor is fleeced, and the big investors gain whether the market is up or down.
In 1987, and again in 1990, they managed to avoid a "meltdown", among other reasons because of the development of the Far Eastern market, especially China. Now, however, the crisis is affecting Asia. Indeed, the present stock market crisis can be traced to that very source. Far from being a source of stability, it is the source of instability. And while the markets in the USA and Europe have managed to stage a rally (for how long is another question), the crisis in Asia continues with no sign of relief.
The main reason why the 1987 crash did not lead immediately to a recession was the fact that the governments of the main industrial nations combined to inject a large quantity of liquidity into the economy to prevent it. From the point of view of orthodox Keynesian economics such conduct was completely irresponsible. The purpose of deficit financing is to get the economy out of recession, not to keep a boom going. The result of this policy was a huge amount of indebtedness which they are now struggling to squeeze out of the system. This partly explains the enormous national debts that plague all the main capitalist economies--more than 60% of GDP in France and Germany, 125% in Italy, 120% in Greece and 130% in Belgium. The National Debt of Great Britain which had been building up steadily for 150 years actually doubled in the last four years of the Tory government. The interest on these debts alone absorbs a huge amount of the wealth of these countries. Without this, Belgium, for example, would actually have a surplus. This constitutes an intolerable drain. Moreover, in pursuing these methods, they only succeeded in delaying the recession for a further two years. A repeat of this method seems ruled out at the present time. Quite apart from the fact that it would run counter to the policy of cutting state expenditure being pursued in all the main capitalist countries, it is not clear that it would have the desired effect.
The only country that has attempted to apply Keynesian methods in the last period is Japan. Under severe pressure from her rivals, especially the USA, to reflate her economy, Japan has pumped at least $275 billion into it. Yet the results have been very poor. Growth remains sluggish, but for the first time since the War, Japan now has a huge national debt--predicted to reach Y254 trillion by the end of 1997. If we add to this the combined debts of local government, the figure climbs to a staggering Y476 trillion. This is about 92% of the GDP (compared to an average of about 60% in the USA, Britain, France and Germany). In addition to this, interest rates are extremely low (only 0.5% in Japan). Since the normal mechanism for increasing the flow of liquidity is the lowering of interest rates, it is hard to see how they could use this method to reflate as they did in 1987 when rates were much higher. In this and other respects the situation is very different to that of ten years ago. It therefore cannot be taken for granted that a serious crisis on the stock exchange would end in the same way.
Peculiarities of the "Boom"
The present boom has some peculiar features which have been commented on in earlier material. With the exception of the boom in information technology in the USA, this cycle has not been characterised by a great increase in investment in the productive forces. What little productive there has been has mainly been to cover depreciation. This is not an accident. The extremely low level of demand everywhere means that the domestic market has been depressed. this reflects the fact that this boom has been mainly at the expense of the working class. As William Greider points out:
"The so-called Clinton boom is distinctive from earlier cycles because, despite five years of economic growth, family median income has still not recovered from the last recession. It's no secret how consumers cope: they borrow to keep buying. Household debt has reached an astonishing 91 percent of disposable personal income, compared with 65 percent in 1980, according to the Financial Markets Center. No one knows at what point the buyers will be tapped out. Consumer debt is being assumed on punishing terms. Nominal interest rates have declined somewhat, but real interest rates--the true cost of credit calculated by nominal rates discounted for inflation--are still extraordinarily high, because as nominal rates subside, the price level keeps falling, too."
The capitalists have concentrated on squeezing the last ounce of surplus value from the sweat and nervous effort of the workers--what Marx calls relative surplus value. Whereas in the past the capitalists obtained profits from investing in machinery this had a relatively progressive character (indeed, it was the only thing that was progressive about it) it now stands exposed as an entirely degenerate, effete and reactionary system. However, by holding down wages and purchasing power, they have also cut the domestic market, creating new contradictions.
The mania for speculation, take-overs, looting the state and generally attempting to get "something for nothing" is only the other side of the coin of the same phenomenon. It is a confession of historical bankruptcy. As always, the ruling class finds intellectual prostitutes ready and willing to find a "theoretical" justification for this. Never has the so-called "science" of bourgeois economics sunk so low as at the present moment. They are mere apologists for a class that has long ago lost any right to stand at the helm of society, that is incapable of developing the productive forces as it did, at least to some extent, in the past. The fall of Stalinism gave them a temporary access of confidence. but now this is turning to ashes. The most far-sighted strategists of Capital (a small minority, it is true) look with foreboding to the future. The majority, as usual, are happy to indulge themselves in the orgy of money-making like contented pigs around a sty, oblivious to all warnings. This applies particularly to the representatives of finance capital who feel themselves to be free and untrammelled in the new "global market" that enables them to indulge their appetite for enrichment without let or restriction. Nevertheless, the present crisis showed that a nervous mood is beginning to develop even in these circles. The subsequent rally on Wall Street (almost certainly the result of the big monopolies buying up cheap shares at the expense of the small investor) will doubtless convince them that it was all just a false alarm. They may well go back to their speculative antics as if nothing had happened. That will be a sufficient guarantee of new and even more catastrophic falls in the next few months.
What is the reason for the underlying nervousness? In recent months there have been a number of articles in the bourgeois press warning that the present boom could not go on forever. Stephen Roach has repeatedly warned of the danger of a "worker backlash", a warning given new strength by the victorious UPS strike in the USA this summer. Clearly, the monstrous squeezing of the workers has its limits. The fact that, at least in the USA, the boom has eventually acquired a certain vitality has encouraged the workers to press for higher wages. If we bear in mind that the real wages of the US workers have not risen for the past 20 years, it is clear that this situation cannot go on indefinitely. New strikes are inevitable in the next months, and not only in the USA. In Britain, the election of a Labour government has created an entirely new situation. The expectations of the workers are very great, and the right-wing Labour leaders cannot fulfil them. Here is a ready-made formula for a big movement on the industrial front. A similar situation exists in France, where the workers have given ample proof of their militancy. And Italy, Germany and Spain will not be far behind. the stage is set for one upheaval after another, especially if the economy picks up a bit in the next few months, which is not ruled out.
The recent events are a graphic reminder of the anarchic nature of capitalism. The idea that this can be controlled by governments and central bankers is nonsense. On the contrary, the uncontrollable nature of capitalism has never been more apparent than at the present time. The fact of "globalisation" merely means that these uncontrollable forces will be played out on a more gigantic scale than ever before. Moreover, the unprecedented intensification of the concentration of capital, where vast amounts of capital (much of it fictitious) are moved about the world at the caprice of a small number of people, lends the whole process an even more convulsive and unpredictable character. It is a finished recipe for massive slumps in the future, which can easily be triggered off by a stock exchange crash like the one we have just witnessed. The fact that this did not immediately happen on this occasion does not mean that it will not happen in the future. On the contrary. The false optimism produced by the present rally on Wall Street will itself reinforce the tendency to continue as before. This means that new and even more catastrophic falls are inevitable. If they coincide with a slowdown in the real economy, a stock exchange panic can easily be the starting point for a slump. The systematic cutting of the home market through the reduction of state expenditure, "downsizing", attacks on living standards etc. is preparing the way for a deep slump, probably the deepest since 1945. Historically, where there has been such a chain of events, it has not been automatic. There appears to be a delay of six months or even more between a stock exchange crash and the onset of a slump. The former serves to announce the latter, just as a tremor announces a serious earthquake. The present nervousness on world stock markets is thus the first of what will be a series of tremors which, for anyone with eyes to read, announce the beginning of the end of the present cycle.
The stock exchange crisis in the USA hit the share prices of the information industry particularly hard. The Nasdaq Composite index--which tracks many of America's fast growing, high-technology companies--slumped more than 10 per cent. This development was predictable, and predicted, and not only by the Marxists Those who argue that the business cycle has disappear based themselves on the idea that the advent of information technology has somehow fundamentally altered the system. This argument was recently answered in the pages of Business Week (1/3/97) which published a cover story under the title of "The New Business Cycle". Among other things, the article says:
"But the business cycle has not disappeared. To the contrary: High technology is more volatile than the automobile industry, with the biggest swings driven by new technologies."
It quotes Andrew S. Grove, chief executive at Intel Corp., as saying: "Every time we thought something about our business was less cyclical, the next cycle was bigger than the earlier one."
Actually, there is nothing new about the present situation. Already in the pages of the Communist Manifesto, Marx and Engels explain that: "The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was on the contrary, the first condition of existence for all earlier industrial classes." (MESW, Vol. 1., p.111.)
It is ABC for any Marxist that the capitalists must constantly find new and profitable avenues of investment. In every period of capitalist development there have been such fields of investments--steam power and textiles in the industrial revolution; the railways, steam ships and telegraphs in the last part of the 19th century; Fordism and automobiles in the 1920s and 1930s; then electricity, aeroplanes, the radio, telephone, television, chemicals, plastics, computers and so on. In fact, the relative importance of information technique is far less than, say, the railways in the last century. From 1869 to 1893, the miles of rail track quadrupled, and rail shipping costs dropped dramatically, opening up large parts of the country for manufacturing and commercial agriculture. The railroads themselves consumed much of the US steel and coal production and accounted for almost 20% of all investment. Overall, the railroads' expansion fuelled an economy that grew an average of 5% a year.
The most striking thing about the present economic cycle is not the opening up of new field of productive investment, but precisely the lack of it. If one excludes information technology, the real growth rate of the USA would be a miserable 1.8% per annum. This is really the only sector of the economy which has experienced a large influx of investment. For this reason, it has become the decisive sector of the US economy. In the past three years, the high-tech sector has contributed 27% of the growth in gross domestic product, compared with 14% for residential housing and only 4% for the auto sector. Over the past year, a stunning 33% of GDP growth has come from information -technology industries, propelled by everything from the Internet boom to the rise of direct-broadcast satellite television.
This is the classical model of capitalist accumulation. By investing in machinery, the capitalists in this sector have secured huge increases in productivity, allowing them to obtain simultaneously high profits (not for nothing is Bill Gates the richest man in the world), raising wages (in contrast to the majority of American workers) for programmers, net-work technicians, and other high-tech workers, and constantly falling prices for such products as computers and communications equipment. This cheapening of the elements of production has been--along side the systematic holding down of wages for most workers-- one of the main reasons for the absence of inflationary pressures in the US economy during the present cycle--at least up till now.
Information technology has in the last three years displaced cars, steel, and construction as the main motor-force of the US economy. Nine million people now work in this sector--more than steel or automobiles. Over the past three years in fact, the high-tech sector experienced strong growth while the rest of the economy slowed down. High-tech, as measured by Business Week, totalled some $420 billion in 1996. Consumers and businesses now spend $282 billion in the US on information technology hardware alone. That's 17% more than US purchases of new motor vehicles and parts, 49% more than spending on new homes, and 168% more than commercial and industrial construction.
High-tech also plays a key role in the stock exchange. From 1993 to the end of 1996, high-tech stocks have been the market leaders, pulling other sectors along with them. Over that three-year stretch, high-tech stocks have produced blistering annual returns of 35%, compared with 20% for the S&P 500. However, there are already signs that this is also reaching its limits. Business Week warns: "Riding a wave of technological optimism, the computer, software, and communications industries have grown at a pace far exceeding the rest of the economy over the past three years, helping to extend the expansion.
As has always happened throughout the history of capitalism, the capitalists invest in order to earn the maximum profits. Where a new and profitable field of investment opens up, the first to exploit it can obtain very large profits. But inevitably, as others pile in, the rate of profit tends to average out. Prices and profits begin to fall. The initial investment required to build a high-tech factory or to create a programme or a microprocessor is huge, although the cost of actually producing the chips or software for sale is relatively low. Rising demand drives average costs down still further, making it possible to charge lower prices and boosting demand even further.
However, there is a problem with this so-called "virtuous circle". As with any other profitable field of investment, at a certain stage overproduction begins to appear, eventually provoking a crisis. In the last cycle, this could be clearly seen in the field of office construction. When the recession finally struck in 1990, the spectacular crash of consumer spending and office construction made the downturn much worse. High-tech now finds itself in a similar position, as Business Week points out: "Over the past three years, business spending on information-technology gear has risen by almost 45%. Meanwhile, spending on labour has risen by only 19%. Even if information technology has become a strategic asset for many businesses, its very size makes it a logical place to cut or postpone when times get tough." The fact that so many workers in this sector are hired on a temporary basis (including outside consulting firms) makes it easier to sack them in a downturn. This will rapidly spread to other parts of the economy such as the telephone and networking industries.
"But this exuberance has a price: With high tech having grown so big, the economy is now vulnerable to a high-tech slowdown in a way that was never true before. And there are already troubling signs of weakness in those industries that, if prolonged, could foreshadow a wider slump--as well as a steep decline in the stock market." And remember that these lines were written several months before the stock exchange crisis. This shows that the serious representatives of capital already understood that the present boom was reaching its limits, and that, consequently, the stock market crisis did in fact reflect, however imperfectly, the real state of affairs. In the same way, it shows concretely the relationship between a crisis in the stock exchange and the real process of production.
"But if and when things turn sour, look out. Information technology--now the single largest line in many corporate capital budgets--will make a tempting target for cost-cutting if the product cycle slows, or if the rest of the economy should slip because of, say, a Fed rate hike. Inventories are lean, and with 3.5 million jobs eliminated since 1989, Corporate America has squeezed most of the fat out of its workforce. Next time the economy slows, the only way tight-pressed companies can save money will be to delay nonessential info-tech projects. 'Our industry used to be immune from the business cycle,' says Eric A. Benhamou, CEO and chairman of 3Com Corp. 'We're no longer flying under the radar. There's just too much money being spent.'
"The downside of the new business cycle could have dramatic consequences for employment, investment, and growth. In Silicon Valley, in Boston, and in other high-tech hotbeds across the country, a multitude of software companies are staffing up in expectation of 20% annual growth, hiring hordes of programmers, testers, and technical writers who would not be needed if high-tech sales slowed. 'It's a speculative bubble,' says Larry Kimbell, director of the UCLA/Anderson Business Forecasting Project, 'and there will be a lot of very disappointed people' when the boom slows.
"If profits drop sharply enough, most high-tech companies would have to curtail new-product development and the construction of factories. Venture-capital funds, now going begging, would dry up. As the breakneck pace of technological change slowed, buyers would have less reason to upgrade immediately to the next generation of computers or software, dampening demand even more. ' If our rate of innovation slowed, and the buying momentum consequently lessened, presumably that could have repercussions on the whole economy,' says Grove."
Crisis of Overproduction
In recent weeks there has been an increasing number of voices in economic journals expressing concern about overproduction, or, as they prefer to put it, over-capacity. October 1, 1997 an article appeared in the New York Times signed by William Greider--the author of "One World, Ready or Not: The Manic Logic of Global Capitalism."--entitled "When Optimism Meets Overcapacity" which sounded a warning note:
"Early this year, an article in The Wall Street Journal announced that the globalised economy had entered a "new era" of stronger, trouble-free prosperity. In August, the newspaper revised the outlook. Actually, The Journal reported, many industrial sectors are burdened by dangerous levels of overcapacity, too much potential output and not enough buyers. This glut, it said, promises ugly shakeouts ahead--failing companies, more closed factories--if not something worse.
"For the same reason, a cover story in The Economist summed up the global auto industry this way: "Car firms head for a crash." The industry will be able to produce nearly 80 million vehicles by 2000 for a market of fewer than 60 million buyers. The imbalances create downward pressure on prices and reduce return on sales. More factories must close, more large companies will merge or fail.
"The Financial Times reported that, thanks to the deluge of investment, even a hot market like China is now stuck with overcapacity, from cars to chemicals to electronics. A couple of years back, every multinational rushed to build plants there and catch the wave of China's rising consumption. Now factories, not consumers, are overabundant.
"Some respected Wall Street observers are now expressing concern, as the glut of productive capacity drives down prices and, eventually, profits. James Grant, editor of Grant's Interest Rate Observer, noted a general glut in areas as diverse as semiconductor plants and aircraft factories. "There are too many hotels in Phoenix and there is too much manufacturing capacity in China," he wrote.
"If a general deflation does occur, whether sudden or gradual, it will generate a negative cycle of falling prices and wages, depressing output and financial values, from real estate loans to stocks and bonds.
"William H. Gross, the respected managing director of Pacific Mutual Investment Company, which manages more than $90 billion in bonds worldwide, now pegs the risk of a general deflation at 1 in 5 over the next several years. "My deflationary fears are supported by two arguments--exceptional productivity growth and global glut," Mr. Gross said. He cites twin causes: real wages, both in the United States and abroad, cannot keep up with the rapid growth of new production--that is, there won't be enough demand to buy all the excess goods. And emerging economies create aggressive new players eager to outproduce and underprice everyone else."
Similar concerns were expressed in a recent editorial of Business Week:
"The global economy is awash in a sea of capacity. Name the product: autos, chips, steel, chemicals, computers, refrigerators, clothes. Now that inflation doesn't terrify people, Cassandras are raising concerns about deflation. They argue that supply is outstripping demand, and a deflationary spiral will send the world into a 1930's style depression. Some proponents of deflation even want to get the Fed to cut rates to boost domestic demand. Let's take time out and consider the issue. So far, deflationary pressures have actually been a boon to the US and, indeed, the New Economy thrives on it. If there is a demand problem looming, it is very much an Asia phenomenon, and therefore the solution lies in Asia.
"Look at Japan, mired in its own liquidity trap. Its benchmark government bond yield is down to 1.78%, lower than US rates during the Depression. Yet business credit demand is dead in the water and the economy is showing zero growth for the first half of the year. Monetary policy is helpless and fiscal policy is misbegotten. Taxes, already high thanks to the cost of a heavy government bureaucracy, just went up. A deflationary spiral has sent prices for goods, land, and stocks falling. Instead of deregulating and lowering taxes to boost domestic demand, Tokyo is cheapening the yen to encourage Japanese companies to export and tap US demand.
"China is the wild card in the overcapacity scenario. Beijing says that one-third of all industrial products made in the country, from VCRs to washing machines, are in oversupply. This is just the beginning. China is building a giant export machine while protecting its own domestic markets and industries. In good mercantilist fashion, China hoards its foreign-exchange reserves instead of spending it for imports. The yuan, like the yen, is deliberately kept low to promote exports and curb imports. Ditto for Korea. Throw in the Southeast Asian financial crisis, and the overcapacity/demand scenario looms large.
"The solution is to boost demand in Asia by dismantling mercantilist practices. US economic growth is already maxed out and there is no way American demand can absorb the capacity being generated in Asia. The good news is that incomes are already soaring around the Pacific Rim and the middle class is exploding. Truth is, demand is already beginning to catch up to supply in Asia.
"So how worried should we be about overcapacity? Deflation in the 1990s is uncharted territory. In the '30s, it destroyed income and jobs, eviscerated savings, and kept the world poor from 1929 until World War II. Yet in this decade, deflation has led to higher growth and rising real wages as high-tech companies cut costs, raise productivity, and increase unit sales to compensate for falling prices. The big question is whether this can work for the entire global economy. Will there come a point when increases in productivity and unit sales fail to outpace falling prices, triggering a deflationary spiral? With US producer prices down 0.4% for the year and inflation approaching zero, we may soon get an answer." (Business Week, 13/10/97 )
These fears are not exaggerated. The existence of overproduction is well documented. There is over-capacity world-wide in a whole series of basic sectors, not just cars and steel, but also microchips. According to the Economist article quoted by Greider, even if the entire US automobile industry were to disappear, there would still be too many cars on the market. In volume three of Capital Marx points out that overproduction manifests itself at the close of the economic cycle. The market, he explains, expands more slowly than production. The narrow base of consumption of the masses in Asia cannot contain the colossal increase in commodity production, both at home and in terms of imported goods from the USA, Japan and Europe, all struggling to conquer this market. The case of cars alone illustrates the point. Not only are Toyota, Ford and Volkswagen fighting for access to the Asian market, but the Asian countries themselves are beginning to produce cars--China, Indonesia, Malaysia all intend to produce their "own" cars which will add to the glut not just on Asian markets but on the world market. Sooner or later, what has taken place in Asia will be reproduced on a global scale, creating the conditions for a fully-fledged slump.
The crisis in Asia
One of the factors that has played an important role in the recent development of the world economy has been the entry of new areas which had previously played a fairly marginal role but which now acquire an increasing importance in the calculations of world capitalism. This is particularly the case with the so-called Asian "tigers"--Taiwan, South Korea, Singapore, Hong Kong, and more recently Indonesia, Thailand and Malaysia. But the greatest hopes were aroused by the prospect of the opening-up of China with its huge population of 1,2 billion people. Actually, there is nothing new in this. In every period of capitalist development from the 16th century onwards, new areas, whole continents even, have been drawn into the system of capitalist production--first the New World in the dawn of capitalism, then the colonies in Asia and Africa in the 18th century , then China, Australia, California and South Africa during the 19th century, and so on.
The emergence of the so-called "tiger economies" did not prevent the recession of 1990-92, but it did prevent it from turning into a deep slump or depression. However, the Asian market, important though it is, is not sufficient to absorb all the exports of Japan, Europe and the USA. There is a fierce struggle for markets in Asia between all these countries. this is an expression of the limited nature of their home markets, and the lack of demand reflecting the low purchasing power of the masses. Ten years ago the USA only exported the equivalent of 6% of its GDP. This has now increased to 13%--quite an astonishing achievement in such a short time--and it wants to increase this figure to 20% by the year 2000. This means increased tensions and conflicts with Japan and Europe which can place the entire system of world trade at risk, especially in the event of a deep slump. The struggle for the Asian market is only one expression of this conflict which continually manifests itself in all manner of ways.
In actual fact, the role that the "tigers" could play in the world economy (at least at the present time) has been greatly exaggerated. Most of them are quite small--two of them (Singapore and Hong Kong) are, in effect, city-states. Taiwan and South Korea are special cases where US imperialism was compelled to help them to develop because of fear of the Chinese revolution (the same was true of Japan after 1945). However, these economies do not have anything approaching the economic weight of Japan, which remains in a depressed state seven years after the last crisis and shows no signs of a serious recovery.
The only economy that could make a fundamental difference to the world economy under certain conditions would be China. However, here too the Western capitalists miscalculated. It is true that huge sums have been invested in China over the last decade. To some extent, China has fulfilled the role that the West had originally intended for Russia. It is a paradox that where they have failed to invest in Russia--which obediently followed all the advise of the IMF (crazy advise even from the standpoint of the Russian nascent bourgeoisie)--they have invested large amounts in China where the Stalinist bureaucracy keeps a firm grip on power and pursues an independent agenda. However, from a capitalist point of view, China does not represent a market of 1.2 billion people at all, since a market represents purchasing power. Despite advances in certain areas, China remains a relatively backward economy in which the great majority (800 million) still live in the countryside in conditions of poverty. Even the rapid growth in the coastal areas generates new contradictions. China has become a significant exporter of cheap goods which have begun to invade western markets. At the present rate of expansion, China will soon replace Japan as the country with the biggest trade surplus with the United States, a situation which has set alarm bells ringing in Washington.
Over-capacity played a major part in the crisis in Asia. As far back as December 1996, in a leader article entitled "Asia: What's Behind the Slump", Business Week reported that:
"As they race to develop their industrial clout, these nations are creating other problems. Overcapacity looms in such key areas as petrochemicals, consumer appliances, passenger cars, and chips. The region has based its strategy on the experience of Japan, South Korea, and Taiwan, which graduated to higher value-added industries through skilful use of protection and subsidy after losing competitiveness in garments, shoes and toys. East Asia doesn't need all these refineries and car plants. But policymakers seem oblivious to what their neighbours have been building so furiously.
"In petrochemicals, Indonesia, Thailand, China, Taiwan, and South Korea all are sinking billions into sprawling complexes. This year, a chemicals glut pushed prices down by 36%, walloping Asian producers. Yet the building binge rages on. South Korea, already accused by its neighbours of dumping, has three huge petrochemical plants under development and three more on the drawing board. They include plants by giants Hyundai Corp. and Samsung Group. 'Once Samsung and Hyunday get into petrochemicals, they will overbuild like they do in autos,' says McKinsey & Co. chemical consultant Steve Tagtmeier: 'They're going to crash the world market.' Kim Tae Han, strategic planning manager for Samsung's chemical group, is unfazed: 'To compete with European and US companies, we need to expand.'" (Business Week, 2/12/96.)
And Greider points out that:
"The visible disorder that gets official attention involves finance--dramatic currency devaluations, overexposed banks, the sudden flight of foreign investors. But the underlying cause, as some acknowledge, is overcapacity. Thailand is a classic illustration of how financial markets can get ahead of reality and destabilise the real economy of producers and consumers. Bankers and investors are so busy lending and investing and bidding up prices that they don't see that the new factories they're financing may not be able to sell their output."
The increased exports from Asia is the other side of the coin of the coin of the drawing in of new elements into the all-encompassing world market. Moreover, western exports to Asia will be affected by the slowdown. South Korea has entered into a serious crisis. Now it has been followed by crises in Thailand, Indonesia and Hong Kong. This shows that the boom in Asia reaching its limits. The stock market and currency crises which began this summer and have continued with ups and downs ever since are merely a reflection of this fact.
By plunging Asia into crisis and compelling one country after another to devalue, international finance capital has unwittingly acted as an agent of revolution. As was the case one hundred years ago in Russia, imperialism has strengthened the working class in Asia by exporting capital in their greed for profits. In an article entitled "Asian currency crisis: rescuing the rich", Eva Cheng spells out the consequences of the crisis for Asia:
"Inflation will escalate and a big drop in the standard of living for the common people in these countries is guaranteed. In Thailand, this process will be spurred by the International Monetary Fund-brokered "bail-out" credit line of US$17 billion. As usual, this requires deep cuts in social spending, reserving the biggest burdens for the poor." The dream of millions of people of a prosperous future through hard work and saving will be shattered, leaving the road of struggle as the only viable option open to them. This will mean further social and political upheavals in one country after another, creating the conditions for a revolutionary mass movement as was already anticipated by the magnificent movement of the workers of South Korea. In Indonesia in particular there is an enormous revolutionary potential because of the crisis of the Suharto dictatorship and the beginnings of a reawakening of the proletariat.
Above all, the fate of Asia will be decided by events in China. Although it has not been given much publicity, the economic turmoil has spread to China, where there has been a wave of strikes over the past year. Once the mighty Chinese working class moves into action, the whole situation can be rapidly transformed. The fears of the bourgeois were expressed in the pages of the Guardian. A bear raider Simon Cawkwell reported a conversation with a partner in the Far East: "Instead, he said, I should concentrate upon the massive economic disarray that has developed in China - a much larger and more significant territory altogether. He emphasised that the pattern of lending and borrowing in China is out of control." (31/10/97)
Pessimism of the Bourgeois
The recent events have undoubtedly worried the more thinking representatives of the bourgeois. "People are worried a global financial crisis is probably around the corner," said Bentham Hung, manager of the $37 million All Weather Fund for President Investment Trust Corp. in Taiwan. There can be no doubt that the collapse caused panic in financial circles. "The beginnings of the first sustained bear market for 17 years", one financial market strategist described it. (quoted in The Guardian, 28/10/97.) The mood on Wall Street was summed up as follows: "As dealers in New York begged for trading to be stopped, President Bill Clinton was briefed on the unfolding crisis. Attempting to restore calm to America's feverish financial markets, a White House spokesman said: ' The President is confident the fundamentals of the American economy are strong.' Others were less sanguine. One analyst said: 'It's just feeding on itself. People are selling to take profits while there are profits to take.' " (The Independent, 28/10/97.)
This is by no means the majority view of the bourgeois. A more common view was expressed by one of the strategists of Capital:
"We're into a severe correction," said William Dodge, principal at money-management firm Marvin & Palmer in Wilmington, Del. "But this is not the start of a bear market," he argued. By Dodge's definition, a true bear market is a decline of more than 20% in stock indexes like the Dow and the Standard & Poor's 500. Despite the panic selling worldwide in recent days triggered by worries over Southeast Asia's economic and market woes, Dodge and many other big investors believe there is little fundamentally wrong with the US economy and stock market--other than that share prices had gotten ahead of themselves."
As always, there is no shortage of soothing voices, assuring investors that the future is rosy and, of course, "the fundamentals are sound". Those fundamentals include low interest rates, continuing corporate earnings growth, a highly competitive US economy, and low inflation. However, the fear of a slump is ever-present, like the ghost of Banquo in Shakespeare's Macbeth. All attempts to exorcise it are in vain! Writing in the Los Angeles Times, Tom Petrunio, the Times Staff Writer spells out a very different scenario:
"Perhaps most troubling, some experts suggest, is the possibility that the market's plunge foretells economic trouble that won't be evident for many months. That worry centres on fears that Asia's turmoil will trigger a global economic slowdown--and price deflation--so severe that it will cripple US companies' still-robust earnings, effectively pulling the rug out from under stock prices even if interest rates continue to decline. That possibility has been dubbed the "ice" scenario for the world economy. And even money managers like Dodge, who don't expect that something so dire will occur, admit that it will become a much bigger topic of discussion as markets globally plummet and questions are raised about consumer and business confidence.
"In this environment, people who want to talk about "ice' now have something to talk about," he said. Even though the American economy's health mostly depends on domestic consumption rather than exports, the great fear is that American consumers--twice as many of which are investors in the stock market today as in 1987 (surveys suggest more than 4 in 10 Americans now invest)--will suddenly begin to clamp down on their spending because they feel poorer as their retirement savings plans and other stock accounts fall in value. The same point was made by veteran Keynesian economist John Kenneth Galbraith, who argued that when people feel poorer, they spend less. Thus, despite all the brave talk and the rally on the stock market, the effects of the recent crisis can still make themselves felt in the coming months. The big investors will have made a good killing. But many small investors must have lost heavily. And this is by no means the last fall. The confidence of the big companies in future investments will also have been shaken, as even Alan Greenspan was forced to admit: "Commenting on market developments, Mr Greenspan said that even after the sharp rebound around the world in the past 24 hours, declines in global markets have left investors less wealthy and business facing a higher cost of capital". (The Guardian, 30/10/97)
The effects on investors was also spelled out in the Los Angeles Times (29/10/97):
"Q: What happens when investors sell off stocks in companies with ties to Asia?
"A: Most Fortune 500 manufacturing companies have plants in Asia. Their revenues could suffer twice, once because of US stock price losses and again because the dollar, stronger in Asia, will translate into losses on the balance sheet. That's because any assets the companies own in that region denominated in those currencies will be worth less and companies then will be loath to expand.
"Q: How does that affect Main Street?
"A: Very simply, if Fortune 500s or other companies see their revenues and profits diminish, they either won't be hiring or they may well be laying off workers."
But by far the most damning indictment came from billionaire investor George Soros. This is not the first time that Soros has expressed doubts in the future of capitalism. His opinions deserve attention if for no other reason than his very close acquaintance with the workings of the market economy. Unlike those bourgeois economists who pontificate from their university pulpits, and whose views are of not the slightest interest to anyone, Soros has at least made several fortunes through his practical activity as a big time speculator. The Guardian (30/10/97) published an article entitled "Soros warns of society in ruins". It begins as follows: "George Soros, the archetypal capitalist, believes that financial markets are so unstable that they can 'destroy society'." He is quoted as saying: "
If fluctuations become too large "you can have a breakdown. It will come through political and eventually military events, rather than events merely in the financial markets". he adds: "Markets can move in unexpected ways and become chaotic. I'm afraid that the prevailing view, which is one of extending the market mechanism to all domains, has the potential of destroying society.
"Unless we review our concept of markets, our understanding of markets, they will collapse, because we are creating global markets, global financial markets without understanding their true nature. We have this false theory that markets left to their own devices tend towards equilibrium". (The Guardian, 30/10/97)
Of course, there is much that is mistaken in Soros' analysis. He is not a Marxist! He approaches the question of the economy purely from the point of view of finance capital. But, given his profession, that is hardly surprising. Also, in the absence of a socialist perspective, he concludes that the breakdown of capitalism can only result in "military events"--which might mean either a war or a military dictatorship of some sort. We need not go into these questions here, except to say that George Soros does not see that the crisis of capitalism can only be resolved when the working class puts an end to the dictatorship of the banks and monopolies and introduces a planned economy on the basis of a genuine workers' democracy. Of course, we never expected Mr. Soros to understand or accept this. It is enough that this "archetypal capitalist" has, from his own very considerable experience, come to a correct conclusion: that the capitalist system is undermining itself through its own inherent and insoluble contradictions. That Mr. Soros is who he is makes such an admission a thousand times more valuable.
Consequences of a slump
For Marxists, the importance of economic perspectives consists in the social and political consequences that derive from them. It is necessary to introduce a number of caveats here. Firstly, economics--even Marxist economics--is not an exact science. Long ago, Engels pointed out that it was impossible to make an exact economic prediction because, apart from anything else, the necessary statistical information always arrives after the event. Even today, with the colossal power of modern computers, the situation has not changed fundamentally. Not long ago a man who had made a lot of money gambling on the stock exchange was criticised for basing himself on mere "anecdotal evidence." His reply was quite interesting. He said "Of course I base myself on anecdotal evidence. What else can I base myself on? Statistics? That is a bit like looking in the rear window of my car." In other words, statistics only show us what has already passed. They do not tell us what is going to happen. It is very dangerous to assume that present trends will continue in the future. That is precisely the mistake of those (and they are many) who assume, for no good reason, that the US economy will continue to grow and that prices of shares will continue to rise. Of such stuff are stock exchange crashes made!
While it is not possible to make precise economic predictions, it is both possible and necessary to study the fundamentals and try to assess the basic processes to see where we are heading. The first thing that is necessary is to discount the huge amount of triumphalist propaganda that has no base in reality but is meant to provide some kind of justification for the capitalist system and soothe the nerves of investors. The assertions that the business cycle has been abolished and that capitalism has entered a new phase of uninterrupted growth ("the New Paradigm") is devoid of any scientific, theoretical or empirical basis. We are heading for a new slump worldwide. The only questions are when? and how deep?
To the first question it is impossible to give a definite answer, except that to say that, after seven years of expansion in the USA, it is probable that the present boom will not continue for more than one or two years, and possibly will end far sooner. As to the second, we have already expressed an opinion, based on a number of empirically verifiable considerations. To look no further: the present boom is wholly different to the kind of boom we saw in the period of capitalist upswing from 1948--74. At the peak of the boom there are, according to official figures that grossly understate the real position, over 30 million unemployed in the advanced capitalist economies of the OECD. In Germany, for the first time since Hitler, there are 4.5 million out of work (11.5%). In France, 12.4%; in Italy, 12.4%; in Belgium, 14.1%; in Spain, an astonishing 20.8%. The unemployment figures for Japan and the USA cannot be accepted at face value because different methods of calculation are used. A large number of people in "employment" only work a few hours a week on low pay. Everywhere there has been a proliferation of part-time jobs, "MacJobs", "rubbish contracts" as they are called in France. Of the nine million or so people who depend on the information technology sector in the States, a large number are on temporary contracts and can be dismissed immediately when there is a downturn in the market. If this is the situation at the "peak" of the boom, what will happen in the next slump?
It cannot be excluded that a new crisis on the stock exchange may be contained, thus providing a "correction" which will not lead directly to a slump, but prepare a further period of expansion. All taken into account, this does not seem the most likely scenario. But even in that case, the boom could only continue for one or two years at most, and then end up in an even steeper collapse. However, the latest reports indicate that the turbulence on the stock markets has by no means exhausted itself. Not only are Latin America and Asia still in crisis, but there is a sustained assault against the Greek drachma, which indicates that the money markets are still seeking out the weaker currencies, like a hunter who is seized with blood-lust. Most important is the self-evident fact that, even after the recent losses, stock market values in the USA and Europe are still seriously over-valued. New panics and falls are therefore inevitable in the next few months, weeks, or even days. Already these is a new wave of panic. "A new bout of panic selling of stocks last night spread like flu to both North and Latin America as fears of depressed corporate earnings and economic downturn in Asia gripped the world's financial markets", reported the Guardian (31/10/97). "It looks as though its' round two, to use a boxing analogy," said Neil MacKinnon, chief economist at Citibank in London.
The present propaganda to the effect that "all is well" is designed to reassure the army of small investors, some of whom have foolishly decided to return to the market with that self-confident air that is usually associated with sheep on their way to the slaughter-house. Of course, those that lead them there will, as usual, escape without so much as a scratch! The exact timing of events is impossible to determine. But that it will all end in tears is not open to serious debate.
If, as seems most likely, the next slump will be severe, what effect will that have on the class struggle? Marxism has never established a direct corollary between slumps and the class struggle. Trotsky once pointed out that poverty, in and of itself, did not give rise to revolution. If that was the case, the masses would always be in revolt! But it is not the case. As a matter of fact, the initial effect of a deep slump would be temporarily to stun and disorient the working class. The onset of mass unemployment (far greater than the present figures, which are already very high) would act as a brake on the economic struggle, although important defensive struggles would occur, strikes against wage cuts and even factory occupations to prevent closures. However, a big movement on the industrial front would be excluded for a time. It would require a new economic recovery before that would occur. However, important political conclusions would flow from a slump. There would be the beginning of a questioning of the system and a generally critical mood. At a certain moment this would find an expression within the ranks of the workers' organisations.
We can draw a rough parallel with what happened in the USA after the 1929 crash. There was not an immediate movement of the class. But with the beginnings of a recovery in 1933-4, there was a sharp upturn in the class struggle with strikes and sit-ins, including the Teamsters' rebellion in Minneapolis where the Trotskyists played an important role. The shift to the left was dramatically expressed by the setting up of the CIO, representing millions of previously unorganised workers who quickly moved in a radical direction. On a world scale, the crisis of capitalism expressed itself in revolutionary and pre-revolutionary situations in one country after another, and, as a corollary, movements towards reaction in either a Bonapartist or fascist form. For reasons we have explained, it is ruled out that the fascists could come to power now as they did in the 1930s. But the general scenario will have many similarities with that turbulent period. Certainly, the coming period will be very different to that of 1948--74.
The post-War period has not seen a deep slump as in the 1930s. This would shake the masses out of the habits and routine of the past. It is not an accident that in the 1930s, the social crisis found its expression in a whole series of internal crises and splits in the mass organisations of the working class. Particularly important was the crystallisation of mass left wing currents in the Social democratic parties. This has not generally been the case in the post-war period in Europe, although there were tendencies in this direction in the 1970s, in the period of the first serious recession in world capitalism since 1945. That tendency was temporarily cut across by the boom of 1982--90. Indeed, it was reversed over the last decade when the Labour and trade union leaders, released from the pressure of the working class, veered sharply to the right. This fact has led all the sectarian grouplets to write off the mass organisations as "hopelessly right wing", "bourgeoisified" and the rest. These people understand nothing of the way in which the working class moves.
The mass organisations will be shaken from top to bottom in the next period. Right wing leaders like Blair who preach the amelioration of class conflict will be left high and dry by the stormy events that impend. They have no alternative to the crisis of capitalism except to echo the ideas and policies of the banks and monopolies. Once the masses see what this means in practice, there will be an enormous reaction against. Even now, the workers are gradually beginning to understand that the capitalist system means nothing but unending exploitation, unbearable pressure, an agony of toil, stress and worry. They will be made forcibly aware of the contradictions of the system and begin to draw the necessary conclusions. The ideas of Marx, Engels, Lenin and Trotsky will begin to obtain a wider audience as workers and young people seek an alternative and a way out of the crisis.
There will be a process of internal differentiation in the ranks of the unions, the Socialist and Communist Parties. At a certain stage the right wing will be vomited out, opening the way for the transformation of the mass organisations. It is necessary to prepare for this! It is necessary to redouble our efforts to win, educate and train cadres, above all from the younger generation who are open to revolutionary ideas and are not hidebound by routinism, cynicism and scepticism. For every one that can be won to Marxism now, there will be ten, twenty or a hundred in the period that opens up before us. The working class will learn in struggle. But the old leaders who have abandoned socialism and capitulated to the pressures of capitalism are incorrigible. They represent the past, not the future. The Socialist and Communist workers, starting with the active layers, will want to return to the real traditions of the movement--to the early days of the Socialist Parties, when they emblazoned on their banner the socialist transformation of society, or the genuine Communism of the first four congresses of the Communist International. On that basis, and on that basis alone, the working class can carry out the socialist transformation of society.