“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.”