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Socialist Resistance : SR01 - November 2002
Economic gurus argue over future of capitalism
Ruling-class opinions about the future of global capitalism are currently more divided than at any time for the last decade. The latest IMF ‘World Economic Outlook’ predicts US growth of 2.2 percent this year and 2.6 percent in 2003, stating that ‘the global slowdown in 2000-01 has proved to be more moderate than most previous downturns’. In the Financial Times of October 10 2002, George W Bush’s chief economic advisor, Glenn Hubbard argued that “The stock market decline will not cause consumption expenditure to collapse… and the economic fundamentals are sound.” In contrast, the chief economics correspondent of the FT, Martin Wolf described the IMF forecasts a week before as ‘orthodox complacency’. In a survey of the world economy in its September 28 issue The Economist pointed out that most of those economists predicting strong economic growth over the next year were the same people who had denied that the USA was experiencing a bubble in the 1990s: “They were wrong then and are likely to be wrong again. America’s economic downturn is not yet over.” And the judgment of stock markets across the world is clear. Since the end of 2001 share prices have tumbled in all the major capitalist economies; by 30 percent in the USA, 50 percent in Germany, 20 percent in Japan, 40 percent in France and 30 percent in Britain. In the so-called ‘emerging markets’ the pattern has been the same, with falls during 2002 in 19 of the 25 such markets listed in The Economist. Socialists trying to make sense of what is happening in international capitalism are faced with two central questions. Firstly, how is it possible for such disagreements to arise, and secondly, which of these two perspectives is correct? Marxism is able to help us answer such questions in a way which neither of the two orthodox approaches above is able to do. The arguments of the optimists are centred around developments in the USA. Over the year since the September 11 attacks, despite the rush of corporate scandals such as Enron, WorldCom and Tyco, the US economy grew by over 2 percent. Inflation remains low and the dollar is still reasonably strong, having fallen just 10 percent against the euro and remained steady against the yen. Most of all, observers such as Hubbard stress that labour productivity has continued to grow sharply. They argue that developments in information technology (IT) and the ‘new economy’ have provided the flexibility for the US to overcome recessions more quickly than in the past. The forecast is that this will lead to a renewal of growth in the USA which will then encourage exports and production in Europe, East Asia and Latin America and enable the world economy to resume the path followed in the second half of the 1990s. The pricking of the stock market bubble in the last two years will be a temporary inconvenience. Against this the pessimists stress two main factors. Firstly, they emphasise the way in which the current economic slowdown is synchronised across the world. The ability of capitalism to resolve the crises of the 1990s, at least temporarily, was crucially dependent on their being kept separate. In particular, the three main areas of instability during that decade; the long-running slowdown in Japan, the speculative bubble in the US and the currency crises in the emerging markets, especially South East Asia, Russia and Brazil, never fused together into a generalised crisis of the system. Instead growth in the US from 1997 onwards provided a home for capital fleeing from Asia and elsewhere, and allowed for an export-led recovery in countries like South Korea, Russia and Thailand. Now, the economic problems of different areas of the world appear to be reinforcing one another. Japan remains mired in stagnation. The slowdown in the USA and the rise in the value of the euro, have led to growth in much of Western Europe grinding to a halt. This has thrown the EU ‘stability pact’ into crisis and led to sharp disagreements between European governments and the European Central Bank (ECB). Slower growth across all three main areas of the major industrialised countries has cut exports and growth across much of the developing world. The second factor stressed by more pessimistic orthodox observers is the massive build-up of debt in the US over the last six years. While corporate debt has been cut back somewhat since 2000, households have continued to borrow heavily, largely on the back of rises in house prices. Two further scenarios make the high level of American debt even more threatening for the system. First, there is the fear that if the economy slows down any more, prices may actually begin to fall in the US, as they have in Japan. Such deflation raises the real value of debts, leading to a vicious circle, as this feeds into lower spending, even lower prices and further increases in the debt burden. Second, is the possibility that the rest of the world may cease to lend the US the money needed to support consumption levels. The USA continues to run a record balance of payments deficit of $430 billion per year. A fall in the foreign investment into the US which currently funds this deficit could push the value of the dollar down sharply and make the Federal Reserve (the American Central Bank) raise interest rates to protect the currency and attract funds from abroad. With domestic debt levels so high this could have a dramatic effect on consumption and investment. Drawing on the ideas of the ‘Austrian’ school of economics, represented by Friedrich von Hayek, The Economist argues that continued slow growth, and possibly a further recession, in the USA is necessary in order to squeeze the accumulated debt out of the system. How should socialists respond to this controversy? Clearly, the pessimists are pointing to real structural problems within capitalism which the optimists simply ignore. But the problem for observers like Wolf and the writers in The Economist is that they have no convincing argument about why these difficulties have arisen. Two explanations have been put forward. Firstly, there is the view that the problem is the irrational behaviour of investors and consumers (‘irrational exuberance’ in the phrase of Federal Reserve Chair Alan Greenspan), taking on excessive debt in the expectation of profits from the stock market. Secondly, blame is laid at the door of inappropriate fiscal and monetary policies. Greenspan has been criticised for keeping interest rates too low and stoking speculation in the 1990s, the ECB is attacked for keeping rates too high and the stability pact is regarded as over-restrictive in its limits on government borrowing. But if these are the source of the instability of the system, the optimists argue, this instability will only be temporary. The end of the stock market bubble will reinforce a realistic attitude among economic agents. And if economic policies are suitably adjusted, the market can then be relied upon to restore growth and prosperity. The failure of the pessimists to analyse the sources of the problems which they highlight leaves them unable to show why the optimistic view of Hubbard and the IMF is wrong. To explain the real basis for the global economic instability and the current slowdown a completely different approach is needed. A Marxist analysis would start from the failure of international capitalism over the last two decades to generate sufficient profits to form the basis for sustained accumulation and growth. This is not accidental but results from the nature of the system; the continuing replacement of the living labour which is the source of value and profits by machinery and equipment. As profits have fallen overall, there has been a greater and greater tendency for investment to concentrate in specific sectors or countries where returns appear more than the average. This has led to a rise in the number of speculative booms and crashes, both in the main industrialised economies and in the developing world. Capitalism has been able to resolve such crises temporarily, but only at the cost of setting up patterns of growth which in turn lay the basis for future crises. So, the 1997 crisis in East and South East Asia was largely ‘solved’ by the US economic boom but this boom in turn lies at the heart of the current problems. This is not just because of stock market speculation and debt, but also because of the nature of the investment that fuelled the boom. While IT investment may have increased productivity, such increases are not leading to increases in profitability. This is both because of the displacement of labour and because of the increase in competition caused by the ‘new economy’. The build-up of credit in the US over the 1990s was not matched by a change in the underlying rate of profit and this is at the root of the current slowdown. In these circumstances economic instability does not simply result from mistaken policies. Had Greenspan raised interest rates in 1998 US economic growth would not have lessened the impact of the crises in Asia, Russia and Brazil. But his current policy of keeping rates low to avoid recession runs the risk of further encouraging the tide of debt in the USA. These dilemmas result from the basic instability of the system as a whole. This does not mean that a ‘double-dip’ recession is inevitable, or that prolonged slow growth must occur. But it does mean that the measures that are taken now to counter the current slowdown will not be able to create a trouble-free capitalism. On the contrary they are likely to lay the basis for greater instability in the future. And with orthodox economists in sharp disagreement about how to manage the crisis there are plenty of opportunities for socialists to argue the case for replacing the economic structures which have caused the problems in the first place.
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Andy Kilmister is Senior Lecturer in Economics at Oxford Brookes University, where he researches industrial restructuring and structural change in Central and Eastern Europe since 1989. Andy is a member of the International Socialist Group and of the editorial collective of the journal Labour Focus on Eastern Europe. He is co-author of ’Critical and Post-Critical Political Economy’.