British Capitalism? Where now for Gordon Brown's recent pre-budget report has seen the British economy once more emerge as an area of political controversy after a number of years of seeming consensus. Andy Kilmister discusses why capitalist commentators, both in the media and the City, have become markedly more critical of Brown's strategies. The main headline of The Guardian on December 6 proclaimed: 'Brown forced onto the defensive for the first time.' Yet such observers do not analyse the nature and depth of the economic problems facing Britain. These problems arise, not from short-term economic mismanagement by New Labour, but are a reassertion of the unstable and crisis- prone nature of capitalist society. Introduction New Labour's economic record since 1997 raises two key questions: Firstly, what is the basis for the relative success of Brown's macroeconomic record? Secondly, 4 how can this record be squared with the deterioration in the conditions of workers and households, for rising example, inequality, regional differences, the pension crisis and intensification of work? What Marxism shows is that these two aspects of the economy are in fact inextricably linked. The stability at the level of the national economy has been bought at the price of deepening the conflicts that face people in their daily lives. Consequently, that stability is inherently fragile, and this fragility is at the root of the problems now facing Brown. Detailed analysis requires going back beyond 1997 in order to set Labour's economic policies in context. Marxist theories of capitalist crisis start from the fundamental insight that capital depends on the exploitation of labour as the source of profits, but is constantly undercutting this process by substituting dead labour in the form of machinery for living workers. This leads to a tendency for the rate of profit to fall over time. However, this cannot be the sole cause of economic crises for two reasons. Firstly, there are a number example, of counter-tendencies; for exploitation of new markets or the raising of the rate of exploitation by lowering wages or increasing the pace of work. Whether the rate of profit rises or falls in practice depends on the balance between the original tendency and these counter-tendencies. Secondly, even if the rate of profit does fall empirically, this long-run decline cannot explain the cyclical booms and slumps that are typical of capitalist economies. There are two main Marxist approaches to analyse the boom-bust cycles. The 'under-consumption', sees the problem as a lack of demand in the economy, caused by attempts to drive down wages, coupled with a growth in monopoly power.' The second, the 'profit-squeeze hypothesis', focuses on falls in profitability arising from a combination international competition.' These contradictory; with one arguing that crises result from wages being too low while the other sees wages as too high. this contradiction arises from the fact that each theory captures a particular aspect of capitalist needs, although in a partial and one-sided way. Capitalist growth depends upon two main conditions. Firstly profits must be generated through production. Secondly, those profits must be realised through the sale of what The profit-squeeze theorists is produced. concentrate on the first condition, seeing crises as resulting from failure to obtain profits in the productive process, while under-consumptionists stress the second condition and emphasise the realisation of profits. The central problem for British capitalism historically has been its failure to satisfy both conditions simultaneously for more than brief periods of time. In the post World War 2 period this expressed itself through periodic 'sterling crises' as attempts to expand the economy quickly ran into balance of payments crises that threatened the value of the currency and led to a rapid halt to growth. After the 1967 devaluation of the pound, the crises took on an inflationary character as rising prices threatened profitability both by worsening international competitiveness and wage claims trying to keep pace. The monetarist policies of the Thatcher governments represented an attempt to solve these underlying structural problems British of capital. Initially Thatcher profits in concentrated ensuring production through strict anti-inflationary policies. The result was a massive recession in the early 1980s. The Tories then switched under Nigel Lawson's chancellorship, towards expanding the economy through a credit- based boom. Yet the inflation generated b: this weakened the competitive position c British capitalism, eventually leading to the humiliating exit from the European Exchang: Rate Mechanism in September 1992. From Clarke to Brown The September 1992 debacle was folle.=: by a prolonged period of expansion fo-*= economy, covering both the Clarke::
Brown chancellorships. One way of analysing this is the 'regulation' approach developed initially by Michel Aglietta.' Aglietta's main insight, allowing him to go beyond the simple under-consumptionist and profit- squeeze theories, was that the analysis of capitalism requires attention both to problems of and problems of realisation. For capitalist growth required the combination productive strategy with a way of organising the economy so that profits could be realised. He described such a combination as a 'mode of regulation'. The mode of regulation, which underlay the boom of the 1950s and 1960s, involved the production of mass consumer goods. based on the development of technologies using electronics, coupled with Keynesian techniques of demand management and the welfare state. This mode of regulation he has been heavily criticised, the more general point about the necessity combining an analysis of production with one of realisation remains valid. Without suggesting that what emerged in Britain after 1992 had the durability of Fordism, it is worthwhile exploring the particular nature of this combination that allowed for British economic expansion during this period. The initial stimulus to expansion came from exports as a result of the devaluation of the currency. Such devaluation in the past had led to inflation as a result both of wage demands and of higher prices for imported inputs and raw materials. This did not occur in the 1990s because of the weakness of trade unions in the wake of the defeats of the 1980s and the anti-union laws. In addition, inflation was kept in check by a major increase in international competition in components industries, notably from countries like China, and by historically low prices for primary commodities. Despite devaluation, expansion led to a balance of payments deficit. This was partly covered by inward foreign investment but equally importantly by a significant rise in the profits being sent back from British investments abroad. In other words, an essential part of the process of expansion over the last decade has been the profits generated by imperialism. Export growth was not enough however to maintain expansion for long. The other source of demand was consumer spending, partly fuelled by optimism about the 'new economy' the so-called dot.com boom. And, since 2000, the surge in house prices has also played an important role in encouraging spending as low interest rates, coupled with rising asset prices, led to large increases in consumer borrowing. But in 2001 and 2002 this expansion appeared to be faltering. Export demand decreased as a result of a slowing world economy while concern grew about the dependence of the economy on debt-based consumption. At this point, Gordon Brown stepped in to increase government spending, substituting for some of the falling demand elsewhere and allowing the expansion to continue. However, Brown's macroeconomic strategy has been very much a continuation of that followed by the Tories under Kenneth Clarke. Prospects for the Future In summary. the growth in Britain during the decade after 1992 depended combination of higher profits as a result of the weakness of trade union struggle, coupled with an employer's offensive based on new management techniques. Realisation of those profits depended on consumption and export growth resulting from a competitive pound and the relatively rapid expansion of the global economy, largely powered by the American boom. Consumption and export growth did not feed into inflation because of increased international competition and low commodity prices while the balance of payments was helped by the repatriation of profits from investments abroad. There are two key conclusions that we can draw from analysing the sources of British economic expansion over the last decade. Firstly, the expansion has been structurally inequality. Consumption demand has depended on rising asset prices, which reflect increasing wealth for the well off, while the increase in profits has been based on holding wages down for the bulk of the working class. Growing domestic inequality has been matched by the international inequality resulting from the competitive squeeze caused by globalisation, the low levels of the primary sector exports coming from developing economies and the dependence of economies like Britain on The second key conclusion, however, is that the particular set of circumstances which have led to this relatively stable period for British capitalism is now drawing to a close. Mervyn King, the Governor of the Bank of England, spoke two years ago about the end of the 'Nice (Non-Inflationary Continuous Expansion) Decade'. It now appears increasingly unlikely that growth on this basis can be sustained for much longer. One obvious constraint is the dependence of consumer spending on the housing boom alongside rising consumer debt. Worries about pensions has led to increased saving. For a while, growth in government spending disguised slowdown consumer demand but the resultant rise in the budget deficit meant Brown being unable to fulfil his commitment to a 'golden rule' of financial management. In response to the outcry from the City of London about the rising deficit, projected spending is being cut back quite sharply - by around £8 billion a year. The Guardian while Brown's 'would help to bring the public back towards balance, it would also signal a return to the stringent spending control of the years after 1997' The Institute for Fiscal Studies claims that, although health spending will be allowed to grow by about 4.4% a year in real terms, education by 2.25% and international development by 13%, this would leave only 0.8% spending growth for the rest of government's - effectively a cap An even more significant problem though capitalism internationally, the slow growth of productivity. Recently argued that the rising costs and lower profits resulting from this meant stagnant tax revenue and pressure to cut public spending in order to avoid tax increases. Though such demands for cuts in spending and lower taxes are common, they are a manifestation of the pressure on profits. The continuing productive weakness of that part of British capital mainly operating within Britain means expansion is very dependent on international conditions. Yet here also things are changing. Most notable of course is the rise in oil prices. In addition rapid expansion in China and continued growth elsewhere are now beginning to push up the prices of inputs and commodities. At the same time, export growth has slowed as a result of stagnation in Europe. In addition the stability of the world economy in general still rests on US growth that has led to a dangerously large trade deficit and the prospect of further currency instability. Conclusion All of these factors together are likely to mean a much more difficult period for British capitalism in the next few years than we have seen over the last decade. The prospects for a dramatic event on the scale of September 1992 do not seem large, but neither is it easy to see how a durable solution to the imbalances that exist could now be improvised in the way that it was the exit from the ERM. For socialists the opportunities for arguing that capitalism cannot satisfy human needs and that the market inevitably leads to economic instability are likely to increase sharply in the coming period. 1. P Baran and P Sweezy (1968) Monopoly Capital, Penguin; J Steindl (1976) Maturity and Stagnation in American Capitalism, Monthly Review Press, M Bleaney (1976) Underconsumption Theories: A History and Critical Analysis, Lawrence and Wishart 2. P Armstrong, A Glyn and J Harrison (1991) Capitalism Since 1945, Blackwell; M Itoh (1980) Value and Crisis, Pluto Press 3. M Aglietta (1979) A Theory of Capitalist Regulation: The US Experience, translated by D Fernbach, New Left Books 4. R Brenner and M Glick The Regulation Approach: Theory and History', New Left Review 1:188 (July/ August 1991) 5. L Elliott and A Seager 'Brown planning return to austerity, say experts' The Guard- ian December 7 2005 p. 27 6. M Wolf The chancellor risks tarnishing a golden legacy' Financial Times December 6 2005 p.9 5