Marx's warnings confirmed
British economy falters as world growth slows
Record consumer borrowing as house prices boom. A growing trade deficit as consumption sucks in more and more imports. Increasing worries about the value of the pound. Seems familiar?
In many ways the British economy at the moment looks very like it did in the late 1980s during the ‘Lawson’ boom. Like Gordon Brown, Nigel Lawson was regarded as a miracle-working Chancellor who had managed to eliminate public sector borrowing and start repaying government debt.
Yet within a few years the economy was in recession and the government budget deficit had soared. It became apparent that Lawson and the Tories had failed to eliminate the underlying weaknesses of British capitalism, and this led in large measure to their defeat in the 1997 election. Will the same happen to Brown and to Labour?
To answer this we need to look both at the specific problems of the British economy and the way in which these interact with growing global economic weakness.
It seemed likely two years ago that the British economy would slow down sharply in the wake of the Asian crisis of 1997 and 1998. In the event this did not happen, and the maintenance of growth was an important element in Labour’s success in winning a second term in government.
This happened for three main reasons. First, the rapid US boom kept the world economy growing at a reasonably fast rate. The USA took in British exports and also growth in the US stimulated production in Asia and Europe, which in turn benefited British exporters.
Second, Britain as a leading imperialist investor has benefited greatly from soaring profits and asset values elsewhere in the world, especially in the US. Over the last few years the British balance of payments has increasingly come to depend on profits and investment income from abroad.
Third, the last two years have seen a significant upturn in both company and household borrowing in Britain, fuelled by low interest rates and a rise in house prices. This is now being backed up by the extra government spending declared by Brown over the last year. Much of this is being channelled into the private sector through mechanisms such as PFI/PPP, but it still has an expansionary effect on the economy.
The problem for Brown is that the first two of these factors are no longer operating. With the US economy slowing, and profits and stock markets falling in the USA and elsewhere, growth in Britain is becoming increasingly dependent on a domestic credit boom. This is at the root of the growing trade deficit and fears of a housing market bubble.
The worry for Labour is that if the problems of the balance of payments result in a collapse of the value of the pound then they will have to raise interest rates to maintain its level and to stop higher import prices pushing up inflation. With companies and households having extended their borrowing so much this runs the risk of repeating the experience of the early 1990s.
Just as for Lawson, this situation results from the underlying weak position of that portion of British capitalism which is based in Britain, and its inability to generate sustained growth which is not based on borrowing binges.
Key to changing this is the issue of productivity – and Brown has stressed this continually over the last few years. Yet a recent article in The Economist of June 23 showed how little he has actually been able to achieve through the market-based measures favoured by New Labour.
Over the first term of the Labour government productivity growth actually decreased compared with the Major years. With productivity rising more sharply in the USA than previously, Britain slipped further behind – and remained just as far behind other European countries as it had been before.
The relatively stable growth rates of output during Brown’s tenure as Chancellor have been based more on international factors than on a transformation of production conditions within Britain.
Over the last few months, global growth has continued to slow. Previous issues of Socialist Outlook have argued that the problems of global capitalism result from an interlinked set of more specific imbalances. In particular, three are crucial; the bursting of the US bubble, the continued stagnation in Japan and turbulence in the so-called ‘emerging markets’.
The key aim of the global capitalist class over the last few years has been to try to avoid these different crises coming together to form one synchronised global economic crisis. This was at the basis of the US Federal Reserve’s reckless expansion of the American economy in order to overcome the effects of the currency crises in Asia, Russia and Brazil in the late 1990s.
The danger for global capitalism at present is that these various difficulties are more closely connected than they have been at any point for the last decade. The Economist recognised this very clearly in its editorial of August 2, saying that ‘so far this downturn is not deep, but it could be the most synchronised since the 1930s’.
This results both from the growing integration of trade and investment relations summed up in the term ‘globalisation’ and from the key role played by the USA over the last five years in stimulating international growth. As a result the effect of the current US slowdown has been magnified dramatically.
Slower growth in the US is now affecting both the European and the Asian economies. Germany is effectively stagnating. In Asia, Singapore and Taiwan, two countries which did not devalue in the 1997 crisis, are in recession, while the majority of other countries in the region have seen sharp falls in their growth rates compared to 1999 and 2000.
The same pattern has been repeated in South America: Brazil which devalued in 1999 is growing slowly, while Argentina, which did not, has been in recession for three years. The result has been a growing threat of currency crises in the developing world, with Argentina and Turkey most at risk.
The largest developing economy in Asia, China, is maintaining a high rate of growth only through a massive increase in government borrowing at a time when there is already a huge level of bad debt in the banking system.
The Asian economies have been unable to turn their exports from the USA to Japan, because the Japanese economy continues to refuse to grow, despite a government budget deficit which is approaching 10 percent of GDP and interest rates now fixed at zero. The mandate of the new Koziumi government is to try to overcome this through ‘structural’ reform and deregulation.
Yet this is a very risky strategy for capital to try in Japan, where business activity has been dependent on so many informal networks and linkages for decades. In addition, there remains considerable political disagreement about who should pay for the accumulated debts stored in the Japanese banking system.
How can we explain the current global slowdown? Here the assessments of both The Guardian and The Economist are of interest. In its editorial of August 25 The Guardian argues that "most recessions in the 20th century were triggered by central banks raising interest rates to curb inflation. The current slowdown looks more like a 19th century-style recession, caused by the bursting of an investment bubble".
The Economist agrees: "this downturn may differ from previous ones [in] that it has not been caused by a collapse in demand after central banks have raised interest rates to fight inflation. Instead it is an investment-led downturn."
In other words, the mechanisms underlying the crisis look remarkably like those pointed to by Karl Marx in his account of economic crises a century ago!
The fundamental basis of the current crisis, as in Marx’s analysis, is a collapse in investment caused by a fall in profitability. The long-run background to this is the tendency for profit rates to fall as higher capital spending undercuts the basis on which profits are made, the exploitation of living labour. However, this long-run trend is translated into a cyclical pattern of booms and slumps through particular circumstances which differ at different points of capitalist development.
The key immediate factors bringing about the current crisis are threefold.
Firstly, there is the investment boom associated with the hype over the ‘new economy’, information technology and the internet. This led to a speculative wave of investment unrelated to any realistic expectations of future profitability.
Secondly, there is the international inflation of asset values, particularly in the stock market, as mobile money capital seeks a home in a world where productive investment opportunities are limited.
Thirdly, there are the specific actions taken by the major industrialised economies, especially the US to deal with the problems of the second half of the 1990s.
Fear that the Asian crisis would spread persuaded them to allow a dangerous increase in borrowing which appears increasingly unsustainable.
Two important questions arise from this. Is this really a new kind of downturn, unlike those of the mid 1970s, early 1980s and early 1990s? How serious are the prospects for global capitalism? The answers to these are in fact related.
The contrast presented by The Economist and The Guardian between the current slowdown and those in the past is overstated. The mechanisms of over-investment and over-production identified by Marx were present in previous recessions as well.
However, there is an important difference which should be noted. In the post World War 2 period, national economies remained to a certain extent insulated from one another, particularly in services as opposed to manufacturing.
This meant that one strategy open to capital when faced with falling profits was to try to recoup the money by raising prices.
This in turn led to an upsurge in working-class militancy and a rise in inflation rates which threatened investment incomes and the future stability of the system. For this reason central banks were prepared to intervene in order to bring inflation down, even at the cost of recession.
As national barriers have come down and international competition has increased, this has become a less and less viable strategy for capital to follow. The inflation levels preceding the slump of 1975 were higher than those before 1980 and much higher than those before 1990. Now competition is so intense that inflation is relatively low.
This might appear to mean that capital has more scope in managing the crisis than in the past. Both the US and Japanese governments have tried to exploit this by raising spending, cutting taxes and lowering interest rates. The Economist argues that the European governments should follow their example by scrapping the post-Maastricht ‘stability pact’ limiting government borrowing.
But in many ways the crisis has actually become more difficult to manage rather than easier. The place of price rises in providing a short-term way out of the crisis for weaker capitals has been taken by increases in borrowing.
And just as the levels of inflation preceding crises have tended to fall over time, so have the levels of household and corporate debt tended to rise. This in turn has strengthened the tendency to over-investment.
For these reasons, the current slowdown is likely to prove difficult to manage both in Britain and elsewhere.
It may well be that a synchronised recession is headed off. But this can probably only be achieved by implementing policies which will contribute to the build up of debt and the shaky financial structures which helped to bring the recession about in the first place.
This in turn will leave capitalism even more vulnerable to the outcome of the next wave of speculative investment.
The opportunities for socialists to argue that global capitalism is an inherently unstable system which cannot ensure security and prosperity for the majority, and to stress the relevance of Marx’s analysis in showing this, are better than they have been for years.