Will war drive world deeper into recession?
Will war drive world deeper into recession?
The last few weeks have seen endless speculation about the likely economic effects of the terror attacks in the USA and the imperialist war drive which has followed. Much of this speculation has centred on the idea that the attacks are likely to push the world economy into recession. But this view is misleading and over-simple.
It implies that global capitalism was basically stable before September 11 and can be thrown into crisis simply by a collapse of confidence and generalised fear.
In reality, the impact of what has happened on the economy needs to be seen in the context of increasing instability over the last few years, which already threatened to create an economic crisis before the attacks.
It is also important to distinguish between the effect of the attacks themselves and that of the subsequent military buildup. The attacks themselves have had an economic impact at three distinct levels.
Firstly, there is the immediate economic damage caused by the events of September 11 itself. This has been dramatic for certain companies located in the New York financial district but it is not generalised.
There will be arguments over who should pay for reconstruction, which will largely involve the insurance industry, but again the impact of this will be limited both geographically, and to particular economic sectors.
Secondly, there is the impact of the attacks on particular industries, notably the airline industry. It is possible, though by no means certain, that there will be a significant decline in the growth of air travel as a result of fears of terrorism.
But two things need to be remembered here. First, the airline industry was already in severe difficulties, both in the US and internationally, before September 11. Severe competition, in a market whose growth is limited by the availability of airline slots, was squeezing profit margins.
To a large degree, airlines and civil aerospace companies are using recent events to ask for state help to resolve their previous problems.
Second, these problems are also not generalised to the economy as a whole. If businesses and consumers are travelling by air less they will spend their money on something else. The security industry and the telecommunications industry may grow in a climate of fear where businesses cut down on travel, for example.
n It is at the third level that observers have seen the September 11 attacks as threatening an overall recession affecting the economy as a whole. This relates to the question of the effect of the attacks on consumer and business confidence.
The argument is that a number of economies, especially the US economy, are currently extremely dependent on such confidence and that a severe downturn in optimism and a sense of panic may stop people consuming and tip them into recession.
This dependence is itself the result of the unbalanced nature of the US boom of the late 1990s, fuelled by record levels of debt, a stock market boom, and in the last year by rapid growth in house prices and land values.
In addition, internationally, the argument is that a collapse in confidence could cause renewed instability in the currency markets, as investors panic, and seek the safest assets possible.
It is important for Marxists to assess this kind of argument carefully. We have never believed that the primary factor determining economic booms and slumps is swings in the psychology of consumers and investors.
This is one of the main differences between Marxist accounts of economic crisis and Keynesian writings. For Marxists, crises are fundamentally determined by the conditions governing the exploitation of living labour in order to make profits.
These conditions are both objective, for example technological developments, and subjective, for example the willingness of workers to fight back.
However, the subjective conditions which Marxists focus on are rooted in the point of production, not in the financial markets or in consumption.
Yet it is also the case that in particular historical conjunctures, psychological effects can have an impact which can worsen the problems already existing as a result of capitalist instability.
An example of this in the last decade has been the crisis in Japan. While this has been fundamentally caused by over-production and bad debt as a result of the investment bubble of the 1980s, it does seem that psychological factors contributed towards making the crisis especially difficult to resolve.
Before 1990 large parts of the Japanese economy functioned through networks of trust, in which the behaviour of one firm depended on being able to predict accurately what other firms would do.
For example, each firm invested because it was confident that others would do the same, and so generate demand for its products, and as a result all would invest the prediction would be self-fulfilling.
These kinds of relationships enabled Japan to avoid to some extent the kind of instability found elsewhere in the world economy in the 1970s and 1980s. But the effect of their breakdown in the 1990s has been to create a psychological climate which has significantly worsened the fall in investment which resulted from objective factors.
Similar arguments apply to the way in which Japanese workers have responded to the collapse of what they previously thought were reliable promises made to them by employers.
It is possible that the US economy may undergo a similar psychological downturn to that which has occurred in Japan over the last decade. If consumption drops dramatically, at a time when profits are already low and investment is falling, then unemployment may rise and the stock market could plunge even further.
This would then lead to further drops in consumption and a vicious circle leading to recession.
It is important to note two things here, though.
First, these kinds of psychological effects are not the main problems facing the US economy at present. They might make a recession worse, but the central economic issue for US capitalism at present is its dependence on artificially high levels of consumption stimulated by the rapid growth of debt.
This will only be sustainable if the gamble of the last five years that the development of information technology and the internet will lead to lasting American productivity improvements turns out to be justified. And the importance of this issue remains unaffected by the events of September 11.
Second, it is not clear yet that US consumer confidence will be badly affected in the long run by the events of the last months. The Japanese example discussed above involved the destruction over the course of a decade of networks of trust that had been developed during a 40 year period. That is a different matter from the events of one day, however horrific.
It is also important to look at the economic impact of the war drive which has followed September 11. Here we need to distinguish between long-term and short-term developments.
If what is happening now leads to a significant rise in military production in the imperialist economies in the long run then this is likely to have important economic effects.
However, these cannot be predicted in a mechanical way. Over the last century there has been a long debate amongst Marxists about the relation between militarism and the economy
Some Marxists like the proponents of the ‘permanent arms economy’ thesis in the 1950s and 1960s, for example Michael Kidron and TN Vance, have argued that military production can play a major role in lessening the instability of capitalism and avoiding economic crises.
Yet as Ernest Mandel argues in his discussion of such writers in ‘Late Capitalism’, this is too one-dimensional a view.
The impact of militarism depends on a range of factors – the need for sources of demand to soak up surplus production, the technological impact of arms production, social struggles over the cost of military expenditure, and so on - and cannot be predicted in advance.
For example, the Korean War laid the basis for much of Japanese industrialisation in the 1950s, while the Vietnam War greatly weakened the US economy in the 1960s and 1970s.
This leaves the question of the short-term impact of the current campaign in Afghanistan and the surrounding region. Here there are two main options for US and British capitalism.
The first would be to finance the war drive by cutting expenditure in other areas. This would contribute towards worsening the possibility of a recession in the USA and Britain by transferring government expenditure overseas, and would be politically very risky.
The second is to try as much as possible to maintain previous spending while also boosting military expenditure.
This seems to be the policy being followed at the moment, especially in the USA where interest rates are being brought down to record lows and the government has been encouraging spending.
This is what lies behind comments of Keynesian writers like Larry Elliott in The Guardian of October 1, where he argues that there is a possibility that
"any short-term damage to the global economy will be followed by a period of sustained and strong growth.
"Policymakers are not so much on a steep learning curve as a steep unlearning curve, seeking to forget all the things they have been taught over the past 30 years: that inflation is the only enemy, that demand management doesn’t work, that capital accounts should be opened up as quickly as possible."
For such writers, the possibility that war might force governments into more expansionary policies is an attractive one.
But this view ignores the way in which such policies are likely to contribute to the instability which has already been building up over the last five years.
Further cuts in interest rate and encouragement of consumption in the US risk worsening exactly the problems which existed before September 11, high debt levels and a record trade deficit. And to a lesser degree the same things are present in Britain.
The world economy looks increasingly unstable, and the measures being taken to avoid a recession are likely in turn to worsen the underlying problems of global capitalism.
In this context, the events of September 11 and what has followed should not be taken as the cause of a possible global slowdown.
Rather they themselves result from the crisis-ridden and inequitable nature of the system under which we live, which unless resisted is continually bound to produce instability and war.