Humpty Dumpty can never be put together
Capitalism may survive but will never be the same
In previous columns, including last week’s (Sunday Island, 11 October), I asserted that recovery from the Great Crash of 2008 (GC-08) will be insecure, a rocky road of partial recoveries and relapses. I coined the term Wobelu for a pictorial depiction of this wobbly process; like a W with many upward humps and downward furrows buried in its belly. My explanation was couched in abstract terms; the dynamism and gargantuan expansion of post-war productive capacity and of capitalism, leading to a tendency to over-production and a falling rate of profit, notwithstanding reprehensible credit driven excess consumption, especially in America. A consequence of the decline in profitability was the diversion of excess capital into finance, which then took on a phantasmagoric life of its own, and by exploiting new technologies invoked explosive self expansion. However it was, and always is, impossible to hold up fantastic rates of profit in finance capital ungrounded in the real economy. This motivated my wrap-up conclusion; the inevitability of the collapse of the financial economy commencing late 2008 but whose catastrophic worst is still to come.
Some of these assertions have been examined by many cognoscenti, not just Marxists, and there is copious material ‘out there’ for those who want it. Formal economic theorists and the better journals of the bourgeois elite reflect some of this, but of course you have to be sensitive to the unspoken subtext. My task today is to buttress last week’s abstract reasoning with some concrete arguments taken from the published material ‘out there’, but I will not cite sources at each step as one would in a scholarly paper. My second task is to discern what the transformed capitalism of the next decade may look like.
Expansion of capitalism and
the falling rate of profit
A thoroughly systematic presentation would need historical depth reaching back over the whole post-war period and would also need to separate America, Europe and China showing their supportive interdependencies and at the same time pointing out how they have aggravated each other’s crises. That is, one must be both globally complete and historically secular in dimensions. For the purposes of a newspaper article however, an abbreviated version that is careful not to leave out important elements should, I believe, be sufficient.
The growth of the world economy after World War II has been astronomical; no other period in known human history has sustained such an exponential rate of global economic growth for half a century. The combined value of just the largest 500 companies in the Fortune Global-500 list, just before the crisis sent asset prices tumbling, was not much below $100 trillion. And if we add in the tens of thousands of other industrial, agricultural, commercial and financial enterprises, we see a colossal value base created by the collective effort of human society, though global capitalism retains the title deeds firmly in its custody. This expansion of the real economy and then the swelling of finance capital is a point I hardly need to canvas, but I also wish to mention something perhaps more important - the advances in productivity, or in different words, the impact of technology.
Moving on, the two accompanying figures taken from the literature illustrate how the sustained expansion of capital has resulted in a decline in the rate of profit in advanced capitalist countries – the US, Germany and Japan are the examples. After the war, capitalist profitability remained high, and peaked in the late 1960s and early 1970s. The mid to late 1970s mark the commencement of a sag in the profit rate which collapsed to terrible lows in the late 1990s, at which stage the production oriented real-economy morphed into something different, capitalism dominated by the financial sector. The graphs also show small fluctuations; upwards when wage restraints and curbs on social welfare, the Vietnam War, or new technologies such as automation, robotics or IT, gave profitability a boost; downwards when oil shocks or industrial unrest spoilt capitalisms game plan. In overview however the graphs dramatically illustrate the tendency for the rate of profit to first rise for about a decade, and then to steadily fall over a longer secular time frame of a few decades. The period after year 2000 is not included in the graphs but other data shows that the rate of profit in the real economy fell further into the doldrums while the phantasmagoric finance economy bought some breathing space for about another decade.
Fantastic finance capital
Modern capitalism is dominated by a financial industry led by investment banks, stock market and investment fund managers, insurance houses and hedge funds, not by the real-economy of manufacturing, agriculture, mining and extraction, global trade, and banking for the settlement of these accounts. Each day the international currency movements for speculation and benefits derived from currency trading per se, are orders of magnitude larger than international currency movements to settle trade and economic investment transactions.
The quantitative dominance of finance can be illustrated simply; in June 2006 the outstanding nominal value of global swaps and derivatives was estimated to be $290 trillion, that is nearly eight times world GDP for that year. Just before the 2008 crash it is estimated to have risen to between $500 and $600 trillion. For comparison, consider that in 2006 the US home equity capitalisation was valued at $35 trillion and US stock market capitalisation at $40 trillion.
So here’s the rub; a large proportion of the global (mainly US and EU) capital asset base is not productively invested in the real economy. Overcapitalisation has found a temporary way out in fantastic finance capital. This is the core of capitalism’s crisis this time round. Periodic and catastrophic crises are inured into capitalism, for a while they can be muted, palliatives can buy time, but eventually economic collapse and the horrors of war are the only proven remedies. Thereafter capitalism emerges anew, totally transformed.
Making money by playing with money is just make-believe like playing Monopoly with make-believe money. Money has value only when it commands goods and services for consumption or investment in the real-economy. But goods and services are products of the real-economy. When the make-believe finance overruns the real-economy the house of cards, or shall I say the house built of Monopoly Board pictures, collapses. Yes finance capital and investment houses, insurance and hedging, derivatives and securitisation, they are all needed and have a role to play. Their role is to be supportive as needed by the real-economy. Yes, there will always be speculators and speculation, but as long as the game does not overwhelm the whole, well that’s fine.
So what is the way out for capitalism this time? The Monopoly Board has to be put aside; destruction of useless financial assets (credits, derivatives, bloated valuation of low end business, overvalued stock and house prices) is unavoidable, and the destruction will eventually be huge and many times larger than the Lehman Brothers debacle; businesses and households in the developed world have no option but to rebuild their balance sheet if not from scratch, then from a low base. In this new world, denizens of what are now known as advanced countries, will simply have to consume less, much less, and their global footprint will have to shrink mightily. The time-scale corresponding to these remarks is similar to the Kordratieff Long Wave postulate - but my logic is rooted in Marx, not time-series forecasting. The recessionary phase which is the subject of this paragraph will be spread over about a decade. The Wobelu effect of last week’s article will also span a similar period. However, duration aside, we are looking at a process that ends in a different kind of world, and global capitalism, if it survives another decade or two, will be utterly different from its previous avatar of the last several decades.
Capitalism in the Emergency Room
Capitalism has been rushed into the operating theatre for life saving surgery and is now struggling on the drip. This emergency treatment has already cost the public purse in America, the EU, Japan and China about $5 trillion in stimulus packages, bank and insurance company buyouts and industry takeovers like General Motors and Opal. By far the lion’s share of the handouts, such as the American Troubled Assets programme, British bank purchases and injections by the German government into propping up financial institutions, has gone to the financial sector. The state has been stampeded into rescuing finance capital and heads of government and finance ministers have been quite explicit and categorical: "If we do not step in with trillion dollar transfusions the financial system (read capitalism) will collapse catastrophically".
In this context we need to ask two questions. Can the system be saved at all? What will the new capitalism of the next decade look like? The emergency transfusion and the drip have bought time but failed to address the underlying problem. Profitability in the real-economy and healthy capitalist investment and growth in the sector cannot be restored until there is a lot more bloodletting. American and West European industries and agriculture are not globally competitive and simply have to be closed down with attendant consequences for employment. The American and European real-economy cannot survive on the drip forever without bankrupting the Treasury, the Chancery, the Fed, the Bank of England and the European Central Bank. Interest rates cannot be held at near zero any longer and Australia has already broken ranks and raised rates last week. Spiralling inflation threatens, if real interest rates go negative or the money supply remains lose (quantitative easing, in the end, is like lose bowels). The choice is between a dervish fever called inflation and a gangrene called systemic financial collapse.
Neither can America and Europe sustain their current or projected budget deficits, spread over the range of 5 to 12% in different countries, for much longer. The dollar is unstable and swings wildly with rate changes anywhere in the world – there are more dollars in the hands of foreigners than in US government or private hands. The trade deficit cannot be corrected by any but revolutionary steps. The post-war age is a lost world; neither profitability nor competitiveness can recover unless American, European and Japanese workers agree to toil for the same wages as their Chinese counterparts of comparable productivity, but that’s another world! Consumption cannot be indefinitely bloated by throwing Keynesian money at the public; this is not the world of the 1930s.
Nobody knows what gyrations will contort stock markets and currencies in the short-run; nobody can predict with much accuracy the next hump and trough in the belly of the Wobelu. But for sure the outlines of the new world economic order a decade or two down the road can be discerned. Much lowered consumption, asset values and comparative real wages in America, Europe and Japan, intensification of state capitalism, planning and global financial regulation (G-20 is already telling banks where to sit and how to stand), a tamer and more controlled financial sector, and most significant of all, a fundamental rebalancing in the distribution of global economic power. I can go on all day, but now its time to draw up my paper and reach for a drink.