marx | ukwatch.net

Not the death of capitalism, but the birth of a new order

JamieSW — Thu, 23 Oct 2008 17:51:44 +0000

As the dust of the credit crash clears and the real world recession kicks in, the ideologues of capitalism are scaring themselves with spectres. “He’s back,” the Times warned its readers on Tuesday over a portrait of Karl Marx. Not only are sales of his masterwork Das Kapital booming, but the virus of the newly fashionable revolutionary has, it seems, spread to the heart of the capitalist camp: the French president Nicolas Sarkozy has had himself photographed leafing through its pages while Marx’s analysis of capitalism has been hailed by everyone from the German finance minister to the Pope.

In the US, John McCain has been lashing out at Barack Obama for his supposed “socialism”, the High Tory writer Simon Heffer excitedly dubbed the state bail-out of the banks “neo-sovietisation”, and the BBC broadcast a prime-time debate last week on whether the crisis signalled the “death of capitalism”. Meanwhile the Economist, the Pravda of the neoliberal ascendancy, has been trying to mobilise true believers for a fightback: “Economic liberty is under attack”, its current issue thunders. “Capitalism is at bay, but those who believe in it must fight for it.”

Of course, they are running ahead of themselves in a panic. If Marx’s central ideas about class and exploitation were really taking hold across the western world, you can be sure the mainstream media wouldn’t be running quirky, cartoonish pieces and debates about them, but something much more ferocious and alarming.

It’s certainly true that the events of the past few weeks have exposed deregulated capitalism as bankrupt and its ruling elites as greedy and inept. But it is the free-market model, not capitalism, that is dying. That is reflected in public opinion: a Financial Times-Harris poll conducted across the advanced capitalist world this month found large majorities believe the financial crisis has been caused by “abuses of capitalism”, rather than the “failure of capitalism itself” – only in Germany did the proportion blaming capitalism as a system rise to 30%.

As Sarkozy has pronounced: “Laissez-faire is finished.” It is not Marx who has really been rehabilitated in short order, but John Maynard Keynes, out of dire necessity. In the wake of the largest-scale acts of state economic intervention in capitalist history, politicians are now having to make a virtue of it. “Much of what Keynes wrote still makes sense,” the chancellor Alistair Darling declared at the weekend, as he announced plans to bring forward large capital projects and the prime minister defended higher borrowing to counter falling demand.

The symbolic significance of this official return to Keynesianism shouldn’t be underestimated. It’s 32 years since the then Labour prime minister Jim Callaghan bowed the knee to monetarism, nearly three years before Margaret Thatcher came to power, and announced to his party conference: “We used to believe that we could spend our way out of a crisis, but I tell you … it is no longer possible.” Faced with financial collapse and the threat of a full-scale economic depression, such fancies have now had to be consigned to the dustbin of history.

But claims that the current crisis signals the end of capitalism or the birth of a new socialism simply set up a straw man and divert attention from what is in fact at stake. If we’re talking about socialism as a systemic alternative, that is clearly not currently on the agenda in the heartlands of capitalism – or elsewhere, with the arguable exception of Latin America. And both its post-communist collapse of confidence and the weakening of the working class as a social and political force make it difficult for the left to take full advantage of capitalism’s stark failures.

That has led some, such as the historian Eric Hobsbawm, to conclude that the main beneficiaries of the crisis will be the right, as in the 1930s. There’s certainly a danger of growing support for rightwing populism on the back of mass unemployment; but if the new enthusiasm for Keynesian intervention and public ownership can be channelled to protect those most vulnerable to the crash – rather than make them pay the price for it, as now seems more likely – that need not be the case.

What the crisis is bound to do is increase the demand for alternatives both within capitalism and beyond it. It has already discredited the economic model that has dominated the world for a generation at a cost of endemic instability, rampant inequality and environmental devastation. In its defence of free-market capitalism this week, the Economist argued that, in the past 25 years of market liberalisation, hundreds of millions of people have been lifted out of absolute poverty and speculated that this decade may see the fastest growth of income per head in history.

But most of that growth and poverty reduction has been in China’s state-directed and still heavily publicly-owned economy, while India’s lesser capitalist success story is so grotesquely unequally distributed that the proportion of its children who are malnourished – at 47% a global leader – has remained almost unchanged for a decade. For the rest of the world, growth was faster and far more equally shared in the postwar decades of Keynesianism and socialism.

An opportunity has now opened up for those political leaders prepared to use this meltdown to reshape the economic system, from Obama to Hugo Chávez. It’s often said that the left has no alternative model after the implosion of communism and traditional social democracy. But in reality no economic and social model, left or right, has ever come pre-cooked: all of them – from Soviet power to the Keynesian welfare state and Thatcherite-Reaganite neoliberalism – have grown out of ideologically driven improvisation in particular historical circumstances. Marx himself famously offered no blueprint.

Instead, the pressure to respond to economic need – as in the New Deal or postwar Europe – will shape the way the new economic order develops. Already, the forms of intervention have been sharply different from past crises, with bank nationalisations offering a potentially powerful new economic lever. We are no doubt heading into a new kind of capitalism as well as a period of growing support for more far-reaching social alternatives. But what form it takes will be decided by pressure, from above and below.

The red archbishop?

Alex Doherty — Thu, 25 Sep 2008 13:13:58 +0000

Rowan Williams’ attack on global capitalism makes great headlines – “‘Marx was right’ says Archbishop” – but it also reveals one of his deepest convictions. He really thinks modern globalised capitalism is something evil. Of course he is not a great one for rhetoric of this kind; but his recent book on Dostoevsky, and especially his treatment of Dostoevsky’s great novel of nihilism, The Devils, suggests very powerfully that he thinks Dostoevsky would have seen modern capitalism as a work of the devil, and that he thinks Dostoevsky was right.

He hates the consumerist ideology of limitless choice because he thinks it tears us way from our real and limited wants; and he sees it prefigured in some of Dostoevsky’s villains, for whom “Everything depends on choice, and what is chosen today need have no relation to what is chosen tomorrow or what is chosen by anyone else”. Reading these words detached from their context, it’s obvious that they are also the perfect description of the workings of an untrammelled market, which may go up, down, or merely sideways depending entirely on the free choices of participants today. For Williams such a market is dehumanising and by extension diabolical:

What is depicted as The Devils moves towards its conclusion is the process by which the elevation of choice increasingly produces an evacuation of desire.

Bruce Springsteen put it in rather fewer words: “57 channels and nothing on”.

You get the impression that the archbishop believes that hell is a place which shows American television everywhere and all the time. That’s not in the shallow sense that hell is meant to be a place of torment, and it would be very horrible to watch cheap TV all the time, but in the much deeper sense that television destroys any idea of the sacred, or the truly important: the villains in the The Devils are “radically incapable of recognising any authority or significance in the images they literally and figuratively deface. They will make an obscene or belittling joke of suffering, of suicide … they mock the bereavement of people … they seek to inhabit a world in which nothing is serious, in which nothing, that is to say, signifies, opens unexpected horizons, or suggests a narrative larger than that of themselves as rootless individuals”.

This, he would say, is sinful in the precise sense that it draws us away from the sight or experience of God: that is also his interpretation of the famous phrase that “If God does not exist, then everything is permitted”. He doesn’t think that this is about the consequences if one less thing (God) is shown to exist; nor even that no punishment for evil can be trusted without God to enforce it in the afterlife. No – his argument is that if God does not exist “we are no longer able to see violence against others as somehow blasphemous, an offence against an eternal order [and] there is nothing definably insane about taking one’s own life”.

Williams’s real objection to the market is that it turns its participants into things to one another – and that, he believes, is a blasphemy because we are not things, but, in some sense, images of God. Money allows us to treat other as impersonal means to an end, and this offends both his reactionary and his socialist instincts profoundly. In 19th-century Russian literature, it is almost always nobler to be a serf than a wage-slave. Though the relationship between a serf and his master is based ultimately on violence, it is personal violence, not the impersonal and invisible transaction of the market, and so it has more room for virtue, and for growth.

That’s a real difference from Marx, who had no doubt that we could treat slaves as things just as easily as wage-slaves.

On the other hand, Williams can sound entirely Marxist when he attacks the introduction of markets into the NHS as he does towards the end of the book. To turn nurses into “producers” of health care for “customers” is to remove the culture of nursing from the activity altogether, he says. It stops being a gesture of selflessness, carried out in response to an ethical imperative, and becomes instead a set of negotiations for advantage, and if neither side sees any advantage in it, then there’s no reason to nurse anyone at all: “When such contracts cease to be satisfactory, there is no relation left; the other has ceased to be properly instrumental to my will and can be safely discarded”.

There’s a great deal that could be said about Williams’s particular critique of the markets: although he’s a very clever man, I don’t suppose he knows any more about economics than all the other very clever people currently bewildered by the question “What should we do?”; and to know that the archbishop supports a ban on short-selling doesn’t make it much clearer that this ban is a good thing.

But the one thing you can’t say is that this is a knee-jerk response, or a piece of publicity seeking. The belief that capitalism tends towards evil is one of his deepest convictions.

Participation nation

tim — Mon, 15 Sep 2008 21:13:40 +0000

Democracy, by Paul Ginsborg (Profile Books)

Paul Ginsborg’s prescriptions for the renewal of democracy are impressive, but disappointing in shirking some of the underlying factors behind the disaffection that plagues modern politics. There are two strands to Ginsborg’s analysis: he draws on case studies of participatory democracy that try to involve people in the decision making process, whilst embodying these in the context of the ideas of Marx and Mill.

Participatory democracy is given the heaviest emphasis: a transparent voting system and the fair election of politicians and representatives, elections being the only moment in the voting process when individuals are formally equal. At other times, there must be meetings of people to assess public opinion and translate it into workable measures: otherwise, the vote itself is meaningless. As the book develops, Ginsborg analyses how these participatory schemes might be applied in the workplace and other areas of public life, and he maintains a careful distinction between economic and political democracy while exploring how they might be fruitfully combined.

Marx and Mill provide more than an overview to the analysis, as Ginsborg considers how these two great thinkers might have viewed modern participatory democracy, often with entertaining results. The difference in their attitudes to ‘economic democracy’ is particularly clear, with Marx’s insistence on the need for proletarian revolution pitted against Mill’s more optimistic view of class as a movable obstacle. However, in the earlier parts of the book, it would be useful to have more discussion of the current political climate, to ascertain just why it’s so apolitical.

For example, a recurring theme is the idea that we have forfeited our rights to participate in democracy: by retreating into the private sphere, we have decreased the time we invest in the outside world. The tone is set by the words of Benjamin Constant, that on larger scales, democracy will take place on behalf of rather than by citizens, and men will instead be allowed ‘the enjoyment of security in private pleasures’. While this is undoubtedly true, it would be useful for Ginsborg to discuss the extent to which modern society is still built on this public-private divide. Ginsborg is right, for example, that families have the potential to produce active and dissenting citizens, but that ‘under consumer capitalism they are…overwhelmingly conformist and self-absorbed’.Ginsborg’s atomised conception of the family has rather Thatcherite overtones, but are we still in that same climate of neo-liberalism which compels individuals to devote all their energies to their own families in the private sphere? Some would argue the problem today is not the corrupting influence of the family, but its absence all together; people are increasingly individuals bereft of a network and a community to which they feel responsible. Indeed, Ginsborg’s proposed ‘system of connections’ implies communities deciding their priorities, but it is not clear whether this focus on inclusion would be provided by families or other institutions. Ambiguous points early in the book like this perhaps need more clarification.

In other places, Ginsborg discusses the limitations of the classical concept of parliament, where in the words of Mill ‘every person in the country may count upon finding someone who speaks his mind’, a view that as Ginsborg points out now looks rather naïve in the light of 150 years of analysis of socio-economic factors. However, in the same passage he talks of civil society as a project dating back to the Enlightenment period, and it would be useful if he could explain the distinction between the Millian view of parliament as the freest possible exchange of public opinion, and the Enlightenment view that citizens need a basic pre-definition of universal rights before the voting process begins. It is certainly pointless to put faith in any kind of parliamentary assembly if you do not have the faith that each individual will put their opinion under the scrutiny of others, and crucially, that they will allow others the free expression of their own views.

However, the problem with participatory schemes like electronic town meetings is that there is nothing in institutional terms to compel policy makers to respect the opinions of the temporary electorate. Clearly, such schemes fail because the views of the people are informed by different interests than those of the policy makers, and the former will always be subordinate to the latter. As a humble citizen participating in one of these schemes, you cannot have faith that every individual will respect your views, since those who make the final decisions are not accountable to you but instead to demands higher up, often set by even more unaccountable senior figures and private companies.

This is not true of all schemes; the case of Porto Alegre in Brazil is one which involves a new committee at each meeting, and allows people to elect their own representatives. This shows promise, but to have an impact on policy at anything but a local level remains rare. Perhaps there would be more progress if we could ensure citizens are empowered, reminded of their basic rights, or perhaps we need to redefine just what these rights are. However, there is little discussion at this level. Mill grasped that ideas had to be freely contended, but he did not envisage a scenario whereby decision makers and electorate sat in fundamentally different spheres. Unfortunately, this is the state we’re in (pardon the pun), and it can only be fully explained by taking economic conditions into account.

So, Ginsborg moves on to suggest how economic democracy might be achieved in spheres such as the workplace. As I noted earlier, the account of the distinctions between Marx and Mill in this chapter is one of the finest parts of the book. In particular, Marx’s essential point that, in becoming a producer of commodities, man loses control over the historical process, is brilliantly captured : ‘the worker was alienated…first from the product of his labour, which assumed the physiognomy of an alien object having control over him, rather than he having power over it’. Ginsborg brings to light several case studies of attempts to attain economic democracy in the workplace. The most interesting of these, worth mentioning, is a policy of collective investment funds which was considered in Sweden in the 1970s. this required company shares to be entrusted to regional management boards, based on how accountably they invested them in social priorities, with the aim of incentivising employees to work together for better working conditions. Schemes like this, it seems, would foster a culture in which worker had to negotiate rights themselves- of having direct control over the working environment, and is precisely the kind of outcome that schemes like the electronic town meeting have not so far attained. This is clearly not lost on Ginsborg: ‘In Millian terms, it leads to skilled and cultured representatives of the working classes, constantly present and active in the workplace’. However, this scheme had a limitation in Marxist terms: it does not allow workers control over the actual commodities being produced.

Indeed, having so well captured the point that control over nature, man’s ‘species-being’, is essential if man is to have any control over the course of his own history, Ginsborg unfortunately does not explore the possible relevance today. An underlying assumption throughout the book is one few would disagree with; the capitalism Marx documented in its infancy now continues to estrange us from political action. Although now, given the multiplicity of ways that we have control over our work, most of us cannot be considered the proletariat of the 19th century, talk of a revolution has lost much of its relevance. But even if we are not that proletariat, part of any agenda for the renewal of democracy should be to regain some control over the economic conditions that have forced us to take a passive role in it.

In the final chapter for example, Ginsborg gives a somewhat rose-tinted view of global civil society. Though the creation of social forums and think tanks on a global scale does open up ‘previously secretive and non-accountable spheres, and the diffusion on a mass scale of relevant information and documentation’, Ginsborg seems to see this as more of an opportunity than a problem: ‘the area of international governance is populated by the voices of diplomats, politicians and bureaucrats..but it is not an impenetrable or impregnable sphere’. The opportunities of global civil society are certainly there; there is hope that, particularly through the internet, citizens on a global scale are better able to mobilise themselves, set their own priorities. Politically minded citizens have been able to network and build think tanks, for example.

But in a global sphere which is dominated by public figures, can the interests of think tanks, and the criticisms it tires to affect, really penetrate the elite institutions of parliament and the EU? Or will they merely be used by self-interested politicians, and those with noble intentions becoming one of those self-interested politicians? Indeed, there is something profoundly Marxian about this idea; that criticisms of a political system can so easily become just another commodity. The media, as well as global democracy, is populated by politicians and often the views which sing their praises which ultimately find the greatest audience. In an indirect way at least, views are indeed affected by economic conditions, and global civil society today may well be a mouthpiece for the masses but it also pays lip service to the politicians and bureaucrats.

In summary, Paul Ginsborg gives much food for thought, but his proposals fall into two rigid categories; small-scale participative democracy in local, organised communities versus large scale global democracy in the form of movements and think tanks. The former allows communities to mobilise and establish some control over the process that represents them, but it is confined to small cross-sections of the electorate and crucially, their views have to penetrate the sphere of policy-making. These practices are atomised, and difficult to replicate in communities with different norms. Global civil society allows issues to be contested on a large scale, which represents a major leap forward. But these ideas are open to distortion by the media and public figures, undermining them before they reach their audiences. However, the book is not a comprehensive agenda and Ginsborg gives a creditable account of our options.

Book Review: A People's History of the World

tim — Mon, 02 Jun 2008 11:51:49 +0000

Flavour of the moment academic philosopher guru Slavoj Zizek recently proclaimed: “One of the clearest lessons of the last few decades is that capitalism is indestructible.”

Bombarded with daily news of international events as we are, it might be understandable that those living in less esoteric circumstances and with memories limited to the result of the last TV football match could well believe that history is simply one damn thing after another, lacking all understandable coherence. But a self-professed Marxist should surely see the world in a longer perspective than decades.

On the other hand, you need to have heroic ambitions to tackle history “from the Stone Age to the New Millennium.”

Chris Harman fulfils those ambitions magnificently in this new edition of his 1999 world history which demonstrates a breadth of scholarship coupled to a lucid style and a clear understanding of the unfolding patterns of human experience.

This last comes from his Marxist analysis, which, along with history itself, we are often told is dead. Without some rational framework, however – and Marx provides the only one that holds water – our world has been and still is a living nightmare.

Moving from the hunter-gatherer societies of pre-history – increasingly a misnomer as we learn more about our early forebears, who seemed to have shared none of the exploitative gender and racial values that inform our brave new world – Harman charts a course through the emerging civilisations which increasingly failed to reconcile internal conflicting social forces.

Throughout, he points his argument with needle-sharp examples. Slavery, which underpinned empires such as Rome, resulted in a lack of technological progress. With a limitless slave workforce, society has nothing to gain from investing in new methodologies of production, consequently providing easy prey for more dynamic predators.

Understandably, the greater part of Harman’s history is devoted to the world that emerged from medieval feudalism and the rise of capitalism.

Here, he takes on the labyrinthine complications of world power politics with deceptive ease. In his analyses of the revolutions that have punctuated the modern period, he demonstrates how the leaders of these movements – Cromwell, Robespierre, Lenin – were circumscribed by the social conditions of their times. As Marx knew, “human beings make history, but not under conditions of their own choosing.”

Harman believes that there is an essential logic to the apparently bewildering confusion of history. For instance, he answers a question that has always puzzled me.

Was it simply a psychopathic Hitler-imposed decision to continue the Holocaust programme even when, facing defeat, German communications and vital war resources would be overtaxed?

Harman suggests that, by then, anti-semitism provided the only binding ideological element for the corrupt nazi hierarchy.

Acknowledging that “capitalism is a more dynamic form of class society than any before in history,” Harman nevertheless demolishes the parroted post-modernist claim of the end of ideology and class conflict.

The industrial workers may have virtually disappeared from the Western imperialist world, but, characteristically using statistics tellingly, Harman points out that, “by the 1980s, South Korea alone contained more industrial workers than the whole world had when Marx and Engels wrote the Communist Manifesto.”

Our own teachers, nurses, local authority and post office workers know that overalls are not an essential qualification for membership of an exploited class.

Zizek needs reminding of Marx’s dictum. Philosophers have only interpreted the world, the point is to change it. And the times, they are a-changing.

Economic Crisis: Capitalism Exposed

Ellie Keen — Sat, 23 Feb 2008 00:01:58 +0000

“Investors are no longer worried whether certain banks have enough cash. They are worried about the risk of a US or even a global recession.” So the Financial Times summed up the fear of those who live off capitalist profits on 18 January.

Mainstream economic commentators agree on one thing: the crisis that began in one section of the financial system last summer could be about to create chaos through much of the capitalist system which they support.

Former US secretary of the treasury Lawrence Summers says the US may be already sinking into a recession. Alan Greenspan, former head of the all important US Federal Reserve (the equivalent of the Bank of England), sees the chances of this happening as 50 percent. A United Nations report warns of a “clear and present danger” of the global economy slowing to near standstill this year.

Ben Bernanke, Greenspan’s successor at the Federal Reserve, tries to paint a slightly brighter picture. He expects slower growth this year but no recession. Bernanke is supposedly an expert on crises, having written academic dissertations on the role of money in the great slump of the 1930s. But last summer he failed completely to see that a crisis was about to hit the financial system. Not much faith can be put in his forecasts, or in those of other mainstream pro-capitalist economists. Their blind faith in capitalism as a money making machine for profiteers means that they nearly always believe things are going wonderfully until they suddenly go wrong.

In any case Bernanke was worried enough to cut interest rates, while George Bush is pressing Congress to agree on an emergency programme of tax cuts. They desperately hope that such measures can prevent an economic slowdown turning into a slump.

One thing is absolutely clear. The extreme optimism in the world economy which characterised most mainstream commentary just a year ago turned out to be completely wrong. Typical was April’s International Monetary Fund (IMF) World Outlook, with its forecast that “the world economy still looks well set for continued robust growth in 2007 and 2008”.

Gordon Brown, chancellor Alistair Darling and governor of the Bank of England Mervyn King were so enamoured of the wonders of the free market that they downplayed the seriousness of what was happening even after the crisis had erupted in mid-August. King resisted calls from his friends in the City to cut interest rates, while Brown and Darling believed that they only had to promise support for Northern Rock for its problems to be automatically solved. They had no notion that in the end tens of billions of taxpayers’ money would be involved. Faced with turmoil in the system, they are like people trying to navigate a ship without a map, compass or rudder.

They put their faith in orthodox “neoclassical” economics as taught in school and university as it is supposed to prove the superiority of capitalism to any possible alternative. But it has never been able to explain the system’s propensity for crisis.

The system rests on the unplanned interaction of thousands of multinational corporations and a score or so of major governments. It is like a traffic system without lane markings, road signs, traffic lights, speed restrictions or even a clear code that everyone has to drive on the same side of the road. This will make it very difficult for those who claim to oversee the system to prevent the crash in the financial sector generalising into something much more serious in the next few months. And any success they have will be temporary, at best deferring the moment of reckoning for a couple of years.

To see why, it is necessary to look at where the crisis has come from. The immediate cause, everyone now agrees, lay in the US’s subprime mortgage lending. Keen to make easy profits, financiers began lending money to people who would previously have been regarded as bad credit risks because they were poor, did not have secure jobs, or had not been able to pay off previous debts. House prices were rising and it was assumed that if they could not keep up with their mortgage payments their houses could be repossessed and sold at a handsome profit. Such lending had the effect of encouraging the very rises in the house prices it relied upon.

The financiers who lent the money did not usually do so out of their own pockets. They went to others to borrow, and these in turn would borrow elsewhere. At each stage small differences in interest rates for very large numbers of transactions involving very large sums of money meant enormous, apparently effortless, profits. Virtually all the major banks on both sides of the Atlantic joined in, setting up special entities to borrow in order to lend, packaging all sorts of different loans together into what were called “financial instruments”. For a time all seemed to go well, and those involved congratulated each other on their financial acumen and brilliant entrepreneurship. Just a year ago Northern Rock was “the toast of a glitzy City dinner where it was heaped with praise for its skills in financial innovation”. Politicians like Gordon Brown wholeheartedly agreed.

The first signs that all was not well were about 18 months ago. US economic growth slowed, causing a sharp increase in the number of mortgage holders who could not afford the interest rates on which the whole business depended and there were a growing number of repossessions. But those involved in the trade in financial instruments were more interested in continuing to make profits than in the problems of poor Americans.

Then as house prices fell the mortgage lenders discovered they could not make enough from selling off one million repossessed homes to pay back what they themselves had borrowed. The banks which had been so willing to lend them money just as suddenly found they faced losses of tens of billions of dollars. What made the situation even worse was that no one knew exactly how deep any particular bank’s problems were because the “financial instruments” were so complex. Financial institutions right across the capitalist system became afraid to lend to each other in case they found they could not get their money back. This was the “credit crunch”.

Modern capitalism depends for its day to day activity on borrowing and lending (See below: Banking and credit). Every business expects to be able to buy certain things on credit, deferring cash payment until it has sold what it has produced. A credit crunch has been compared to a heart attack. If it is not dealt with, the whole metabolism comes to a halt. That is why governments whose whole philosophy is one of not doing anything to interfere with the free market have rushed to do so, pouring billions of dollars into private hands, hoping the recipients will use the cash to start lending and borrowing again.

There are many media commentators who see the story as ending there. Usually the only lesson they draw is the need for more financial regulation. The whole debate over what has happened then degenerates into an argument about exactly how much regulation.

However, some have looked a little deeper. One of those who has been most worried about the direction of events has been Martin Wolf of the Financial Times (perhaps because he completely misjudged what was happening when the Asian crisis began in Thailand ten years ago, describing it as a mere “hiccup”). “I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself – across the globe”, he recently wrote.

Commentators like him point out that economic growth in the US since the last recession seven years ago has been to a considerable extent fuelled by growing debt, both of consumers and of the US government. Many of the goods produced by US firms could not be sold without that borrowing, and so if it dries up a slump is inevitable. It is not only US firms that are affected. If the US has been one motor of worldwide economic expansion, China has been the other. And central to its growth have been hundreds of billions of dollars a year of exports to the US.

To add to the difficulties – and to the complexities for governments and central bankers in trying to deal with them – much of the lending that has enabled US consumers to borrow to buy Chinese goods comes from China. Effectively China’s profits from selling goods to the US cross the Pacific to be used in the US to buy those goods. The US consumer, as Wolf put it, is the “buyer of last resort for the world economy”.

An important IMF-sponsored study of the world economy three years ago shows how this happens. About 10 percent of Chinese “savings” (to use the conventional term for profits) are left over after new investments have been made. Much of this excess has been poured as lending into the US economy. “Savings” from other south east Asian countries and oil producing states have followed the same path. Even US industry has been “saving” more than it invests, and lending the excess to the banks to lend to consumers.

Enormous implications

This has had enormous implications. For a capitalist economy to function smoothly the wealth being produced throughout the system must be bought. The world’s workers and peasants cannot buy more than a portion of it, because their living standards are held down to create profits. This means the rest must be used by the capitalists, either as their personal consumption, for state expenditures they regard as essential to themselves (armies, weapons, etc), or on investment aimed at producing future profits.

If investment falls below savings, a gap opens up between what has been produced and what is being bought. Some firms cannot sell all their output and sack workers in order to balance their books. This reduces still further what can be bought, and a slump ensues.

This has not happened over the last five years as lending to US consumers had provided extra markets and absorbed the surplus production.

The credit crunch is putting a stop to this, and house building and car sales in the US are already being hit. Even if the banks recover confidence in lending to each other, they are not quickly going to start lending again to people without very good credit ratings. That is why the prospects of a recession are so high, and why one would have an impact outside the US.

The story told by Martin Wolf and the others is not, however, complete. They cannot explain why the world economy has become so dependent on the US consumer. To answer that question it is necessary to look deeper than any version of mainstream economics – to an ailment which the world economy has been suffering from since the 1970s.

What motivates capitalists to invest is not just the absolute level of profits they make, but the “rate of profit” – the ratio of profits to investment. This stayed more or less steady through the late 1940s, the 1950s and the 1960s. That is why these years saw a rising investment and a continual boom, sometimes referred to as “the golden age of capitalism”. But from the late 1960s through to 1982 profit rates fell, until they were only about half the average level of the previous two decades (see below: Marx and the rate of profit). The deep economic recessions of the mid-1970s and the early 1980s were a result of this fall.

Mainstream economists usually blame sudden rises in the price of oil for those recessions. But those rises would have easily been absorbed by the system had profit rates not already fallen so much.

Profit rates were able to stage partial recoveries in the mid-1980s and the mid-1990s. One thing which enabled them to do so was increasing the share of total profits in total national incomes at the expense of wages. Everywhere this meant increased pressure for people to work harder and attacks on welfare services (the “social wage”). In the US it has also meant a fall in the real wage from the early 1970s until the late 1990s and a massive increase in working hours. In Europe there has not yet been the same fall in real wages, but Britain has seen a rise in working hours (particularly if you include the unpaid overtime that is the fate of many white collar workers) and the pressure is now for the major European countries to follow suit.

Alongside this, the bankruptcies of some big capitalists have allowed others to gain at their expense. Rupert Murdoch will have gained from the demise of Robert Maxwell’s media empire 15 years ago, a wave of bankruptcies in the airline industry will have helped the profits of survivors like British Airways, BAe will have benefitted from the troubles of GEC-Marconi, and so on.

But the profit rates never recovered more than about half their previous decline and the booms suddenly ran into trouble with the stock exchange crash of October 1987 and the Asian crisis of 1997. On both occasions the US Federal Reserve and the Bank of England reacted by cutting interest rates and encouraging lending. Such measures were able to extend the booms, and media commentators boasted that capitalism had entered a new era of endless growth on each occasion – until it turned out that the recessions had been deferred a couple of years, not banished forever.

The recession of 2001-2 was particularly threatening to the US economy. Giant firms like General Motors were already making losses before the 9/11 attacks, which added to the panic in the boardrooms. The US government rushed to cut taxes to the rich and to boost arms spending, while the Federal Reserve slashed interest rates so as to encourage even greater levels of borrowing than before. This dragged the economy out of recession – indeed, some mainstream economists went as far as to say the recession never happened. But it laid the ground for the problems the system faces now.

For a time firms were able to improve their profit rates by making massive cuts in their workforces, with 2.7 million manufacturing workers (about one in six) losing their jobs. Real wages, which had risen for the first time in a quarter of a century in the late 1990s, fell again. But even so calculations made by Marxist economist Robert Brenner suggest that the peak for profit rates in 2005 was only about the same as the levels on the eve of each previous crisis since the mid-1970s. In 2006 the country’s biggest firm, WalMart, announced a fall in its profits and the big US owned car companies General Motors and Ford made record losses. It is then that the slowing down of economic growth hit the ability of many poor people to keep up with the mortgage repayments.

The rise in profit rates had not been enough to raise investment to its previous level – Brenner calculates investment growth was the lowest in any economic recovery in half a century. But raising profits had cut into the capacity of workers to buy all the consumer goods being produced by the economy out of their wages. Hence the centrality of personal borrowing, which rose to the record level of 9 percent of gross domestic product. There has been no other way all the goods produced by capitalism could be sold. If borrowing collapses, there has to be a recession.

This is not just the US’s problem. Some people point to the massive rate of expansion of the Chinese economy and suggest this can rescue the rest of the system. But that expansion rests to a large extent on selling goods to the US. If the US economy goes into crisis, it will face problems as well.

The response of capitalist governments and their central banks has been to look for some desperate ploy to keep borrowing going. One way to do so is to cut interest rates so as virtually to give money to the banks to lend to people. Martin Wolf has compared this to dropping money from helicopters. Another way is to increase government borrowing. This is what Bush is proposing with his tax cuts.

But states always face a problem if they simply print banknotes in order to cut interest rates or to cover the cost of cutting taxes. Such methods can sometimes give a short term boost to a flagging economy. But they are necessarily a short term remedy, since they do not solve the fundamental problem of how to raise profits to induce investment without cutting wages in a way that cuts the market for goods. So the Japanese state cut interest rates to virtually zero through the 1990s and still did not get the economy working back at its old levels.

Governments in the US and Europe fear such measures would increase prices (on top of the existing upsurge of oil and food prices) without stopping the economic slowdown, producing the combination of stagnation and inflation known in the late 1970s as stagflation. In the US the fears are deepened by the way in which the combination of the financial crisis and low interest rates is leading to a rapid fall in the international value of the dollar. That will both increase domestic prices in the US and weaken the global economic power of the US ruling class.

It is just possible, nevertheless, that such measures will defer the crisis, as they did at the end of the 1980s and 1990s. But they will not be able to do more than that.

The British economy faces some of the same problems as the US. Borrowing has been at an even greater proportionate level here than there, with a debt to disposable income ratio of 162.9 percent compared to 137.3 percent. The house price boom has been even crazier, with average prices quadrupling in 12 years. There are already signs that house prices are beginning to fall and repossessions to rise.

More importantly, perhaps, Gordon Brown’s policy over the past 11 years has been to compensate for the continued destruction of industrial jobs by trying to make London the centre of the world’s financial system. As a result the financial crisis can have a proportionately bigger direct effect on jobs here than elsewhere. At the same time, he has less room for manoeuvre than the US government when it comes to trying to keep the economy up by substituting government spending for private borrowing. He began increasing government spending six years ago (after cutting it to the bone in the previous four years), as a way of trying to sustain electoral support and limiting the impact of the last US recession. He is now under pressure to cut spending.

His response so far has been based on his faith that the market can work wonders providing he can keep capitalists happy. Hence his offer of vast amounts of money for a “public private” solution to the Northern Rock disaster. Hence too his insistence on holding down pubic sector pay.

Such measures are not going to be sufficient to protect British capitalism if the storm brewing in the US comes to a head this year. But they are going to deepen discontent with his government. They can also open many people up to arguments about the insanity of an economic system driven forward by the drive for profit.

Banking and credit

The financial system is often portrayed as a “weightless”, “global” system with no roots in the “real” economy and no particular national base.

But finance has long been of central importance to capitalism. At any moment some capitalists will have excess cash that they cannot invest, while others will want to expand but will not have access to the capital to do so.

Banks allow capitalists to deposit money they can’t use immediately and earn interest, or to borrow money they need for which they pay interest.

This lubricates capitalism, but if the system goes wrong it can threaten the stability of the whole system. As Karl Marx put it, “Banking and credit thus become the most potent means of driving capitalist production beyond its own limits – and one of the most effective vehicles of crisis and swindle.”

Central banks, such as the US Federal Reserve and the Bank of England, are key players in the world of finance. These central banks, which are subject to varying degrees of governmental control, are firmly rooted in a particular country, forming a pivot around which the wider financial system revolves.

Generally they will have a monopoly over the issue of legal tender and great power to influence interest rates.

Marx and the rate of profit

The rate of profit – how many pence in profit the capitalists get for each pound they invest – is central to the dynamics of capitalism. Karl Marx argued that there was a tendency for this rate of profit to fall.

He argued that “living labour”, the labour put in by those exploited by a capitalist, was the source of profit. Living labour creates new value, and some of this value is returned to the worker in the form of wages. Profit comes from the surplus value left over.

But capitalists don’t just hire living labour. They also purchase “dead labour” – machinery, raw materials and so on. This is the product of past labour by different groups of workers. The capitalists who manufacture and sell these things might make a profit on them, but the capitalist who purchases this dead labour makes no profit on it.

Marx argued that over time competition forces capitalists to invest in more and more dead labour – so each worker sets in motion a greater mass of machinery and raw materials. But if the total amount of dead labour rises, while the living labour (the source of profit) stays the same, the capitalist will invest more but get the same profit. Hence the rate of profit will fall.