Friday, June 2, 2006

Cooking the Books

From the forthcoming June 2006 issue of the Socialist Standard

Cooking the Books (I)

Capitalist Ideals

"The unacceptable face of capitalism" has become a standard term for excusing some excess of capitalist enterprise as if capitalism could ever have an acceptable face. At the annual jamboree of the Institute of Directors at the end of April, Todd Stitzer, chief executive of the Cadbury Schweppes group, whined that "business bashing has become everyone's favourite sport".

"He said recent scandals and disasters, from 'Enron to Arthur Andersen to Exxon Valdez and Bhopal', were not typical. 'These episodes did expose the unacceptable face of capitalism . . . But the business world is not populated by malignant people determined to harm others and exploit the world for base profit'" (Daily Telegraph, 27 April).

He was also reported as saying that businesses had to try to convince the public that companies were "capitalists with ideals" (London Times, 27 April).

Of course Stitzer and other heads of capitalist corporations are not (or at least the vast majority of them aren't) "malignant people determined to harm others and exploit the world" but it remains true that their "ideal" is, and has to be, maximizing profits, base or otherwise.

The personal views and motivations of business leaders are not relevant to the way the capitalist system works. Business leaders are cogs in the economic mechanism of the accumulation of capital out of profits derived from the surplus value produced by the class of wage and salary workers. They have to pursue a policy of maximising profits, even if this might "harm others and exploit the world", as this is what has to be done for their particular company - in fact, for any company - to stay in the competitive struggle for profits. If they didn't do it, somebody else would be found who would.

It is true that some of them seem to have completely internalised putting the making of profits before everything else and delight in applying this ruthlessly, and that this has earned business its deserved reputation for having an interest only in the bottom line. Others, such as Stitzer, may have some qualms about what they are doing, but do it all the same.

Then there was the case of the Norfolk and Norwich Hospital Trust which was tricked by a consortium which had contracted to build a new hospital for them. The "re-financing" deal was exposed by the House of Commons Public Accounts Committee, whose (Tory) chairman, Edward Leigh, called it . . . "the unacceptable face of capitalism".

What happened was that, after the hospital had been built, the consortium Octagon was able to obtain better financial conditions for the money it had borrowed to build the hospital. An extra £116 million was raised which, according to the (Tory) MP for Norwich South, Richard Bacon, was used "not to build more wards or a new cardiac unit. The sole purpose of this extra borrowing was to speed up the rate of return to investors" (London Times, 3 May).

Octagon had done nothing illegal. They had merely used their financial expertise to get a favourable deal for their shareholders at the expense of a hospital trust inexperienced in such matters. It happens all the time. In fact, such wheeling and dealing is virtually all that goes on in the City of London where not an ounce of wealth is created, but where financial capitalists try to trick each other - and any inexperienced suckers they come across - out of what has been produced by the working class.

Cooking the Books (II)

Towards An Economic Crash?

"Imbalances 'pose risk of recession'" ran a headline in the London Times on 28 April. The US has a "huge" balance of payments deficit "heading for 7 percent of national income this year", explained another article. "In turn, Asia has built up vast current account surpluses and foreign exchange reserves".

The balance of payments is basically the balance between payments coming into a country from the sale abroad of its exports (visible and invisible) and payments going out to pay for its imports (visible and invisible). A deficit exists when imports exceed exports. To pay for exports from the country, dealers in other countries have to acquire the country's currency while importers into the country have to acquire foreign currency. If a country has a balance of payments deficit, the demand for its currency will be less than that for foreign currencies, so its currency will tend to fall in value (whether through formal devaluation or through floating downwards). The opposite will be the case for a country with a balance of payments surplus; the value of its currency will tend to rise.

Given the US payments deficit and the Asian countries' surplus, what would normally happen is that the dollar would fall and the Asian currencies rise in value. That this has not happened yet to any great extent is because the countries involved find the present situation to be in their interest. The Asian countries, especially China, with their undervalued currencies benefit from being able to export more (because the price of their exports is lower than it would normally be, making them more competitive), while the US benefits from the Asian countries using part of their surpluses to fund the US government by lending it money (through purchasing its Treasury Bills).

There is a general recognition in international capitalist circles that this situation cannot continue indefinitely - that, sooner or later, in one way or another, the exchange rate adjustments must take place. The big question is how. The ideal solution of "a relatively stable adjustment", according to Mervyn King, the Governor of the Bank of England appearing before the House of Commons Treasury Committee, would be for this to "happen gradually over ten years in fits and starts".

But he went on to outline another possible scenario:
"You can certainly imagine cases where the sharp fall in exchange rates could well lead to a fall-off in financial stability, and start to lead to a disorderly adjustment which could be very costly and might involve recessions in some countries".

Some critics of capitalism are arguing that this is what is inevitably going to happen (for instance, Loren Goldner in an article predicting an "inflationary blow-out"). This is certainly a possibility, as King admits. But it is not inevitable. King's other scenario for a "relatively stable adjustment" is also a possibility.

Monetary matters are the froth and bubbles on the real economy. Even so, mismanaging them can provoke an economic crash that might not otherwise occur. But mismanagement is not inevitable. Slumps are only inevitable when caused by movements in the real economy.