Saturday, October 3, 2009

It isn’t over till it’s over

The Cooking the Books column from the October 2009 issue of the Socialist Standard

When the latest figures for business investment were published at the end of August, pro-capitalist commentators were shocked:

“From April to June businesses spent £29.9 billion on investments, from new computers to vehicles, down 18.4 per cent on last year – the biggest annual drop since records began in 1967. Against the first quarter of the year, investment tumbled 10.4 per cent from £33.3 billion – the steepest quarterly decline in 24 years” (London Times, 28 August).

Times journalist Ian King commented:

“Normally sober economists, such as Michael Saunders of Citi, reached for the history books as they pointed out that, in terms of total investment, the annual decline this year is likely to be about 18 per cent – the biggest fall, outside wartime, for more than a century. Judging from these numbers, businesses are simply not spending enough to haul the UK out of recession”.

Even though it only amounts to between 10 and 14 percent of GDP business investment – essentially what businesses spend, except on wages and land, on renewing production – is what drives the capitalist economy. It is an increase in this, resulting from the reinvestment of profits not just in maintaining but in expanding production, that results in an increase in GDP.

Business investment falls either because profits are down (so businesses don’t have the money to spend) or because they are not prepared to reinvest all of them as they don’t see themselves making a profit from doing so. Both these factors will have contributed to the current fall.

Marx analysed capitalism as a system of capital accumulation where the amount of capital invested increased over time through profits made out of past production being invested as new capital. However, this was not a smooth process but one that proceeded in fits and starts due to fluctuations in business investment.

GDP does not measure capital accumulation directly, but it is the source of income from which new capital is accumulated. In any country where there is no longer any subsistence farming, GDP can only go up if there has been some capital accumulation. If GDP falls this is a sign that capital accumulation has faltered.

The official definition of a recession is a fall in GDP for two consecutive quarters. The initial fall will be the result of a fall in business investment but, as business investment is only about 10 percent of GDP, a relatively big drop in this will be reflected only as a small fall in GDP. Thus a fall of 10 percent in business investment will reflect itself as a fall of only 1 percent of GDP. (In fact it will be larger as businesses will also be reducing their outlay on wages, another component of GDP).

When quarterly GDP increases again (as it will) politicians and the media will proclaim the end of the recession. But this will only mean that the bottom has been reached, not that it is over. It won’t really be over until business investment and GDP reach the levels they were at before the recession began. As GDP has fallen 5.7 percent since the recession began this will be many quarters later.

At the moment the big argument amongst economists and business analysts is what shape the whole episode will turn out to have. The optimists are hoping that it will be V-shaped (i.e. a fairly rapid return to pre-recession levels). Others see it as being more like a tick (i.e. a slower recovery). The pessimists see it like a W (i.e. a double dip, a initial small recovery followed by second fall).