Voice From The Back: This is Democracy? (2009)

The Voice From The Back Column from the September 2009 issue of the Socialist Standard

This is Democracy?

The US government are very fond of lecturing other governments about democracy and extolling the virtues of democracy as opposed to one party regimes. Where it suits their economic interests, such as in oil-rich Middle East states they are less adamant about democracy though. Nevertheless, compared to dictatorship like Saudi Arabia and North Korea, the USA would seem to be a model for the superiority of democracy. However on closer examination the US model is far from perfect. “In 2000, Jon Corzine spent tens of millions of his personal fortune to vault himself from political obscurity to the United States Senate. In 2005, he spent millions more to jump from Washington to Trenton and become New Jersey’s governor. This year he’s opening his wallet again as he looks to overcome a steep deficit in the polls to win re-election, in what could be the ultimate test of whether money trumps all in politics today. Throughout American history, personal wealth has often played a significant role in winning political office. But as campaigns are increasingly decided by 30-second TV ads and sophisticated get-out-the-vote efforts, the two major parties are increasingly looking to recruit individuals with personal fortunes that can help bankroll campaign costs that now more often than not run into the tens of millions of dollars.” (Yahoo News, 9 July) In US-style democracy anyone can become politically powerful but it does help if you happen to be a multi-millionaire.

The Power of Money

It is axiomatic in capitalist society that if you have more money you eat better than those with less of the stuff. Likewise when it comes to accommodation the rich live in palaces while the poor live in inadequate housing. In education, recreation and every other human pursuit money allows for the best of everything and consequently lack of the stuff leads to the cheap and the shoddy. A recent example of this was provided by a review of the treatment of mental health patients in the NHS. “A bleak picture of a mental health service that tolerates bullying and houses children alongside adults in breach of guidelines is revealed in a damning report from a government monitoring body. The Mental Health Act Commission claims many more patient deaths will occur through inadequate staffing and lack of training. The 248-page study, the last by the commission before it is replaced by the new Care Quality Commission, highlights how patients put on suicide watch are often poorly observed, leading to tragedies half-concealed by ‘falsification’ of nursing records.” (Observer, 19 July) Needless to say this sort of treatment is reserved for those who cannot afford the luxurious treatment provided for the very rich. As the Bob Dylan song has it – “Money doesn’t talk, it swears!”

Prophets and Profits

The financial journalist Richard Wachman recently wrote an article in the Observer entitled “We’re two years older and sadder, but perhaps not a great deal wiser”. He reviewed the financial collapse that had occurred from August 2007 to August 2009. “What happened two years ago was to lead to a chain of event that involved the nationalisation of about half the major banks in Britain and the United States. It was also to lead to the collapse of emerging markets from Latvia to Pakistan and the biggest ever globally co-ordinated government rescue package, involving trillions of pounds. The world is now an uglier place with mass unemployment, widespread business failure and dramatic falls in world trade.” (Observer, 2 August) Wachman’s analysis of the problem is not particularly revealing but what is of interest in his article is how the crisis has left so-called experts with egg on their faces. Mervyn King (August, 2007) “I don’t think there’s any real evidence here of a fundamental challenge to the macroeconomic outlook.” and then (February, 2009) “The UK is in deep recession … Restoring both lending and confidence will not be easy and will take time.” George W Bush (August, 2007) “The fundamentals of our economy are strong … and we are headed for a soft landing.” and then “If money isn’t loosened up, this sucker could go down.” (September, 2008) Alistair Darling (August 2007) “People should have confidence that many of the investment they make will be good investments.” and then “Times are arguably the worst they’ve been in 60 years… it’s going to be more long-lasting than people thought.” (September 2008) Capitalism is a social system based on economic slumps and booms and it makes fools of all the “experts”.

Las Vegas, Another View

We are all aware of the Hollywood depiction of Las Vegas as a fun-loving city, full of casinos, nightclubs and good times, but the reality for its growing homeless numbers is far from idyllic. As jobs and homes disappear many of the dispossessed street dwellers are subject to attacks of violence. Now even the streets are being abandoned by the homeless. “Some of the Las Vegas homeless resort to living in a maze of underground flood channels beneath the Strip. There they face flash floods, disease, black widows and dank, pitch-dark conditions, but some tunnel dwellers say life there is better than being harassed and threatened by assailants and the police. ‘Out there, anything goes,’ said Manny Lang, who has lived in the tunnels for months, recalling the stones and profanities with which a group of teenagers pelted him last winter when he slept above ground. ‘But in here, nothing’s going to happen to us.’” (New York Times, 7 August) In one of the most sophisticated urban areas in the world some members of the working class are living like sewer rats. What a hellish system capitalism is.

Proper Gander: Where the wealth went (2022)

The Proper Gander TV column from the March 2022 issue of the Socialist Standard

Since the financial crisis and through austerity, Brexit and then the pandemic, we’ve had to get used to the effects of the economy at its most volatile. Reminding us of the depressing years from 2008 onwards is BBC Two’s documentary The Decade The Rich Won, which would more accurately be titled ‘Another Decade The Rich Won’. This two-part programme has an all-star cast of politicians, economists and government advisers who tell us how they navigated the last decade’s fiscal turbulence. Instead of a narrator, captions in block capitals flash up on the screen to pull the story along, accompanied by urgent-sounding ominous music.

The documentary begins with the government’s ‘bailouts’ of hundreds of billions of pounds to banks such as the Royal Bank of Scotland. Without this intervention, we would have faced ‘financial armageddon’, according to then-Governor of the Bank of England Mervyn King, and with this intervention, the wealthiest got even wealthier. It’s explained that this is because the bailout funds stayed with the banks, rather than flowing through and boosting the economy. So, an alternative strategy was tried: quantitative easing. This tactic (credited to King and then-Chancellor of the Exchequer Alistair Darling) is when the Bank of England ‘creates money’ to buy government bonds from financial institutions, which then have more funds to lend out to people and businesses. Between 2009 and November 2020 the impossible-to-visualise amount of £895 billion went through the UK’s quantitative easing plan, with more paid out by other countries’ central banks. The effect of this was an increase in the value of assets, and consequently, according to hedge fund head honcho Paul Marshall, the ‘owners of assets have all made out like bandits’. Marshall isn’t the only city bigshot interviewed for the programme who knows exactly how capitalism works, and in whose interests. Private equity supremo Guy Hands says it’s obvious that wealth attracts more wealth, regardless of what the government recognises. If they and the other economists featured didn’t already know this when quantitative easing was used in 2009, then they would have learned it when the same pattern recurred when the strategy was used after Brexit and again when the pandemic hit.

The super-rich haven’t only benefited from bank bailouts and quantitative easing, but also from shrewd management of their tax affairs. The tax havens where the elite stash their cash were revealed in the Panama and Paradise Papers, leaked to German reporters Bastian Obermayer and Frederik Obermaier. Alongside these revelations, companies such as Vodafone, Amazon and Starbucks were outed as paying little or no tax to the UK government, which at that time was implementing its austerity measures. Then-Prime Minister Theresa May wagged her finger and said to these corporations ‘I’m putting you on warning. This can’t go on any more’, although nothing was done because her reduced-majority government became distracted by Brexit, according to ex-minister and senior aide Gavin Barwell. A more fundamental reason (not given in the documentary) is that governments see high profitability as good for the economy, and therefore are reluctant to impose a heavy tax burden on corporations which would reduce the amount of profit they make.

While the richest grew and held on to their massive amounts of money, millions of people were struggling because of job losses, insecure ‘gig economy’ contracts, rising house prices, shrinking wages and cuts to government funding of services. The widening inequalities of wealth led to the normalisation of food banks and global protests. The programme features some of the campaigners with UK Uncut (a direct-action group targeting corporate tax dodgers) and also the Occupy movement. When asked what the movement achieved, Tina Rothery, one of its members says ‘so much… Occupy pulled the conversation back… to real humans’, although she also admits they didn’t offer solutions beyond this. Another way people reacted to the establishment letting them down was by voting for Britain to leave the European Union. Brexit created more financial instability, responded to with more quantitative easing which again boosted the elite’s coffers.

Some of the interviewees who represent the status quo are more candid than might be expected because they’ve since retired or left their previous careers. For example, Mervyn King (now a life peer) says it’s ‘deeply unfair’ that banks get bailed out when in financial trouble, but other businesses wouldn’t. Ex-Deputy Prime Minister Nick Clegg, who looks like he’s still recovering from his spell in government, tells us there was no debate about further cuts to public spending, as the coalition agreed they would be necessary, despite his talk of ‘difficult decisions’. The Chancellors of the Exchequer (Alistair Darling, George Osborne and Philip Hammond) all seem to be sticking strongest to the decisions made during their tenures. In contrast, Gary Stevenson, a Citibank trader between 2008 and 2014, has shifted his views because of his experiences during those years. As an ‘interest rate trader’, he discovered he could make a fortune by betting on the economy getting worse and as a result became Citibank’s most profitable trader in his area. Realising that economic crises have led to increases in the value of the capitalist class’s stocks and assets, Stevenson felt guilty and left his job. He now works as an economist campaigning against inequality, although the documentary doesn’t mention his proposal to remedy this by placing a time limit on property ownership, thereby forcing the elite to sell their assets, which no government would agree to.

The Decade The Rich Won shows that the way the economy works has enabled the capitalist class to prosper through the turmoil of recent years. The wealth owned by UK billionaires has risen by 310 percent since 2010, little of which has trickled down to those of us scraping by on low incomes. The documentary is worth watching not only because it’s a grim reminder of how capitalism functions but also because it reveals the views of those in prominent positions. Their openness now makes the spin we heard last decade – ‘we’re all in this together’, ‘stronger economy, fairer society’, ‘aspiration nation’, ‘strong and stable leadership’, ‘a country that works for everyone’ – sound even more hollow.

Mike Foster

Cooking the Books: Towards an economic crash? (2006)

The Cooking the Books column from the June 2006 issue of the Socialist Standard

“Imbalances ‘pose risk of recession’” ran a headline in the 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.

Wages and the cost of living (again) (2011)

From the March 2011 issue of the Socialist Standard

As inflation begins to kick off again, is it a return to the 1970s?

The government and the Confederation of British Industry are banking on an “export-led recovery”. They are hoping that, with the fall in the value of the pound making exports cheaper, there will be an increase in production in the sectors producing for export which will have a knock-on effect on the rest of the economy.

There is no guarantee that this will happen, especially as others – in particular, the US and German-dominated Euroland – are hoping for the same. But there is another side to a fall in the value of a currency. While it makes exports cheaper, it makes imports dearer.

When, in the days of formal devaluations, the Labour government of the day was forced in November 1967 to devalue the pound, by 14 percent compared against the dollar, the Prime Minister Harold Wilson made his famous remark about the “pound in your pocket”:

  “From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued. What it does mean is that we shall now be able to sell more goods abroad on a competitive basis.”

Technically, he was right. If you had a pound in your pocket it didn’t become 86p (in today’s money). But he was being disingenuous as he knew that the devaluation would make imports dearer and so lead to higher prices for imported goods. The cost of living would go up, leading to “the pound in your pocket” not being able to buy as much as previously.

It’s happening again now. The government has let the foreign value of the pound fall; the price of imported goods (such as oil and gas, and oranges and bananas) has gone up. So, as a result has the cost of living. Figures for January for the Consumer Price Index showed a rise of 4 percent compared with the previous January, well above the 2 percent that the Bank of England is supposed to keep it at.

It’s going to continue. According to Sean O’Grady, the Economics Editor of the Independent (21 January), there is “mounting evidence that manufacturers are having to pass a rapid rise in import costs on to the consumers – with the acceleration in imported inflation at its highest since 1975, the year that recorded the highest import inflation in modern British history.” He went on to quote the CBI’s chief economic adviser, Ian McCafferty:

  “Manufacturers have come under intense pressure to pass on rising costs: they have increased prices markedly in this quarter [last quarter of 2010], and expect to raise them at an even faster pace over the next three months. This will drive further inflationary pressure in the wider economy.”

What this means for workers is clear. Unless money wages go up too (by the same percentage) real wages – what wages can buy – will go down. Which is what the government and other apologists for capitalism want. As Bank of England Governor Mervyn King declared in a speech in Newcastle on 25 January that “the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.” He noted approvingly:

  “Average real take-home pay normally rises as productivity increases – money wages normally rise faster than prices. But the opposite was true last year, so real wages fell sharply. And given the rise in VAT and other price rises this year, real wages are likely to fall again. As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.” (LINK. His emphasis)

People on benefits are protected to a certain extent by these being indexed to the Consumer Price Index, so if this goes up so do their benefits. So are workers in unions, as unions are usually able to obtain a wage increase at least equal to the increase in the cost of living.

Now voices are being raised to stop this. As if to show that the Keynesians are just as anti-working class as the Free Marketeers, Keynes’s biographer Lord Skidelsky and Michael Kennedy wrote to the Financial Times (29/30 January) claiming that “the indexed incomes policies of the 1970s were a national disaster”. They called for increases in the cost of living due to increases in the price of imported goods to be excluded from the Consumer Price Index. Which of course would mean a reduction in the standard of living for those with indexed incomes.

Tim Shepherd replied the following week (Financial Times, 5/6 February) warning that manipulating the cost of living index would be “a slippery slope that will reduce the credibility of the indices” (as if this hadn’t already happened – only last October the government changed the link for benefits to an index that goes up more slowly). But he too asserted that “real wages need to fall when the terms of trade move against an economy”.

The terms of trade compare export prices with import prices and “move against an economy” when more exports are needed than before to pay for the same amount of imports. But this is precisely what happens when the value of a country’s currency falls; it decreases export prices and increases import prices, so increasing the gap between them.

So it really could be the return to the 1970s that Lord Skidelsky and the others fear. Then, governments, both Labour and Tory, tried all sorts of ways to hold wages down – wage restraint, incomes policies, wage freezes, anti-union laws – and the workers and their unions fought back. Strikes were more frequent than today. The governments and the media described this as a wages-prices spiral, blaming the workers for fuelling it with their wage demands. But it was more of a prices-wages spiral, with workers trying to keep their wages going up in line with rising prices (caused, at that time, mainly by currency inflation).

Strictly speaking, an increase in import prices is not “inflation” as inflation is not any particular price increase but only (as the word itself suggests) an increase in the general price level due to an overissue of the currency. Currency inflation is still moderately practised by governments who often aim to keep it at around 2 percent a year. One of its effects is in fact to increase export prices along with all other prices and is a factor in whether a currency floats up or down relative to others.

If the rise in the cost of living is going to speed up as in the seventies then the workers’ response will have to be what it was then – to push, including by going on strike, for money wages to go up to maintain living standards, even though this time, given mass unemployment, employers will be in a stronger position.

What this confirms is that built-in to capitalism is a class struggle between workers and employers. But it’s not just over wages and working conditions. It’s ultimately over the ownership and control of the places where wealth is produced.

As capitalist ownership of the means of production is created and upheld by the state, the struggle needs to be carried over from the workplace on to the political field. It means organising not only in trade unions and the like to wage what is essentially a defensive struggle. It means organising politically to put up candidates against the parties of capitalism (Tories, Labour, Liberals, Greens, Nationalists) with a view to wresting political control from them and using it to declare private, class ownership of the means of production null and void so that they become the common property of society as a whole. This is why, in addition to trade unionism, a socialist political party is needed.

Adam Buick

Cooking the Books: Wages, prices and profits (2005)

The Cooking the Books Column from the July 2005 issue of the Socialist Standard

Mervyn King, as Governor of the Bank of England, is supposed to know all about inflation. After all, his remit, now that the Bank no longer takes direct orders from the government, is to keep inflation below 2 per cent a year.

Inflation proper, as the name suggests, is not just any rise in the general price level but a rise caused by over-issuing the currency, something which is entirely under the Bank’s control. However, the word has come to mean, even to the Bank’s Governor, any rise in the general price level whatever the cause.

Judging by his comments in a speech he gave in Bradford on 13 June, King also subscribes to the view that wage increases cause inflation. The Guardian (14 June) reported his speech under the headline “Migrants hold down inflation says governor”:

  “Mr King said that the 120,000 eastern Europeans who had arrived in Britain since 10 more countries joined the European Union in May 2004 had kept the lid on wages and prevented inflation from rising . . . ‘Without this influx to fill the skill gaps in a tight labour market it is likely that earnings would have risen at a faster rate, putting upward pressure on the costs of employers and, ultimately, inflation,’ he said.”

At least King had the honesty to make it clear that employers (whatever vote-catching politicians might say) welcome immigration of workers from other countries to help both ease skills shortages and keep wages down, but he seemed to be suggesting that, faced with a wage increase, employers can simply pass this on as increased prices.

Later on in his speech, however, he had to admit that employers are not at liberty to raise prices at will:

  “May’s figures for producer prices showed the cost of the fuel and raw materials used by manufacturers still growing strongly but the increases being largely absorbed in lower profit margins. According to the Office for National Statistics, input prices increased by 7.8% last month compared with a year ago and increased by 0.2% compared with April. In contrast, the weakness of demand and the strength of competitive pressures meant the price of goods leaving factory prices fell by 0.2% last month.”

But why, if employers couldn’t pass on increases in energy and materials costs, why could they have done so if wages had increased? The answer is that they can only increase their prices, when their costs increase, if the market will allow this. Otherwise the cost increase, including wages, has to be “absorbed in lower profit margins”.

Marx made the same point 140 years ago in a speech he gave to British Trade Unionists.  “A general rise of wages would”, he said, “result in a fall in the general rate of profit, but not affect values” (Value, Price and Profit, chapter XII).

An Open Letter to The Chairman of the Bank of England (2012)

Mervyn King

From the August 2012 issue of the Socialist Standard

Dear Sir Mervyn

Having heard on the BBC news channel on the evening of the 29th June your condemnations and exhortations concerning the practices of your fellow-bankers I am taking the liberty of writing to you to register my surprise at your remarks. It is not my purpose to be offensive but I find it difficult to accept that a man of your knowledge and experience can view the current crisis of capitalism in moral terms or, indeed, as aberrational.

I am an eighty-seven year old man and a great-grandfather which gives me a particular concern for the future. I was born four years before the awful world economic slump of 1929 and I have lived through some eight or nine ‘recessions’ –as they are euphemistically referred to today. I have witnessed life under the system of capitalism when it was largely unregulated –capitalists had discovered earlier that they required some sort of Queensbury Rules to protect themselves from one another.

Post-1945, when government adopted the war-time National government’s commitment to the Beveridge Report, I experienced Maynard Keynes’ antidote to the caprice of the system, via ‘demand management’: the exchange of bonds for shares and –in recognition that working-class poverty was an endemic feature of capitalism – the institution of a complex scheme of nationalised poverty.

It would be churlish to deny that there was some improvement in social conditions for the producing class: improvement, it has to be said, greatly assisted by the need to make good the awful destruction of the late world war –while frenetically preparing for yet another possible war against our late ‘glorious Russian allies’ and their Leninist philosophy of trying (vainly, as it turned out) to rationalise commodity production through central state planning.

While knowledge was constrained by the cash nexus, science in all fields of human endeavour has brought about a geometrical increase in our potential to create the material conditions of a full and happy life for every human being on the planet. Unfortunately much of our fantastically expanded wisdom and wealth has been siphoned into military establishments which are today a vital indigenous segment of the world economy; a segment which often manifests an independent and dangerous threat to human freedom.

The world of my lifetime has seen the economic murder of some eight billion people through starvation, lack of clean water and necessary medication. The food and medication to keep these people alive was available but the men, women and children concerned did not represent a viable market that would yield profit. They died because they were poor.

In the same period I have seen World War Two –the awful sequel to World War One –that brought homes onto battlefields. Now, since the end of WW2, there is at least one major conflict occurring every single day. In fact, the industrialised killing of human beings that arises from the endemic conflicts of capitalism has itself created investment opportunities effectively making international concord a serious economic threat.

Rich list
It is surely legitimate, Sir Mervyn, to ask such as your good self how you think people in what we hope will be a more enlightened future will see the current phase of what we are told is civilisation. How, for example, would a future economic historian see the current Sunday Times ‘Rich List’ which shows that the wealth of the one thousand richest people in the UK –a mere 0.003% of the adult population –increased by an incredible £155 billion over the last three years? This in a period when wages and social security benefits were, and are, being slashed and the vision and disagreements of the three political parties, marketing the same political product, is confined to the duration, in years, the working class will have to endure the appalling increase in its miseries.

Moral aphorisms appealing to those who have purloined the means whereby the rest of us live have never restrained the appetites of an owning class. It is said that Jesus got his comeuppance for suggesting the meek –by definition, the poor –should inherit the land. Centuries later, in the dying years of the nineteenth century, when Pope Leo mildly admonished the capitalism of his day, opining that “…the wages of the working man ought not be insufficient to support a frugal and well-conducted wage-earner…” (Encyclical: Rerum Novarum, May 1891) public criticism was raised by Italian businessmen who suggested that the promulgation of the document might cause social unrest.

Poverty and riches are two sides of the same coin –almost literally so, for as Shelley put it, “Paper coin, [is] that forgery of the title deeds which we hold to something of the worth of the inheritance of earth”. You cannot be ignorant of the mechanism by which a small minority class dispossesses the creators of all real wealth of the fruits of their labour and rations their access to their needs through a wages-money system.

Whatever the form of society, real wealth is produced, and can only be produced, by the application of human labour power to nature-given materials. Capitalism adds a third element to this simple equation: investment on foot of the promise of profit. The shareholder, whether s/he is a billionaire or a plumber in a pension scheme, seeks a return on their investment and is rarely persuaded by the needs of ‘the nation’ or their perception of morality. Only the threat in the aforesaid ‘Queensberry Rules’ of the system curbs the pecuniary enthusiasm of the more predatory captains of capital and that, as we are currently learning, is not always the case.

Capital on strike
The labour power that provided the fervid productive activity of, say six years ago, when the system was in relative ‘boom’, is still available as are the natural resources of that period. The missing element is capital; effectively, capital is on strike, holding the nation up to ransom as the pensioned editors of their newspapers proclaim when some group of low-paid workers withdraws their labour. Surely the fact that a small minority of satiated money shufflers can visit such overwhelming hardship on the populace in general (as it does periodically) must bring the entire system into question.

Whatever of the past, when the owner of the local factory lived in the big house on the periphery of the town or village and occasionally visited the local hostelry and even bought the lads a pint, capitalism today is a curse on the lives of the world’s billions. Technology has given it a mobility to seek the cheapest labour, circumvent health and safety standards that might impinge on profits or capital on-costs and to force the hand of allegedly democratic authority.

The implications in the current crop of chastisements against bankers and those of their ilk is that capitalism is an efficient, humane economic system that offers the human family the best of all possible worlds except when, as now, it falls victim to the ineptitude or greed of some of its functionaries. That is a lie told in defence of the system. Of course there has been abuse, and even absurdity, in the administration of banks and businesses but it was the uncontrollable greed that fuels the system that gave rise to the activities of bankers and speculators. Nor should we forget that it was the approbation of millionaire and billionaire shareholders that justified the fabulous salaries and bonuses so lately enjoyed by now-discredited servants of capital.

The widespread clarion for a public enquiry might expose some of the greedy swindlers whose dishonest activities have added misery to capitalism’s cyclic trade crisis as well as the self-interested manoeuvrings of politicians in all the three main parties. For a while these scoundrels might suffer in comfort the embarrassment of being publicly pilloried. But the system itself, the vile, anachronistic system that brings dire poverty or mere want to most of the people on the planet, will be off the hook.

What we will not have is an incisive enquiry into the question of capitalism’s suitability for purpose and whether socialism, in a clearly defined sense, offers a better way of life for the whole of humanity. That would be much too democratic.

Such are my thoughts. I confess, Sir Mervyn, that I am a ridiculous optimist who thinks human concern and human honesty might occasionally rise superior to the exigencies of office. Additionally, of course, in submitting this to the Editors of the Socialist Standard, I would stipulate that publication guarantees your right of reply.

Sincerely

Richard Montague

Cooking the Books: Going for Growth (2012)

The Cooking the Books column from the September 2012 issue of the Socialist Standard

When Mervyn King announced on 8 July that the Bank of England was predicting zero growth for 2012, Chancellor George Osborne pledged that the government would now devote a 110 per cent effort to creating growth. But how?

Growth is defined as an increase in Gross National Product (GNP). This is made up of three things: business investment, government expenditure and consumer spending. So, in theory, growth could be brought about by increasing any of these. In practice, however, it can only come about through an increase in business investment. This is because this is what drives the capitalist economy, but it only takes place in the pursuit of profit. When it contracts or stagnates this is a sign that profitability has fallen. Growth won’t take place again till this is reversed.

When there is a slump the obvious solution seems to be to increase consumption by giving people more money to spend. Keynes wasn’t so naïve but he did provide an economic theory that justified doing this. So it is fair to say that the Keynesian solution to a slump is that the government should intervene to increase both its own spending and consumer demand.

When this was last tried in Britain by the Labour governments of the 1970s it didn’t work, but merely led to “stagflation”, i.e. rising prices but no growth. The then Labour Prime Minister, James Callaghan, had to confess at the 1976 Labour Party Conference:

“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment” (Times, 29 September 1976).

The fallacy behind this policy, still advocated by Labour left wingers and the Green Party, is that it assumes that capitalism is an economic system geared to meeting paying consumer demand whereas it is in fact an economic system geared to making profits to accumulate as capital. Profits are the key to growth not government and consumer demand.

In a slump there is a fall in consumer demand but this is a consequence of an increase in unemployment due to a fall in profitable investments. This is why government action to increase demand does not work. Only an improvement in profit prospects, leading to an increase in business investment, will bring about an inevitably gradual exit from a slump. Various things that happen in a slump help to bring this about. Lower wages, lower interest rates, a fall in the value of fixed assets and the elimination of unprofitable firms all help to restore profitability. So does a reduction in taxes. In fact, insofar as a government does not decrease its spending and so taxes to finance it, this can prolong a slump.

To apply Keynesian remedies in a slump could even make things worse. Not that the present government has any intention of doing this. They can pledge to “go for growth” as much as they like but unless profits recover there will be no growth.

Adam Smith: capitalist icon? (2007)

From the January 2007 issue of the Socialist Standard

Mention of the name Adam Smith calls to mind the “invisible hand” of the market, free trade, even capitalism itself. And money makes this capitalist world go round. So the Bank of England’s decision to feature Smith’s face on its twenty-pound notes, starting this spring, certainly seems appropriate

The Bank’s Governor, Mervyn King, says that Smith reminds us of how “openness to trade with others” allows us to “seize opportunities to specialize” that result in higher “productivity, incomes and standards of living for citizens of all countries.” To drive this point home, the new banknotes will have an engraving of a pin factory, which Smith used as an example of how the division of labour increases productivity, with the caption: “and the great increase in the quantity of work that results.” King hopes the new banknotes will encourage visitors to Britain “press their own politicians to support the opening up of trade, which has been at the heart of the British Government’s efforts to reform the world economy.”

The image of Smith presented on the banknotes, while not incorrect, is certainly one-dimensional. It ignores those aspects of his investigation of capitalism that run directly counter to some of the cherished beliefs of his followers.

That is not to suggest, however, that Smith was an anti-capitalist. Some like Noam Chomsky have flipped through the pages of The Wealth of Nations to uncover ideas critical of capitalism, but this effort seems misguided and unhistorical. Smith undeniably had faith in capitalism, but this view arose naturally from living in an ascendant capitalist system that had yet to fully reveal its contradictions. Compare this to the contemporary cheerleaders for capitalism who can only maintain their belief by denying reality. In late 18th century Europe, there was no socialist spectre haunting the sleep of burghers like Smith. If anyone had insomnia it was aristocrats worrying about the rising bourgeoisie. With the peace of mind that this situation afforded him, Smith pursued the sort of disinterested study of capitalism that could only be carried out a century later by critics of capitalism, such as Marx.

A labour theory of value

Smith’s great interest in the “specialization” of production, which the new banknotes emphasize, naturally led him to ponder what regulates the commodity exchange that mediates this division of labour. In other words, he wondered what determines the “exchangeable value” of commodities. In using this term, Smith already makes an important distinction from what he calls “value in use.” Smith notes that something with great utility, like water, has no exchange value at all, whereas a diamond is of little real use but has great exchange value. Smith thus sets aside the issue of use-value, to instead “investigate the principles which regulate the exchangeable value of commodities.” The answer he arrives at later came to be known as the “labour theory of value.” That is, he identifies the labour necessary to produce a commodity as the factor that regulates its exchange-value.

This view is presented in chapter six of The Wealth of Nations, where Smith says that “the proportion between the quantities of labour necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them for one another” He offers the example of “a nation of hunters” where it usually costs twice the labour to kill a beaver” than “it does to kill a deer.” The result is that “one beaver should naturally exchange for or be worth two deer.” In other words, “produce of two days or two hours labour” would naturally “be worth double of what is usually the produce of one day’s or one hour’s labour.”

Smith goes on to point out that more difficult or complex labour would naturally be worth more than simple labour: “If the one species of labour should be more severe than the other, some allowance will naturally be made for this superior hardship; and the produce of one hour’s labour in the one way may frequently exchange for that of two hours labour in the other.”

This view is expressed in such a simple and straightforward way that it may seem inconsequential. But the significance of Smith’s idea that commodities have intrinsic value, based on the labour “embodied” within them, becomes clearer if we compare it to other explanations of value.

The most common “explanation” of value, which most people would offer without thinking twice, is that a commodity’s value is the outcome of supply and demand. But on closer consideration, it becomes clear that this can only account for why the price of a given commodity might fluctuate higher or lower; it cannot explain why a price fluctuates around a certain level. Supply and demand might account for why the prices of 4x4s fell compared to hybrid vehicles, when oil prices soared, but won’t tell us why cars have far greater exchange value than, say, bicycles.

Another related theory is the idea that a commodity’s value is determined subjectively according to its utility. But, again, this does not answer the car-versus-bicycle question. Many people find bicycles infinitely more useful than cars, but that does not mean they are willing to pay dearly for them. A subjective theory can explain why a person dying of thirst in the desert would gladly exchange a diamond ring for a glass of water, but this does not help us understand everyday commodity exchange.

In addition to these explanations, there is the theory of value that claims a commodity’s “value” is determined by the price of producing it (“cost price”). But this is a tautology that does not explain what determines this price.

Only a labour theory of value, which locates the intrinsic source of value, offers a way to move beyond these superficial explanations.

Dangerous implications

Capitalists have been vehemently opposed to the labour theory of value for good reason. A theory of intrinsic value leads towards an understanding of the source of profit, which capitalists are eager to obfuscate. If a commodity has no intrinsic value, and its price is only determined in the actual process of being exchanged, then profit is likewise something that arises out of thin air.

Smith’s idea that value is based on the labour embodied in a commodity, leads him to better understand where profit comes from. In the same chapter in which he presents his labour theory of value, Smith offers the view that profit is a “deduction” from the intrinsic value of a commodity. In other words, first we have the existence of value (determined by labour), and this is then broken down into the revenue of the various classes (i.e. profit, rent, and wages).

He writes: “The value which the workmen add to the materials [means of production], therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced.” And this same explanation is offered to explain the source of rent: “[The landlord’s] rent makes the first deduction from the produce of the labour which is employed upon land.”

There are still many unanswered questions here regarding the exact source of profit, but by generally locating it in the value created by workers, Smith is not far from a theory of surplus-value. He is certainly head and shoulders above the view, still common today, that profit arises from “buying low and selling high.” This explains nothing, really, because the gain on one side is a loss on the other. The end result, as far as society is concerned, is zero. Or, as Marx famously said, “the capitalist class as a whole cannot defraud itself.”

According to Smith’s argument, instead of profit arising ex nihilo from the process of exchange, it is a slice of the value originally created by the labour of workers. This is a very dangerous idea as far as the capitalist class is concerned. It implies that the interests of workers and capitalists are fundamentally opposed. Smith is not afraid to bluntly describe this reality. He says that the interests of the two classes “are by no means the same,” because “the workmen desire to get as much, the masters to give as little as possible.” There is no “win-win” situation in Smith’s mind. And he brilliantly depicts how, in industrial struggles, the workmen “are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands,” while “the masters…never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen.”

This realistic view of class struggle, so distant from the platitudes of Mervyn King, flows naturally from an understanding of the source of value and a “deduction” theory of profit.

A step backward

Smith was unable to consistently adhere to a labour theory of value, however. He concluded that this principle is only applicable to commodity exchange in pre-capitalist societies (the “early and rude state of society”). But if we examine why Smith abandoned this theory, we can appreciate how seriously he struggled to understand capitalism.

When he turns from pre-capitalist society (depicted as being made up of independent commodity producers who own their means of production), to examine the situation under capitalism, Smith is perplexed by a case of unequal exchange. This is the exchange between capitalist and wageworker, where the worker is paid a money-wage that contains less (embodied) labour than the (living) labour carried out in return for the wage.

Smith does not realize it, but in making this observation he is tantalizingly close to identifying the precise source of surplus-value. Marx was able to reveal this great secret of capitalist society by clarifying how surplus-value arises from the difference between (a) the value of the labour-power (or labour capacity) a wageworker sells as a commodity to the capitalist and (b) the new value created in production by the actual use of this labour-power (i.e. labour itself), with the latter being greater in value magnitude than the former.

Smith fell into hopeless confusion because he did not make this distinction between labour and labour-power, instead using the same the term “labour” to refer to both. Once this crucial distinction has been made, however, it becomes clear that the exchange between wageworker and capitalist is not unequal. The capitalist pays for labour-power according to its value, which is determined by the value of the commodities the worker consumes to “reproduce” this capacity to labour. What is unequal is not the exchange itself, but what happens next, in the production process, where the worker’s labour generates a greater magnitude of value than the value of the labour-power exchanged.

Far from contradicting the labour theory of value, it is only on its basis that this exchange between wageworker and capitalist can be adequately explained. But Smith, fixated on the very real inequality of the outcome, concluded that another theory of value was needed to explain capitalism. He turned away from the “deduction” theory of value, to embrace the opposite, “composition” theory where value is explained as the sum of profit, rent and wages. What this does not explain, of course, is what determines these three component parts.

Even here, though, Smith’s views are not without basis, since under capitalism commodities are sold at their “production prices,” rather than their values, and this is a composed price (cost price plus average profit). But Marx explained the relation this composed price has to intrinsic value, whereas Smith merely described it.

Smith’s thought was this mixture of science and a mere cataloguing of external phenomena. Defenders of the capitalist system draw on the latter, and love to quote from his superficial descriptions of the marketplace, but socialists can thank Adam Smith for taking an important step towards an understanding of what makes capitalism tick.

Michael Schauerte

Editorial: What then must we do? (2011)

Editorial from the May 2011 issue of the Socialist Standard

Mervyn King, the governor of the Bank of England, kicked off a speech he gave earlier this year by stealing the words of the 19th century Russian novelist Leo Tolstoy, author of War and Peace and Anna Karenina. (The speech is available here.) King turns the opening sentence of the latter novel to his own purposes, stating that, ‘all happy economies are alike; each unhappy economy is unhappy in its own way’. He then goes on to tell us what ‘happy’ economies look like: they ‘combine growth, stability of prices and of the financial system, fiscal sustainability, supply-side flexibility and low unemployment’. He leaves aside the puzzling coexistence of such blessed happiness with historically unprecedented levels of stress, anxiety and depression, and presses on instead to give some of the reasons for the present unhappiness.

One reason we might be feeling glum, speculates King, is that most of us are getting poorer. Real take-home pay has already fallen 12 percent and is likely to fall again in 2011 to 2005 levels. ‘One has to go back to the 1920s to find a time when real wages fell over a period of six years,’ says King. But this ‘squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies’. Here King inadvertently invokes the ghost of another 19th century radical thinker, but does not mention this one’s name: it was Karl Marx who taught us that capitalism inevitably goes through periods of ‘rebalancing’ (i.e., of restoring profitability by destroying capital and devaluing labour), which inevitably leads to a squeeze in living standards (for the working class).

King concludes his speech with Tolstoy ‘s conclusion to Anna Karenina. This is that, despite life’s ups and downs, happiness is less important than trying to live in the right way. King must have been smugly proud of his intellectual prowess, connecting something as dull as a long speech on inflation with the words of one of the world’s best loved novelists. But the result is revealed as putrid when you compare King’s intent with that of Tolstoy’s.

Tolstoy was disturbed and horrified by the high levels of poverty and misery in the towns of the Russia of his day, and turned his mind to identifying the cause of the misery in his book, “What Then Must We Do?” Tolstoy followed Jesus in arguing that the first thing rich men like himself (and Mervyn King) could do would be to ‘get off the backs of the poor’ by giving up their own wealth. King misses this advice.

Tolstoy recognized that even such grand gestures of charity would not make a dent in the problem, because the problem is rooted in the whole system of property ownership and money, backed up by the tyranny of the state machine, which Tolstoy said must all be abolished. King strangely missed these lessons too. Tolstoy was on the right lines because he had the courage and intellectual honesty to pursue social problems to the root, and to state his conclusions regardless of the harm it might do to his previously existing beliefs, or social status or wealth. That makes Tolstoy a truth-telling hero.

What it makes Mervyn King we leave our readers to decide for themselves.

Editorial: The return of bleak times (2008)

Editorial from the July 2008 issue of the Socialist Standard

Last month both the Chancellor of the Exchequer and the Governor of the Bank of England announced, as they tucked into a slap-up meal at the Mansion House in the City of London, that austerity was returning.

First off was Mervyn King. He warned that real take-home pay would not keep up with rising prices. "It will not be an easy time,“ he said, “and I know that some families will find it particularly difficult.” Alistair Darling made it quite clear that the government was going to help ensure this, declaring that "continued restraint on pay is required from both the public and private sector”.

It’s the same old story. Profits are being squeezed by rises in the price of oil and raw materials and the government is trying to protect them by squeezing wages. This, at a time when wages are themselves being squeezed by rising food prices and gas and electricity bills.

This was not what Gordon Brown promised when he was Chancellor. “My Budget choice is to lock in stability and never put it at risk”. he said when introducing the 2005 budget, “at all times putting Britain’s hard working families first.”

In that same speech he proudly proclaimed that his policies had conquered the stop-go, boom-slump cycle. “Britain”, he said, “is today experiencing the longest period of sustained economic growth since records began in the year seventeen hundred and one.” He wasn’t worried then about rising oil prices. The British economy could take it:

“In any other period an oil price rise of over 100 per cent and rises in industrial materials and metals of around 50 per cent would have led to a surge of British inflation. But inflation - which went as high as 20 per cent in the 1980s and 10 per cent in the early 90s - has, every year in the last eight years, been 3 per cent or less - the least volatile and most stable of all the major industrialised economies.”

Even in his last budget speech as Chancellor in 2007 he was still under the illusion that he had banished the business cycle, proclaiming “that after 10 years of sustained growth, Britain's growth will continue into its 59th quarter – the forecast end of the cycle – and then into its 60th and 61st quarter and beyond”.

He got out just in time. He had been lucky: the up phase of the business cycle in the British economy had happened to coincide with his period as Chancellor.

As socialists who know how capitalism works – how it can’t be controlled by governments and how it can never been made to work in the interest of wage and salary workers – we knew that sooner or later Gordon Brown would have to eat his words. And now he has to.

Now the crunch has come it is not “Britain’s hard working families” that are being put first, but profits. As it has to be, and always will be, under capitalism.