"Bottoming Out"? (1981)

From the August 1981 issue of the Socialist Standard

Is the current slump coming to an end, “bottoming out” as Francis Pym puts it? It is in his opinion, as well as that of the Governor of the Bank of England and Leon Brittan, Chief Secretary to the Treasury.

They could be right because sooner or later the slump will come to an end. As Marx pointed out “permanent crises do not exist”. His study of the workings of capitalism led him to the conclusion that “the life of industry” is “a series of periods of moderate activity, prosperity, over-production, crisis and stagnation” and to speak of “repeated self-perpetuating cycles, whose successive phases embrace years, and always culminate in a general crisis, which is the end of one cycle and the starting-point of another”.

The course of production under capitalism is cyclic: boom-slump-boom-slump-boom-slump. In the long-run the trend is upward but this is by no means a steady, continuous growth; it is a growth by fits and starts so that the graph of production is one of peaks and troughs with, generally (but not always), the last peak higher than the preceding one.

But we don’t have to go back to Marx for this. With the complete discrediting of Keynes in recent years, a little less misunderstanding of how capitalism works has crept back into the universities and even into government circles. Leon Brittan, for instance, told a meeting of the Teeside and District Chamber of Commerce and Industry on 24 April:

  My first answer to the question “How will the recovery come about?” is “naturally, just as day follows night”. The regularity of the business cycle in this and, I suspect, every economy may not be fully explicable, but its existence is undeniable. The Central Statistical Office have analysed it lucidly in their work on the “cyclical indicators”. They tell us that the normal cycle lasts a little over four years; that it begins with an expansionary phase of some 20 months, and ends with a slightly longer period of some 30 months of much slacker activity. Though the timing is not precise to the last month, the rhythm is well established. And, more important, though the extent of the expansion and slow-down differs, there has been no trade cycle since the first world war in which output has not grown significantly in the expansionary phase. So phases of growth are truly a central feature of the natural rhythms of our economy. One would need the most compelling evidence imaginable before believing that we had suddenly departed from that pattern of behaviour.

It is equally true of course that phases of slump are “a central feature of the natural rhythms of our economy”, but Brittan at least recognises that there is a business cycle and that it is “normal” under capitalism. And he is right that a recovery must follow a recession, as night follows day, even if he could be wrong about the timing. For while it is true that sooner or later the present slump will come to an end. there is no way of telling whether this will happen sooner or later. Brittan, as a politician, naturally hopes that it will be sooner. In the case of the Governor of the Bank of England (where Keynesian illusions are still fairly well entrenched), it is probably more an attempt to influence the psychology of businessmen by giving them the impression that things are getting better in the hope that this will get them to begin reinvesting. In other words, trying to talk them out of the crisis in accordance with one of the crack-pot ideas thought up by economists.

Doing Nothing

One of the implications of the view that capitalist production goes through a series of “repeated, self-perpetuating cycles” is that government intervention can do little to influence this—except, as Marx pointed out, to provoke a crisis prematurely, but certainly not to bring about a recovery before it would normally occur anyway. Doing nothing is in fact just as effective, or rather ineffective, as applying the whole range of Keynesian gimmicks. The plain fact is that governments do not control the workings of capitalism and that capitalism will continue to go through the boom-slump-boom-slump cycle in its own time regardless of what they do.

The present Tory government seems to have accepted this fact of capitalist economic life. At any rate it is at the moment behaving as if it had, since, despite the howls from the die-hard Keynesians in the Labour Party and the TUC, it is in effect just sitting back waiting—hoping and praying too, no doubt—for the recession to bottom out naturally.

The reason a slump is sooner or later followed by a boom is that slump conditions themselves create the condition for a recovery: a restoration of profitability. It may seem paradoxical that, as at the moment, there should be increased company profits and rising share prices alongside industrial stagnation and massive unemployment, but this is what happens towards the end of a slump. At the beginning of the slump, just after the crisis, profits are hit but as the slump continues it creates the conditions for a restoration of profit levels.

First of all by leading to a “devaluation” of capital. In other words, to a fall in the value of the total capital on which the rate of profit is calculated, permitting, with the same amount of profit, an increase in the rate of profit. This devaluation of capital does not necessarily mean that it is physically destroyed (though this is an extreme form which occurs in all slumps, including the present one) but that the replacement value of the physical components of capital (machines, factories, stocks) falls. For instance, when a company goes bankrupt its assets are eventually sold, but well below the price at which they were bought. The company which buys these assets now has the same physical assets but, as they have a lesser value, will be able to register a higher rate of profit than the previous owner even if the amount of profit remains the same.

A similar process occurs within firms which don't actually go bankrupt. They are forced to write off part of the value of their assets, so restoring the rate of profit. This process—bankruptcies, closures, take-overs, mergers—has been going on for the last few years and, if the speculations on the Stock Exchange are anything to go by, the stage may have been reached where profit levels have been sufficiently restored for the recovery phase of the economic cycle to begin. Or it may just turn out to be a bump along the bottom.

A second reason why profit levels are sooner or later restored in a slump is that wages fall. The value added in the course of production is divided into profits and wages, so that a fall in wages automatically increases the share of profits. Wages—real wages that is, or what they can buy in relation to the prices of consumer goods—fall in a slump because all the closures and bankruptcies result in an increase in unemployment. An increased number of sellers of labour-power turns the labour market more in favour of employers. As always happens when supply exceeds demand prices tend to fall. The labour market is no exception: with increased unemployment wages, which are the price of the mental and physical energies a worker sells to an employer, tend to fall.

Actually, in this age of chronic inflation, the amount of pounds in the wage packet does not decrease (except through short-time working and less overtime but we are talking about basic wage rates here). What happens is that wages increase less than the prices of other goods. When, in a period of double-figure inflation, trade unions settle for single-figure wage increases—as they are at the moment being obliged by economic circumstances to do—this is, in terms of purchasing power, a wage decrease just as much as the decreases in money wages wages which trade unions were obliged to negotiate in the slump of the 1930s. Then there was no inflation so it was clear straightaway what was going on. The same thing has been happening in the current slump, but because of inflation it is not so obvious. But the economic effect of these wage decreases has been the same: to help restore the rate of profit, a fact which has not escaped the attention of Leon Brittan. He gave as one of the factors making for a recovery:

  The latest wage round is seeing much lower wage settlements and therefore substantial reductions in the growth of pay bills: and we are witnessing dramatic improvements in productivity. These changes should correct part of the loss of competitiveness in many industries, and strengthen profitability.

So when will the slump come to an end? This year, next year, sometime, never? Knowing how anarchical capitalism is we are not going to engage in crystal ball-gazing or sooth-saying like the professional economists and lay down an exact date for the recovery. The recovery stage of the capitalist economic cycle will be reached sooner or later, that is certain, but whether it will come in time for the run-up to the next General Flection in 1983 or 1984, as Madame Thatcher told the Scottish Tories at the end of May that it would, is a different matter altogether. Later could be as late as the end of the 1980s. Capitalism has seen prolonged slumps before.

Adam Buick