That Sinking Feeling (1998)

From the January 1998 issue of the Socialist Standard

If there is one thing that the current British Chancellor and his predecessor are agreed about it is that Britain currently enjoys the most favourable economic conditions witnessed in decades. Around the wider developed world, economists and politicians of various kinds have been speaking of the dawn of a new golden age, based on an economic and cultural paradigm shift never previously encountered.

Anatole Kaletsky in the Times has summed up this prevailing economic orthodoxy well:

  “. . . new paradigm theories can be divided into two quite separate kinds. One type asserts that the long-term sustainable rate of growth in the American (or British or world) economy has increased because of globalisation, technology or some other exogenous boom. The other type claims nothing about the trend rate of growth, but merely says that economies can now operate at lower levels of unemployment than in the 1970s and 1980s without inflation getting out of control” (12 September)

The first of these theories is the most exciting, but at the same time, the one that is most obviously and demonstrably false. No-one who has examined growth statistics for the major capitalist states since World War Two could possibly think otherwise unless their job was to provide propaganda and not dispassionate analysis. Growth statistics for the world’s oldest capitalist state–Britain–and for the world’s largest economy–America–give the lie to this misleading propaganda straight-away, demonstrating a post-war trend observable in most other major states too. The long-term growth rate for the major world economies has not been rising–it has been falling fairly steadily. This is illustrated in the table below:

In what are now the European Union countries annual GDP growth averaged nearly 5 percent in the 1960s. During both the 1970s and 80s this had fallen to under 2.5 percent. This decade it has so far been barely 1.5 percent.

Much has been said about the now dilapidated state of many of the so-called “tiger economies” in recent weeks. Falling growth rates in Japan are a good illustration of the underlying difficulties that are now rising to the surface in the entire Pacific Rim. Japan’s heady 1960s annual growth rate of 10 percent had declined by the 70s and 80s to the 3-4 percent range. Average annual growth so far in the 1990s is under 1.5 percent.

The world growth rate has also fallen, though not by as much as in the major economies because of the comparatively sharp growth of some the remaining Asian states and a handful of developing states in Africa and South America. It is these states which have been able to undercut the major economic powers in the production and sale of many primary and manufacturing products, largely because of the subsistence wages paid to the working class there.

Prices

The idea that the major economic powers can now operate at lower levels of unemployment before inflation takes off is also incorrect. It is in part based on the erroneous belief–introduced into bourgeois economics by the “Phillips curve” analysis beloved of economics students everywhere–that somehow a trade-off exists in the capitalist economy between unemployment and price rises. This was in actual fact an analysis discredited in the 1970s and which is no more relevant now than then.

Persistent price rises in the capitalist economy occur when the government pushes more currency into circulation than is warranted by increases in real growth. In other words, more token representatives of value are pushed into circulation than new value actually produced. Under the influence of John Maynard Keynes economists and governments across much of the world since the Second World War have persistently issued an excess of currency, leading to rising prices year on year. Coupled with the massive oil price hikes this led to particularly large price rises in the 1970s and 80s. Price rises in the 1990s have tended to be more modest on average. This has principally been a product of the world slump and the massive indebtedness still overhanging the world economy, which has acted as a drag on accumulation. If it was not for the continuing process of currency inflation going on in countries like Britain, prices would actually have been falling not continuing to rise slowly. In effect, currency inflation has outweighed what would have been the negative effect on prices during the slump. (A similar process took place during and after the 1974-5 slump and then 1980-2). This time, the amount of unliquidated debt is so huge that the overall price level, relatively, has only crawled upwards, while some prices such as in the property market, have fallen significantly.

Unemployment rates

The view that unemployment rates are somehow lower now at each peak of the economic cycle is pure fantasy. Unemployment across the EU is currently running at about ten percent. This is not historically a low figure. Compared to the 1950s and 60s it is positively astronomical. The countries most successful at reducing unemployment have co-incidentally been the countries which have made the most significant changes to the way in which the unemployment total is calculated. These are the United States and the UK. After 30 changes in the UK alone since the mid 1980s the claimant count is now significantly lower than the unemployment total otherwise would have been. The official unemployment figure is just under 1.5 million at the time of writing, though the real total is commonly estimated as being 150,000-300,000 higher (some put the true figure much higher still). To put this into perspective, when unemployment rose to over 1 million for the first time in the UK in the post-war period, during the early 1970s, there were mass demonstrations across the country.

Huge numbers of the jobs actually created in countries like the US and UK have been part-time or short-term contract jobs. In the US in particular, millions of part-time jobs have been created while the take-home wages of huge swathes of the American working class have declined even on their levels of 20-5 years ago.

Paper tiger

There has, of course, at least until recently, been the dynamism of the so-called “tiger economies” in the Far East for the supporters of capitalism to point at. They do not seem to be pointing in their direction at the moment, however. The growth of these economies has been very real and much that has been said about them is true–or at least was. The problem is that no capitalist state can seriously expect spectacular, or even uninterrupted growth, in anything like the long-term. The history of the capitalist system demonstrates that a time always comes when the drive to expand production and profit in some sectors of the economy comes up against the limits of the market at any one time. The difficulties created by excessive and disproportionate growth in these sectors can be papered over for a time by the extension of credit. This is stored up capital gleaned by the financial institutions from previous circuits of production and which can then be redistributed and used as an advance against the sale of future commodities. It is, in effect, an advance of stored-up value against the anticipated production of new value.

The advance of credit mostly keeps capitalism running smoothly and speeds up greatly its circuits of production. The problem arises when–as always happens as the boom reaches its peak–credit is being advanced effectively as a life-belt to those enterprises in serious difficulties because they have produced too much for their available market. The more credit is advanced, and the longer this process continues, the more serious the necessary “correction” will have to be. If financial institutions keep extending credit to unprofitable enterprises, they will all go under, not just the latter. This is what has happened in the Far East.

The bubble burst initially in the regions strongest economy, Japan, at the turn of the decade where the stock market fell by over 60 percent, property prices collapsed and where short-term interest rates were reduced to 0.5 percent in a futile attempt to stimulate economic activity. But still the banks and brokerage firms ploughed money into essentially unprofitable schemes and enterprises. The result has been, after a period of apparent abatement, bank collapses and failures among the brokerage houses. Japan’s fourth largest brokerage house, Yamaichi, recently collapsed with liabilities estimated at $24 billion, followed by Japan’s seventh largest bank. Several other banks and securities firms are reported to be in severe financial trouble.

The same difficulties that have beset Japan have spread alarmingly among the other Far East economies, particularly Malaysia, Thailand, Kong Kong, and worst of all, South Korea. The financial bubble in these states, which has been an integral part of the so-called “Asian Way” of economic development, is now exacting its revenge. Legendary Morgan Stanley investment strategist Barton Biggs has summed up the situation beautifully:

  “The heralded Asian Way is something of a joke. The Asian Way, it turns out, has a lot less to do with education, hard work and family values and a lot more to do with pegging your currency, borrowing a lot of money in dollars, plowing it helter-skelter into relatively unproductive capital investment and real estate projects of dubious merit owned by the elite, corrupting your politicians by involving them in the stock market bubble and assuming everyone is going to live happily ever after” (Guardian, 24 October).

Ridiculously overvalued stock markets in Asia and in many other parts of the world are a reflection of the fact that financial speculation and growth in stock market investment bears no real relation to value production in the real economy. The stock markets may have boomed, but the productive economy has not entered into some golden new period, has not experienced a ‘paradigm shift’ and has not been able to supersede the boom-slump cycle.

At some time the world financial bubble will burst, bringing stock prices back into line with the slothful realities of the productive sphere of the economy. Stock markets growing at 20 or 30 percent annually when growth is barely two or three percent (and real manufacturing growth less still) is simply not something that is going to last. Sooner or later–as on all previous occasions–there will be a correction. Whether the situation in the Far East will be the catalyst for this process or not is impossible to say. What can be said with a fair degree of certainty, however, is that the more the fault lines are papered over and hidden, the greater the eventual damage will be.

Dave Perrin