Editorial: Recession closing in (2001)

Editorial from the December 2001 issue of the Socialist Standard

The events of 11 September have had many repercussions – foremost amongst them being a deepening of the financial insecurity pervading much of the world economy. Nowhere has this been exemplified more than in the major industrialised states at the heart of the capitalist system.

After the terrorist attacks stock markets across the world began to plummet. In the UK the FTSE 100 lost nearly six percent in a day (one of its biggest losses ever) and at its lowest point was nearly 30 percent down on its high of nearly a year ago. This was mirrored by similar falls in the Dow Jones Index in the US, the Nikkei in Japan, the Hang Seng in Hong Kong and other stock markets across Europe, the Pacific and South America. Most have since recovered at least part of their losses caused by the initial panic but their continuing fragility mirrors the fragility of the ‘real economy’ of which the stock markets are largely a reflection.

Indeed, if this supposed fragility of the ‘real’ economy was once in question, it cannot be any longer. In November unemployment in the UK started to rise, impelled by no less than 123,000 job losses in manufacturing in the last year. In recent weeks, BP, the Prudential insurance company, Rolls Royce and Waterford Wedgewood have been amongst those that have announced plans to slash thousands of jobs. On mainland Europe the story has been similar: French telecoms giant Alcatel has cut 10,000 jobs across the continent, Deutsche Bank 4,500 and Europe’s second largest travel operator, Thomas Cook, has started shedding over 2,500 jobs Europe-wide.

In the United States the numbers signing up for unemployment benefits has risen to the second highest in ten years on the back of severe job losses across the hi-tech sector and in those industries (such as airlines) most badly hit by 11 September. These have had a sizeable impact with companies like Boeing, Motorola and Merrill Lynch cutting back their operations across the globe. The US Federal Reserve has warned in its ‘Beige Book’ report that economic activity in the US is now “sharply reduced” and most analysts are expecting further cutbacks in output and sharp rises in unemployment.

The situation in the Pacific Rim is little better. Indeed, in the “engine room” of the Far East – Japan – things are, if anything, even worse. In early November the Japanese government went on the record as admitting that the economy was probably in its worst state for 20 years and the Bank of Japan has since downgraded further its own assessment of the economy in the light of falling consumer spending and increased job losses (Financial Times, 19 November). To give but one example, Matsushita, the largest consumer electronics manufacturer in the world for much of the last fifty years (producing brands such as Panasonic, JVC and Technics), has predicted that it will be £1.5 billion in the red by the end of the fiscal year and is cutting at least 8,000 jobs as a result of the weak domestic economy and contracting export markets.

Boom goes bust 

The onset of recession across the developed world should really come as no surprise – in the capitalist economy bust inevitably follows boom just as night follows day. It would be fair to say that currently even the more astute of the various business analysts and journalists who are paid to monitor developments in the markets have noticed this. Many realise that all they can really do is talk about softening the blow and mitigating the worst effects of the downturn.

Because the capitalist economy is orientated to making profits and as the expansion of the competing enterprises in the economy is not regulated and harmonious, the over-expansion of some sectors, a process which has a knock-on effect to the economy as a whole, is always a danger – and periodically a reality. This is what appears to be happening now. The industries that expanded so rapidly during the boom of the mid to late nineties, such as those involved in the ‘dot com’ and telecommunications revolution, have expanded far too quickly for market demand and the consequences have been severe. Sales have fallen, production has had to be cut back, debts have mounted and jobs have been slashed as companies get into serious difficulties, in some cases going bankrupt.

A key factor in this is that capitalism’s financial apparatus is largely built on confidence that transactions will be smooth and payments will be met. When this confidence in the efficiency of trade and commerce starts to ebb then things can take spectacular – and serious – turns for the worse. The erosion of financial confidence is one of the ways in which a downturn in one sector – or country – can spread to others.

If the word ‘globalisation’ means anything in the era of the Multi National Corporation, it is surely that the world economy has now become so inter-related that the worsening of a company’s financial position in one country can lead to them shedding jobs in another. This is what currently seems to be happening across the industrialised world and illustrates why so many of the so-called ‘solutions’ to economic downturns in the past (import controls, Keynesian ‘pump-priming’ economics, etc) are now more transparently useless than they ever were.

Cooking the Books: Turmoil at the Stock Exchange (2007)

The Cooking the Books column from the September 2007 issue of the Socialist Standard

“FRESH TURMOIL IN EQUITY MARKETS” read the headline of the weekend Financial Times (11/12 August) after a week of dramatic falls in share prices on the world’s stock exchanges. “GROWTH THREATENED BY MARKET TURBULENCE, SAY ECONOMISTS” read the one in the Times the next day, which reported the principal of one hedge fund are saying “Nobody has yet mentioned to me the possibility of a stock market crash and I find that surprising”.

So, what was it all about? Could it really have been a prelude to another 1929 and 1930s slump? Or was it another purely financial crisis hardly affecting the real economy?

Although the turmoil was centred on financial markets, especially stock markets, in most respects its origins lay in the housing sector in the US where financial institutions have been selling “sub-prime” mortgages, i. e. to those with poor credit records and who are therefore more likely to default – and have been. The US housing market bubble – now being paralleled in the UK and elsewhere – has come to an end and mortgage defaults have escalated.

Financial institutions in the US and elsewhere are now coming under pressure because of their exposure in this market but the main issue at present is that no-one knows the extent of the problem, mainly because much of this debt has been packaged together and sold on to financial institutions other than those originally lending the money.

Some hedge funds and other financial instruments that have invested in this debt in the hope of higher than average returns for their investors have got into trouble. In the case of some funds run by BNP Paribas, they have simply been unable to calculate their value because of the current volatility of this sector of the financial markets, leading to even further fear and uncertainty.

The most serious knock-on effect has been a tightening of credit – banks are reluctant to lend money, even to one another. It is this that has been affecting stock markets in particular.

The easy credit that has helped financial merger and acquisition activity the last two or three years (especially by private equity firms) propelled the stock markets of the world upwards. This is because private equity groups, by changing the legal status of the firms they take over from public to private companies, have been taking firms off the stock market and so reducing the supply of shares available as a whole; also, easy credit has helped companies buy back their own shares, to the same effect – reducing the supply of shares and so, in accordance with the law of supply and demand, pushing up share prices.

It is the end of this easy credit and the positive stock market conditions it has promoted that is bothering the financial markets more widely. In truth, after the massive stock market falls of 2000-2003, most stock markets are not over-valued but are being affected by a contagious fear that has spread from the housing sector via the credit markets.

But this is one of the problems with the capitalist market economy – the lack of planning and the instability inherent in the system can have far-reaching and unpredictable consequences. Just how far-reaching only time will tell, but given the underlying problems into the UK housing market alone, this period of market fear may have some way to run yet.

Stock Market shake-out (1989)

From the January 1989 issue of the Socialist Standard

They said it would never happen again. Never again would there be mass unemployment. Never again would there be a stock market crash. Capitalism had overcome its contradictions and prosperity would be permanent. Marx was wrong and Keynes was right. This was the message put over by the economic gurus of capitalism in the 1950s and 60s.

This illusion began to shatter in the early 70s when falling profit levels led to closures. redundancies and rising unemployment in all the major industrial countries of the world. Soon the number out of work in these countries reached mass proportions. Ten, eleven, twelve, thirteen per cent of the workforce rather than the two or three per cent that economists claimed would be the norm under post-war capitalism.

Despite this industrial slump the boom on the stock market continued after a slight falter. But sooner or later this boom too had to come to an end, since capitalism can't change the fact that the source of wealth remains the actual production of physical goods and services and not financial juggling. No wealth is created on the stock exchange or on any other financial market. All that happens on these markets is that existing wealth changes hands. The same is true of all financial institutions — banks, insurance companies, building societies, pension funds and so on — they are all involved in mere money-changing, not wealth creation.

The basic economic role of financial markets under capitalism is to channel finance to productive industry, although these markets can also develop a life of their own divorced from the reality of production. The stock exchange is a market on which the stocks and shares of capitalist firms are traded. Normally the price of a firm's share reflects its profit-making record and prospects but, as on all markets, day-to-day prices are determined by supply and demand. If the demand for shares keeps on rising then so will share prices. This is precisely what happens in a stock market boom. Share prices keep rising, not because the profit prospects of the firms whose shares are traded are improving but simply because the monetary demand for shares goes on increasing

Under these circumstances people can make money simply by using a telephone, buying shares on credit in the morning and paying for them in the afternoon after selling them at a higher price. (This is all the Yuppies used to do.) But share prices can't go on rising for ever. Sooner or later the bubble must burst. As it did on the Stock Exchanges of the world at the end of October 1987 Reality reasserted itself and the stock market boom came to an end.

Because the Great Slump of the 1930s was preceded by the Great Stock Market Crash of 1929. many wondered whether the Crash of 87 was not going to herald some Great Slump of the 1990s. Labour MP Ken Livingstone, for instance, immediately went on record with a prophecy: "It's not just a slump that has happened on the stock market: it will be the worst recession that has happened since the Second World War and it will change all political relationships and all economic and military relationships" (Guardian, 26 October 1987).

The trouble with a prediction of this sort is that it ignores a fundamental difference between the crash in 1987 and that of 1929. The 1929 crash occurred in a period of capitalist prosperity, the source of the demand that fuelled the stock market boom being the increased profits made in productive industry. 1987's crash , on the other hand, occurred in the middle of a slump, the source of the extra demand for shares being the cash capitalist firms had available because they were not investing in productive industry. In other words, the 1987 crash does not need to herald a slump since it occurred in the middle of one.

In any event slumps are not caused by financial crashes even if, historically, they have often been preceded by one. They occur as a result of developments in what even capitalist economists have taken to calling “the real economy", that is to say, the world of the actual production of wealth. Under capitalism wealth is not produced for use but for sale at a profit. Profit is in fact the motivating force of the capitalist economy. All firms seek it and all their activities are subordinated to this end.

A slump is by definition a time when firms have cut back their investment in production, but they will have done this because investment in production on the previously-existing scale has ceased to be profitable. Profit prospects fall when a market has become glutted through overproduction (in relation to market demand not real needs, we hasten to add), as inevitably happens from time to time under capitalism since the competitive struggle for profits between rival firms leads to over-confidence and the production between them of more than the market for their goods can absorb, at least at a price that yields a profit.

If this overproduction has occurred only in some minor sector of the economy then the cut-back will be largely confined to that sector. But if it occurs in some key sector, such as steel, shipbuilding or car manufacturing. then this will have a knock-on effect on the whole economy as its suppliers, and their suppliers, and so on, are forced too to cut back on production and lay off workers. The result is a slump, be it a really major one as in the 1930s and 1880s or less severe one like that we have been in since the mid-1970s.

The stock market crash on top of the mass unemployment that returned in the 1970s, finally disposed of the myth cultivated by defenders of capitalism in the exceptionally long boom that followed the Second World War.

In the News (2001)

From the April 2001 issue of the Socialist Standard

Economic crisis

Tumbles across the world’s financial markets have sent shockwaves through the media and the owning class. The “dotcom” revolution is under threat as new technology corporations report stalled sales, faltering profits and now share prices in freefall. One of the greatest success stories of the 1990s was computer company Cisco which was the best-performing stock of the decade with its share price soaring 100,000 per cent at one point to make it the world’s most valuable company; Now it has announced that it is axing thousands of workers, just like its competitor Compaq and many other high-tech companies.

This has confirmed that even the largest firms are now being hit by the US slowdown, undermining confidence in the entire cconomy. The impact on the world stock-market bubble has already been considerable. Here in the UK the FTSE 100 is down 20 per per cent already on last year and it is likely there may be some way to go. In the US the Nasdaq index of technology stocks has plunged as depressing business results pour in. In Japan. the situation is worse still: the economy refuses to kick in to life despite the best efforts of successive governments and its financial system has lust been described by a government minister there as “on the verge of collapse”.

So much then for the perpetual boom capitalism had allegedly entered and the associated “paradigm shift” in the world economy that was supposed to have taken place. Day by day capitalism is again showing itself red in tooth and claw — and lust as prone as ever to the economic crises and slumps that have beset it throughout its history. Socialists have never been fooled into thinking the system can act in any other way, of course—which is rather more than can be said for Gordon Brown, Eddie George or Alan Greenspan who now seem to be on a learning curve as steep as the Nasdaqs plunge.

Xenophobia

“Patriotism is the last refuge ot a scoundrel”, wrote Dr. Johnson. “In a half-hour speech in which he used the words Britain or Britishness 25 times, Mr. Hague insisted that he, his party and Conservative voters were not racist, bigoted or little Englanders.” (The Times, 5 March)

We can expect a beleaguered politician like the Tory leader who is facing political extinction, to appeal to the worst elements of Xenophobia in a deperate attempt at survival. His depiction of the possibility of an other Labour government as a “journey to a foreign land” and his promise to toughen up restrictions on refugees is to be expected.

But what of the Labour Party? A chance to champion the plight of the refugees? No chance, because the same newspaper reports, “Labour refused last night to criticize Mr. Hague’s remarks on asylum and Europe—areas which party officials believe they are vulnerable— and attacked the Tory economic record.” The awful fate of some refugees being sent home to be imprisoned, tortured or killed can only be wondered at, but it is worth noting what one unknown visitor to the Hololocaust Exhibition at the Imperial War Museum has recently recorded in the visitor’s book.

  “It is 2.15pm. I came into this exhibition at 10.15 this morning I feel very overwhelmed. I am Jewish— on my mother’s side and some of her family perished in the Holocaust. Some survived because they escaped. It would have been interesting to reflect on the debates which must have gone on in thousands of families as the 30s unfolded. To escape? To what? To lose all and face a life of uncertainty and exile. Or to stay because “it’ll all blow over” or “we’ll manage” or some other reason. I have never seen this written about and I think it is especially relevant today when asylum-seekers are so reviled and suspected.”

Environmental disasters ahead

At election times it often suits politicians to make sympathetic noises about environmental issues, but after the elections are over the same politicians can usually find “practical considerations” that make them have “re-appraisals” of previous “policy statements”. This cynical manipulation is rife throughout the capitalist world, but it is doubtful if any of the political con-men could beat President Bush for the rapidity of his volte-face on the environment.

In a letter to Republican Senators, Bush reversed his election campaign promise to limit CO2 emissions from coal-fired plants, saying a new study shows it would be too expensive. He also reiterated his opposition to the Kyoto protocol, a 1997 agreement which aims to reduce greenhouse gases in the industalised countries by 5.2 per cent by 2012 (New Scientist, 15 March).

This is of course, the crux of the matter—cost. We live in a capitalist world based on commodity production with the aim of obtaining a profit. In competing with other capitalists, both nationally and globally, it is necessary to drive down costs in order to grab a bigger share of the market.In such a cut-throat society environment considerations count for little, except perhaps a little electioneering rhetoric. With the USA putting the interests of their capitalist class before the needs of the planet the future looks grim indeed.

The reversal was a blow to Kyoto supporters, since limits on power plants are probably necessary for the US to reach the goals. Christopher Flavin, President of the Worldwatch Institute says: ‘It is essential since those plants are one of the main reasons for the recent sharp increase in US CO2 emissions. In the last two years, the US has passed China to be the world’s number one coal burner'” (New Scientist, 15 March)

Market Panic: Capitalist Hysteria (2020)

From the April 2020 issue of the Socialist Standard

Another Market Panic

At the time of writing, the world’s stock markets have been in near free-fall with many of them entering ‘bear market’ territory (defined as falling 20 percent or more from their recent high). This has been in response to the concern around Covid-19 coronavirus, as human fright turns into financial panic. It is essentially because investors are fearful that ‘lockdowns’ in countries like Italy will negatively impact on company revenues and profits. Obvious candidates like airline companies and events management agencies have been especially hard hit, though the financial contagion has spread far and wide to nearly all sectors.

There are a number of elements to this financial panic. One is that when market sell-offs occur, the actions of dominant financial players tend to exacerbate them, as they did in the financial crisis of 2008. Many operate automatic trading systems driven by algorithms which will trigger further sales of shares when certain low prices are reached. These traders also tend to deploy ‘short positions’ to protect themselves from falling markets, which involves profiting from betting that certain shares will fall — but thereby making their falls all the steeper. This has been illustrated by what US asset management firms like Fidelity have said has been happening during this panic — that asset management firms and hedge funds have been on the sell side of most trades, while private investors have disproportionately been on the other side of the trade, buying for the longer-term (in the view that there’s a sale on). The Financial Times (7 March) reported that since 1960, of the 13 most volatile stock market periods, seven of them have happened since 2007.

Investors have been especially concerned that the coronavirus scare will lead to recessions in the countries affected (and even others too). This is on the back of investor suspicion that some of the world’s major economies have most likely been on the brink of a recession anyway. A good indicator of this has been the recent inversion of the yield curve in the world’s largest economy, the US. This happens when interest rates for tying up your money for longer (e.g ten years) are lower than for short periods (e.g two years). It is the opposite to the usual situation, and indicates fear in the government bond markets as investors move from investing in riskier assets to the safe haven of long-term government bonds, pushing their prices up and their yields down. This happened in the US late last year and is usually one of the best lead indicators of a coming recession there is, also reflecting the fact investors believe future interest rates will fall (as they do doing recessions). During the current panic, the yield on 10 year US Treasuries has reached the lowest it has been in history, at the time of writing 0.7 percent, i.e less than inflation and therefore effectively paying the US government for the privilege of taking your money.

Another factor in the market panic has been the oil price.  Some of those hardest hit on the stock markets have been oil majors like BP and Royal Dutch Shell as the oil price collapses, falling at one stage by a third in a single day (to around $30 a barrel for Brent crude). This has been because the major oil producer states, dominated by OPEC, have failed to agree with another major oil producer, Russia, to limit production and therefore push up prices. There is a suspicion that Russia won’t play ball as it hopes a falling oil price will drive a lot of newer US companies producing oil and gas from shale deposits out of business altogether — a tactical ploy that is exacerbating the panic.

Despite this current chaos, the crisis will of course pass and lower interest rates and lower commodity prices like oil will be among the motor forces for this. In the meantime the traders will scream and shout as they try to assess the real extent of the underlying economic crisis – seemingly unable to leap out of a rollercoaster ride that’s been scarier than usual for them, and for some good reasons.

DAP

Editorial: In Place of Wishes (1988)

Editorial from the January 1988 issue of the Socialist Standard

Each year at this time an arbitrary line is drawn across our lives. It has as much mysticism about it as any religion. On one side of the line lies the Old Year with its mistakes, its problems, its inadequacies. On the other the New Year beckons us, with its pristine sanity, enlightenment, happiness. It is a time to make resolutions that the next twelve months will be innocent of the disfigurements of the past twelve. Some people mark the occasion by getting drunk, to lubricate the process of acting towards others with warmth and respect. Others may rely on the collective hysteria of the occasion to intoxicate them. Happy New Year, they wish each other. It’s probably not all insincere, either.

But powerful as alcoholic poisoning and popular delusions can be there is an amnesiac scale about the event which is positively staggering. For does life really get better from year to year for the millions of people who wish to each other that it should? The millions who snatch the short holiday to pretend that they are something other than the social class which, although productive and useful, is exploited, repressed and deceived?

That question was what actually dominated the election last June. Thatcher and her crew energetically told us that things were not only getting better but would carry on like that, as if the Tories will never rest until they have drenched us all in prosperity. Enough workers were impressed by this campaign, shrewdly aimed as it was, to send the Iron Lady back to Number Ten.

It is likely that the Tories won a lot of votes through their schemes to enable workers to buy shares in the privatised industries. This whole idea, with its elaborately buoyant publicity, rested on the assumption that the Stock Market is a casino where share prices always go up, so that workers who borrowed a little money to buy a few shares could then sell them quickly and so make a small profit. This illusion — that the class structure of capitalism had been radically changed by Norman Tebbit was badly damaged by the stock market crash, which catapulted distraught yuppies into a position of media-dominance. In fact, a falling stock market also offers the possibility of making money — but in a way not usually open to penurious workers.

It is worth mentioning this if only because a popular response to any criticism of Thatcherite Britain is that the critics are motivated by a septic envy. There is, apparently, an opulent gravy train on the move for those who are economically nimble enough to climb aboard. The economically disabled have only themselves to blame. But is this society, which we labour under, really so carefree an arrangement? Are its critics really so devoid of material to support their arguments?

Well what, apart from the events on the Stock Exchange, happened last year? What effect did all those salutations, last January, have for us?

It was, in fact, a year of disasters in a very material sense. The crazy massacre of Hungerford cannot be explained away as an isolated mental breakdown. Michael Ryan was a man who could not answer, to his own satisfaction, the sexual, social and familial expectations of capitalism. So instead he loved his guns, his cars and his terrible fantasies. The capsize of the Herald of Free Enterprise was not an accident for the ship was being sailed just as the company's balance sheet thought appropriate. At the time of writing the immediate cause of the King's Cross fire has not been made public, but emerging facts have shown up the reductions in vital staff and the tardiness in replacing dangerously outdated equipment, in the cause of reducing costs and so maximising profit.

Although as a disaster it is rather less dramatic, the problem of the homeless grew worse, with the numbers of families with nowhere to live increasing as their chances of finding anywhere within a reasonable time decreased. Young workers have been coerced into accepting government approved work or courses under pain of being cut off from state benefit. The government's discovery that state benefits can be cut by changing their name and the conditions under which they can be claimed brings memories of the special indignities heaped on the unemployed during the 1930s. Finally, in face of the official statistics which tell us that it is not happening, the waiting lists of workers who need treatment in hospital grew longer so that some die while they are waiting and babies are prevented from having desperately needed operations through a lack of specialised nurses who have been driven out of the work through their paltry wages. Even the consultants, contemplating the beds kept empty by the priority of conforming to a budget, have been moved to make their unequivocal protests.

There was no happier prospect abroad. At the end of the year Bob Geldof was flying back to Ethiopia to ask why, after all that effort and expenditure, millions have to suffer an agonising, degrading death by starvation. Those sickening pictures of dying babies, too sick even to take their mother's milk, are condemnation enough of capitalism in themselves. The Gulf War continued to consume its fearsome human diet, there is slaughter in Africa, Haiti, Afghanistan and the brutality of South Africa's racist regime does not lessen. The cold cynicism of capitalist politics has been exposed by the Irangate affair, which cannot be hushed over by even Reagan's consummate acting skills. He may yet be saved by the diversion of a treaty to abolish medium-range nuclear missiles which, even if it should ever be fully implemented, would still leave us living in a world with more than enough destructive power to kill us all several times over.

No, it was not a Happy New Year. Neither was 1986, 1985, 1984 . . . We shall need to do more than wish that things will get better. We have the power to change the world and the ability to run it in the interests of the human race. And the reasons for that are all too obvious.

Casino Capitalism: Inefficient and Irrational (2011)

From the November 2011 issue of the Socialist Standard

Even supporters of capitalism can see this – at least some of the time.

One of the trends of political reporting in recent years has been to announce the odds being given by bookies of a particular outcome of an election.  On the face of it, this makes a lot of sense.  Punters will use the information they have to hand to gauge the mood of the electorate and risk their money.  The fact that many of them do so separately should draw out the “wisdom of the crowd” and provide the best analysis short of the actual vote itself.  Of course, this face value isn’t the whole story:  candidates may try boosting themselves by encouraging supporters to bet on them; large-scale betting syndicates may skew the odds through their betting patterns; punters may follow the crowd and bet on the short odds, hoping for a win; some people may just place a flutter without caring if they win or lose. Which is why we don’t decide elections based on the bookies odds alone, and wait till the actual vote.

Some people, though, think that that is a good way to organise producing and distributing what we need.  There was an idea, with considerable traction in academic and official circles, called the Efficient Markets Hypothesis, which held, as a recent UN report puts it, ‘that all publicly available information is immediately reflected in prices. In its strong form, the EMH contends that even private information – available only to individual market participants – is reflected in the price through the effects of the transactions of the persons in possession of the information.’ (Link.). In short, it holds that market prices (particularly stock market prices) are always right, and we shouldn’t try and second guess the market.  Almost no-one, in the aftermath of the financial crisis, seriously puts this case forward any more – although a few bitter-enders maintain it was the state failing to leave it to markets that caused the crisis; and doubtless a new version will appear if the economy returns to steady growth.

The UN report, Price formation in financialized commodity markets: the role of information, delivers an academic coup de grace to that idea.  It analyses recent trends in food markets, with a view to explaining their apparent volatility.  It finds ‘market participants also make trading decisions based on factors that are totally unrelated to the respective commodity, such as portfolio considerations, or they may be following a trend.’  It explains this by identifying a difference between commodity markets (trying to profitably get goods to where they are needed) and financial investment (which is about maintaining a portfolio of investments and following a pattern of earnings, irrespective of the goods/outcomes involved).  When this latter predominates, then, they note, rational use of information goes out of the window:

‘In an environment of herd behaviour there are limits to arbitrage. Acting against the majority, even if justified by fundamentals, may result in large losses, often of borrowed money. It may therefore be rational for market participants to ignore their own information and follow the trend. This is what many financial players do by default, basing their trading decisions purely on the behaviour of price series (algorithmic trading), which can lead to a commodity price bubble.’  

That is, it becomes harmful to act on good information against the flow of the market.  A “weight of money” effect can come into play.  If, for example, an investor commits a large sum of money relative to the market, and then faces liquidity constraints. This may push market prices in the wrong direction. In particular, since many investors rely on computer programs to organise their trades, there is a risk of re-enforcing herd behaviour due to the fact that the software is following the same set of algorithms and programmed responses: like an evolutionary ecology lacking diversity, it may work well for a while, but a small change in the environment could see everyone killed off.  

A recent report by the UK Government Office for Science, entitled "The Future of Computer Trading in Financial Markets” identifies:

‘three main mechanisms that may lead to instability when financial markets involve significant proportions of CBT [Computer Based Trading]: nonlinear sensitivities to change (where small changes can have very big effects), incomplete information (where some agents in the market have more, or more accurate, knowledge than others), and internal “endogenous” risks based on feedback loops within the system.’ (Link.)  

They also, though, find that computer-based trading is more efficient than human trading.  That may be, as another study has shown, that human traders do not behave in a rational manner at all.  According to Der Spiegel a study at the University of St. Gallen has found traders behave in a reckless manner:  

‘the bankers weren’t aiming for higher winnings than their comparison group. Instead they were more interested in achieving a competitive advantage. Instead of taking a sober and businesslike approach to reaching the highest profit, “it was most important to the traders to get more than their opponents.(…) And they spent a lot of energy trying to damage their opponents.’ (Link.)

Rather than behaving like parts of a rational algorithm, they behave like primates in a status competition. In either case, whether it is computer or primate driven, the financial markets, according to the UN report, have expanded massively into the food production process.  Its authors speculate that this may be attributable to the 2000 financial crisis (the collapse of the dot.com bubble after the Asian Tigers wobble) as investors sought to find a new safer profitable place to put their money.  In other words, the real world need of human beings to eat became subsumed to a (virtual) game of profit making ever more divorced from reality.

The important thing about all these reports is the emphasis they put on the flow of information in the production process.  As the UN report notes:

‘There is ample information on physical commodity markets, but it is not easy to obtain in a systematic way. A number of sources provide the same information, but in different formats. It therefore takes time and expertise to find out which are the most useful, relevant and reliable sources of information required for a specific commodity. Even from a single source the multiplicity of information products can make it rather cumbersome to access the targeted information. The various sources of information include official sources, such as international organizations and study groups, organizations specializing in specific commodities or groups of commodities, and governments of countries which are key players in the commodity markets, such as Australia and the United States, as well as private sources. In many cases, even from official sources, the information is not publicly available and can be accessed only against payment.’

This, in part, illustrates what a simple idea socialism is: that that information about production and stocks will be opened up and consciously shared.  It doesn’t require complex mathematics, or the invention of the new way of doing things, but a framework allowing the opening up and provision of information currently hidden behind and distorted by the operations of the financial market and indeed of the whole market system.  The brains of mathematicians currently behind the computer trading programs could be put to use finding creative and useful ways of enabling the free information to find its way to the hands of those who need to organise producing and distributing what we need.  Socialism will not be the result of advances in computing, but it could certainly benefit.  Even aggressive bankers will see that they would benefit: after all, many of their jobs are now being mechanised away.  We can see to it that getting food for everyone isn’t a gamble. It’s what might be called the Efficient Non-Market Hypothesis.

Pik Smeet

Economics Exposed: Fair shares? (1987)

The Economics Exposed column from the December 1987 issue of the Socialist Standard

The plummeting of share values on October 19 of this year produced a lot of hot air, as pundits on all sides attempted to draw their political conclusions. Brian Walden, in a feature article defending the free market, warts and all, glibly referred to "capitalism's manifest superiority to socialism as a method of improving society" (Sunday Times, 1 November 1987). The Labour Party shadow cabinet produced a document stating that what was needed to avoid further trouble was "massive government intervention". And the CBI, at their Conference in Glasgow, made it a shocking crime to utter the dreaded word "crash", referring instead to a range of terms such as "adjustment". "nosedive", "the problem", "the events of the past few days" and "the latest squalls '.

There were two types of people who were immediately affected by the wiping of about 25 per cent off of the share prices at the London Stock Exchange in the course of a week. On the one hand, there were those for whom losing a quarter of the value of their shares meant losing millions, or very many thousands of pounds. Of course, they still had three quarters of the value of their shares, which would have been worth even more millions! Moreover, at the time of writing, share prices appear to be regaining a large part of their former value. For the people in this first category, socialists would not have shed any tears. They are a small minority who live comfortably on the backs of the rest of us. Most big capitalists would not have been affected by such a hiccup. Their privileged lifestyle smugly continued regardless of the panic by workers on their bosses" behalf.

We can sympathise rather more with the second group of people who were affected during that week. Many workers have been persuaded in recent years to buy shares in industries which had previously been nationalised. The government claimed it was taking these industries out of the hands of the state bureaucracy (which Labour had indeed falsely equated with "the people") and handing them over to ordinary people themselves. Of course, there was one snag. Most people are workers and therefore lack the cash to buy more than a handful of shares at the most. All the rhetoric about ordinary people becoming "capitalists" overlooks this simple fact.

To be a real capitalist you would require the cash to buy such shares in hundreds of thousands. Dividends paid on shares tend nowadays to be in the region of, say, 20p a share annually. While this provides the owner of a million shares with a nice unearned income of some £4,000 a week (making it a matter of choice whether to bother to go to work or not), the worker who has proudly bought 400 shares, for example, would receive £1.60 a week; hardly enough to retire on. It is an obvious but rarely stated fact that somebody can have a small "stake" in an enterprise, even with some minimal voting rights or control, but it is the size of the stake they can afford which dictates their position in society, their class and therefore their condition of life. And no reforms proposed by any of the political parties can even attempt to deal with this ultimate inequality at the roots of capitalism.

Beyond this aspect, several other problems have emerged from the great privatisation "sell-off" bonanza of recent years.

★ Largely as a result of these policies, the number of adults in Britain who own any shares has increased from 7 per cent in the late 1970s to 15-20 per cent today. But that still leaves four out of five adults with no shares whatsoever. There is every possibility that the number of shareowners will once again fall below 10 per cent, particularly after recent events.

★ Within the small minority who own shares, there is a much smaller minority who monopolise the bulk of all shares. About four fifths of all privately held shares are owned by less than one per cent of the population.

★ Of all the shares bought in recent "privatisation" issues such as the Trustee Savings Bank. British Gas and even British Telecom, a substantial proportion have already been cashed in again, with more shares gradually falling, predictably, into fewer hands. In many cases workers had saved a few hundred pounds and found that they needed that money back again after a year or two to help with household expenses, for which they had no other resources to fall back on. In other cases the intention was to make a quick (and very small) profit, then withdraw. The proceeds will hardly finance a life of leisure. Real capitalists do not have to sell their entire investment portfolio some months after acquiring it.

It is the people in this second category whose recent position was tragic. In some cases, workers had put their life savings into projects promoted by the government's smooth-talking advertisers only to watch their modest nest-egg eaten into during one week by the fluctuations of the business casino known as the Stock Exchange. During the television coverage of the October "crash", some investment analysts actually came on (rather too late) and said that it really was "not right" for the "very small investor" (the worker) to get too involved in the risks of share investment in the way that the big investors are able to and that the dramatic fall in share prices might serve as a warning and lesson to such people.

The real lesson, however, is that such wild commercial fluctuations show us the true nature of the capitalist economic system. Based on competition for profits throughout the world market, capitalism is unpredictable, uncontrollable and unable to meet human needs securely. The mass media had a field day, getting excited about their tedious obsession with share price indexes minutely fluctuating in a way that was of little immediate interest to most viewers. It was nearly as bad as the boring hysteria of the election coverage during the summer. What they failed to point out, though, was that such "strange" developments have happened before and will happen again, because of the very nature of world capitalism itself. They will happen under Brian Walden’s "free market" and under the "massive government intervention" which the shadow cabinet waffled on about. Nobody can predict when such problems might happen again, or find any way to avoid them.

The price of shares in a company can respond to subtle changes in business "confidence”. In a sane, socialist society the only pointers will be human needs on the one hand, and the real resources available for meeting those needs, on the other. The only “confidence" to be concerned about would be our vital confidence in our own ability to work together co-operatively to meet our needs. That ability certainly exists.

The temporary failure of "confidence" which found expression on October 19, on the other hand, was a failure of confidence in the secure, continued flow of profit into the bank accounts of the parasite class in society. They seem to have picked up since then, and persuaded themselves that there is nothing to worry about. Shall we prove them wrong?

Clifford Slapper