Letter: Full employment, slumps and other questions (1964)

Letter to the Editors from the October 1964 issue of the Socialist Standard

Full employment, slumps and other questions

Dear Sir.

An article published in the Socialist Standard in January of this year posed a question with its title, namely "Are you better off?" Unfortunately, however, the article does not provide any definite conclusion.

The article does however concede that the average increase of the purchasing power of take-home pay is probably about 10 per cent.

"In the meantime, owing to more than proportionate increases of pay deductions from pay (national insurance and income tax), the average increase of the purchasing power of take-home pay is not the 18 per cent of the two indexes would show (wage rate index and retail price index) but something less, probably about 10 per cent Socialist Standard, page 9, January 1964.”

It might also be pointed out that.the present alleged standard of affluence that many of the working class are at present living at is dependent on their wives going to work in order to augment the family budget. But, notwithstanding, this and other factors such as the tremendous growth in hire purchase commitments, it is difficult to deny that the worker of today is better off if fully employed, as the vast majority are at present, than his counterpart was when unemployed in large numbers before the Second World War, particularly in the slump of 1929. In case it should be asked why one should compare the lot of a fully employed worker to that of an unemployed one in the pre-war period the answer is that millions were unemployed then, and relatively few are unemployed now. The article in question gave four columns of figures, one of which gave the number of unemployed of 1938 when it stood at 1,927,000. The column next to this gives unemployment as a percentage of 1938. this year being taken as 100 per cent. If these figures are accurate, then we may conclude that unemployment has not reached 50 per cent of this level since 1938.

On this aspect of the problem the article in your journal is significantly silent. In fact I think it would be true to say that the Socialist Standard has failed to account for this continuing full employment since the end of the war and does not even find the subject worthy of discussion in its columns.

May 1 therefore ask the following questions?

(a) Why in your opinion has the slump which you maintain is an essential feature of capitalism failed to appear in England?

(b) Why has there been no slump of the magnitude of 1929 since the war.

(c) Are the present conditions of full employment, increasing the membership of your organisation and the sales of the Socialist Standard.

(d) Do you think the orthodox economists using ideas of the late Maynard Keynes have found a way of preventing widespread and profound slumps of the pre 1938 variety and if not how do you account for this rather prolonged period of full employment?

I am, yours etc.

T. Lawlor

Reply:

Our correspondent comments on the fact that, compared with pre-war years, the position of the workers has been affected by the decline of unemployment and the increased number of married women who go out to work, as well as by the rise of average wages in relation to prices. This was referred to in the article, where it was pointed out that total wages are about five times what they were in 1938, “mainly because of the decline of unemployment and the fact that far more married women are now out at work".

Whether this last factor can be regarded simply as a gain is another matter. In the nineteenth century the need of married women to work was commonly regarded as a disadvantage by those who studied its consequences.

If however it is a fact that most workers now are rather better off than before the war, this kind of development is not a new thing. Frederick Engels noted in 1885 that since 1844, when he wrote his The Condition of the Working Class in England, the factory workers had become “undoubtedly better off”, and the condition of engineers, carpenters, joiners and bricklayers, organised in the trade unions, “had remarkably improved". (See Preface to 1892 Edition).

In the same Preface and in the 1886 Preface to Capital Engels then went on to state a position which events proved to be wrong. He had concluded, because of the length and severity of the depression, that British Capitalism would never resume its expansion and that “either the country must go to pieces or capitalist production must ”. He thought unemployment was bound to increase year by year and that shortly, “ the unemployed . . . will take their fate into their own hands ”,

Profiting by Engels' mistakes the SPGB reached the conclusion (one indeed that Marx and Engels had themselves seen) that the achievement of Socialism calls for understanding on the part of the workers and cannot be the outcome of discontent and despair without understanding.

Our correspondent accepts rather too easily the claim that there has been “continuing full employment since the end of the war". In the column of figures to which he refers in the January Socialist Standard it is shown that since the war unemployment has ranged from 302,000 in January 1956 to 861,000 in January 1963. This latter figure may not be high by pre-war standards but it certainly cannot be described as “full employment”. Allowance ought also to be made for the fact that unemployment will have been increased in the nineteen thirties by the big flow of migration into this country. In post-war years up to about 1960 the net flow was outwards.

Against that background we can answer the specific questions.

(a) For this question it is necessary to take care about the use of words. If by “slump” our correspondent means only a “heavy slump” like that of the thirties, the answer is that such heavy slumps are not an essential feature following each capitalist crisis.

What we had as an essential feature o! capitalism is, to quote the words used by Marx in Capital, Volume I, Chapter XV, Section 8: —

The life of modern industry becomes a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation.

The crises, that is the sharp interruptions of booms, have continued to happen in the post-war years. For example, the index of production in January 1963 was down to 108, after having reached 120 in January 1961. If in post-war years, the ensuing “stagnations" have not been heavy and prolonged this is in line with the experience of crises in the nineteenth century. Most of these crises were not followed by heavy prolonged slumps. The outstanding big ones were in the eighteen forties, the eighteen eighties (the one that threw Engels off-balance) and the nineteen thirties, and in between there were depressions that were not heavy or prolonged.

(b) Among the reasons why heavy depression existed in the nineteen thirties and not in post-war years in this country (experience of some other countries has been markedly different) is the absence of a very important factor which existed then. This is the pre-war feature of crisis-dislocation superimposed on the long-term decline of some very big industries, agriculture, coal and cotton without the counter effect of strongly expanding new industries. In post-war years, along with a much larger Civil Service, large armed forces and armaments industry, there has been expansion of building (helped by war-time destruction and stoppage of building), man-made fibres, electricity and electrical engineering, motor car and aircraft manufacture, television, chemicals and oil, electronics and nuclear power.

(c) If this question means has low unemployment since the end of the war been accompanied by a continuous increase of membership, etc., the answer is no; but we would not expect increase of membership to be determined by low unemployment any more than the heavy unemployment of the thirties had that effect. Other factors also come into it.

(d) This question relates to the supposed ability of governments to prevent widespread and profound slumps by means of the techniques associated with the late Lord Keynes. It will put the matter into perspective to point out that also before 1935 (the year Keyne's major work appeared) there were, between the heavy slump, long periods without heavy slumps.

If it is claimed that Keynesian techniques give Governments effective control over capitalism why did unemployment rise to 861,000 in 1963? As all governments have at their disposal these same techniques, and numerous economists who approve of them, why have many countries had heavy unemployment for prolonged periods since the war. among them U.S.A.. Canada. Germany, Italy, Belgium and Denmark? In Italy unemployment ranged between 1½ and 2 million for 10 years after the war. During this year unemployment has been at the 6 per cent level in Canada and U.S.A.

How have the techniques supposed to have worked? The Keynesians claim that the Government can, when it likes, stimulate capital investment and consumption and at other times damp down over-expansion. When the present motor car boom slackens off as it certainly will, what can the government do, if the world market for cars is temporality saturated, except wait for demand to recover? Theoretically the government could have prevented the industry from expanding so rapidly—and left the market to be filled with the cars of other producers—but the car manufacturers, the trade unions and the Tory and Opposition M.P.'s would all have protested.

Now that the Southern Rhodesian tobacco industry has been hit by falling prices following a bumper crop, how can Keynes help them? The producers are in fact turning to another and older technique, that of restricting production.

Of course it long ago ceased to he true that Keynesian doctrines were held only by the unorthodox minority. They had become the orthodoxy of large numbers of economists and members of governments. Now fashion is changing again and Keynes comes under increasing criticism. It would seem that his theories have not proved, even to his admirers, to be the panacea they were claimed to be.

Editorial Committee.

Faith, poverty and lies (1993)

From the October 1993 issue of the Socialist Standard

Religion has an irrational,
 non-materialist ideology 
which can result in
unrestrained barbarism. In 
the battle over birth
 control women workers are
in the front line and are 
suffering appallingly

During a recent visit to the United States, the Pope encountered considerable criticism of his views on "natural methods of birth control" and the rights of women to termination of pregnancy. Gallup polls conducted before his arrival such as in USA Today/RCC concluded that 75 percent would sooner follow their own consciences than accept papal doctrines. Another poll indicated that 83 percent of Catholics aged 18-25 years "believe they can disagree with Church teaching yet remain good Catholics". ("Catholics for Free Choice/KRC Research and Consulting", Lancet, 21 August). Other views expressed have been more critical. Frances Kissling, president of a movement called Catholics for Free Choice concludes that Pope John Paul is "lost in the pelvic zone as he increasingly insists on fidelity to his restrictive views on sex and reproduction".

The Catholic Church seeks to maintain and recruit followers based on strongly-held precepts or dogma. The purpose of the Pope's travels abroad is to reinforce these, including the Church’s views on contraception and termination of pregnancy.

Far from taking account of the views expressed in opinion polls by his adherents he is at present working on an encyclical entitled "Veritatis Splendor" which is said to be more extensive than the "Humanae vitae" put out 25 years ago. Leaked versions of the forthcoming encyclical do not indicate any compromise by the Pope on these issues. He is also working on yet another encyclical concerned about "questions of life" which will be concerned with questions of sexual morality.

Encyclicals are meant to be binding and obeyed. This may have been the ease in mediaeval times when the Catholic Church had total control of all information and ideas and their availability to the subject population but it is certainly not the case today.

The harsh reality of the world's problems and the futility of applying these outmoded concepts is brought home forcibly by A.A.Verkuyl, a gynaecologist working in Zimbabwe:

"In large areas of the world, health care is provided by the RCC and the Church’s powerful position prevents effective access to reliable contraception. In Rwanda one-third of the health facilities are administered by the RCC. The bishops refuse to discuss the possibility of promoting condoms for contraception or even for Aids prevention purposes while 40 percent of the under-five population are malnourished, the population doubles every I9years, and HIV prevalence in urban areas is more than 20 percent.As in sub Saharan Africa, so in tat in America and the Philippines " (Lancet, 21 August).

The author describes instances of what the Church's attitude results in:

"Take Maria. She is a girl of 17 living in abject poverty in one of the enormous third world cities. No running water or sanitation. Maria looks after her siblings while her mother can just scavenge enough to prevent starvation. Her only chance of escape is to marry someone with a good job. If she finds a candidate, he will most likely blackmail her into having sex before marriage. She assents out of fear of losing him. There are dozens of other girls who see him as an escape vehicle from terminal poverty, and thus he acts as a transport medium for gonorrhoea, syphilis, and HIV between them. The end result is that his girl friends experience infertility, ectopic pregnancies, backstreet abortions, and Aids. If they ever give birth, the baby may die of Aids or congenital syphilis, or become an orphan. Maria refuses to have an abortion. To provide for her child and herself she has to give sexual favours to a dozen men. Five years later she dies of Aids without dignity. Her son is a street urchin."

Another case deals with a recently-qualified nurse:

"she is happy to get a job in a remote RCC hospital even though her husband is obliged to stay in town and look for work. At Christmas her husband visits her . . . there are no condoms in the hospital. At the end of her 6 months’ probation the nuns in charge of the hospital will make here have a pregnancy test. If it is positive she will not get the job. Six weeks before the urine test she misses her period. A traditional doctor in a nearby village tries to help. She dies of a perforated uterus."

The Muslims are no less reactionary than the RCC in these matters. They consider a child to be a gift from Allah. Verkuyl quotes the case of a 12-year-old girl:

"Her father is a staunch Muslim, thinks that education is not important for girls. She had had her menarche so a marriage is arranged. She never had sex education and has no idea about antenatal care and what is supposed to happen during delivery. Her mother cannot tell her; she died during her eleventh pregnancy. After three days' labour at home she is encouraged with hot irons on her hack to push harder. In the end a dead baby is born. Three months later she is able to walk more or less normally and is rejected by her husband because the huge hole in her bladder causes her to smell and leak. Her family do not want her back. So much for 'natural methods ’."

The lifetime risk of death from pregnancy is greater than one in twenty-five in Zaire and in Muslim northern Nigeria whilst the risk in western Europe is one in 25,000 Both religions are united in their outmoded view that women should not have a say in deciding how many children they have.

Commenting on the argument that family planning is unnatural the author writes that:

"These arguments would not be used by somebody who flies in an aeroplane all over the globe and has a natural tumour removed by unnatural surgery under unnatural general anaesthesia."

On a recent visit to Brazil the Pope pursued the same authoritarian line that he has elsewhere. The murder of the street urchins in Rio recently emphasizes the consequences of these policies in Latin America."Almost two million Brazilian girls aged between 9 and 17 are prostitutes, an inquiry has been told in Brasilia" (Daily Telegraph, 24 August).

The Roman Catholic Church and the Islamic leaders have millions of followers. But how obedient are they to the outmoded view's of these religions that deny any fundamental right to women and take no account of the economic problems facing ordinary workers or agrarian workers anywhere? The vast majority of Catholics do not practice natural methods as defined by the Church. J. Poole writing in the Lancet in 1992, in an article entitled "Time for the Vatican to Bend" commented:

"It is hard to see how Western European and American Catholics, 80 percent of whom have themselves rejected the teaching of Humanae vitae, can vote to deny effective family-planning to the women of the poor nations of the world." In other words the Pope and the Muslim leaders are out of touch with the views of their own followers and fail to realize that they cannot turn the clock back as far as the development of human ideas are involved, which finally are shaped by the everyday material problems people have to face world-wide.

So what is the significance of the Pope’s visits abroad and the above comments from people grappling with the everyday problems of living and in many eases literally barely surviving? It is clearly incontrovertible evidence that chinks are appearing between these leaders and their followers as the views fail to have any application to the consequences of modern capitalism.

To the Socialist, religion or any concept based on the supernatural is a means of keeping the masses subservient to a given class-divided society. It is a barrier to social progress and can only exist where there is a minority owning the means of production and the bulk of the wealth produced. People who believe in a life hereafter are more likely to tolerate adverse conditions here on this planet.

Marx had no doubts about this. He wrote:

"It is the opium of the people. The abolition of religion, as the illusory happiness of men, is a demand for their real happiness. The call to abandon their illusions about their condition is a call to abandon a condition which requires illusions." (Contribution to the Critique of Hegel's Philosophy of Right, 1843).

When the resources of the world are owned and shared by those that produce them, then the palliative needs satisfied in some cases by religion will disappear.

Terry Lawlor

The dotcom bubble (2003)

From the July 2003 issue of the Socialist Standard

In the 1990s, with the world’s economy and stock markets driven largely by the dotcom internet telecommunication advances, it was claimed by capitalist spokesmen that this would result in ever-increasing productivity along with rising prosperity. This was the view propagated by Greenspan in the United States and by Gordon Brown in the UK.

House prices soared, along with internet stocks, to record levels. Borrowers already highly in debt borrowed even more against their assets in what has become known as the feel-good factor.

In spite of the optimistic forecasts by Greenspan and Gordon Brown the boom ended, in a slump as socialists had forecast. Capitalist politicians struggled to adopt measures to halt the economic deterioration by juggling with interest rates and money supply, attempting to avoid the inevitable downturn. The fact of the matter is that we are in an environment which is now inevitably accompanied by rising business failures and unemployment. Hardly a week passes without the announcement of some pension scheme being unable to meet its obligations, Marconi and Equitable Life to mention only two.

It is not uncommon for workers to lose not only their jobs but a large part of their pensions as well. Due to the greater life expectancy it is doubtful whether pensions as we know them will survive. How the funding of pensions conflicts with adequate pensions schemes was explained in the August 2002 Socialist Standard (“Pensions, pay and poverty”). Members of Parliament will have no worries, however, as they regularly vote for generous increases in salaries and pensions.

In France recently there have been large demonstrations against the extension of the contribution period to 41 years in order to qualify for a full pension as a government employee. Pension funding problems in Italy and Germany greatly exceed those of the UK. Why has this happened? Why did the dotcom internet “revolution” fail to produce the lasting upsurge in production, profits and prosperity that the official spokesman promised?

To claim, as do present-day economists, that new inventions in production based on faster communications increasing turnover are novel developments of capitalism is fallacious. Marx and Engels were well aware of this but, unlike the present-day politicians, were aware of its consequences.

In chapter 4 of Volume III of Capital, Marx (in fact Engels from Marx’s notes) describes how in his day the introduction of wireless telegraphy, the Suez Canal, and the resultant reduction in shipping time led to a reduction in the time of circulation of capital and refers to “the entire globe being girdled by telegraph wires”. Marx was aware of the effect of improved communications on circulation of capital and its period of turnover and the resultant effect on profits. But in no sense did he see it as producing a permanent social change for the better in the form of steadily rising prosperity. He pointed out that the resultant decrease in the period of turnover leads to a rise in the rate of profit. The dotcom “revolution” had this same effect, which led to capitalists investing in the new technology attracted by the prospect of bigger profits. As usual, there was too much investment leading to what is commonly called a “bubble” which inevitably burst.

The claims of orthodox economics to be a science is dubious. To be so it would have to have measurable units just as chemistry, for instance, has atomic and molecular weights. Having no precise units of measurements, they resort to terms such as “confidence”, “market outlook”, and “aggregate supply and demand factors”. Central to their theories is the belief that the capitalist economy can be managed without periodic economic crises. Clearly, history shows that this does not happen.

We are now in a situation where rival capitalist powers cut their respective interest rates in order to lower currency values against their rivals. One of the main factors in determining a currency value is real interest rates (nominal rate minus the rate of price increases). Nominal rates rise with inflation but this does not mean that real interest rates do. However, if inflation falls and nominal rates remain the same then real interest rates rise. This effect can currently be seen in Germany with a soaring euro reflecting high real interest rates.

Nominal interest rates in the UK today are at their lowest for fifty years. As prices fall consumers do not automatically increase spending if they feel the goods will be cheaper in the near future. If goods are sold more cheaply to clear stock, this will result in a fall in profits. The result of this pushes the economy towards recession, the opposite of the brave new world we were promised as the result of the internet dotcom “revolution”.

At the same time the economy sees the unwinding of debt. As businesses are liquidated so the money goes out of the system. Those economic historians who base their opinions of the view that economic history commenced in 1945 have seen steadily rising prices as a permanent feature of capitalism. Many are now saying it cannot go much lower than it is now.

Because a downward pressure on prices, other things being equal, is an inevitable corollary of depressions, Greenspan has made if clear that he is prepared to buy US government bonds in order to maintain liquidity although interest rates are already 1.25 percent in the United States.

Gordon Brown, the King Canute of Economics, has even stated that, by balancing public expenditure and taxation, the economy could be managed without economic crises. GDP has failed to achieve the levels he forecast. When he and other world leaders congregate at their G7 and G8 meetings, as they did last month in Evian, their ruminations fail to come up with any measures to remedy capitalism’s problems. Its problems are inherent as are its inbuilt contradictions which cannot be managed away.

Terry Lawlor

SPGB Meetings (1995)

Party News from the February 1995 issue of the Socialist Standard

SPGB Meetings (1992)

Party News from the March 1992 issue of the Socialist Standard

Blogger's Note:

I'm not sure if David Hines was a member of the SPGB but he was definitely a sympathiser. His play "Bondage" was adapted into the film the 'Whore', which starred Helen Mirren and was directed by Ken Russell.

World View: Japan's Tightrope Act (1995)

From the October 1995 issue of the Socialist Standard

"The Japanese economy is moving into recession following the banking crisis and credit crunch. Property prices are on the slide. Business bankruptcies are increasing” (Socialist Standard, November 1992).

When we warned of worsening prospects for the Japanese economy our view was a minority one. The consensus view expressed in the capitalist media was that by government intervention using tax cuts and increased public spending the economic slowdown could be reversed.

At the beginning of 1993 when signs of a developing trade war appeared, the conventional view was that negotiations among the world’s economic superpowers could settle their differences. We stated however "the present trade war cannot be ended by GATT. NAFTA, or G7 summits. It will, continue in one form or another as long as world production is organised for profit rather than use" (Socialist Standard, April 1993).

At the end of July this year Cosmo, Japan's fifth largest credit union (these are similar to our building societies) collapsed following the withdrawal by depositors of 60 billion Yen (£425 million). Cosmo which has 15.297 members admitted that bad debts were about ¥170 billion in May with interest in arrears on loans of ¥184 billion. The Bank of Japan was forced to lend Cosmo sufficient to cover the withdrawals. The Japanese Finance Ministry quickly produced a rescue plan to weaken the Yen and thereby boost exports and boost the economy. This consisted of intervention along with the US Federal Reserve to bolster the dollar. Japanese insurance companies will now be allowed to lend in foreign currencies. Accounting rules will be changed to "give Japanese insurers more flexible ways to account for foreign bond holdings and will also let them decide whether to report foreign exchange losses in their accounts . . . Such changes may help insurance companies out of their present fix but at the cost of making their accounts less transparent" (Economist, 5 August).

Banking crisis: Excessive lending in the 1980s is estimated to have left the country’s lenders with bad debts of ¥50,000 billion, almost £350 billion (Daily Telegraph, 1 August). Non-performing loans of Japanese banks, trusts and longterm credit banks at put at around ¥12 trillion (The Banker, July 1995). Problem loans, according to the Director of the Finance Banking Bureaux, amounted to about ¥40,000 billion (£290 billion) equal to almost 10 percent of Japan's gross domestic product (Financial Times, 7 July). In a recent speech the governor of the Bank of Japan stated that:

"the late 1920s Showa depression was triggered by the failure of a very small bank. The issue is not the size of the troubled institution but whether any unrest in the financial system could cause a chain reaction of deposit withdrawals throughout the system” (The Banker, July 1995).

Trade wars: These are not over. Following a last-minute compromise agreement over car imports into Japan from the United States, Kodak complained to the American trade authorities that the Japanese Fuji Film Company was obstructing Kodak’s access to the Japanese market. Trade wars ultimately have no victors. They can end in being extended to the battlefields.

The property bubble: Housing in Japan is estimated to be 19 times as expensive as similar properties in the United States and has been estimated at six times Japanese GDP. Cosmo quadrupled its lending in the space of two years by backing property developers. In December 1994, two other credit unions failed after their property-related loans turned sour (Economist, 5 August). Commercial property has fallen by 50 percent of its value since 1991.

Pension funds: Like other developed countries, Japan has an increasing number of aged people but on a scale that is larger than the UK and other European countries with rapidly increasing pension liabilities. The projected pay-outs have been based on assumptions made when the stock-market was far higher than at present and where commercial property values were booming along with their rentals. But in an economic environment where asset values are falling to a level that cannot cover the amounts borrowed against them the projected pension payouts become questionable. In short the welfare system in Japan is undergoing the same demise as it is elsewhere.

Unemployment: This has for the year 1994 increased to 2.94 percent

Interest rates: The recent cut in the Japanese discount rate to a record low of one percent in the hope of stimulating the economy and the stock-market has had no lasting effect. The Nikkei Dow has lost two-thirds of its value in the last five years. Japanese banks enter a large number of their share holdings at their acquisition value which means that with the fall in the Japanese stock-market they are worth less than the balance sheets imply.

Apart from the previous six attempts since 1992 to prop up the Japanese economy with tax cuts, public spending injections even to the extent of getting the postal savings institute to help by investing in the stock-market all have been of no avail. Why should this latest package of measures announced after the Cosmo collapse be anymore effective? Japan’s problems are deep-seated and long-standing. The present scenario is similar to the l929-30s in the United States.

Japan’s problems cannot be viewed in isolation from the rest of the world economy. A full-blown slump in Japan could have knock-on effect by disruption of capital flows if the Japanese overseas investors start withdrawing their assets from overseas. There is also the consequences of lessened demand for imports.

Once again the financial commentators are suggesting that Japan has reached a point where recovery is the only possible outcome of the recent rescue attempts by the Japanese powers-that-be. We have no hesitation in rejecting these arguments. The worsening problems described above are inherent to the capitalist mode of production. Credit crises, trade wars and the problems dealt with above are inevitable in a system where competing capitalist powers struggle for market dominance in their relentless drive for profit.

Terry Lawlor

SPGB Meetings (1995)

Party News from the September 1995 issue of the Socialist Standard

SPGB Meetings (1991)

Party News from the September 1991 issue of the Socialist Standard

Trade wars (1993)

From the April 1993 issue of the Socialist Standard

At a recent meeting at the White House, President Clinton promised John Major that he would "try to make the GATT accord succeed" (Financial Times, 25 February). Subsequently. however, both he and his Secretary of State. Warren Christopher, were less conciliatory in their pronouncements.

Speaking to students at Washington University. Clinton said “we will say to our trading partners that we value their business, but none of us should expect something for nothing". Warren Christopher, addressing NATO foreign ministers, referred to “a new diplomacy that views domestic and foreign issues as inseparable. Wc will elevate us economic security as our primary foreign policy goal” (Daily Telegraph, 27 February).

The North America Free Trade Agreement, the supposed US answer to the European trade bloc, has resulted, however, in the use of cheap labour in Mexico by American industrial manufacturing companies with resultant lay-offs in the corresponding industries in the US.

The United States is constantly calling for a “level playing field" with the other major capitalist powers. This ignores the fact that America has imposed import duties on steel, wine and cereals. The volume of US exports abroad expanded by 74 percent between 1985 and the first quarter of 1992, compared to increases in German exports of 28 percent and those of Japan by less than 20 percent (Financial Times, 10 February). So the "cooperation" that Clinton and Christopher are demanding is really a greater share of the world market.

Barriers

In Europe the promises of prosperity based on an expansion of trade with the former Eastern Bloc countries has given way to the worst recession of the post-war period. Nor has the German economic miracle that was to follow the unification of the two former German states materialised. Instead. Europe now has increasingly bitter internal conflicts over jobs, trade, currencies and interest rates. The volatility of the two latter is indicative of the failure of the larger market to produce convergence or stability.

The average level of unemployment in Europe has risen to 10 percent. Recently 7000 German steel workers demonstrated against proposed job cuts. Car manufacturers in western Europe have drastically cut costs by restructuring plants and laying off workers. Far from stimulating trade, the EEC has put up barriers, particularly to countries such as Poland and the former Czechoslovak Republic whose labour costs are lower (hourly rates for car workers are about one tenth of those of western German workers). Exports to the EEC from the former Eastern Bloc countries have increased to 19 percent during the past half-year. Czech exports to the EC alone rose 10 percent last year to 51 percent of the new regime's total exports. Restrictions on textiles, farm products and cement imports already exist and it is anticipated that these measures will shortly be extended to steel products from Hungary. Poland and Slovakia.

Western capitalist politicians who welcomed the break of the eastern European states with the Soviet Bloc as a triumph for democratic capitalism which would lead to an economic boom are now erecting a reverse version of the Berlin Wall by creating trade barriers.

Japan and China

Japan, a country involved in a worsening slump, is frequently the object of exhortation by American spokesmen to lower its trade barriers on industrial goods as well as rice imports. Industrial production is falling, bad debts are increasing rapidly as property values continue to slide whilst banks struggle with at least 100 billion dollars of doubtful loans. For a country in this position to lower import barriers so as to admit manufactured goods could only worsen a rapidly-deteriorating situation. Domestic sales of cars fell by 7.2 percent in 1991. Importing Fords and Chryslers will hardly mitigate the problem. Against this background Japan can offer a market for little else than Japanese goods. As an export dependent country to an extent greater than its rivals, Japan has no alternative other than to struggle for an outlet for Japanese manufactured goods.

One country whose production is rising rapidly is China which is already beginning to seek an outlet for its manufactured goods on the world market. As it is, China’s exports to the United States are rising and this is causing tension:

  The Americans have made it clear that GATT membership for China will not lay to rest the provisions of America’s own laws that make China’s most-favoured nation (MFN) status a perennial subject of dispute. The Clinton administration’s China policy is still unformed, but it seems likely that human rights, Chinese arms sales and China’s huge trade surplus with the United States (more than $18 billion last year) will all crop up yet again in this years’s MFN debate. (Economist, 6 March).

Already the US trade negotiator Douglas Newkirk has gone on record as saying that ’’China and America are further apart now' than they were before the talks were broken off in 1989”.

What we are witnessing is the division of the world into rival trade blocs where the major powers are following the “beggar thy neighbour policies” of the 1930s. Far from stimulating world trade this can slow it down drastically. All the high-sounding phrases such as “free trade” and “cooperation” are merely attempts to dress in respectable language the struggle of the various capitalist powers to grab a bigger share of the world’s markets.

Many observers have draw n parallels between the present world economic crisis and the Great Depression of the 1930s. The Wall Street Journal (15 February) recalled that Cordell Hull, United States Secretary of State under Franklin D. Roosevelt, had said in 1937 "I have never faltered and will never falter, in my belief that enduring world peace and the welfare of nations are indissolubly connected with friendliness, fairness, equality and the maximum practicable degree of freedom in world trade”. Thus the same nebulous phraseology was being used then as the modern politicians are using now. One other more significant quote is attributed to Hull in the same article, and is said to be heard nowadays in the corridors of GATT headquarters in Geneva, "that when goods don't cross frontiers armies do”. War commenced in Europe two years later.

The present crisis and trade war exemplify the anachronistic nature of capitalism in terms of social development. Marx saw the contradiction clearly:

  The enormous power, inherent in the factory system, of expanding by jumps, and the dependence of that system on the markets of the world, necessarily beget feverish production, followed by over-filling of the markets, whereupon contraction of the markets brings on crippling of production. The life of modern industry becomes a series of periods of moderate activity, prosperity, over-production, crisis and stagnation . . . Except in the periods of prosperity, there rages between the capitalists the most furious combat for the share of each in the markets. (Capital, Vol.1. chapter 15, section 7)

The present trade war cannot be ended by GATT, NAFTA or G7 summits. It will continue in one form or another as long as world production is organized to produce primarily for profit rather than use. The present mode of production can no more function without trade conflicts than it can without world slumps as we have today.

Terry Lawlor

The slump in Germany (1993)

From the July 1993 issue of the Socialist Standard

The optimism and euphoria that accompanied the reunification of Germany two- and-a-half years ago has evaporated. At the time Chancellor Kohl and other European politicians talked of the coming of yet another economic miracle, not only for a unified Germany but for the whole of the EC.

So confident was Kohl of success that he decided to give the East German currency parity with the West German Deutschmark, in spite of warnings from the Bundesbank officials of the inflationary consequences that would ensue. German social welfare payments were also extended to the whole of East Germany. The result was an increase in the purchasing power of the formerly poorly-paid East German workers who rushed to spend the newly-upgraded currency on goods previously unavailable to them. The extension of welfare payments to the East German population has been estimated to cost the German Treasury DM 170 billion per year.

These measures did not, however, make up for the obsolete nature of East German industry, where manufacturing production has failed to catch up with that of West Germany (see graph). Eighty percent of railways in the East were still steam-driven at the time of unification. East German workers, although paid in DMarks, still get lower wages than their West German counterparts. Inevitably, they have taken strike action to obtain comparable wages.

Steel workers have recently managed to obtain an increase in wages from about 60 per cent of western levels to 80 percent this June and 90 percent by October 1994 (Wall Street Journal, 24 May). These concessions have been obtained against a background of a severe crisis in the European steel industry that has already forced two western German steel companies—Kloeckner Werke AG and Saarstahl AG—into bankruptcy proceedings. Effective unemployment in eastern Germany is up at 30 percent. "German industrial output is now 7 percent below last year", according to the Sunday Times (28 March).

The automobile industry is also being hard hit by the depression:

  Results from Daimler Benz, Volkswagen and BMW are among their worst on record, reflecting world-wide recession and the rapid deterioration of the German economy. Volkswagen, Europe's largest car manufacturer, lost DM 1.25bn (£503m) in the first three months of the year after sales fell by 23 percent in Germany and more than 17 percent across Europe as a whole . . . Volkswagen plans to cut 12.500 jobs over the next two years, while Daimler is shedding 7 percent of its 367,000 workers" (Daily Telegraph, 14 May).

With the inevitable rise in welfare spending accompanying rising unemployment and immigration estimated at 500,000 per year, pressures to cut government spending have developed.

Worsening deficit

The German deficit for the state sector will amount to over 8 percent of GNP this year, which is similar to that in the UK. in order to try to maintain stability against a background of runaway public spending the Bonn government signed a solidarity pact with the local governments of the western and eastern regions:

  Under the terms of the pact the government agreed to certain measures in return for restraint. Income tax is to increase in 1995, but so does public borrowing for Eastern Germany in order to help restructure the obsolete industries there. It was also accepted as part of the pact that there would be no cut in social spending in the economies pursued by the government (Daily Mail, City & Finance. 5 May).

Since the pact was signed, however, there has been a marked change in outlook for the German recovery that these measures among others were supposed to help. According to the Economist (19 May), "the budget deficit is rising alarmingly as recession cuts revenue and drives up unemployment. Unless the government cuts spending its finances will deteriorate further. The Finance Minister T. Waigel has proposed cuts of DM 20bn annually beginning next year”.

Leaking boat

Much of the propaganda extolling the benefits of a unified Europe have suggested that subsidies to ailing industries would help smooth over cyclical downturns, the euphemistic term used by orthodox economists who do not wish to acknowledge the worsening features of recession.

Subsidies have certainly not helped Germany or other European states in difficulty. The crucial restructuring of Europe’s stricken steel industry is in danger of total collapse, leaving British steel struggling against unfair competition from heavily subsidised Continental producers, has warned Industry Minister Tim Sainsbury:

  Mr Sainsbury told his counterparts that Spain and Italy ran the risk of undermining the whole restructuring programme “unless they finally agreed to reduce public funding of their loss-making steel producers as well as to implement radical cuts in capacity" (Daily Telegraph, 5 May).

The German Economics Ministry now forecasts that the western German economy will shrink by at least one percent this year. The vision of Germany as a strong economy at the centre of Europe is fading. "Investors have concluded that Germany is in the same leaking boat as other members of the ERM", commented the Financial Times (22 May). “Unification has swept away its financial stability and the historic strength of the German current account; inflation is now well entrenched; and the all-German unemployment rate is the highest in the EC".

Compounding Germany’s economic difficulties further is its exposure as a result of huge loans to Eastern Europe. It is estimated that total loans to Hungary, Poland and Czechoslovakia by German firms had reached almost $2 billion by the end of 1992. Many banks loans to these regions are not receiving any returns on their investments. Total exposure to Russian banks, hardly the most secure, is greater than that of all the rest of Europe combined.

Interest rates

Many government spokesmen throughout Europe are urging the Bundesbank to lower interest rates in order to bring about European recovery. The fact that interest rates in the US are at their lowest since the 1930s with no major recovery occurring is not explained. The Bundesbank sees its primary function as to prevent inflation, and the fear is that reducing interest rates will revive it. Memories of Weimar and runaway inflation die hard.

The depression has come to Germany and is deepening. The problems of Germany are the problems of Europe and are ultimately caused by the present world slump. The idea that the Maastricht Treaty can overcome these problems is absurd. For the Treaty to work it would have to be assumed that the competing economic powers in Europe have common interests. The violent movements of currency markets, in spite of central banks losing millions trying to restore stability, is indicative of the futility of trying to adjust or solve the problems of capitalism by altering interest rates.

One disturbing feature of Germany’s plight is the revival of rightwing movements. "Opinion polls show a steady increase for parties of the extreme right led by the Republicans", according to the Financial Times (German Survey, 26 October 1992). Failure of the capitalist politicians to solve the problems that result from the depression has led to widespread disaffection with the major political parties. Refugees in Germany are being blamed for unemployment and housing shortages and have become the focus for attacks by neo-Nazi skinheads.

The problems developing in Germany have happened or are developing in other parts of Europe, namely, rising unemployment, falls in production, bankruptcies, growth in extreme rightwing racist movements along with public spending crises. These problems do not develop or emerge exactly simultaneously in each country, but the overall trend is there.

The problems occurring in Europe are fundamental to the capitalist system. When the working class world-wide understand and accept this then the remedy will be the abolition of the system that puts countries and peoples against each other either on the marketplace or on the battlefield.

Terry Lawlor

Recovery — Fact or Fiction? (1994)

Cartoon by George Meddemmen.

From the April 1994 issue of the Socialist Standard

In an article in the Socialist Standard last May we described how politicians and media commentators had developed a whole new terminology when describing what in fact was a developing recession.

From Norman Lamont's announcement that "recovery had begun" in June 1991 terms such as "growth recession”, "slowdown in growth", "soft landing" have all been used in the press to describe what we know was the commencement of a major economic slowdown. As conditions worsened we were told that it was going to be "a shallow depression of short duration" in an economy that needed "kick starting".

Recovery under way?

This year, almost in chorus, the press are telling us that recovery is under way here and abroad with one or two qualifications. According to a CBI survey published in the Daily Telegraph (11 January) it is "fragile and patchy". The survey also concludes that "no U.K. region has totally eliminated recession".

The consensus view expressed in the popular press is that the United States is leading the world out of recession, and that a strong recovery is underway in Britain and the emerging economies of south-east Asia.

It is not that long ago that Germany was to be the source of a booming recovery following unification. Prior to this Japan was the "wonder economy" of the Far East. Both these countries are now in deepening recession.

In Germany unemployment is now 9.6 percent of the working population. Volkswagen announced it would bring in a four-day week following losses of £612 million and an 11.4 percent slump in sales in the first nine months of 1993 (Daily Telegraph, 26 November). The level of unemployment of just over four million has prompted comparisons with the Weimar Republic when unemployment touched five million in 1933 and Hitler took power. The prospect of an export-led recovery has not materialized. "According to the Economic Ministry, orders received by Germany Industry fell by 0.8 percent after declining by 0.6 percent in October" (Daily Telegraph, 6 January).

Rising unemployment

With rising unemployment the pressures on the public sector debt has increased. Describing this in an article entitled "Up. up and away", the Financial Times says that

  total overall public sector debt will sail through another Maastricht convergence criteria, topping DM 2000 billion or more than 60 percent of GDP. The last straw has been the addition of East German debts of DM 275 bn to the total.

Private household debt has reached record levels with industrial bankruptcies close behind. "The recession has driven one in two households into debt with 1.5 million families out of a total of 35 million estimated to owe an average of £16,000" (Daily Telegraph, 7 October).

Europe too

France like Germany, has all the features of a deepening depression. Unemployment is 12 percent. Car sales are falling. It too has increasing problems with its welfare budget, resulting in the unemployed having cuts in their dole payments whilst a group of nurses staged a 500 days’ protest outside the Ministry of Social Affairs as a protest at understaffing and poor pay (Financial Times, 24 November).

In Britain, in spite of the optimistic announcement of recovery by politicians and others, the economy is still in a contained depression. This means it has been contained to some extent by public, personal and corporate borrowing as well as relatively low-interest rales. But these factors can only have a transient effect.

Of course it wouldn’t be Spring without the usual optimistic cuckoo noises from the building societies.

The Halifax Building Society has published its Monthly Index of house prices and announced an increase of 2.2 percent in February. If the implication is that this is likely to continue then house prices would rise by 27 percent for the whole year. This is difficult to reconcile with the fact that between one and one and-a-half million owners are living in houses that are worth less than they owe to the banks and building societies. With this amount of debt outstanding and the tax increases in the budget plus the lowering of interest rate relief on mortgages, recovery in this market is unlikely.

Retail sales are often quoted as evidence of recovery. The optimistic forecasts for retail sales have failed to match expectations. The Xmas sales improvements forecast last year have turned out to be a damp squib.

Price war

Overall sales fell by 0.2 percent over the sector. Supermarkets such as Tesco, Sainsbury. ASDA and Safeway are now engaged in a price-cutting war. This sector has often been described as counter cyclical in periods of recession. Sainsbury have even been considered recession-proof and cited as evidence of recovery based on their results. When, however, it announced reductions in the price of 300 basic food items, the fear that this would escalate price-cutting by their rivals led to a fall in the share prices of food retailers including their own (Daily Telegraph, 4 November). The company has subsequently announced forthcoming staff cutbacks.

The United States is now said to be in a recovery of sufficient strength to lead the world out of recession. Whilst it is undeniable that there has been an increase in housing starts as well as an increase in manufacturing and purchase of machinery and equipment, much of this equipment has been cost-cutting which will be lead to idle capacity elsewhere.

The increase in housing starts have been to a large extent due to very low interest and mortgage rates. Non-residential construction has remained flat. Whilst there has been a rise in published GDP statistics there has not been a corresponding rise in living standards commensurate with a sustained recovery. Much of the optimistic projections failed to consider the huge personal debt that still exists in America.

In an article in the Financial Times (4 January) entitled "Locomotive runs out of Puff", Robert Giordano forecasts a slowdown in US economic growth:

  Households will be unable to sustain their consumption binge because it cannot be financed. Outlays have been rising at a 4 percent annual clip since early 1993 while real disposable income growth averaged only 2.5 percent.

Commenting on America’s problems he writes

  foreign trade prospects look bleak despite completion of the Uruguay Round. A deteriorating trade balance has restrained growth and should do so in coming months. 

He also points out that US GDP adjusted for inflation has yet to equal the level achieved in 1988. As in Britain, the deficit has been cushioned by a huge Federal Deficit and by deposit insurance to prevent a financial crisis as in the 1930s. But this cannot continue indefinitely. The outstanding debts have still to be eliminated. The recession in Europe and the trade disputes with Japan does not bode well for US exports.

Economic opinion formers in the rest of the world have been waiting three years for the US to act as the world’s locomotive for growth. It seems that they will have to wait longer yet.

Italy is still plagued with massive public spending problems and political scandals. Unemployment is 11.5 percent. Public spending is equal to 114 percent of GDP at a time of low growth and rising interest rates (Financial Times, 28 February).

Spain, like Italy has political scandals. The banking system was recently shaken by the collapse of the Banesto Bank which had to be bailed out by the Central Bank of Spain after depositors rushed to withdraw their savings. Spain has the highest rate of unemployment in the European Union at 23.1 percent.

Japan, formerly the miracle economy of the 70s and 80s and until recently the largest economy in the world, is moving into deeper recession. The Normura Research Institute has forecast that the economy will shrink by 0.4 percent this year and blamed the expected shrinkage on a continuing fall in corporate earnings and capital spending in coming months (Financial Times 10 December). Three attempts by the government to stimulate the economy along Keynesian lines have not produced a recovery.

Nippon Steel has built a $240 million new steel plant in Nagoya which has yet to open. Steel output in Japan has fallen by 40 percent. As the Wall Street Journal reported in January one of the largest property companies in Japan AZBUV has total debts amounting to twice the value of its assets. According to the Economist (19 February') it will take Japanese banks ten years to clear their debts provided conditions do not worsen further.

Japan is expected to have the highest percentage of people over 65 among the industrial nations by the end of the century. As elsewhere many consumer prices are falling. Unemployment is 2.9 percent but the security of job tenure is becoming impossible to maintain. With production and exports declining Japan is an accident waiting to happen. There can be little doubt that with deflationary recession sweeping Japan there will be repercussions on the rest of the world economy.

Here in Britain the Chancellor of the Exchequer is advised by the Seven Wise Men. They are economists who suggest ways of "managing" the economy. This usually consists of recommendations on interest rates, taxation and the monetary aggregates such as the money supply. However, the Seven do not always agree on the remedial measures to be adopted. One of the most optimistic is Professor Patrick Minford of Liverpool University. He considers that recovery is underway and is being held back by failure to reduce interest rates and lower taxation. Opposing this view is Professor Congdon of Lombard Research who vigorously advocates higher taxes and interest rates to control public spending. The Seven rarely reach a unanimous conclusion. They think that by tinkering around with the monetary aggregates depressions can be smoothed out. Of course they cannot achieve this. If they could it would be possible to prevent these economic upheavals from arising.

Inherent dislocations

They fail to realize that the major dislocations in the capitalist economy are inherent to the capitalist system. The bulk of what passes for economic opinion tends to look at the world economy as if the conditions that have applied since 1945 are the only ones applicable. With the ascendancy of Keynesian economics in the post-war period with massive public spending and money supply growth and with the inevitable consequent inflation, it has been assumed that the Great Depression of the 1930s is something from an economic dark age and which won’t be allowed to happen again.

In interpreting economic events orthodox capitalist economists tend to take short-term trends and project them in linear fashion into the future in the way in which the Halifax Housing Index was used earlier. An increase in production over a three-month period is projected forward as a positive trend. They fail to realize that capitalism is fundamentally chaotic in its movements. The fact of the matter is that we seen to be in an era of falling prices, rising unemployment and financial instability on a global scale. In short, the current economic environment has much more in common with the conditions of the 1930s.

Looking at the economic indicators in the Economist (26 February) of the 15 industrial countries listed 13 have shown year-on-year increases in unemployment. Industrial production has exceeded four percent in only four.

Taken on a global view there is no convincing evidence of an upturn anywhere of sufficient strength to lead to world recovery. The probability that we are entering into another 1930s scenario cannot be dismissed out of hand. The fact that millions of people may consider it too terrible an event to contemplate does not mean it cannot happen. Five years ago many people believed that the housing crash with people thrown out of their houses was something the government would not let happen. Sadly they know otherwise now to the extent of 250,000 repossessions in five years.

The propaganda of strengthening recovery this year is being put out by the same official sources that promised this last year as well as every year back to 1991. They were wrong then so why should their promises of recovery be taken seriously now?

Terry Lawlor

Gatt: Free Trade — or Protectionism? (1994)

From the March 1994 issue of the Socialist Standard

Last year we dealt with the various factors that were leading to a trade war (Socialist Standard, April 1993). The possibility of a return to the "beggar thy neighbour" policies of the 1930s was discussed in the light of NAFTA (North American Free Trade Area) and GATT (General Agreement on Tariffs and Trade).

Prior to the recent signing of these agreements the Establishment-controlled media argued that the alternative to signing these agreements was a gigantic world slump. Quoting the OECD, the Financial Times (9 November) stated:

   "a successful round would add about 200 billion dollars a year to world trade. . . the increased business would certainly help the international economy from its current recession. If the talks collapse, then these potential gains will be lost. But, worse, a tit for tat trade war would lead to higher tariffs, higher prices, reduced sales, lost export opportunities and lost jobs."

Before the recent signing of GATT, the world was already dividing into trade blocs such as NAFTA, comprising Canada, the United States and Mexico, the EEC (Europe), and the Far East under the domination of Japan.

A similar attempt has been made in Latin America to form a trading sphere made up of Brazil, Argentina and Uruguay (MEPOSIL). Currently Brazil and Argentina are in dispute over movement of capital goods between the two countries. Argentina accusing Brazil of dumping.

NAFTA, when signed, was considered a triumph for the diplomacy of President Clinton. It has not, however, resolved the trade rivalries between the member countries. Canada has raised tariffs on farm products since GATT was signed "to make up for the protection its farmers lost in the GATT agreement. Tariffs are expected to be as high as 350 percent on butter. 290 percent on cheese and 270 percent on eggs" (Daily Telegraph, 16 December). The United States is pressing Canada to phase out these tariffs in 10 years instead of 15 as required under GATT’s rules.

The revolt of the Zapatistas in Mexico had their leader denouncing NAFTA from a hotel balcony as "a death sentence for Mexican Indians" (Economist, 22 January). In short, the Indians see no hope for themselves under NAFTA. Unlike the European Community there is no offer of regional aid to the poorer members of this trade bloc.

Export subsidies
One of the claims made by the advocates of these multinational agreements is that freer movement of goods will result in a raising of living standards world wide. Because many of the goods exported by the major industrialized countries have export subsidies the opposite is the case as far as the "lesser developed countries" are concerned. The higher prices of these products, especially agricultural products, are often more than they can afford. With much of their revenue being consumed in paying crushing interest payments on outstanding loans, far from improving, their living standards are worsened.

Similar attempts have been made in the past to reach agreement on a world scale with the object of preventing trade disputes and the economic rivalries that result eventually in world wars and slumps with mass unemployment. The Bretton Woods Agreement was one such example when in 1944 it was proposed along with the IMF and the International Trade Organization. The latter, the ITO, was rejected on the ground that it would provoke hostility from some of the major trading powers. No such considerations apply today. There is now a World Trading Organization replacing GATT.

The problem that capitalist politicians have to solve is how to have world trade without the various powers falling out as they compete for a bigger share of the world market. Bretton Woods, out of which came the IMF, gave rise to a system of fixed exchange rates that could periodically be adjusted where trade imbalances occurred. It appeared to work initially but with the entry of countries such as Japan into the world market and the subsequent erection of trade barriers it finally ended when President Nixon ended the dollar’s convertability. Under this arrangement America provided enough currency to provide a gold exchange rate system.

The violent currency movements that have occurred in recent years is evidence of the developing trade imbalances instead of the convergence of currencies as the enthusiasts for the European Community promised. Currency adjustments cannot overcome the problems of trade rivalries. Tight control of the D-Mark by the Bundesbank has not prevented the deepening recession in Germany.

Erection of trade barriers does not in itself afford protection against rival economic competitors or prevent import penetration. American multinationals were not in fact kept out of Europe by the formation of the EEC for the simple reason they were already established in Europe; Kellogs Cornflakes, Budweiser Beer, Camel Cigarettes, Ford Motors and the inevitable McDonald’s to mention only a few.

The only time anything approaching free trade can occur is when one world power has acquired a dominant position in the world. This was the case in the middle half of the 19th century, when the British Empire was the dominant world power with unlimited access to a large Empire from which it could obtain raw materials at minimal cost. A similar situation existed after the Second World War when America was the predominant world economic power for about two decades. In this sense protectionism has dominated, apart from these two periods in the history of capitalism.

Whilst NAFTA was launched under the auspices of free trade it is in reality protectionist as is the EEC ("Fortress Europe”). The three trade blocs that have emerged have access to cheap labour and raw materials. In the case of NAFTA, America and Canada can increasingly use Mexico for production of labour-intensive goods. This will reduce their interest in the Newly Industrialized countries such as Singapore, South Korea, Taiwan and Malaysia which are all heavily export-dependent. The percentage of GDP that comprise exports are 30 percent for South Korea, 44 percent for Taiwan and well-over 90 percent in the case of Hong Kong and Singapore. The main markets for their exports are OECD countries such as the industrialized nations of North America, western Europe, Australasia and Japan. The OECD accounted for an average of 44 percent of the export of South Korea, Taiwan, Singapore and Hong Kong in 1992. Any failure of GATT will cause serious economic problems in these export-dependent economics.

China has officially admitted that it has over 130 million agricultural workers surplus to the requirements of its industry. Many of them have defied regulations and flocked to the cities in search of work. With surplus labour-power of this size, where wages can amount to less than a dollar an hour, it is not difficult to see what impact this will have on the world market if utilized.

Hardly had the ink dried on the new GATT agreements before the United States and Japan were involved in a dispute over computer copyrights and access for computer hardware, with America alleging that Japan was violating the agreement. On a recent visit to Japan, Jean Spero, US Under-secretary of State for Agricultural and Economic Affairs, accused Japan of foot-dragging. Speaking in Tokyo she said: "Quite frankly progress has been disappointing and when the leaders meet it will be against a backdrop of the largest trade deficit in the history of United States-Japanese relations” (Daily Telegraph, 13 January). Subsequently Lloyd Bentsen, US Treasury Secretary, warned that "his country would have to re-examine the basis of its bilateral trade agreement with Japan if negotiations fail to make sufficient progress by next month" (Daily Telegraph, 24 January). Lloyd Bentsen said "Japan is out of step. It has the lowest penetration of manufactured imports and it has the lowest foreign investment levels among major nations." At the same time the European Community is in trouble with GATT for operating a restrictive quota of bananas while Latin American countries claim discrimination against them" (Daily Telegraph, 24 January).

Last year it was discovered that Germany had signed a secret trading agreement with the United States unbeknown to its European partners leaving them out in the cold (Daily Telegraph, 21 June). With the majority of European countries in recession the likelihood of trade barriers and protectionism increases, particularly as the recession deepens.

There is absolutely no convincing evidence that GATT involving 105 countries can increase free trade when it retains many of the features of protectionism. Its history is one of endless disputes, complaints and alleged violations. Its ultimate effect is the opposite of what its advocates claim. The groupings of NAFTA, the EEC and the Far East are expressions of competing capitalist groupings struggling for access to the world’s markets.

Terry Lawlor

Keynes — in the land of the sinking sun (1992)

From the November 1992 issue of the Socialist Standard

For more than a decade, Japan has been portrayed as a non-stop growing economy based on new concepts of social harmony that somehow made it different from the other major industrial powers which were characterized by strikes and general social unrest as well as by inferior production records. The Japanese workers employed by the big multinationals such as Nissan, Sony and Honda were looked after in terms of regular employment, access to company hospitals and modern housing. Workers and managers wore the same company-style clothes, ate in the same canteens and worked in teams on the production line where the responsibility was shared by the team, with a resultant increase in production.

The Japanese economy has tripled in size since 1967. To many observers Japan has been, in economic terms, “the Land of the Rising Sun”. The Labour Party have been impressed to the extent that they suggested in their 1991 Policy Review document that the management of the Japanese economy indicated how a country can work its way out of recession:

  In Japan they train their way out of recession . . . Wc want to create a new training culture across British industry, one which recognises the relationship between training, innovation and profit.

With this rapid growth in the Japanese economy and the resulting surplus of funds available to Japanese banks huge loans were made abroad for the purchase of assets which were perceived to be cheap. By June 1990 Japanese banks had 12.4 percent of American assets or $408 billion-worth (Economist, 18 January 1992). The scale of this lending abroad is exemplified by the State of California. In the inflationary 1980s nearly every new office block in downtown Los Angeles was financed by the Japanese. The Japanese banks own the fifth, sixth and seventh largest banks in California.

Today, however, Japan faces an accelerating banking crisis as asset values inevitably decline as the world economy, including Japan, enters the deflationary phase of a world depression.This has resulted in a credit crunch and the consequent downgrading of the credit rating of Japanese banks and institutions. Because the accounting methods of Japanese banks fail to report loan defaults for periods as long as a year after the borrower has stopped paying, and because the Finance Ministry in Tokyo will not compel the banks to report them, the American regulatory authorities are rigorously examining the accounts with the result that the banks have to make higher loss provisions. These problems can be duplicated in Europe, Australia and throughout the industrial world.

The property boom in Japan involved levels of borrowing exceeding that of the UK and the USA. Mortgages of 99 years are not uncommon and housing is bought as an investment as well as a place to live with a view to passing it on to future generations. Availability of land is an important factor since Japan is a mountainous country, 68 percent of which is uninhabitable. Although in land area it is roughly the size of Italy the population—twice that of Italy— is confined to an area about the size of Austria.

This inevitably affects land prices and the banks have accumulated property loans on both domestic and commercial property. A one-bedroom flat in Tokyo could cost $500,000 before the market began to fall. Furthermore, large sections of the Japanese population have used the property they were buying as collateral for further bank loans to invest in the Japanese stock market. Along with the banks and institutions buying shares, this pushed the Nikkei Dow index to astronomic levels.

The Japanese economy is now moving into recession following on the banking crisis and credit crunch. Property prices are on the slide, business bankruptcies are increasing. The major Japanese banks have been put on credit watch by the major debt rating agencies. The worsening economic conditions are reflected as elsewhere in social disorder, as instanced by riots in Osaka:

  Trouble flared on Thursday after labourers tried to storm a municipal centre in protest against a decision to cut benefits to many of the local jobless, who do not qualify for full unemployment pay . . . About 2500 riot police dispersed hundreds of protesters early yesterday after cars and bicycles were set ablaze . . . Japan's unemployment rate is only 2.2 percent but that disguises the fact that many companies arc saddled with surplus staff, whose jobs may be in danger.

(Daily Telegraph, 3 October).

In a recent quarterly report the Bank of Japan acknowledged the worsening state of the economy:

  The outlook for profits, sales and investment were all down . . . The survey was reinforced by Nippon Steels forecast of a 74.6 percent drop in pre-tax profits for the half year ending this month . . . Job losses have so far been relatively few but with consumer demand waning, output falling, inventories growing and profits plunging many economists say it is only a matter of time before the manufacturing sector contracts with big job losses. (Financial Times, 13 September).

Some workers deemed to be no longer useful to their companies are being paid to stay at home but this is unlikely to continue indefinitely.

As in other countries the ruling politicians have been making proposals in order to convince the public “that something is being done to put things right”. And it is Keynesian methods that have been proposed as the solution: injecting large sums of money into the economy in order to upgrade the infrastructure. Undoubtedly the infrastructure badly needs improving. The bulk of the Japanese population do not enjoy the facilities of those who work for the big corporations. Sixty percent still live in backward agrarian conditions in dwellings whose toilets are not connected to outside main sewers. Japans roads are not adequate for the traffic which has increased five times in the last 25 years (Wall Street Journal, 28 September). Traffic holdups 50 miles long are not infrequent. But this is not the reason for the proposed Keynesian spending spree on which the government has embarked.

These plans have already run into difficulties about how the government should finance them:

  Mr Hat, Japanese Finance Minister, giving a lecture in Tokyo ruled out a return to special borrowing to finance the emergency spending package announced in August. He also rejected demands from retailers and industrial leaders for an income tax cut in 1993 to boost flagging consumption . . . His comments signal an intensification of the political struggle over how the government should finance higher public spending, which is virtually the only domestic source of economic growth at the moment. (Financial Times. 30 September, our emphasis).

In other words, the economy is moving into deep depression with zero growth in the private sector. So how can the Keynesian-inspired government bail-out plan revive the Japanese economy? Attempts to avert slumps by increased public spending have never yet been effective in a contracting economy. It failed to revive the American economy in the depression of the 1930s in spite of schemes such as the Boulder Dam under the New Deal. There are many similarities between the 1929 crash in the USA and the crash that is beginning now in Japan where the Nikkei Dow has lost over 60 percent of its value. The instability of the Japanese banking sector bears some comparison with the state of the American prior to Roosevelt closing them.

The socialist analysis, using the scientific Marxist economic approach, shows that this proposed solution (or any like it that are propounded by the Labour Party) is doomed to failure. The world depression that today engulfs all countries in varying stages, and the human tragedies that go with it of which the Osaka incident is but one example, are inherent contradictions of the capitalist system whether market-orientated or state “controlled” and cannot be solved by tinkering about with government finances.

But Japan may prove to be different in one sense, namely that the depression may reach depths not seen in previous ones as the huge mountain of debt is liquidated. The world depression is causing contraction in the Japanese economy and is exposing the phoney myth of permanent Japanese social tranquillity between workers and employers. The economic sun is no longer rising in the East. It is sinking and taking Keynesian theory with it.

Terry Lawlor