The theory of capitalist crises (1979)

From the October 1979 issue of the Socialist Standard

In the long run, production under capitalism expands. The accumulation of capital, the self-expansion of value, is, after all, the economic logic of capitalism. The expansion of production, however, does not proceed smoothly at a steady rate but is interrupted from time to time, so that the graph of production under capitalism has the appearance of a series of peaks, each generally higher than the previous one (see graph). The troughs in between represent periods variously described as crises, depressions, recessions.

World capitalism is now in one of these troughs, and has been since 1974. But sooner or later it will recover from this depression, just as it has from all previous ones. This is because a depression itself creates the conditions for a re-expansion of production.

In a depression, three things occur which tend to raise the rate of industrial profit. First, a number of capitalist enterprises go bankrupt and their assets are sold off cheaply to their rivals. The result is a fall in their capital value, or a depreciation of the capital invested in them, so that less profits are needed to maintain the same rate of profit. Secondly, the increased unemployment tends to depress wages, and this once again tends to raise profits. Thirdly, the cutback in productive investment means that the demand for money-capital is reduced while at the same time the supply (from capitalist enterprises who are not re-investing) is increased, resulting in a fall in the rate of interest and so to a rise in the proportion of surplus value going to industrial profits.

These — depreciation of capital, lower wages, lower interest rates — eventually raise the prospects of making profits high enough to encourage those capitalists who have not been re-investing to begin investing again. Business confidence returns. Production begins to pick up and, through the chain reaction effect of more money being spent both by capitalists investing in new means of production and by workers now earning wages again, at an increasing rate.

So begins the process of economic recovery which develops into a boom . . . and eventually ends in a crisis and another depression. This is because boom conditions lead to ‘over-investment’, to too much wealth being devoted to expanding the means of production. This is inevitable due to the anarchy of production under capitalism, to the fact that production is not socially controlled and planned but is decided by hundreds of competing enterprises — and, on the world scale, states also — acting independently and in isolation.

When business is booming, capitalist enterprises assume that this will continue and so plan to expand their productive capacity. The demand for labour power increases, unemployment falls as the ‘reserve army of labour’ is drawn into production; wages, under the pull of enterprises competing among themselves for scarce labour power and the push of trade union action from the workers, rise. This in itself tends to reduce the rate of profit.

But what generally sparks off a crisis is one key industry over-expanding in relation to its particular market. The competing enterprises in that industry will all have assumed that they would be the beneficiaries of the expanding market and all of them will have expanded their productive capacity. The result is that the market for their particular product becomes saturated; they have over-expanded their productive capacity in relation to their industry’s market. Unsold goods pile up, the expected profits are not realised, the industry in question is forced to cut back its production. Now the chain reaction which encourages the recovery of production after a depression works in the opposite direction. Other industries are affected by the cut-back in the industry, which has over-expanded and, if this is a key industry, the end result is a generalised depression.

So the cycle — depression, recovery, boom, crisis, depression — has been completed and is ready to begin again. Governments try to intervene to stop this cycle, and occasionally make matters worse by their mistaken monetary policies, but there is essentially nothing they can do about it. This — boom, slump, boom, slump, boom, slump — is the way capitalism works.

It is important to realise that crises are not caused by overall production having expanded beyond overall market demand, as is suggested by one theory which was once popular in social democratic circles, and echoes of which are still to be found in the writings of some calling themselves Marxists. Such ‘under-consumptionist’ theories argue that crises are caused — and, in an extreme form, that capitalism will eventually collapse — through total social production coming to exceed total social purchasing power, or what amounts to the same thing, through total purchasing power coming to be insufficient to buy the total social product.

Crises under capitalism are not caused by a lack of purchasing power. They are caused by the anarchy of production under capitalism leading to an overexpansion in relation to a particular market, or, from the point of view of production, over-expanding disproportionately in relation to other industries. When this happens, the purchasing power to buy the over-produced commodities is there but it is not used because the commodities in question are not what those who have the money want to spend it on.

To be more specific, what happens in a depression, as far as overall market demand is concerned, is that some capitalists choose (because of low or nil profit prospects) not to spend their money on buying machinery, raw materials and labour power. This non-spending, or hoarding of money, interrupts the circulation of capital. Which is precisely what a depression is: an interruption in the circulation of capital. It is also why depressions are never permanent. Sooner or later, in one way or another, the conditions will arise which will encourage those capitalists who have been hoarding their money-capital to re-invest, so restoring the circuit.

Those who hold the under-consumptionist view that crises are caused by capitalism’s tendency to produce more than it can sell have got it wrong. If it were indeed the case that built in to capitalism was a chronic tendency for market demand to fall short of production, then how could capitalism have continued for so long? It should have long ago foundered in a glut of unsaleable goods. The fact that capitalism still exists, and still manages to expand production in the long run, is a living, if unpleasant, proof of the falsity of all under-consumptionist theories.

The fact is that there is no flaw in the economic mechanism of capitalism that is going to cause it permanently to break down or clog up. Capitalism will continue going through its cycle of depression, recovery, boom, crisis, depression until the working class consciously decide and act to end it by bringing production under the conscious democratic control of society on the basis of the common ownership of the means of production.

Adam Buick

All academic (1998)

Book Review from the October 1998 issue of the Socialist Standard

Economic Cycles by Solomos Solomou, Manchester University Press, 1998. £10.99

What should be a fascinating book about capitalism’s enigmatic trade cycle is marred by the academic pretentiousness of the author. How could it be otherwise with a writer whose egocentricity extends to the point whereby the citations for his own works on economic cycles are greater in number than those for Marx, Keynes, Schumpeter, Kondratieff and Kuznets added together? That this book is part of Manchester University Press’s Insights From Economic History series makes this all the more remarkable and fantastic.

Solomou’s own particular insight into the boom-slump economy is that “the idea that business cycles can come to an end seems naive. Today we realise that economic fluctuations are part of economic life. Moreover, as we have a better understanding of concepts of equilibrium in economics, it is clear that the path of business cycles is not predictable”. Quite an “insight” indeed, only 150 years or so after Marx first said just about the same thing!

Students of the business cycle and of economic history would, frankly, be far better off reading some of the original texts of the various business cycle theorists, or, at the very least, some of the serious works written about them and their analyses. They would be better off too with a spread of the more intelligible contemporary accounts rendered by authors like Galbraith, Kindleberger and Beckman than with this scramble of convoluted academic-ese. They should also remember that while the precise course of the boom-slump cycle of capitalism is notoriously unpredictable, this does not mean that there are no observable tendencies about the development of capitalism at all, or for that matter, that the trade cycle and its devastating impact on human lives will be with us for evermore. The trade cycle can be abolished once and for all when the working class consciously organises to abolish trade, money, prices and profits altogether.

Dave Perrin

Crises, booms and slumps (1991)

From the March 1991 issue of the Socialist Standard

  Since its evolution out of feudalism, the capitalist system of society has ensured that there has been a long-term expansion in the productive capacity of the world. TVs, computers, weapons capable of mass wreckage at one stroke—all these things that were once unthinkable have become basic features of life, at least in the more developed areas of the planet where capitalism has been dominant for many decades, and in some instances, hundreds of years.  

  Although capitalism broke through the fetters placed upon production by the feudal system and has expanded the forces of production to an unprecedented degree in the years since, the expansion of productive capacity and output under capitalism has never proceeded in a straight line. Notions of steady growth and constantly increasing well-being owe more to the rhetoric of politicians than the actual reality of capitalist development.

As a system, capitalism grossly underuses the technology and potential for production that it has helped develop. On one level, this can be seen by the growth in employment of people who are not engaged in intrinsically useful activity—bankers, accountants, insurance workers, armed forces personnel and so on. But even when capitalism can be said to be working at “full capacity”, with expanding output, growing productivity and booming sales, a period of “under-use” is always around the corner.

Falling output
Capitalism in Britain has reached just such a turning point. The last few years have seen fairly steady growth, with rising productivity and increased investment in those expanding sectors of industry that were making the headlines in Thatcher’s last years in office—particularly microelectronics and information technology. Much of that growth and expansion has now been halted.

This has not, of course, prevented the present government from arguing that the downturn in economic performance is just a "blip”. Only in November 1990 was John Major (when Chancellor) prepared to admit tentatively that Britain is in recession. The government currently defines a recession as being a situation when there is a negative growth rate for two successive quarters, but this “official" definition hardly matters to the thousands being thrown on to the dole queue or the thousands of others forced into bankruptcy.

Britain, in common with a number of other countries, is now in a situation where industrial production is falling and unemployment is rising. Although the official unemployment statistics have been doctored to the extent that they have become virtually meaningless as a measure of the actual level of unemployment in Britain, they do at least indicate trends—and the current trend is up. Manufacturing production has been falling since April last year and in the three months to November fell by 2.7 percent compared with the previous three-month period (Independent on Sunday, 27 January).

So far as governments and politicians are concerned, falling rates of growth and high levels of unemployment are signs that something has “gone wrong". When things start to go wrong for capitalist governments they often look for a scapegoat— like some hapless (ex-)Minister whose irresponsibility and recklessness is blamed for having brought the period of growth to an end. In Britain this role has been allocated to former Chancellor Nigel Lawson, a man previously described as "quite brilliant" by Thatcher and Major. But governments taking the credit when output is expanding and unemployment is low, and finding a scapegoat when things get rough is based on the mistaken assumption that the capitalist business cycle results from the policies they pursue. They may like to think that they are in control of the economy and that when things go wrong they can put them right again with the correct policies, but this is a fantasy.

George Meddemmen

Over—expansion
What governments fail to realise is that an economic recession is not an example of capitalism “going wrong" because of some dreadful ministerial error. Economic recessions with stagnating production, growing unemployment and a further slide into poverty are entirely normal—and necessary—features of capitalist development. This is because of the inner logic of the capitalist system's drive towards expansion.

The conditions for the development of an economic recession are present even when the capitalist system is in a period of boom, or relative prosperity. One thing that is immediately noticeable is that the operations of capitalism are not planned at the level of the whole economy. Decisions about investment are made by thousands of competing enterprises operating independently without social control or regulation. This means that when business is booming and when profits and growth rates are high "over-investment" by some enterprises will inevitably occur. In pursuit of future profits they expand their productive capacity beyond what the market which they are producing for can absorb.

A particular industry over-investing and expanding its productive capacity beyond the limits of market demand in this way is the usual cause of an economic crisis and subsequent depression. If capitalist growth was to be achieved in a controlled manner, eliminating booms and slumps, then growth would have to be balanced in each sector of industry. But the growth of an industry is not linked to the demands of other industries—its growth is determined by the expectation of profit, and this inevitably leads to a disproportion in investment and a disproportionate expansion between the various branches of production.

When an industry has over-produced for its particular market, this will have a knock-on effect for firms operating in other sectors of the economy. For instance, if an enterprise is no longer able to sell the commodities it has produced on the market at a profit, production will be cut back thereby slowing output. This will provoke a chain reaction as the enterprises' suppliers will no longer be able to sell all their products either, which will in turn affect their suppliers and then their suppliers' suppliers, and so on. Such an overproduction for selective markets therefore only has to appear in a few key industries for a crisis to break out and spread—reducing overall growth rates and increasing unemployment. And it all arises out of the general anarchy of production inherent in the capitalist system.

Boom—slump cycle
After a period of generalised stagnation and high unemployment, capitalism will be able to move out of the slump phase of its trade cycle. Although a recession has devastating consequences for the working class, no slump is permanent and once many of the weaker capitals have gone to the wall—with their assets being sold off cheaply to their competitors—the prospects for investment and expansion improve again. Capital depreciation, coupled with reduced interest rates caused by reduced demand for money capital, and lower real wage rates in a recession, mean that the prospect for making profits improves and industries begin to expand once more, taking on more workers. The cycle then begins all over again. As Marx pointed out in the last century:

The factory system's tremendous capacity for expanding with sudden immense leaps, and its dependence on the world market, necessarily gives rise to the following cycle: feverish production, a consequent glut on the market, then a contraction of the market, which causes production to be crippled. The life of industry becomes a series of periods of moderate activity, prosperity, over-production, crisis and stagnation. (Capital. Volume I. page 580, Penguin edition).

Now that capitalism has become a world system the "sudden leaps" of production referred to by Marx are not nearly as immense as they were in the capitalist system's historical ascent when whole continents of the Earth still had to be brought into the "factory system" with its wage-labour and capital relationship. Indeed capitalism, having raised the forces of production to a level where a society of abundance is feasible, has outlived its usefulness for humankind, and its cycles of boom and slump are a testament to its inherent inability to utilise resources efficiently. Capitalism can only advance so long as there are periods of regression when workers are made redundant in increasing numbers. when growth stagnates and when poverty spreads—not merely in the "developed" areas of the world but in the weaker capitalist states also, where the effects of the capitalist trade cycle are often felt hardest.

Most importantly of all, there is nothing that politicians can do to eliminate the boom-slump cycle—it will be around as long as capitalism itself. Capitalism cannot be efficiently planned as anarchy of production and uneven development are at the very heart of the system. All attempts at planning capitalism have ended in disaster—most notably in state capitalist countries like Russia and China where production seems to be in an almost chronic state of stagnation and where unemployment has. at least until recently, been masked by overstaffing.

The only way to take the abundant resources of the Earth and use them in an efficient manner is to establish a system of society based on common ownership and democratic control, where articles of wealth will be produced solely for use and not for exchange on a market with a view to the profit of a minority. Only then will crises, booms and slumps be a thing of the past and only then can production be geared to satisfying the needs of the inhabitants of the Earth.

Dave Perrin

A quote from Gavyn Davies which accompanied the article:

  “Around July, companies began to complain in private that demand had suddenly fallen away without much warning . . . What we are now observing is the flip side of the boom in confidence which led to so much borrowing and investment from 1985 to 1989. In those years, output growth was persistently stronger than anyone expected, initially because consumers were so willing to dip into their savings . . . As consumers threw caution to the winds companies decided it was time to invest, and the level of capital formation rose to heights which had never been seen before, relative to GDP. Companies continued to press ahead with expansion long after consumers had started to rebuild their savings and for quite a while that kept employment rising, and the economy afloat.
  It was not until the middle of 1990 that companies suddenly realised their expansion plans were not supported by the prospects for demand . . . Companies are now in the full throes of a major adjustment which is designed to correct their over-borrowed condition. And the main casualty over several years is likely to be capital spending, since productive capacity has run ahead of demand."
—Gavyn Davies, currently chief UK economist at Goldman Sachs International, writing in the Sunday Telegraph, 27 January 1991.

Capitalism's crisis cycle (1982)

Cartoon by George Meddemmen.

From the October 1982 issue of the Socialist Standard

Capitalism is a system of society in which the means of production take the form of “capital” or wealth used to produce other wealth with a view to profit. It is a system where wealth is produced to be sold profitably on a market. For capitalism to have come into existence (and to continue to exist) certain conditions have to be met, in particular the separation of the producers from the means of production. The producers must have been reduced to the status of a propertyless proletariat compelled to sell their mental and physical energies for a wage or salary to the minority who monopolise (own and control) the means of production. The essential features of capitalism are then: production for profit, buying and selling, wage labour, class monopoly of the means of production and distribution.

Capitalism differs from other systems of society by the fact that under it production is not carried on for use. Even under another class system like feudalism most production was for use; the peasants produced their own subsistence needs, the rest going in kind to maintain the barons, the church and other exploiters. It was the same in ancient slave society. Capitalism is different in that goods are no longer produced to be directly used but to be sold on a market with a view to profit.

Decisions about production — what to produce, how it is produced, where it is produced, and soon — are no longer simple decisions to produce what is needed, either by the producers or by their exploiters. Decisions about production become decisions to produce those goods which, at any moment, appear most likely to procure a profit when they are sold. In other words, production is governed by the search for profits, by the impersonal forces of the market which express themselves in the minds of the individual capitalists (or of their hired managers) as the "profit motive”.

As a matter of fact the situation is even more impersonal than this simplified description might suggest. For the individual capitalist does not seek profits just to satisfy their own personal needs. To stay a capitalist they are obliged to reinvest. rather than consume in riotous living, the greater part of the profits they make — in other words, to accumulate capital. It is this in fact — the accumulation of capital — rather than simply making profits that is the object of production under capitalism. The individual capitalist, just as much as the wage and salary earner, is a mere cog in this economic mechanism which is beyond human control and which operates independently of human will.

The accumulation of capital is not the mere amassing of greater and greater sums of money; it reflects itself as the expansion of the means of production, the growth of the stock of machines, factories, means of transport and communication and other means for producing wealth.

This growth, however, does not proceed smoothly and in a straight upward line. The general trend is upward — capitalism has immensely increased the stock of means of production since it made its historical debut in the 16th century and particularly since it entered its industrial phase in the 18th century — but this growth is in fits and starts. Illustrated graphically capitalism’s growth pattern would be an alternating series of peaks and troughs, with each peak normally being higher than the previous one. Or, more accurately, as a series of upward moving waves. Traditionally of course the metaphor that has been used is of a cyclical movement, the ups and downs of growth under capitalism being described as "the business cycle”, the "trade cycle” or the “economic cycle”.

Marx’s explanation, in a nutshell, is that growth under capitalism is cyclical due to the unplanned nature of production — what he calls the “anarchy of production” or the fact that production decisions are taken by a host of independent, profit-seeking, competing firms. This anarchy of production coupled to the search for profits, said Marx, leads to one sector of the economy over-expanding in relation to the others, so provoking by a chain reaction a more general slow-down or halt to growth.

Marx, towards the end of Volume II of Capital (published after his death by Engels from his notes and thus not a form Marx would necessarily have regarded as ready for publication) divides production into two main sectors, or departments:

Dept I: producing means of production or what academic economists today would call "producer goods" or "capital goods”.
Dept II: producing means of consumption or "consumer goods”.

If there is to be steady growth then these two sectors must grow in proportion. The necessary proportion is quite easy to work out. Thus Ernest Mandel in his Introduction (not at all bad apart from the occasional nonsense about Russia being "non-capitalist" or "post-capitalist") to the new Penguin translation of Volume II:

. . . the equilibrium formula of expanded reproduction . . . implies an identity of the rate of growth of demand for consumer goods generated by department I. and a rate of growth of constant capital in department II (p.67).

In a sense this division of production into only two sectors is a gross simplification but its logic lies in the fact that it brings out that capitalism is not a system of production for use and that the output of Department II is restricted in the end by the need to limit the consumption of the producers at the expense of profits and capital accumulation. All the same, there are in fact as many sectors as there are industries and, if growth is to be smooth, all these sectors, or sub-sectors, must expand proportionately. It is thus easy to see how, given the anarchy of production, crises are possible, in fact inevitable, under capitalism. As Mandel puts it:

the very structure of the capitalist mode of production, as well as its laws of motion, imply that the "conditions of equilibrium" are inevitably destroyed; that “equilibrium" and "harmonious growth" are marginal exceptions to (or long-term averages of) normal conditions of disequilibrium (“overshooting” between the two departments) and uneven growth, (p.31)

Crises are due not to simple disproportionality but come about because this happens in the context of a society where production is for profit and where consumption is restricted by the majority being exploited by a minority class. A crisis, as a more or less sudden stop to growth, is in fact only one phase of the capitalist economic cycle. In Volume I of Capital (which he did himself see to the press) Marx speaks of the “life of industry" being a "series of periods of moderate activity, prosperity, overproduction, crisis and stagnation" which are “recurring cycles whose successive phases cover a number of years and which always end in a general crisis, which is the end of one cycle and starting point of another".

The key factor governing the move from one of these phases to the next — from moderate activity to prosperity to overproduction and crisis to stagnation — is profits, short and medium term variations in the rate of profit.

In the period of moderate activity, which is the period of recovery just after the stagnation (the period Tory ministers have been saying for the past year or so is just round the corner!), industrial activity is beginning to pick up. This means that more workers are in employment and have more money to spend. More money to spend means a larger market for consumer goods, which means that capitalist firms in this sector will expand production ordering new factories, machines and raw materials from the producer goods sector. This interaction between the two sectors eventually leads to the period of prosperity and boom, with relatively full employment, rising wages, full order books. So it is the confirmation of the confidence that capitalist firms had in being able to sell profitably what they produced that leads from the period of "moderate activity" to that of "prosperity”.

But this period of prosperity does not last for ever. It inevitably ends in "overproduction", as capitalist firms become over-confident. This is because the competing firms in an industry all assume that they will sell their goods profitably on the expanding market. As a result the total amount produced comes to be more than enough to satisfy the market. In this sense, there is “overproduction” in one industry. This leads to lay-offs and cutbacks of production which affect other industries, and so to a generalised "overproduction” and an end to the boom.

In Marx's day, when most industry and trade was financed by trade bills, this led to a loss of confidence in credit and to a financial crash — or crisis in the sense Marx used it in this context. Then followed the period of stagnation: a fall in industrial output, mass unemployment — which is what we today more usually mean by crisis.

The evolution from "stagnation” to "moderate activity" is once again governed by a change in the rate of profit. As a slump continues the conditions are eventually created for a restoration of profit levels and a gradual recovery of economic activity. Profit levels are restored by a number of factors: (1) depreciation of capital, through bankruptcies, write-offs, takeovers, fall in the value of stocks and so on: (2) a fall in real wages; (3) a fall in real interest rates as the supply of capital for lending comes to exceed the demand. These three factors all work to increase the rate of industrial profit and eventually bring about a recovery, and so the cycle recommences.

This is our analysis of the current slump. It is one phase of the economic cycle which is repeated under capitalism and will in time give way to the next phases: moderate activity, prosperity and then another crisis and stagnation. In other words, capitalism will eventually recover from the present crisis.

So, to sum up, growth under capitalism is not smooth and steady but cyclical. Crises occur because of the uneven development of the various sectors of the economy which is inevitable given the anarchy of production which reigns under capitalism. The present slump is not the final crisis of capitalism, nor the beginning of a permanent depression, but simply one phase of the economic cycle which will sooner or later come to an end — even if this turns out to be later (say, the 1990s) rather than sooner.

Adam Buick

Economic Crisis in Russia (1991)

From the October 1991 issue of the Socialist Standard

The current economic crisis in the Soviet Union well illustrates the effect of years of totalitarian state control on a capitalist economy. Having attempted to bring a semblance of order to the anarchic capitalist system, the Soviet Union is now experiencing a devastating period of industrial stagnation and growing unemployment, previously considered unthinkable by its admirers. Gross National Product fell by 4 percent in 1990 and is widely forecast to fall by 10-20 percent this year (Financial Times, 20 August).

The Soviet Union, it was said, could plan away the capitalist trade cycle on the basis of the nationalisation of the economy and the “collectivisation” of agriculture, and ensure steady growth and economic prosperity. But the actual course of events has not proceeded in the way the supporters of the Soviet regime had hoped. There are two basic reasons why this should have been the case.

Firstly—and as the proponents of Western-style private enterprise have always been quick to point out—planning the intricate operations of capitalism down to every investment decision, every price, every wage and so on is impossible. Planning virtually every aspect of economic activity to avoid a disproportionate, unbalanced growth simply cannot be done, and this has been shown through practical experience in the Soviet Union, China and elsewhere. Indeed, it must now be obvious to almost anyone, except, that is, to the small band of faithful defenders of centralised state planning, to be found now mostly in the Trotskyist movement, who still insist that planning the profit system through state control is a worthwhile aim. Belgian Trotskyist Ernest Mandel, for one, has recently praised Soviet achievements on planning and balanced growth as the success of a “post-capitalist” society:

From 1928 onwards . . . growth really was regular and uninterrupted (and) that unlike the capitalist economy the USSR has experienced no recession, no crisis of overproduction leading to an absolute fall in production, for more than 60 years.

(International Socialism 49)

Trotskyists like Mandel are looking at the Soviet Union through rose-tinted spectacles, ignoring, for instance, that the difference between growth rates in maximum growth years and minimum growth years in Russia and other state-capitalist countries has been quite pronounced. When the Western capitalist world was experiencing an economic downturn in the period 1966- 74, the difference was 130 percent in the USSR and as much as 228 percent in Poland. Even though offical statistics are not as reliable as they perhaps might be in many instances, it should also be noted that "absolute falls in production” were not a phenomenon restricted to the Western capitalist world.

Law of value

It is undoubtedly the case that state-capitalist economics are unable to escape the capitalist trade cycle, though this is not to suggest that the operation of these economics is identical in all respects to private-enterprise-based capitalism. The primary difference is that state-capitalist economies are not subject to the direct operation of Marx’s law of value, and herein lies the second reason for the current Russian economic crisis.

Very often, prices have not been related to the labour value of commodities and inefficient enterprises have not been purged from the system as they have in the West. The process by which a slump serves as a means to future development for the capitalist economy has not readily applied, at least until now. What has tended to happen in state-capitalist countries is that inefficient enterprises and productive methods have been supported, and wastage often tolerated, with new technology only being introduced at a generally more pedestrian pace than in the West.

In such a situation, the purging benefits of a fully-blown capitalist slump are lost. The state intervenes to offset the development of mass unemployment by methods such as planned overstaffing, largely at the expense of the more efficient sectors. Instead of capital flowing to the most profitable areas of investment, it is redirected on a mass scale towards units of production that would otherwise be purged from the system. Thus there is an attempt to “cheat” the operation of the law of value.

Though some of the worst effects of the capitalist trade cycle can be avoided in this way, this is only achieved at the expense of the long-term health of the economy. Slumps are not aberrations for capitalism, but are entirely necessary for the overall development of the system, helping to offset the long- term tendency for the average rate of profit to fall caused by the displacement of the sole source of surplus value, variable capital (investment in human labour power), by constant capital (investment in machinery, raw materials etc). Slumps offset this tendency by devaluing the elements of constant capital, through, for instance, the destruction of stocks and even machinery.

Because of the attempts in state-capitalist countries to cheat this process of normal capitalist development, stagnation set in. which eventually undermined the stability of the one-party political structure and the position of the privileged ruling class. A more unrestricted capitalism than has hitherto been allowed to operate in the Soviet Union will provide its own solution to the problem of industrial stagnation— mass unemployment as inefficient productive units are allowed to go to the wall, and attacks on working-class living standards to restore profitability for investors. It will come as no surprise that the only “solution” capitalism knows will be of detriment to the interest of the working class.

Dave Perrin

All at sea (2008)

From the September 2008 issue of the Socialist Standard

The indications are that the economy is heading for a recession, which no government can prevent.

The idea that the market economy can progress steadily, providing for ever-rising levels of growth, trade and employment, is a fantasy dreamt about by every Chancellor of the Exchequer and most politicians generally. This was never more the case than with the former Chancellor Gordon Brown who claimed repeatedly that year-on-year economic growth was the unique product of his prudent and circumspect economic management of British capitalism.


The prudence of the erstwhile Chancellor – and now Prime Minister – is suddenly in doubt as the economy, according to most commentators and analysts, heads towards a recession his government seems powerless to prevent. No longer in command of everything he surveys, Brown’s frailties are suddenly all too apparent, even to many of his former supporters. Indeed, it is interesting that many of the commentators who saw little to question in Brown’s outlandish claims over the last ten years were also most often the cheerleaders for a housing market bubble they said would never burst, and which now provides them with endless column inches of hard-hitting prose now that it finally has.

Before the housing market crash began and when the politicians and mainstream press were still in denial, we had, in the May 2007 Socialist Standard, a different perspective: ‘past history demonstrates that sooner or later, the current housing bubble will end in tears. When asset prices become completely disengaged from what is happening in the real economy where wealth is produced and value created, and are only sustained by ever increasing amounts of indebtedness, it cannot last – capitalism just does not work that way’. According to the Financial Times (9th August) this debt has now risen from 100 per cent to 170 per cent of household income under New Labour (the highest in the G7 countries) and 80 per cent of this has been secured on property, a perilous situation for the housing market in particular but also for the economy as a whole.

Business cycle
Growth in the market economy (in the housing sector and more generally) does not proceed in the manner of a straight upward line as imagined on a Treasury graph. Its general direction is upwards over the long-term, but growth tends to be uneven, unpredictable, and prone to periodic wild gyrations. For very good reasons this is the way it has always occurred in capitalism and there is nothing about the system, or the politicians who oversee it, to suggest it will happen any differently in future.

In the nineteenth century the concept of capitalism’s ever-recurring trade cycle was well-known, the most coherent and in-depth analysis of it being developed by Karl Marx. As prescient now as it was then, Marx summarized his view in the following terms:

‘The factory system’s tremendous capacity for expanding with sudden immense leaps, and its dependence on the world market, necessarily give rise to the following cycle: feverish production, a consequent glut on the market, then a contraction of the market, which causes production to be crippled. The life of industry becomes a series of periods of moderate activity, prosperity, over-production, crisis and stagnation’ (Capital, Volume 1, p.580. Penguin Edition).

There are two related factors which drive this boom/slump cycle. Firstly, the fact that production takes place with a view to realising a monetary profit. Without this prospect of profit, production will not take place. Needs without the ability to pay are left unrecognised, whether that be housing for those unable to get a mortgage or food for those unable to pay for it. Secondly, this profit-seeking is conducted by hundreds of thousands of competing enterprises whose ultimate aim is to increase market share, increase production, and through doing so increase profits. The problem is that the drive to compete for these enterprises is their only tangible reference point to one another. What they do is not co-ordinated and planned, and not linked to the demands of other companies and industries. Instead, there is an anarchy of production which periodically leads to key sectors of a booming economy over-expanding in relation to existing market demand.

That this situation occurred in the US housing market from 2006 onwards, and has since been transmitted to many other property markets including that of the UK, is now obvious even to most of those who vehemently denied it would happen.

Defining a recession
The Treasury and Bank of England (along with their counter-parts in the United States) officially define a recession as ‘two consecutive negative quarters of economic growth’. By this they mean half a year of economic contraction. The way that statistics are necessarily compiled (especially considering the time-lag factor) it is not always evident that a recession has been happening until after the event. In 2001 it was assumed that the United States was in a recession, but after the event it turned out that this wasn’t (quite) so based on this definition.

Marx claimed that for a recession (depression or slump – depending on your preferred terminology) to occur, overproduction for particular markets had to spread and ‘grip the principal articles of trade’ (Theories of Surplus Value, p.393). In practice, sometimes this generalisation of overproduction will occur through a ‘knock-on’ effect when there is clearly disproportionate growth and overproduction in some industries that spreads more widely, but at other times it doesn’t spread sufficiently to cause a noticeably wider downturn. Furthermore, even when it does spread there are usually industries that do well in an otherwise declining economy, as was the case in the major 1930s slump when motor car manufacturing, for instance, continued to grow while other industries contracted.

There is little doubt that capitalism in most industrialised nations is long overdue a recession of sorts – the last widespread one was in 1990-92 and the boom since then has been far longer than the historic average. In this period capitalism has survived the Asian crisis of 1997, the collapse of the world’s biggest hedge fund a year later (the ironically named Long Term Capital Management), the spectacular bursting of the dot-com bubble with its various corporate scandals, the attacks on the World Trade Centre and other major political crises, and the massive 2000-2003 bear market in equities, all without officially entering recession in either the US or UK.

This time there are two significant forces propelling it in the direction of recession, however: the aforementioned property market crash which has seen the biggest monthly house price falls in both the US and UK in history, and the serious ‘credit crunch’ that has developed from it. The latter has occurred because so many investment products have been based on low-grade (‘sub-prime’) housing debt and as the housing market falls and people cannot pay their mortgages much of this debt has to be written off. It was recently enough to turn what would have been a six monthly profit for the Royal Bank of Scotland of in excess of £5 billion into a loss of £691 million instead, and has led RBS and many other banks to re-capitalise themselves through issuing more shares; in the US it nearly led to the complete collapse of one of the largest investment banks, Bear Stearns.

The main problem is that no-one, sometimes not even the banks themselves, know where all of these problematic sub-prime investments are or how much needs to be written off. It is this that famously led to an almost unprecedented reluctance among the banks to lend to one another last year as they did not trust what was on (or rather not on) each other’s balance sheets. Irrespective of what central banks have done with base interest rates, it has led to inter-bank lending rates being pushed up to comparative historic highs (the spike in LIBOR – the London Inter-bank Offered Rate – is what put paid to Northern Rock’s meteoric rise as it was hugely dependent on borrowing on the money-markets).

The credit system and the money markets associated with it are what oil capitalism’s financial machine. When they become dysfunctional the entire system can suffer; banks are reluctant to lend either to industry or to individuals, lines of credit dry up and companies getting into difficulty find that their one possible lifeline has been cut off. Indeed, it is the credit system that tends to act as a key transmission mechanism spreading problems in some sectors of the economy to others.
Lead indicators
The extent to which the combined effects of the housing market crash and the resultant credit crunch will lead to a recession is currently hotly debated by analysts, though it clearly has the potential to be very serious indeed. Hard data in the coming months should prove conclusive one way or the other as, in truth, there are few genuine ‘lead indicators’ of a slump that can tell us definitively that one is about to happen, or how deep it will be. For example, production tends to fall most noticeably once the slump is already underway and unemployment is another lagging indicator, only rising when companies have started cutting back on staffing levels in response to difficult trading conditions.

Falling stock markets are better lead indicators of a recession; this is because at the level of individual companies it is their interim and preliminary company results along with quarterly trading statements that typically give advance clues as to what is happening on the ground, and stock markets are usually quick to react, as they have been this time. Nearly all major stock markets have at some point fallen 20 per cent or more from their peaks since the credit crunch started, technically entering ‘bear market’ territory. The problem with stock markets, however, is that they can fall in the short-term for all sorts of other reasons too and also have a tendency to over-react to events. When UK shares lost about 50 per cent of their value in the 2000-3 bear market (and US shares almost as much) this reflected little that was happening in the real world of the underlying capitalist economy of production and trade.

Some economists and analysts have argued that the best indicator of an impending recession is what is called an ‘inverted yield curve’ on the money markets. This means a situation whereby short-term interest rates are above long-term rates (the inverse of the usual relationship) and in these circumstances banks have little incentive to lend long-term to industry when selective short-term lending is both safer and more profitable. In practice, an inverted yield curve is indeed almost always a precursor of recessions. Unfortunately, like falling stock markets, inverted yield curves can happen at other times too (the US had a significantly inverted yield curve in 2000 and had a curve that flattened and threatened to invert in 1998, yet there was no recession on either occasion). This time around, the US yield curve inverted in 2006-7 and has since switched to being positive; the UK yield curve inverted in the wake of the credit crunch starting last summer, and has recently started to flatten out again.

Mine’s A Baltic Dry
Arguably the best lead indicator of a recession exists as a measurement of what is happening in the ‘real’ economy of production and trade in capitalism rather than its financial superstructure. This is a curious and little known gauge of economic activity called the Baltic Dry Index. It covers dry bulk shipping rates and is managed by the Baltic Exchange in the City of London.

Each day the Baltic Exchange establishes average prices for shipping various cargoes around the world, whether it be 100,000 tones of iron ore from Brazil to the UK or 100,000 tons of soybeans from the US to India. Essentially, the index is a barometer of activity amongst shipbrokers involved in shipping those raw materials that are typically the precursors to production around the world, and it measures the demand for shipping capacity versus the supply of bulk carriers. It is a useful index because dry bulk mainly consists of commodities that act as raw material inputs into the production of other goods such as electricity, steel and food. Also, demand for these is variable and elastic whereas the supply of dry bulk shipping is inelastic, changing little in the short-term because of the length of time needed to build new tankers. This means changes in the index tend to principally reflect changes in demand. Fluctuations in the index have historically proved to be amongst the best lead indicators of economic activity in the market economy there is.

This has been demonstrated over the last few years, when the Baltic Dry Index surged on the back of the booming global economy and the demand for industrial and agricultural commodities led by China, India, Brazil and other emerging markets. Interestingly, despite a continuation of much of this activity, the index has in more recent times faltered. From the beginning of 2005 until the start of 2008 the index more than doubled, but after some volatile movement has since fallen from a peak of nearly 11,800 reached in May to around 7,000 at the time of writing, a fall of around 40 per cent. If this fall continues into the autumn and beyond, then a widespread, serious recession is more than likely as it will be reflective of a massive decline in the demand for raw materials required for the world economy.

Quite how severe the economic downturn proves to be is no small matter of interest as it will affect the lives of hundreds if millions across the globe, leading to falling production, falling property prices, rising unemployment and acute financial distress for many. And this is far more significant than the distress that is being caused for a Prime Minster in Britain who swore that this would never happen and who thought he could hold back the tide of capitalism’s business cycle through his financial management skills – a man who has been left looking ever more like King Canute instead, staring out to sea with the waves already lapping well above his ankles.

Dave Perrin