Finance and Industry: Devaluation of the Pound? (1960)

The Finance and Industry Column from the October 1960 issue of the Socialist Standard

Devaluation of the Pound?

In the early days of capitalism the business men and economists invented the theory that if each capitalist got on with the business of selling goods and making profits production and distribution would flow smoothly and all would be well for everybody, including the workers. Like all such theories it was no more than their attempt to justify their profit-making activities against the critics and it became increasingly difficult to defend in face of the evidence that the flow was never smooth and at intervals was chaotically otherwise.

Then grew up the idea, from the same quarters, that with more study and the accumulation of facts and figures, capitalists and governments could foresee trends and avert unwanted developments. This, too, has proved to be a myth and a case in point is the frequency with which governments find themselves induced to vary the values of their currencies because of international trade difficulties. The point is that these revaluations are never the result of free choice. The pound has been devalued several times and now another devaluation is being discussed. The pound was once worth 4.86 dollars, then it was reduced to 4 dollars, and then, in 1949, despite the repeated denials of the British government, it was suddenly dropped to 2.8. And in the nineteen thirties Roosevelt cut the dollar to about half its gold content.

Now, Mr. C. L. Day, writing in the London and Cambridge Bulletin (supplement to the Times Review of Industry, September, 1960) gloomily forecasts the possibility that the low level of British exports will have to be met either by policies which will increase unemployment or by devaluing the pound.

The City Editor of the Daily Mail (7/9/60) concedes that Mr. Day may be right in his forecast because he "has an excellent record in this respect." but can derive no happiness from the prospect.

It may well be. But surely we can try a little harder and suffer a little more to preserve the value of our currency before we shrug our shoulders and admit defeat by devaluing the pound again—about the best way of making sure that nobody ever wants to hold pounds any more.

And, of course, the assumption that such a move would solve anything by giving a boost to exports depends on what other countries do; if world trade becomes stagnant they may all be doing the same, including the U.S.A. One forecast we can safely make is about the attitude of the government and employers if a devaluation is decided upon sometime: they will be urging the workers not to press for higher wages. In 1949 when the Labour Government took that step they knew that the effect would be to raise the cost of imports and raise the cost of living and Sir Stafford Cripps, Chancellor of the Exchequer, made his famous or infamous declaration that workers must not ask for more pay to meet higher prices.

Speaking in the House of of Commons on September 27, 1949, he said:—

"Especially and specifically there can, in our view, be no justification for any section of workers trying to recoup themselves for any increase in the cost of living due to the altered exchange rate. That is a general burden spread over all and must be accepted as a very real and essential contribution towards the avoidance of vast unemployment."

Fortunately the workers did not take much notice of his appeal: if it happens again they should in their own interest take no notice at all.

The Oil Industry 

Ever since Malthus there have been “experts” telling us that at some time in the future world resources will not be sufficient for the needs of a bigger world population, but none of them have been able to show that world resources have been insufficient in the past or present, or explain why capitalism has all along failed to meet the reasonable needs of the vast mass of the population. It is not nature, or lack of efficiency in production that is responsible, but the structure of the social system, which in industry after industry periodically produces too much for the market and too little for the needs of those who have not the money to buy. At present world markets are glutted with too much coal and too much oil, millions of tons of unsold coal, oil refineries working below capacity and tonnage of idle tankers running into hundreds of thousands.

The City Editor of the Sunday Times (21/8/60), Mr. William Rees-Mogg, tells how the oil situation came about. It is the old story of capitalists absorbed in their own problem of producing to make profit irrespective of what is happening elsewhere, of governments determined to promote their own oil industries no matter what the effect on markets, and planners making forward plans in the dark. Mr. Rees-Mogg lists four specific reasons:

"The first is that the Suez crisis concealed from the industry the fact that it had reached a stage of over-investment. At what should have been the top of the investment cycle another great wave of investment was added on. The second reason, and a most important one, is that the American oil companies looked abroad for oil to supply their home market: then the cuts on imports forced them to try to sell abroad what they had found abroad. During the 1950s it also happened that local nationalist feeling made each country want its own refinery; as a result there are too many refineries. Finally, nature was generous and oil exploration, particularly in North and West Africa, found enormous new fields.”

About the planners he writes;

The result is that there is more oil, more coal and more electricity at lower cost than anyone foresaw. As recently as 1956 the standard view, taken, for instance, in the Hartley Commission Report, was that there would be a general fuel shortage lasting as far ahead as could be foreseen. That has already been proved false.

Russia too!

In the early days Russian economists used to maintain that in that country self-sufficiency was the aim and production was planned for the needs of Russian industry only. Now Russian trade departments are busy scouring the markets of the world for outlets for surplus commodities, from motor cars to oil. A special correspondent of the Times (8/9/60), who holds the view that the trade drive is only partly political in its aims, quotes from a recent Russian novel what he accepts as a picture of what has happened:

"A Russian novel which has just appeared devotes a chapter to the embarrassment of local officials in the Volga oilfields who are faced with an unexpected abundance of oil for which insufficient outlets exist. This presents a new problem for Soviet planners. By long tradition, they are conditioned to urge the industrial chiefs on the spot to increase output to the maximum extent, rewarding them generously with bonuses for “overfulfilling the plan.”

The planners now appear to suffer from overfilled storage tanks, and measures must be taken to check the flow, which has consistently exceeded expectation. For example, the oil plan for 1960, as laid down in 1956, envisaged an output of 134m. tons, but production in 1960 is, in fact, likely to exceed 144m. tons. If these output figures are indeed unexpectedly high, they must have outrun the growth in refining and storage capacity, and it is reasonable to suppose that the foreign trade agencies of the U.S.S.R are under heavy pressure to dispose of extra quantities of Soviet oil abroad, additional to amounts which were originally earmarked for export. "

A sideline on this is provided by Mr. Stephen Parkinson, who recently led a delegation of British business men to Russia on behalf of the Institute of Directors. Writing in the Director (August, I960) he reports that the Russian officials they met “could not resist talking about greater trade possibilities and making one or two acid comments about their failure to sell Soviet oil to Britain’’—the British government has so far turned a cold eye on Russian offers to sell oil here well below the prices of the British and American companies.

Mr. Parkinson also had something to say about the Russian sense of humour which he finds is rather like the British. He tells of Russian officials he met: “Nor were they backward in pointing to what they considered to be the advantages of Socialism over capitalism, but it was all done with good humour and often to lighten the tedium of a long meeting.”

If Russian officials say, and Mr. Parkinson accepts, that Russian State capitalism is Socialism, it is funnier than any of them think.

Edgar Hardcastle

Voice From The Back: An Investment Opportunity (2008)

The Voice From The Back Column from the July 2008 issue of the Socialist Standard

An Investment Opportunity 

Many people see the recent rise in foodstuff as an unmitigated disaster. Millions of poor people see it as a potential death sentence, but we live in capitalism and many capitalists see it as an investment opportunity to make huge profits. “Huge investment funds have already poured hundreds of billions of dollars into booming financial markets for commodities like wheat, corn and soybeans. But a few big private investors are starting to make bolder and longer-term bets that the world’s need for food will greatly increase — by buying farmland, fertilizer, grain elevators and shipping equipment. One has bought several ethanol plants, Canadian farmland and enough storage space in the Midwest to hold millions of bushels of grain.” (New York Times, 5 June)

Tory Turnaround

The recent increases in oil and food prices combined with the so-called “credit crunch” has led many economists to reconsider their viewpoints, but none more startlingly than that of the Times journalist and arch-conservative William Rees-Mogg. “All serious political analysis has a Marxist element. The core discovery of Karl Marx as a political philosopher was the dominance of economic change in shaping the history of political society.” (Times,12 May)

The Priorities of Capitalism

“A California company will give five dog owners the chance to have a favourite pet genetically copied and brought back to life later this month. BioArts International has arranged an online auction to decide which dog lovers will qualify: at starting bids between $100,000(£51,000) and $180,000.” (New Statesman, 5 June) “Every 17 seconds, a child in the developing world dies from water-related diseases. In around the time it takes you to read this paragraph, someone, somewhere, will die. Everyday, people in the world’s poorest countries face the dilemma of having to trust their health and that of their children to the consequences of drinking water that could kill them. It’s a gamble that often carries a high price – seeing children needlessly dying is simply heartbreaking.” (WaterAid leaflet, June) It says a lot about the priorities of capitalism when WaterAid are asking for £2 a month to help save children and someone can spend £90,000 to clone a pet dog.

This Frightening World

It is always difficult if not impossible to predict where the next international conflict will erupt inside capitalism, but this piece of sabre-rattling by a prominent Israeli politician gives us the heebie-jeebies. “An Israeli attack on Iranian nuclear sites looks ‘unavoidable’ given the apparent failure of sanctions to deny Tehran technology with bomb-making potential, one of Prime Minister Ehud Olmert’s deputies said on Friday. ‘If Iran continues with its program for developing nuclear weapons, we will attack it. The sanctions are ineffective,’ Transport Minister Shaul Mofaz told the mass-circulation Yedioth Ahronoth newspaper. ‘Attacking Iran, in order to stop its nuclear plans, will be unavoidable,’ said the former army chief who has also been defense minister.” (Yahoo News, 6 June)

A Murderous Society

There are many examples of how capitalism turns human beings into monstrous creatures, but we doubt if a more extreme example than this could be found. “A woman beat her grandmother to death with a garden spade because she feared her inheritance would be spent on her residential care. Joanne Hussey, 33, has been jailed for a minimum of 20 years for the brutal attack on 77 year old Annie Garbutt. …The jury was told that Mrs Garbutt had the onset of Alzheimer’s disease and it had been recommended she be placed in a home. Her savings of around £250,000 would have been dipped into in order to pay for the cost of her care.” (Daily Telegraph, 11 June)

Who is in Charge? (1962)

From the June 1962 issue of the Socialist Standard

The government is now well past its halfway mark and soon it must start thinking about the timing of the next general election. Whatever date it decides on, we may be sure that it will be the result of a careful calculation. A time like the present, with bye-elections running against it and with signs of internal strain, is not likely to be chosen. Mr. Macmillan—if he is still Prime Minister—will try to wait until he can feel surer of victory. This does not mean that he will leave it until the last minute, which would give him little room for manoeuvre. It does mean that, as in the past, the next election will almost certainly be held some time before the government’s term expires in October, 1964. This time next year, then, the decision may not be far off.

Whenever they are called upon to vote, the workers in this country will display all the bemused docility which we have grown accustomed to. They will concentrate on the wrong issues, at the wrong time. They will allow themselves to be misled by the government’s claim to have been a sage, responsible administration and by the clamour from the opposition parties that they are the men to put fire into the belly of British capitalism. The workers will not pause to consider the futility of it all and to compare the anomalies of Capitalism with the obvious impotence of the political parties to deal a with them. As a whole, they will not even toy with the idea that it might be a good thing to abolish Capitalism and to have Socialism instead.

We can say all this with some confidence, because experience has taught us that the working class prefer to take Capitalism on trust to what must be the painful business of thinking and remembering and comparing. The election policies of the Tories, the Labour Party and the others always amount to a claim that they are able to control Capitalism. As each of Capitalism’s crises blows up, there is no lack of political leaders to make speeches which state their solution to it. City Editors are prolific with schemes which put the politicians straight. Nobody seems to notice that some of the schemes are not very different from those which are being blamed for producing the crisis in the first place and that some of the bright ideas contradict others which have been offered before as the solution to our problems.

Let us, for example, consider the recent reversal of the government’s policies of last July, when Selwyn Lloyd pushed through his emergency Budget. The main provisions of that Budget were the increase of Bank Rate to seven per cent., the increase of some taxes by ten per cent. of the previous rate and the imposition of the pay pause. These policies were necessary, said the government, because we had all been living too well. The working class forgot to ask themselves when Capitalism had ever allowed them to live anywhere near as well as some of the people who make speeches about the Budget. They grumbled a little about it, but in the main meekly accepted it. The Budget was sold to them as essential to save British Capitalism—and there is no higher task to which a British worker can feel himself called.

Since then, apparently, British Capitalism has been saved, because the emergency Budget has gone. Bank Rate has come down steadily until now it is lower than it was last July. The pay pause, formally at any rate, is finished; workers who ask for higher wages have some other reason given to them for the employers' resistance to their claim. The ten per cent. increase in taxes has been dropped; some taxes, in fact, have been even further reduced. The entire tax structure has been somewhat simplified, which may be a clue to a new theory hatching in the Treasury—that British Capitalism would work better if it imposed a uniform sales tax upon its Capitalist class instead of the various purchase taxes which apply at present. There is, of course, no evidence to support this theory and in any case it has nothing to do with working class interests. But never mind; the experts at the Treasury must cultivate restless minds to keep up with Capitalism and it all makes good copy for the election programmes.

Perhaps the experts would feel more confident about the effectiveness of their remedies if they could all agree on them. But this they cannot do — is it any wonder then that mere inexpert Socialists should have so little confidence in them? Each time a Chancellor slaps restrictions on — or takes them off — the economy, there is a chorus of dissentients who assure us that he is too late or too early, too bold or too timid, or just plain wrong. In July, 1960, for example, the government reverted to the sort of credit restrictions which they have been imposing for years, on and off. This was met with anything but unanimous applause. The Guardian commented on July 5th, 1960:

  The past week has brought fresh support for those who questioned the need for the Chancellor's latest round of credit restrictions. The Board of Trade's admission that hire purchase sales in May dropped below last year's level simply confirms the view, expressed by many manufacturers and traders, that the boom in demand for consumer durable goods had already slackened off . . . the Government ought to have been congratulating itself on achieving a desirable new balance in the economy, rather than imposing new restrictions.

Newspapers, of course, need only comment upon the muddle which political parties get themselves into when they try to run Capitalism. Happily for the press, they do not have to involve themselves in trying to sort out the muddle. Even so, newspapers may sometimes hit upon the basic features of a crisis. There is an obvious question which is provoked by the continual upsets which Capitalism's economy is heir to, and by the contradictory policies which are put forward to settle these upsets. Do the politicians, the economists and the Chancellors control the economy? Or does the economy control them? As we have seen, The Guardian thought that the Chancellor in 1960 was trailing a long way behind events. And this is what Samuel Brittan, the Economic Editor of The Observer — who thought the pay pause was a good idea — wrote on September 3rd, 1961, about the effect of the Lloyd policy:

  The Government's hand will be enormously strengthened in the coming months by a marked change of trend in the labour market, which actually began as early as June . . . unemployment has since been creeping up and unfilled vacancies have been declining . . . labour should become a good deal easier to obtain in the coming months.
  At the same time manufacturers will find orders on the domestic market fewer and further between; and with profit margins under pressure they will offer fiercer resistance to wage claims . . . All this was without Selwyn Lloyd, who has administered a cold douche to an economy that was probably already coming off the boil even without his efforts.

Current Trends
What this means is that the Chancellor's policies are only a desperate attempt lo straighten some of the wilder zig-zags of Capitalism. They do not run counter to the current trends in the economy; they do not try to deflate a boom, nor to shake out a slump. They do not, in fact, have any considerable effect upon economic conditions, but only reflect those conditions, usually some time after they have passed by. Samuel Brittan's rival — Mr. Rees-Mogg, the Political and Economic Editor of The Sunday Times — summed it up for us all on July 30th, 1961: “. . . what Mr. Selwyn Lloyd has produced is not a policy, it is a reaction.”

We can now consider the conditions which make the Chancellor's policies for him. Two of the industries which The Guardian mentioned as being in difficulties were those making cars and domestic appliances. These were among the industries which cashed in on the post war boom; they built great factories, often in old depressed areas of the country. They invested tens of millions of pounds in their productive machine and up to a few years ago this all seemed to be paying off. They were riding high. Times have changed since then. The motor car firms have suffered violent ups and downs some of them have gone altogether and others are sickly plants.

Similar conditions have hit the domestic appliance trade. A. J. Flatley, a washing machine, drier and refrigerator firm which suddenly sprang up in Manchester a few years ago, to expand at great speed, has recently gone bankrupt. Hoovers are busily cutting their cloth to suit a severely restricted coat—last year they took a fifty per cent. cut in their profits. Hotpoint—part of the mighty Associated Electrical Industries—have recently reduced their washing machine prices to catch sales in a hardening market. We all know what has happened to the price of refrigerators over the past few years, and to some of the firms which make them.

Now why does this happen, to these industries and to others? In August, 1960, the Economic Review, published by the National Institute of Economic and Social Research, drew attention to what it called the “over capacity” of the durable consumer industries. This “over capacity” was largely the result of the enormous investment which was placed when consumer durables were booming. When the boom slackened the extra productive power became an embarrassment—stocks of machines accumulated, production had to be cut and workers laid off. That is the immediate, at any rate, explanation of a slump.

The fundamental explanation goes deeper. What could the consumer durable firms have done to avert the decline? Should they have held off their investment when the boom was going strong? Of course, they could not. At the time, intense investment was not merely a good idea, it was an absolute must for a company which wanted to get its share of the market. Could they then have correctly gauged the market, foreseen how long it would hold and so forecast the slump? This is something they have never been able to do, nor ever will be able to. The Capitalist class train up expensive experts and economists, but still they are caught napping by the disappearance of a market.

For Capitalism's slumps, like its booms, happen because its wealth — whether it is motor cars, washing machines or anything else — is made to be sold. This means that the market is the key to Capitalism's fortunes. And the market is a capricious, unpredictable, anarchic thing. It sums up Capitalism, that its fortunes should rest in such uncertainty.

So we know that as fast as one policy is knocked from under him, the Chancellor must come up with another. They all will be equally ineffective, but that will not stop him groping for another palliative, another stopgap, another lame horse to sell to the working class. Rees-Mogg put it bluntly in his article when he said, “The Chancellor is not in charge of the economic machine: it is in charge of him.”

Sadly, this will almost certainly pass the working class by, when the next election gets under way. Then there will be many lame horses on display at capitalism’s political market place. The voter, will prod them over, examine their mangy hides and finally plump for one or the other. A depressing prospect? For humanity, yes. But for those who pocket the proceeds, no.

Ivan

Unbalanced exports and experts (1964)

From the April 1964 issue of the Socialist Standard

One of the toughest problems which faced the Attlee government when it took over in 1945 was the deficit in Britain’s balance of trade. The six years of war had cost this country a great deal, apart from the bloodshed and the suffering which the working class had endured. Britain's capitalist class had lost a lot of their overseas investments, they had been forced out of several spheres of influence and had seen many of their traditional markets fall under the sway of their wartime allies. The Imperial Preference system, by which they had once set so much store, had lost a lot of its power as a tight trading club.

As the world turned from the production of munitions, attention was focused upon the markets offered by the rebuilding of the countries which had suffered in the war. There was a frantic rush to get into these markets; almost anything could be sold there, provided it got there quickly. The Labour government launched its famous export drive, sending its Ministers around the country to draw homely analogies between the world market and Mrs. Smith's housekeeping, and sticking up its “Work Or Want” posters. The more we exported, and the less we imported, went the story, the better off we would be.

Some of this propaganda went home. Many workers actually worried about the trade gap and as each set of figures came out, showing how large the gap was, they sank into gloom. It was useless to tell them that the trade gap was a problem for the people who owned the goods which were going in and out of the country and that workers should concern themselves only with their own economic interests. They were convinced that the bigger the gap the more everyone would suffer and perhaps, as well, they thought that the “lousy foreigners” were getting one over on poor, simple, honest John Bull. Amid the gloom, their blood boiled.

The Tories, of course, made a lot of hay while this particular sun shone. The trade gap, they said, was caused by the amateurish methods of the Labour government; there were too many controls, too much nationalisation, it was all something to do with Socialism. Just let a businessman’s government take over and in no time at all the trade gap would disappear.

Well that was a long time ago and it is time now to draw attention to one or two facts. First of all, the trade deficit has not disappeared under Conservative government; it has, in fact, remained as stubbornly as ever. Secondly, the fact that the Tories used to say in the days of Labour government that the gap inevitably meant poverty has not stopped them claiming that we are all having it good—although the gap is still there. And thirdly, the Tories have notched up the biggest trade deficit ever to be recorded for one month. All of which indicates that, however baffling the Labour government found the problems of running British capitalism, the Tories have not found the going much easier.

It was in last January that the trade gap reached its peak. Imports reached a new high of £457 million, while exports fell to £326 million which, taking into account £11 million worth of re-exports, left a “crude" trade gap of £120 million. This figure was especially impressive when compared to the monthly average gap of £45 million for 1962 and £49 million for last year.

By all the standards which the newspapers, the politicians and the city editors have used in the past, this was a crisis for British capitalism. But some of them, when the January figures were announced, revealed that they had adopted new standards, or had at any rate modified the old ones. The Daily Telegraph headlined a gap of only £72 million, without mentioning the fact that this lower figure was arrived at after using a method of calculation which had not been used before. In the Sunday Times, economic editor William Rees Mogg was saying “By this weekend . . . no one doubts that there is a serious balance of trade problem to be contended with," although The Guardian a couple of days later had it that “People can talk themselves into a financial crisis. But at the moment there is none in sight." Sir Alec Douglas-Home was keeping his eye firmly fixed on the next election: “Do not let us,” he said, “Talk ourselves into a crisis or write ourselves into one on the basis of one set of monthly figures.” And in this he was supported by Samuel Brittan in The Observer ". . . a crisis is a psychological phenomenon that exists when people think it does.’’

The obvious comment on this latter kind of optimism is that, if it is possible to talk ourselves into a crisis then all that is needed to remedy the situation is to talk ourselves out of it. (Sir Stafford Cripps, when he was Labour’s Chancellor, made a similar statement about a crisis in 1949 but the economic problems of British capitalism, beat him in the end—and no one could accuse Cripps of not being able to talk.) And if crises are only, after all these years, psychological phenomena, why, what the Treasury needs are not economists but psychiatrists, and Mr. Brittan's column should not be written by a financial wizard like himself but by an expert in mental disorders. What a pity nobody thought of it in the ’thirties! It would have saved the government such a lot of dole money.

This was not the end of the confusion. If the experts could not agree on whether there was a crisis, neither could they agree on what was needed to get rid of it. The National Institute of Economic and Social Research advised the government, in an article written a few days before the January trade figures were published, to increase personal taxation by about £200 million. Three days later the Federation of British Industries was recommending a decrease in income tax and an increase in indirect taxation. Mr. Rees Mogg declared himself ". . . opposed to import controls" — something which, said The Guardian, “. . . is beginning to be talked about again by economists in responsible places . . ." In the end, Mr. Maudling increased the Bank Rate, which some of the pundits had advised him to do but which the National Institute had described as “. . . not likely to be effective.’’

It is easy enough to pick out these contradictions. Whenever British capitalism finds itself in some sort of difficulty there is no lack of inconsistent advice from the experts. Whenever a Chancellor announces a measure which is supposed to relieve a crisis there are plenty of the same experts to crow that the measure is too little or too late, too large or too early, or that anyway they thought of it first. It does not seem to occur to them that, if they cannot agree upon the nature of a crisis, or upon the solution to it, or indeed upon whether there is a crisis at all, the chances of them ever being able to solve the economic maladies of capitalism are just about non-existent.

What the experts never tell us is that the trade gap is a problem which only capitalism can produce. Most of the world's developed countries are exporters—and even the undeveloped lands have some sort of export trade, if only in some primary crop like cocoa or sugar. But exports do not simply go off into the blue—every one of them is an import into some other country. The £457 million worth of goods which came into this country during January were worth about that much to the countries which sent them here. Sometimes a nation’s exports depend upon its imports; goods which are sent abroad are made by machinery which has been imported or include a vital component which, because it is made more cheaply in a foreign country, has been bought from there in preference to home produce. And with so many countries in this struggle, each of them fighting to get on top, it is impossible for them all exactly to balance their trade with each other. Even if they wanted to, that is; for if they were to try to keep their imports precisely level with their exports, capitalism's international trade would collapse and many of its industries with it.

This fact, naturally, is ignored by the government, who tell us what all good, docile patriots want to hear—that it is best for our country to be on top, for our country’s trade balance to be in credit and to hell with the rest. At the same time governments abroad, who are competing with British industry in the world’s markets, are telling their workers the same story and the workers are swallowing it and so the whole sorry mess goes on. While the people are busily swallowing the official propaganda, few of them are realising that the crises are interminable, that the experts and the Ministers are unable to deal with them and that in any case the state of their country's trading accounts has no appreciable effect upon their welfare.

Neither are they realising that it is capitalism itself which creates the balance of payments problem. Why, in the name of sanity, should one area of the world not import more than it exports? Why should the Americas not send out a lot of cereals? Or Africa a lot of raw minerals? Or Australasia a lot of dairy produce? Why should not the world’s wealth be produced in the areas where this can be done most efficiently and easily and sent to the areas where it is needed?

Why? Because at present the world is divided into opposing nations and groups of nations, who unite their interests, often temporarily, against the rest. Because the world is now split into rival trading groups who fight bitter economic wars against each other. Because the world produces its wealth to be sold so that the class which owns the machines and the materials which go into the wealth can make a profit on their investments.

We are now at the very root of the trouble. Until we deal with it the crises, of many kinds, will continue. But whoever may lose his job in a crisis, there is one type of person who will not be unemployed—the person who owes his position to his professed ability to do something about the uncontrollable ups and downs, stops and starts, which are an inevitable part of capitalism all over the world.

Ivan

From Recession to Slump (1992)

From the December 1992 issue of the Socialist Standard

When is a recession not a recession? Answer: when it's a slump. Up to now pro-capitalist economists, journalists and politicians have avoided this word because of its associations with 1930-like conditions which, they have proclaimed for years, could never come back. But now the taboo on using it being broken and the talk is about "the danger of sliding into slump" and how this can be avoided.

“Recession” was a word invented in America after the war by the followers of the pre-war British economist Keynes. Big slumps, they preached, could be avoided by the application of Keynesian “demand-management” techniques, but relatively minor downturns could still occur. These were “recessions" but there was no need to worry since Keynesian policies would always prevent them turning into slumps. Thus the Penguin Dictionary of Economics defines a recession as “a sharp down-turn in the rate of economic growth or a modest decline in economic activity, as distinct from a slump or depression which is a more severe and prolonged downturn".

There is even an official internationally-agreed definition of a recession: two successive quarterly falls in the total production of goods and services (“seasonably adjusted real Gross Domestic Product", to be precise). On this definition, Britain has been in a recession since the end of July 1990, GDP having fallen or been stagnant every quarter since then. It is this that has got the pro-capitalist economists worried. According to their theory no recession should have lasted this long. No “recession" has in fact ever lasted this long. Hence their doubts about whether this time it is not a slump rather than a mere recession that they are faced with.

Worried
Gavyn Davies, a City economist who is also an economic adviser to the Labour Party, is worried:

  So do we now face a "slump"? As far as 1 am aware, this word has no precise economic definition, but it is generally used to denote a state of enduring decline in activity, in which a total collapse in confidence—often associated with an overhang of excessive private sector debt— leads to permanent weakness in asset prices and capital spending. It is further associated with a decline in the general price level (negative inflation), and describes a situation in which monetary policy alone is powerless to stimulate demand. It is a word most often applied to describe the calamity of the 1930s, from which a combination of Lord Keynes and international rearmament (mainly the latter) eventually rescued the world. (Independent, 19 October).

He concludes by saying he doesn't know whether we are yet in a slump. William Rees-Mogg, former editor of the Times who now writes a regular column in the Independent, is bolder. He has frankly compared the present situation to the depression of the 1930s:

The belief that has previously restrained the Government from acting decisively is that this is an ordinary 10-year recession, like those of 1973 or 1981. The evidence is that it is a major debt deflation crisis, more like the 1930s, the 1870s or the 1820s. (26 October).

As a Monetarist Rees-Mogg has his pet theory as to what causes a depression. As he wrote in his column the week before, “each great depression is worldwide. It is set up by inflationary expansion of debt. It is produced by the painful process of liquidating that debt, which forces down asset values and destroys businesses and jobs". So, for him, a depression is a “debt deflation crisis" and the way-out lies in reducing the burden of debt by reducing interest rates. This, purely monetary, explanation is inadequate and superficial.

It ignores why at times businesses go into debt and why banks are prepared to lend them money. Businesses go into debt when they think they can invest the borrowed money in production and make sufficient profits both to pay the interest and still have plenty left for themselves. And when the prospects of profit-making by businesses are good, banks are prepared to lend them money because they can be sure that they will be paid their interest. So the key factor is the rate of profit not the rate of interest. In fact interest is a totally dependent factor: it can only be paid out of profits. As profits arise out of production it is here, in the field of production not that of money, that we must look for the explanation as to why slumps occur.

In a period of boom all the various competing businesses imagine that they will be the one to benefit from the expanding market and all plan to expand their productive capacity, generally borrowing to do so. There eventually comes a point, however, after all the planned for extra productive capacity comes on stream, when the amount produced in some key sector exceeds the amount required by the market. A crisis of overproduction then occurs. Factories cut back on production; workers are laid off; orders for supplies are reduced; all this has a knock-on effect, leading to a contraction of the total market. Then what they call a recession and we call a slump sets in.

Gavyn Davies explained the onset of the present slump well enough in an article he wrote in the Sunday Telegraph soon after it started:

  Around July [1990], 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 . . .  As consumers threw caution to the wind, 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 . . . It was not until the middle of 1990 that companies suddenly realised their expansion plans were not supported by the prospects for demand . . . [T]he main casualty over several years is likely to be capital spending, since productive capacity has run ahead of demand. (27 January 1991).

In a slump businesses are left with the problem of paying from their reduced profits the interest on the loans they contracted to expand productive capacity during the boom period. Rees-Mogg wants to help them by reducing interest rates. This would certainly reduce the money they have to pay the banks and to that extent increase their retained profits, but there is no reason to suppose that in itself this would be enough to lead them to invest in expanding production again, as the example of the US shows were interest rates are as low as 3 percent yet the slump there persists.

Recovery after a slump only begins when the prospects for profit-making revive. This is sometimes called "confidence” and in a sense it is: businesses have to be "confident" that if they invest in increasing production they will be able to sell what they produce and make a profit. This is not a question, as Major and Lamont evidently believe, of just talking about things getting better and giving the impression you really believe this (even if you don't). Something concrete is required and that can only be a real change in the opportunities for profit-making.

Falling asset values

Ironically perhaps—since what is involved is a capital loss for businesses—the main factor bringing this about is the decline in “asset values” that both Rees-Mogg and Davies highlight. In a slump the value of the capital invested in buildings, factories, plant, machinery, raw materials and stocks falls in real terms. Marx called this “the devaluation of the elements of constant capital” and it comes about either through firms writing off the previous value of their assets or through them going bankrupt and their assets being bought up by other firms at a lower price. Either way the rate of profit is increased, as this is calculated as the ratio of the amount of profits to the total capital invested. If the latter falls in value the rate of profit increases even if the amount of profit remains unchanged.

This fall in asset values is a key element in the Marxian explanation of the function of slumps under capitalism: to clear away deadwood and allow capitalist production to resume on a fitter, leaner basis. It works by raising the rate of profit, so eventually making the businesses that survive ready to invest in production again in response to the only incentive they know—profit.

Contradiction

The present slump has led to a revival of Keynes' discredited ideas. The Independent, in a ten-point plan it has launched to “save Britain from slump”, declares “as Keynes pointed out, if the private sector will not spend, the public sector must” (22 October). The Guardian is even more enthusiastic. The front page of its magazine section (3 November) featured a full page photo of Keynes with the caption “Is this the only man who can save us now?”. The opening words of the main article, by Robert Skidelsky, author of a new book on Keynes entitled The Economist as Saviour set the tone: “the search for a saviour to lift us out of the slump has led us back, not unnaturally, to John Maynard Keynes”.

However, it is not the “spending your way out of a depression" aspect of Keynes' policies that Skidelsky emphasises, but rather his clever little scheme to decrease real wages in a slump. Keynes argued that workers would offer less resistance to their real wages being reduced by rising prices than by a direct cut in their money wages and so advocated a policy of (mild) inflation as the best way to bring about the necessary reduction in working class living standards. He was, in other words, just as much an enemy of the working class as any callous Free Marketeer. The “us" he wanted to save was not us but the ruling class of which he was himself a well-heeled member.

“Spending your way out of a slump” seems to be the common-sense solution. The only problem is where is the government to get the extra money to spend from. There are three possibilities. One is to raise it through taxes. Another is to borrow it. And the third is to print it. All have their drawbacks. Printing the money will simply lead to double-figure inflation which will eventually adversely affect the balance of payments. Borrowing it will tend to push up interest rates, increasing the debt burden on productive industry. Taxes, like interest, can only come in the end from the profit-making sector of the economy, and increasing taxes on businesses which are already suffering from a fall in profits is clearly no way to encourage them to increase production again.

The last Labour government tried to apply Keynes' policy of “if the private sector won't spend, the public sector must” during the 1973/4 slump. In the end Callaghan had to confess to the 1976 Labour Party Conference:

  We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment. (Times, 29 September 1976).

There is a fundamental contradiction here which no government can overcome. Capitalist businesses have cut back on production because the market for their goods has shrunk and they can't make the same amount of profits as before; the government can't spend what the businesses aren't investing, because all the possible ways of financing this will further undermine the profitability of industry. The plain fact is that in a slump there is virtually nothing any government can do to speed recovery. All they can do is to wait for the slump to run its course—to wait for asset values or real wages to fall sufficiently to restore the prospects for profit-making— while refraining from doing anything to make matters worse.

Adam Buick

Inflation: the Theories and the Facts (1974)

From the September 1974 issue of the Socialist Standard

Along with explaining what inflation is and why it happens, another question presents itself today. Why is it that a problem fairly widely understood half a century ago now completely baffles the majority of politicians and economists? Some of them admit that as far as they are concerned it is inexplicable and incurable; others offer explanations which a look at past inflations would show to be quite untenable. And now we have psychologists telling us it is not just an economic problem but is to be explained as indicative of a deep-rooted dissatisfaction with life.

A few facts show the irrelevance of most of the theories of inflation now current. Past inflations have always been halted when governments decided to halt them, and British capitalism operated continuously for a century before 1914 without any inflation at all. Are we to seriously believe that it was a century of “satisfaction with life” on the part of the workers? And what of the ten years 1921-31 when prices were not rising but falling, and the workers showed their “satisfaction” by the General Strike?

Push, Pull and Prattle

Understanding inflation may not be particularly easy, but most of the difficulty is the confusion introduced into it by economists. An economics handbook published in 1909 defined inflation in terms of its cause, depreciation of the currency: “high prices caused by an over-issue of inconvertible paper money”. That is how Marx and many other economists correctly explained inflation, but nowadays most economists attempt to explain it in terms of its symptoms not its cause.

They talk about two kinds of inflation, “cost-push or wage-push” and “demand-pull”, the one pushing prices up and the other pulling them up. That is about as useful a concept as Dr. Doolittle’s famous circus animal the Pushmi-Pullyu which had a head at both ends. (It would appear that the economists’ monster has both heads at the same end but, like Dr. Doolittle’s, they mostly take control alternately and not both at the same time.)

If a general price rise had not been caused by currency depreciation its “cost” and “demand” symptoms would also not be there; which is not to say that individual and general price rises cannot happen for causes other than inflation. In the period 1820-1914 in this country, when there was no currency depreciation and therefore no inflation, there were alternate comparatively small falls and rises of the price level in depressions and booms. But it never once rose above the level of 1820 whereas, with inflation, the present price level is about six times what it was in 1938.

General price rises due to currency depreciation were known in previous centuries, but it was a mark of 19th-century British capitalism that, by deliberate government policy, prices were kept comparatively stable by the avoidance of inflation. It did not stop the growth of production and wages.

Marx and Keynes

Marx dealt with one aspect of price changes in his lecture published in the pamphlet Value, Price and Profit, where he examined the erroneous proposition that wage increases cause a general price rise; but he did not there deal with currency depreciation or inflation. On the contrary, as he pointed out, he was dealing with the situation as it existed in Britain when there was no inflation. He was therefore assuming for his purpose no change whatever “in the value of the money wherein the values of products are estimated”.

His examination of inflation is in Capital, Volume I, in the chapter “Money, or the Circulation of Commodities” where he put forward the proposition, based on his labour theory of value, that the excess issue of an inconvertible paper currency puts up prices.

J. M. Keynes in his Tract on Monetary Reform (1923, pages 42-3) gives a similar explanation. Marx pointed out that beyond a certain point an excess issue of notes will result in money “falling into general disrepute”. Keynes, in the work referred to, dealt with the way this condition of general disrepute developed in Germany in the great inflation of the nineteen-twenties. Professor Edwin Cannan, without using the labour theory of value, reached much the same conclusion from observation of what actually happens (Modern Currency and the Regulation of its Value, 1931).      

It should be noted that Cannan, like Marx, dealt with “currency” (notes and coin). Some modern “monetarists” have introduced more confusion by trying to base their theories on “money” defined to include bank deposits as well as notes and coin..

What must be emphasised is that inflation is caused by those who control the note issue, which in this country is the Government through the Bank of England. It is often used in wartime because it is a speedy way of increasing government revenue to meet additional war expenditure. In Germany in the nineteen-twenties, in peace-time, it was a deliberate device (backed by big business) to pay off debts in depreciated currency: inflation, at least in the short term, serves the interest of debtors against lenders.

Marx and inflation

Marx’s treatment started with the economic law that the use of a particular commodity to serve as the money commodity, e.g. gold or silver, rests on the fact that that commodity like all other commodities is an embodiment of value, the amount of “socially necessary labour” required to produce it. If for example one ounce of gold and one bicycle each require ten hours’ labour they are equal values, and gold can serve as the “universal equivalent” for the exchange of all other commodities.

The conversion of value into price takes place through the minting of coins of uniform weight and purity. In Britain each £ or sovereign was, by law, fixed at a uniform weight of gold (about a quarter of an ounce). So the bicycle’s price would be about £4 because its value was equal to that of one ounce of gold. If the British government had fixed the £ at one-eighth of an ounce of gold instead of one-quarter, the bicycle’s price would have been £8 not £4 and all prices would similarly have been doubled. If they had fixed it at half an ounce, all prices would have been halved. On both suppositions, while the price of the bicycle (or other commodity) would have been doubled or halved, its relation to an ounce of gold would have remained unaltered.

The next stage in Marxian monetary theory was based on the proposition, confirmed by long experience, that with a given total volume of production and buying-and-selling transactions, and with gold minted into the £ or sovereign at about a quarter-ounce, a certain total amount of currency would be needed. (The fact that the required total varies from time to time with the velocity of circulation need not be gone into.) What Marx put forward was that the total value of needed currency represented a total mass of value, and therefore a total weight, of gold, and that if the total of gold is replaced by inconvertible paper money and the paper money is then issued in excess, prices will go up.

“If the paper money is in excess, if there is more of it than represents the amount of gold coins of like denomination which could actually be current, it will (apart from the danger of falling into general disrepute) represent only that quantity of gold, which, in accordance with the laws of circulation of commodities, is really required and is alone capable of being represented by paper. If the quantity of paper money issued is, for instance, double what it ought to be, then in actual fact one pound has become the money name of about one-eighth of an ounce of gold instead of about one-quarter of an ounce. The effect is the same as if an alteration had taken place in the function of gold as a standard of prices. The values previously expressed by the price £1 will now be expressed by the price £2.” (Capital Vol. I, page 108 in Allen & Unwin edn.)

Now Showing

Long experience has shown that Marx was right. Whenever inconvertible paper money has been issued in excess for a considerable period it has raised prices above what they would otherwise be.

In Britain the amount of notes in circulation in 1938 was £554 millions. It is now about £5,330 millions. Since 1938  the needed amount has been affected by certain changes, including greater total production (now more than double the 1938 level), and increased population, which would operate to raise the needed amount of currency. Working in the opposite direction has been the wider use of cheques, etc. and corresponding reduced need for notes and coin.

In the 19th century the issue of notes in excess amount was effectively prevented by law. Beyond a small fixed amount the Bank of England could only expand the note issue by placing an equivalent amount of gold in its reserve, and the paper was tied to gold by the requirement of “convertibility” –that is to say, the Bank of England was compelled by law to give gold in return for notes at the legally fixed rate of about one-quarter ounce for each £1. Except for marginal variations the value represented by Bank of England notes could not be different from the value of gold. Bank of England notes “were as good as gold” and were everywhere accepted as such. Now there is no convertibility, and in effect no restriction on the note issue.

A Two-way Fallacy

The man largely responsible for the adoption of inflation as government policy (they now call it “reflation”) was the economist J.M. Keynes. Yet he did not knowingly and intentionally advocate inflation as a long-term policy. (There were some people who did just that.) What Keynes did was to say that if certain other things were looked after it was no longer necessary formally to restrict the note issue.

“Thus the tendency of today  . . . rightly I think is to watch and to control the creation of credit and to let the creation of currency follow suit, rather than, as formerly, to watch and control the creation of currency and to let the creation of credit follow suit.”

Professor Cannan promptly warned that the doctrine was basically unsound and would open the door to inflation. See Economic Journal, March 1924, and Cannan’s An Economist’s Protest, 1927, pages 370-384. Keynes’s views won the day and came to be accepted by the Tory Party and Labour Party and by the trade unions, not only as monetary theory but because Keynes put them forward as part of his popular “full employment” doctrine.

This doctrine was formally set out by the Tory, Labour and Liberal wartime government in 1944 in the White paper Employment Policy. It was cautiously phrased but was immediately followed by a more crude interpretation drawn up by the Labour Party in Full Employment and Finance Policy. Here it was laid down that if unemployment threatened “we should at once increase expenditure, both on consumption and on development – i.e. both on consumer goods and capital goods. We should give people more money and not less to spend. If need be we should borrow to cover government expenditure. We need not aim at balancing the budget year by year.”

It is the Labour Party version that has been followed by Tory and Labour governments, particularly in the past decade. It has included hoping for a much lower level of unemployment than even Keynes thought possible, and part of the belief has been the idea that increased spending increases production –something which events show to be true, if at all, only for a short period.

The fallacy of the theory is well illustrated from the period 1965-72. In that period annual consumer spending jumped from £22,943m. in 1965 to £39,263m. in 1972, an increase of 70 per cent. In the same period registered unemployment jumped from 360,000 to 943,000 and production went up by only 17 ½  per cent. The principal result was that prices rose by 47 per cent.

The policy is still being operated. One of the few forecasts about the present Labour government that has proved correct was that made by the late Richard Crossman, former minister in a Labour government, that the rate of inflation would be increased (Times, 12th Sept., 1973).

There are two ways in which currency depreciation can be operated, the direct way used by the German government in the ‘twenties and the more indirect way used in Britain. Professor F.W. Paish summarised them:

“In some countries it [the Government] might simply print more notes and use them to pay for its expenditure. Nowadays, in such a country as Great Britain, the government would borrow from the banks, printing more notes to enable the banks to maintain their cash reserves.” (Benham’s Economics. 1967, p. 465)

The additional notes and coin get into circulation through the joint-stock banks (Lloyds, NatWest, etc.) which bank with the Bank of England.

These banks withdraw notes and coin from the Bank of England and in turn the additional notes and coin reach the individuals, shopkeepers and employers who make withdrawals in that form from their deposits with the banks. The note issues are set out in the Bank of England’s Weekly Return. In the week ended 24th July 1974 there was an increase in the notes in circulation by £52,193,306 to a total of £5,098.767,831.

Signs of Alarm

Many economists and politicians would be happy to see inflation going on indefinitely in the belief that it keeps unemployment down. But whatever happens with moderate inflation, even they cannot ignore that when inflation gets to the point that money falls into “general disrepute”, unemployment multiplies. In Germany in 1923, unemployment was 4.2 per cent with another 12.6 per cent partially unemployed. Within the year it had jumped to 28.2 per cent and 42 per cent respectively, representing together over 5 million workers in receipt of unemployment pay and an unknown larger number not receiving relief. At this point the German government called a halt by replacing the notes by a new gold-backed currency.

Realisation of this danger here has induced some politicians and economists to call for the limitation of the note issue. In 1968 the Editor of The Times (15th October) described the idea that price rises could be checked “by printing fewer notes” as a “crude error”. Now the Editor, Mr. Rees-Mogg, has been converted and is urging a return to the gold standard (Times, 1st May 1974).

But at the same time they are fearful that the drastic action of entirely stopping the increase of the note issue would, as in 1920, bring prices down but be accompanied by a big increase in unemployment. So the line taken by one group of economists is to call for a gradual reduction in the rate at which inflation is increasing. Professor A.A. Walters of the London School of Economics is urging that such a slackening should be spread over three years (Money and Inflation, Aims of Industry 1974. and Times, 23rd July 1974).

It only remains to point to the difference between Marx and other economists. Marx was simply describing how capitalism operates, with inflation and without it. He was not saying, as did Cannan, that it is better to run capitalism without inflation, or saying like Keynes that a “full employment” policy will improve and save capitalism.

In Marx’s view capitalism inevitably produces unemployment and crises. For him the task of the workers is to abolish capitalism and replace it with Socialism, in which problems of prices, inflation, crises and unemployment will not exist.

Edgar Hardcastle

Is the World Slump Over Yet? (1994)

From the August 1994 issue of the Socialist Standard

The Great Reckoning by James Dale Davidson and William Rees-Mogg (Pan, London, 1994 £7.99), subtitled "How the World Will Change Before 2000", aims to be prophetic. It foresees rocketing taxes, worldwide stock market crashes, a further fall in the property market, a collapse of the welfare state, social disintegration writ large, petty nationalist squabbles and terrorism.

The odd thing is that its authors are both gung-ho supporters of the very system - capitalism - that is capable of unleashing such horror, and find no contradiction in their position. They view the economic basis of capitalism as being fundamentally unstable, yet their advice is only to those already wealthy enough to be able to use their capital to their own advantage in the coming economic crunch. No talk of revolution here.

Nevertheless, The Great Reckoning is a fairly sophisticated book, which is unusual for one that prophecies a Doomsday scenario. Central to its analysis is its prediction of a 1930s-style economic crisis from which other dangers will follow. Davidson and Rees-Mogg claim that there are two main reasons why the world capitalist economy is in for a major period of slump. One is taken from the Austrian Physicist Cesare Marchetti who has spent time analysing the penetration of innovations and products in the capitalist economy. Marchetti dispenses with price-analysis and deals only in physical quantities, claiming that the penetration of commodities into markets can be equated with the spread of living species. He has, for instance, argued that the growth and spread of motor-cars into Western Europe can be explained by the same logistic equation that describes the penetration of, say, rabbits into Australia. Ten years ago Marchetti claimed that most of the markets that provided the spur for the post-war economic boom, like motor-cars, had become saturated. This, he reasoned, would mean economic slowdown.

Economic Slowdown
Marchetti's argument doesn't fully take into account that technological innovation is itself a spur to capitalist growth and that the "old" industries are forever being replaced by new ones - and continue to be so. If capitalism is true to its development so far, the industries supposedly at the point of market saturation today will be heard of only in history books in the future. It should also be noted that devices exist - from proverbially "reinventing the wheel" to built-in obsolescence - which ensure that the long-term growth in cars, televisions and many other lines of production continue apace. There used to be near-physical market saturation for black-and-white TVs, but did that stop growth in the market for television? - Hitachi, Sony and Ferguson are testament to the fact that it did not. The manufacturers replaced black-and-white with colour, then brought out VCRs, then replaced colour mono with colour stereo, then stereo with surround-sound. Market saturation disappeared in a flurry of pound notes and dollar bills.

In truth Davidson and Rees-Mogg have a far better argument than Marachetti's to justify their view of the major world economic slowdown. Their second, more plausible view, is that capitalism is currently drowning in an ocean of debt:

Debt cannot go on compounding faster than output forever. At the rate it expanded in the United States in the 1980s, interest payments would consume 100 per cent of GNP by the year 2015. No such thing will happen. Long before debt reaches that extreme, it will be wiped away...One way or other we expect a great reckoning. A settling of accounts. We expect the long economic boom and credit expansion that began with World War II to come to an end. The end, when it comes, will not only reveal the insolvency of many individuals and corporations, it may also bring bankruptcy to the welfare state and breakdown of authority within political economies.

There is more than a grain of truth in this. In many world economies, debt is compunding at a faster rate than income and total world indebtedness, by every yardstick that can be named, was heavier at the start of the present slump than at the beginning of any other. In the United States alone the rate of debt to national GNP is now 195 percent, compared with 120 percent before the 1929 crash.

History has demonstarted that sustainable recoveries only begin when a considerable of debt built-up during the boom has been liquidated. If debt liquidation is insufficient, growth will remain sluggish even when "recovery" has supposedly begun, such as at present. Davidson and Rees-Mogg estimate that the amount of debt still to be liquidated during this slump in the US is three to four trillion dollars-worth.

The extension of credit effectively delays the onset of capitalism's periodic economic crises only to make them worse when they finally occur. In all economic booms some industries over-extend their operations in the pursuit of further profits and find that they have overproduced for their particular markets. A case in point in the present slump was the commercial property sector.

Perilous Situation
While some industries get into difficulties, other sections of the owning class find that their profits are increasing. The banks, acting as intermediaries between the buyers and sellers of money capital, lend out their accumulated capital to the enterprises in difficulty to keep them going. But this cannot generally correct the fundamental disproportion in growth between the industries and uneven expansion in relation to market demand. Through knock-on effects in industry overproduction spreads and the demand for money capital rises, pushing interest rates up. In this way, the mechanisms of credit extension in the capitalist economy papers over the underlying weaknesses in the productive sphere and buys firms some breathing space before the crisis comes - and this usually comes when the demand for credit is highest and interest rates are at their peak. However, the ultimate outstanding debt increases through this process, requiring a much greater "correction" in the slump as capital assets are devalued to bring productive capacity back into line. The result is not merely an industrial slump, but a financial, banking and property crash as well, as in the 1930s.

Davidson and Rees-Mogg see this as the present outlook for world capitalism. Mounting corporate, government and personal debt has placed the world economy into its most parlous situation for decades. They are all too aware that the only way out for capitalism, sooner or later, is a financial reckoning which will bring about a growth in poverty, a reduction in social welfare programmes and possibly more armed conflict between nation states.

Their analysis of the situation ends there. There is no prescription for how the slump can be avoided - we must just let it wash over us. The authors are completely blind to how the world might be organised to avoid financial slumps, without the market mechanisms which causes them in the first place. They dismiss the Soviet Union's model of capitalist planning out of hand, as well they might, but in doing so claim that this proves socialism to be an impossible dream. Particularly crass is a chapter on the fall of the Eastern Bloc - which socialists predicted - containing the assertion that this demonstrates the failure of Marxism. Indeed, some of the comments in this chapter, like the assertion on page 188 that workers exploit capitalists rather than the other way around, defy rational analysis and are completely at variance with the otherwise coherent account presented. But, of course, the likes of Davidson and Rees-Mogg want workers to think that there really is no alternative to capitalism, however bad it may be, and that, despite everything, workers still get a good deal out of the system. Unluckily for them some of us know different.

Dave Perrin