The way the economic wind blows and what it means for the left
With employment increasing, is the economic crisis nearing an end? or are we heading for triple dip recession as manufacturing and exports shrink? Will the economy be on the mend by the next election, or will we be in the middle of a lost decade?
Each day the newspapers confront us with suggestions that the economic winds are blowing in a different direction, but understanding the crisis is central to the formulation of left strategy. For example, should we support the Labour Party as an immediate antidote to the absurdity of the Coalition, or does the crisis represent an opportunity to build a new anti-capitalist party?
Such questions cannot be answered without a developing a deeper understanding of the causes of the crisis than a simplistic focus on the financial crash which triggered it. What must be grappled with are the underlying structural reasons for the phenomenal rise to prominence of the financial sector and therefore, the real structural causes of the crisis.
There is near uniform agreement that the 1970s crisis of Western capitalism constituted a crisis of profitability or at least a crisis of relative profitability – though a large degree of disagreement remains surrounding the reason why (stagnation, rising wages or decreasing labour and capital productivity). There is, however, surprisingly little consensus amongst the left about the causes of the current economic crisis, and subsequently what radical hopes and prospects it represents.
The left is largely split into two main camps; those who argue we are experiencing a crisis of profitability and those who hold that it is one of underconsumption. The profitability camp’s most prominent members are economists Andrew Kliman and Alan Freeman. They argue that as profits declined productive enterprises ran up debts, and investors increasingly sought returns from financial products causing a speculative asset bubble. When that bubble burst in 2007 firms were overexposed to debt.
The underconsumptionist camp, composed of the likes of David Harvey, John Bellamy-Foster and Rick Wolf, argues that the crisis was caused by a decline in demand resultant from the stagnation of workers’ wages and the siphoning of capital away from productive investments and into unproductive stocks, shares, commodity futures and venture funds. These outcomes are argued to be endemic to the neo-liberal agenda which returned Western Capitalism to profitability in the late 1970s and early 1980s – but also resulted in a vast over dependence on debt in order to maintain demand.
Not only does this approach provide an alternative mechanism for the build up of debt and increasing prominence of finance to that provided by the profitability camp but it is also diametrically opposed to it as it is premised on the conjecture that neo-liberalism led to a resurgent profit rate.
If the underconsumptionist approach is correct then increasing the wages of workers and curbing the attractiveness of unproductive investments in the City could lead to a long term recovery. This points towards a rejuvenation of social democracy as the saviour of capitalism.
On the other hand if the crisis were caused by a long term decline in profitability, the only way to ensure a capitalist recovery would be an intensification of exploitation, or the destruction of capital through bankruptcies – in order to create new opportunities for profit. Neither of these can be acceptable for those on the left as they entail the expansion of misery, either through declining wages and work intensification or the mass unemployment entailed by bankruptcies. If the ‘profitability camp’ are correct then those on the left must then look to anti-capitalist alternatives.
What evidence is there to support each approach?
Both sides dispute each other’s evidence claiming that each other’s measures of profit, wages and income are incorrect. Thankfully, in the ‘Cambridge Journal of Economics‘, Deepankar Basu and Ramaa Vasudevan provide clarity through an exhaustive exposition of the dozen possible measures of the US rate of profit.
They find that in all but one of the measures (the most flawed measure), declining profitability was reversed by the mid 1980s, and that the current crisis was not preceded by a period of declining profitability. Through decomposition of these measures, it is shown that from 1980-2000 this was the result of an increasing distribution of profits away from workers and increasing productivity of both capital (i.e. technology, machinery, equipment, buildings, energy, materials etc.) and labour. They argue that this was due to the introduction of relatively cheap information technology, which not only increased capital productivity, but also facilitated greater exploitation of labour through surveillance, flexibility and threats of outsourcing and offshoring.
However, since 2000 the increasing cost of new technology has caused a decline in capital productivity. This means that the increasing rate of profit has only been maintained through increasing labour productivity (i.e. lower wages and intensification of work) and an ever greater regressive distribution of profit away from workers. Therefore, barring the discovery of new cheap productive technology, any social democratic attempts to rebalance the economy will lead swiftly to a crisis of profitability.
Assuming that something similar has taken place in European capitalism, this suggests that the crisis which started in 2007 was not in fact a, short term financial crisis which will come to an end by the next election, but rather the beginning of a crisis period of capitalism. It represents a ‘new normal’ of low growth, declining wages and living standards, high unemployment and greater job insecurity.
This new normal will likely continue for the foreseeable future, until capital productivity returns through technological innovation. However, by this point the environmental crisis which has been pushed to the back of the Global North’s consciousness will be coming to deadly fruition with devastating consequences, not just for economic models but for human lives. A renaissance of anti-capitalism seems the only alternative.
I’ll not write a long response here, but I’ve replied here: http://www.nishmadoshi.net/2013/the-economy-game/
Not necessarily a direct reply, but a challenge to how we continue to view the economy as essential to governance when that has only *become* the case (with capitalism).
Why we got here is an important question, but I’m not convinced by either the ‘loss of profitability’ or the ‘loss of demand’ arguments. Neither of these theories explains why this sudden ‘loss’ occurred in the first place.
I’m more convinced by those who suggest that government policies caused the problem: allowing too much immigration caused lower wages, and allowing the money supply to expand too much led to lower interest rates.
Low interest rates induced investors to make capital investments in things people didn’t want; so when the investors tried to sell these things, no one wanted to buy at the prices the investors set.
At this point others took notice and started blaming lack of demand and lack of profitability – but the precursor event was the malinvestment caused by the government’s intervention into interest rates, which tricked investors into wrongly thinking that investments in capital goods would be profitable.
Hi guys,
Thanks for commenting, Chris I agree that the argument is based on a big assumption that the European capitalist experience is similar to that of the US’. And it would be really interesting to see a similar paper addressing this issue (though I lack the skill to do it myself).
However, I think there are three reasons why this is not an unrealistic assumption. Firstly, I can’t think of any factors present in Europe as whole which would lead to a different outcome. Production is fairly similar across both sides of the Atlantic in terms of methods and technology and if European countries are employing some differing technology which is boosting European capital productivity then it would be strange that this hasn’t also been adopted in the US – especially as many firms operate on both sides of the Atlantic.
The main differences are institutional variations in the exploitation of labour – though even in this regard since the late 70s there has been increasing homogenization towards low regulation and declining unionisation and collective bargaining. The other main difference is monetary policy (in particular the effective devaluing of the German currency) but as whole I think the benefits (Germany ect.) and negatives (Greece etc.) would probably equal themselves out.
Secondly, the US economy is the hegemonic economy of global economy. Therefore, even if European capitalism was in fact experiencing growing capital productivity it would soon run into serious barriers to continued prosperity in the global economic system.
Thirdly, the US was the epicenter of crisis (which was caused by the US housing bubble and sub prime mortgage crash). So in explaining the crisis, at least its cause, Europe is irrelevant.
Though another objection is that capitalism is a world system so we need to include the global profit rate, which again I would agree with but again I think the inclusion of China and India would not massively alter the picture above as their success is built upon extremely high levels of labour productivity (low wages plus horrific conditions) rather than highly productive capital. We would expect to see wages increases with the organization of the working class – which is already happening. Also product cycles mean that when a technology is first created it leads to monopoly profits but as that technology gets older, more firms understand how to compete technologically, profit declines. As there has not been any significant technological break through since IT, the margin for profit should be squeezed.
Finally, China and India are export focused economies, making use of low wages to produce products for high wage economies. If wages continue to decline in these high wage economies then their market will collapse.
No idea about the economic arguments that are used to back this up, but it seems a bit of a jump to go from the US to Europe, which while admittedly is similar in terms of de-industrialisation, is also a completely different place with all manner of different variables. It seems like you’re assuming a lot by moving from one to the other, although that’s an assumption of my own. Having said that you’ve made the arguments nice and clear, but I think the article could be improved with a better discussion of the European situation.
Regardless of what lies behind it, the response to the crisis seems pretty clear across the continent – pushing down wages (particularly through forcing people back into the labour market and removing/lowering benefit rates), increasing labour market flexibility, and supressing dissent (look at the use of civil mobilisation orders against strikes in Greece for an extreme example). Would the response have been different if the crisis were of a different nature? (i.e. one of profitably rather than underconsumption, or vice-versa depending on your viewpoint)
I’m certainly of the camp that says a return to social democracy is practically impossible, though I think understanding why that is true requires more than looking just at profit rates, illuminating as those can be. To get to the heart of the crisis requires looking at precisely how and why the global economy restructured in the 70s, the increasing generation of surplus population, the role of automation and the increasing technical composition of capital and the ways in which finance capital has come to subsume “real” production. Endnotes 2 is very good for this. As is Aufheben’s two part series on the return of the crisis: http://libcom.org/library/return-crisis-part-1
As such, I think I’m more sceptical than you of the ability of capital to return to long-term profitability even with technical innovation – the potential of which I think is undersold by some people recently.
Which is all a roundabout way of saying I agree with your conclusion.
Regarding tech innovation, I think there is some hope in the fact that common and widely used technologies tend to undergo more rapid change than rare, often centralised technologies. For example, digital cameras and laptops, widely used, have seen very rapid changes through innovation over the last two decades. In the same way, I think there is some hope that decentralised and increasingly common renewable energy technologies such as solar pv will undergo a similar transformation and undermine the centralised competition (nuclear, coal, gas). This has potential to both address the ecological crisis and also literally decentralises power, necessary for a more rapid social transformation.
It may happen too late of course.