The fundamental contradictions behind the stockmarket jitters

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This article is a shortened version of one that will appear in the next issue of the ICC's International Review, which will be published shortly.


The recent stock exchanges convulsions (see article on front page) pose the following question: whether the approaching open recession, which everyone agrees is likely, is part of the inevitable up and down pattern of the capitalist economy which is fundamentally sound, or whether it is a sign of a process of inner disintegration and breakdown, integral to capitalism, that will be punctuated by more and more violent convulsions.

To answer this question it is first necessary to deal with the idea that the development of speculation and the resulting credit crisis is in some way an aberration or a departure from the healthy functioning of the system, which could be corrected by state control or better regulation. In other words is the present crisis a result of financiers holding the economy hostage?

The role of credit in capitalism

The development of the banking system, the stock market and other credit mechanisms have been integral to the development of capitalism since the 18th century. They have been necessary for the amassing and centralising of money capital in order to permit the levels of investment required for vast industrial expansion that was outside the scope of the richest individual capitalist.  The idea of the industrial entrepreneur acquiring his capital by saving or by risking his own money is a pure fiction.  The bourgeoisie requires access to the sort of sums of capital that have already been concentrated in the credit markets. In the stock markets the ruling class is not betting with their own individual fortunes but with monetised social wealth.

Credit, and lots of it, has thus played an important part in immensely accelerating the growth of the productive forces in comparison with previous epochs and in the constitution of the world market.

On the other hand given the inherent tendencies of capitalist production, credit has also been a tremendous accelerator of overproduction, of overvaluing the capacity of the market to absorb products and has thus been a catalyst of speculative bubbles with the consequent crises and drying up of credit. Side by side with facilitating these social catastrophes the stock markets and the banking system have encouraged all the individual vices of greed and duplicity that are typical of an exploiting class living off the labour of others; vices that we see flourishing today in insider trading, fictitious payments, outrageous ‘bonuses' that amount to huge fortunes, ‘golden parachutes', accountancy fraud, and plain theft.

The speculation, the risky loans, the swindles, the subsequent crashes and the disappearance of huge quantities of surplus value are therefore an intrinsic feature of the anarchy of capitalist production.

Speculation is, in the last analysis, a consequence, not the cause of capitalist crises. And if today it seems that speculative activity in the financial sector dominates the whole economy, it is because over the past 40 years capitalist overproduction has increasingly lapsed into a continuing crisis, where world markets are saturated with goods, investment in production is less profitable and money capital's inevitable recourse is to gamble in what has become a ‘casino economy'.

Therefore there is no possibility of a capitalism without its financial excesses, which are an intrinsic part of capitalism's tendency to produce as if the market had no limits.

The recent slump in the housing market in the US and in other countries is an illustration of the real relationship between overproduction and the credit squeeze.

Housing industry illustrates the anachronism of capitalist production

The characteristics of the crisis in the housing market are reminiscent of descriptions of the capitalist crises that Karl Marx described in the Communist Manifesto in 1848:

"In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity - the epidemic of over production. ...there is too much civilisation, too much means of subsistence, too much industry, too much commerce".

So today we don't see homelessness as a result of a shortage of homes but paradoxically because there are too many of them; there is a veritable glut of empty houses. The construction industry has been working flat out over the past five years. But at the same time the purchasing power of American workers has fallen, as American capitalism attempts to increase its profitability. A gap opened up between the new homes being thrown onto the market and the ability to pay by those who needed them. Hence the risky - ie sub-prime - loans to seduce new buyers who could hardly afford them, and square the circle. Eventually the market crashed. Now, as more and more homeowners are evicted as a result of foreclosure on the crippling interest rates on these loans, the housing market will be further flooded - in the US some 3 million people are expected to lose their roofs as a result of defaulting on sub-prime mortgages. This human misery is anticipated in other countries where the housing bubble has either burst, or is about to. The surge in the construction industry and in mortgage lending over the past decade, then, far from reducing homelessness has put decent housing effectively out of reach for the mass of the population, or put homeowners in a precarious state[1].

Evidently what concerns the leaders of the capitalist system - its hedge-fund managers, its treasury ministers, its central bankers, etc - in the current crisis are not the human tragedies created by the sub-prime debacle, the dashed aspirations to a better life (except insofar as they might lead to questioning the insanity of this mode of production) but their inability as consumers to pay the inflated prices of houses and usurious rates of interest on the loans.

The sub-prime fiasco epitomises therefore the crisis of capitalism, its chronic tendency in the drive for profit to overproduce in relation to the solvent demand, its inability, despite the phenomenal material, technological and labour resources at its command to satisfy the most basic human needs[2].

However absurdly wasteful and anachronistic the capitalist system appears in the light of the recent crisis, the bourgeoisie still tries to reassure itself and the rest of the population that at least it won't be as bad as 1929.

The present situation: the same problems as 1929

The 1929 Wall Street Crash and the Great Depression continues to haunt the bourgeoisie, as the media coverage of the recent crisis testifies. Editorials, in-depth articles, historical analogies, have tried to convince us that the present financial crisis won't lead to the same catastrophe, that 1929 was a unique event that turned into a disaster by wrong decision making.

The bourgeoisie's ‘experts' foster the illusion that the present financial crisis is rather a repeat of the relatively limited - in time and place - financial crashes of the 19th century. In reality today's situation has more in common with 1929 than this earlier period of capitalism's ascendancy, sharing many of the common characteristics of the catastrophic financial and economic crises of the decadence of capitalism, of the period opened up by the First World War; of the inner disintegration of the capitalist mode of production, of a period of wars and revolutions.

The economic crises of capitalist ascendancy, and the speculative activity that often accompanied them and preceded them, were the heartbeats of a healthy system and gave way to new capitalist expansion throughout the world, through the construction of railways over entire continents, massive technological breakthroughs, the conquest of colonial markets, the conversion of artisans and peasants into armies of proletarian labour, etc.

The 1929 New York stock market crash, which announced the first major crisis of capitalism's decay, put all the speculative crises of the 19th century in the shade. During the ‘roaring twenties' the value of shares in the New York Stock Exchange, the biggest in the world, had increased five fold. World capitalism had failed to recover from the catastrophe of the First World War, and in the now richest capitalist country the bourgeoisie sought an outlet in stock market speculation.

But on Black Thursday 24 October 1929, a precipitous decline took place. Panic selling continued on Black Tuesday of the following week. And the stock market kept on crashing until 1932, by which time stocks had lost 89% of their peak value in 1929. They returned to levels not seen since the 19th century. The 1929 peak in share value was not reached again until 1954!

Meanwhile the US banking system which had lent money to buy the stocks itself collapsed. This catastrophe heralded the great depression of the thirties, the deepest crisis capitalism has ever experienced. American GDP was effectively halved. 13 million workers became unemployed with no relief to speak of. A third of the population sank into abject poverty. The effects were echoed around the world. 

But there was no economic rebound as there had been after the crises of the 19th century. Production only began to resume when it had been harnessed to arms production in preparation for a new re-division of the world market in the imperialist bloodbath of World War II. In other words when the unemployed had been transformed into cannon fodder.

The thirties depression appeared to be the result of 1929, but in reality the Wall Street Crash only precipitated the crisis, a crisis of the chronic overproduction of capitalism in its decadent phase. Here lies the essential identity of the thirties with today's crisis, which began in the late 60s.

The bourgeoisie in the 1950s and 60s smugly claimed to have solved the problem of crises and consigned them to a historical curiosity through such palliatives as state intervention in the economy both at the national and international level, through deficit financing and progressive taxation. To its consternation the world wide crisis of overproduction reappeared in 1968.

Over the past 40 years this crisis has lurched from low point to another, from one open recession to one more damaging, from one false Eldorado to another. The form of the crisis since 1967 hasn't taken the abrupt nature as the crash of 1929. In 1929 the financial experts of the bourgeoisie took measures that only allowed the financial crisis to take its course. The measures were not errors but methods that had worked in previous crashes of the system, like in the panic of 1907, but weren't sufficient in the new period. The state initially refused to intervene. Interest rates were increased, the money supply was allowed to shrink, tightening the credit squeeze and further shattering confidence in the banking and credit system. The Smoot-Hawley Tariff bill imposed import barriers that accelerated the downturn in world trade and consequently worsened the depression.

In the last 40 years the bourgeoisie has understood the need to use state mechanisms to reduce interest rates and inject liquidity into the banking system in the face of financial crises. It has been able to phase in the crisis, but at the price of overloading the capitalist system with mountains of debt. A more gradual decline has been achieved than in the thirties, but nevertheless the palliatives are wearing out, and the financial system is increasingly fragile.

The phenomenal growth of debt in the world economy during the recent decade is exemplified in the extraordinary growth, within the credit markets of the now famous ‘hedge-funds'. The estimated assets of these funds have risen from $491bn in 2000 to $1,745bn in 2007[3].  Their complicated financial transactions, mostly secret and unregulated, use debt as a tradable security in the search for short term gain. The hedge-funds are judged to have spread bad debt throughout the financial system, accelerating and rapidly extending the present financial crisis.

The economic history of the last 40 years has been the history of the failure of one magical remedy after another. Keynesianism - deficit financing by the state to maintain full employment - evaporated in the galloping inflation of the 1970s and the recessions of 1975 and 1981. Reaganomics and Thatcherism - restoring profits by cutting the social wage, cutting taxes and allowing unprofitable industries to collapse with mass unemployment - expired in the stock market crash of 1987, the Savings and Loans scandal, and the recession of 1991.  The Asian Dragons, saddled with huge debts, ran out of puff in 1997. The dot com revolution, the ‘new' economy, turned out to have no visible means of support, and the boom in its shares bust in 1999. The housing booms and credit card debt explosion of the past five years, and the use of the gigantic US foreign debt to provide demand for the world economy and the ‘miracle' expansion of the Chinese economy - this too has now been put in question.

We can't predict exactly how the world economy will continue to decline but increasing convulsions and even greater austerity is inevitable.

Capitalism has prepared the conditions for socialism

Karl Marx, in the third volume of Capital, argued that the credit system developed by capitalism revealed in embryo a new mode of production within the old. By enlarging and socialising wealth, taking it out of the hands of individual members of the bourgeoisie, capitalism had paved the way for a society where production could be centralised and controlled by the producers themselves and bourgeois ownership could be done away with as a historical anachronism:

"The credit system hence accelerates the material development of the productive forces and the creation of the world market which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production"[4].

For a century now conditions have been ripe for the abolition of capitalist exploitation. In the absence of a radical proletarian response, the contradictions of this moribund system, the economic crisis in particular, have only become more acute. While today credit continues to play a role in the evolution of these contradictions, it's not that of conquering the world market, since capitalism has long established its social relations throughout the planet. The massive indebtedness of all states has allowed the system to avoid brutal collapse despite the virtual impossibility of further expansion of the world market. But there is a price. After functioning for decades as a means of attenuating the conflict between the development of the productive forces and the obsolete social relations of capitalism, the headlong flight into debt is beginning to "accelerate the violent outbreaks of this contradiction" and to shake the social edifice as never before.  Como

[1] Benjamin Bernanke, Chairman of the US Fed, referred to mortgage arrears as "delinquencies": in other words crimes or misdemeanours against Mammon. Accordingly the ‘criminals' have been punished... by still higher interest rates!


[2] We can't here go into the state of homelessness in the world as a whole. According to the United Nations Commission on Human Rights, 1 billion people on the planet are considered to be without adequate housing, while 100 million have no home at all.





[4] Part 5, Chapter 27: ‘The Role of Credit in Capitalist Production'


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