Crisis of neoliberalism or crisis of capitalism?

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This text is a translation of an article by the section of the ICC in Spain.

Today French President Sarkozy proclaims that "Capitalism must be re-built on ethical bases". German Chancellor Merkel attacks the speculators. Spanish PM Zapatero points an accusing finger at the ‘free-marketeers' who pretend that markets will regulate themselves without state intervention. They are all telling us that this crisis announces the end of ‘neo-liberal' capitalism and that hopes are turning today towards ‘another kind of capitalism'. This new capitalism would be based on production and not finance, liberating itself from the parasitic layer of financial sharks and speculators who were presented as its champions under the pretext of ‘deregulation', ‘limiting the state', and the primacy of private interests over ‘public interests' etc. To hear them speak, it's not capitalism that could collapse, but a particular form of capitalism. The leftist groups (Stalinists, Trotskyists, anti-capitalists) proudly claim: ‘The facts are proving us right. Neo-liberal measures are leading to disaster!' They remind us of their opposition to ‘globalisation' and to ‘unfettered liberalisation'. They demand the state take measures to make the multinationals, the speculators and others, supposedly responsible for this disaster through their excessive thirst for profits, see reason. They claim their solution is a ‘socialist' one that reins in the capitalists for the benefit of ‘the people‘.

Is there any truth in these claims? Is ‘another kind of capitalism' possible? Does benevolent state intervention provide a solution to the capitalist crisis? We will attempt to provide some elements of a reply to these vital questions. But, to begin with, we must first clarify a fundamental question: does socialism come through the state?

Is socialism the same as state control?

Chávez, the illustrious champion of ‘21st century socialism' has just made an amazing declaration: "Comrade Bush is about to introduce measures associated with comrade Lenin. The United States will become socialist one day, because its people aren't suicidal". For once, and without wanting to set a precedent, we are in agreement with Chávez. Firstly on the fact that Bush is his comrade. Indeed, even if they are in a bitter competitive imperialist struggle, they are no less comrades in the defence of capitalism and in using state capitalist measures to save the system. And we can also agree with saying that "the United States will one day be socialist", even if this socialism has nothing to do with what Chavez advocates.

Real socialism defended by marxism and revolutionaries throughout the history of the workers' movement has nothing to do with the state. Indeed socialism is the negation of the state. The construction of a socialist society requires that the state be destroyed in every country of the world. A period of transition from capitalism to communism is required, as communism can't be created overnight. This period of transition will still be subject to the law of value peculiar to capitalism. The bourgeoisie isn't totally destroyed and along with the proletariat, there are non-exploiting classes still in existence: the peasants, the marginalised, the petite-bourgeoisie. As a product of this transitional situation, a form of state is still needed but it no longer has any similarities to the other states that have existed; it becomes a ‘semi-state', to use Engels' formulation, a state on the road to extinction. To advance towards communism in the historical context of a period of transition which is both complex and unstable, full of dangers and contradictions, the proletariat will have to undermine the foundations of this new state as well. The revolutionary process will have to overcome it or run the risk of losing sight of the perspective of communism.

One of the authors within the workers' movement who has addressed this question more than any other is Friedrich Engels. He is very clear on this point: "The whole talk about the state should be dropped, especially since the Commune, which was no longer a state in the proper sense of the word. The ‘people's state' has been thrown in our faces ad nauseum by the Anarchists, although already Marx's book against Proudhon and later the Communist Manifesto, directly declare that, with the introduction of the socialist order of society, the State will dissolve itself and disappear. Since the state is only a transitional institution which is used in the struggle, during the revolution, to hold down one's adversaries by force, it is pure nonsense to talk of a free people's state: so long as the proletariat still uses the state, it does not use it in the interests of freedom but in order to hold down its adversaries, and as soon as it becomes possible to speak of freedom, the state as such ceases to exist." (Letter to Bebel, 1875).

State intervention to regulate the economy in the interests of ‘all the people', etc, hasn't anything to do with socialism. The state will never be able to act in the interest of ‘all the people'. The state is an organ of the ruling class and is designed, organised and constructed to defend the ruling class and to support its productive system. The most ‘democratic' state in the world is no less the servant of the bourgeoisie and will defend the capitalist system of production tooth and nail. On the other hand, the specific intervention of the state into the economy has no other purpose than preserving the general interests of the reproduction of capitalism and the capitalist class. Engels makes this clear in Anti-Dühring: "And the modern state, too, is the only organisation with which bourgeois society provides itself in order to maintain the general external conditions of the capitalist mode of production against the encroachments either by the workers or by individual capitalists. The modern state, whatever its form, is an essentially capitalist machine; it is the state of the capitalists, the ideal collective body of all capitalists. The more productive forces it takes over as its property, the more it becomes the real collective body of all the capitalists, the more citizens it exploits. The workers remain wage-earners, proletarians. The capitalist relationship is not abolished; it is rather pushed to an extreme."

Throughout the 20th century, with the entry of capitalism into its decadent phase, the state has been its main defence faced with the worsening social, military and economic contradictions. The 20th and 21st centuries are both characterised by the universal tendency to state capitalism. This tendency exists in every country of the world, no matter what political regime is in place. State capitalism is implemented in two basic ways:

- Complete statification more or less of the whole economy (this is what existed in Russia and still exists in China, Cuba, North Korea...) ;

- The combination of the state bureaucracy and the big private capitalists (as in the United States, Britain or Spain, for example).

In both cases, it is always the state that is in control of the economy. The first makes an open display of its ownership of a large part of the means of production and services. The second intervenes in the economy through a series of indirect mechanisms; taxes, fiscal policies, buying into companies[1], fixing the inter-bank interest rates, price controls, standards of accounting, state advisory, inspection and investment agencies[2], etc.

We are overwhelmed with ideological hype that is based on two associated lies: the first identifies socialism with the state, the second identifies neo-liberalism with deregulation and with the free market. Throughout the period of decadence (the 20th and 21st centuries), capitalism couldn't survive without being propped up all the time by the state. The ‘free' market is directed, controlled and supported by the iron hand of the state. The great classical economist Adam Smith once said that the market ruled the economy like an ‘invisible hand'. Today the market is ruled by the invisible hand of the state![3] When Bush was forced to save the banks and the insurance companies, he wasn't doing anything exceptional, any more than he was doing "what comrade Lenin did". He was only continuing the work of controlling and regulating the economy that is the daily responsibility of the state.

Has neo-liberalism failed?

After a period of relative prosperity from 1945 to 1967, the recurring world crises of capitalism returned with periodic convulsions followed by tremors that have brought the world economy to the brink of disaster. We can go back to the 1971 crisis when the dollar had to be detached from the gold standard; that of 1974-75 that ended with galloping inflation of over 10%; the debt crisis of 1982, when Mexico and Argentina had to suspend debt repayment; the Wall Street crash of 1987; the crisis in 1992-93 that led to numerous European currencies collapsing; that of 1997-98 that exposed the myth of the Asian Tigers and Dragons; that of the bursting of the Internet bubble in 2001...

"What characterises the 20th and 21st centuries is that the tendency towards overproduction - which in the 19th century was temporary and could easily be overcome - has become chronic, subjecting the world economy to a semi-permanent risk of instability and destruction. Meanwhile competition - a congenital trait of capitalism - became extreme and, crashing up against the limits of a world market which constantly verged on saturation, lost its role as a stimulant for the expansion of the system, so that its negative side as a factor of chaos and conflict came to the fore"(‘Capitalist economy: is there a way out of the crisis?' WR 315).

The different stages of the crises that followed each other through the last forty years are the product of this chronic overproduction and the exacerbation of competition. The capitalist state has attempted to combat the effects using various palliatives, the main one being increasing indebtedness. The strongest states have also deflected the most harmful consequences, ‘exporting' the worse effects onto the weakest countries[4].

The classic policy adopted in the 1970s was state indebtedness, backed up by a policy of direct state intervention into the economy: nationalisations, taking companies over, a rigid supervision of external trade etc. This was the ‘Keynesian' policy[5]. We should remind the amnesiacs who want to impose a false dilemma between neo-liberalism and state intervention that every party from the right to the left, were ‘Keynesians' then and publicised the benefits of ‘liberal socialism' (like that of the Swedish social democratic model). The disastrous consequence of runaway inflation arising from this policy, destabilising the economy, tended to paralyse international trade. The ‘solution' adopted in the 1980s was christened ‘the neo-liberal revolution' in which the key figures were the ‘Iron Lady', Margaret Thatcher, in Britain, and the ‘Cowboy' Ronald Reagan in the United States. This policy had two objectives:

  • Cutting costs by eliminating substantial unprofitable parts of the productive apparatus resulted in an unprecedented wave of redundancies organised and planned by the state. Thus began a process of irreversible degradation of workers' living conditions, with an end to job security and the start of cut-backs in state benefits etc[6].
  • Relieving the burden of the debt strangling the state by privatising sectors and sub-contracting services and operations to private companies, with the systematic transfer (via sales of shares) of the public debt to individuals, banks, speculators etc. This second stage of the ‘neo-liberal' policy was designed to pass the state's debt onto the financial sector. The market was flooded with all kinds of stocks, bonds etc, in which speculation exploded to monstrous proportions. From this point the world economy began to reassemble an immense casino in which governments, banks and expert brokers engaged in complicated operations to realise immediate profits from speculating... at the cost of terrible consequences in bankruptcies and destabilisation.

Don't listen to stories about how ‘private initiative' promotes ‘neo-liberalism'. These mechanisms don't spring spontaneously from the market but are the fruit and the consequence of a state economic policy for curbing inflation. It only postponed it, and it paid a heavy price as a result: using obscure financial mechanisms, debts were transformed into speculative credits at high rates of interest, yielding some juicy benefits at first which would however need to be disposed of at the earliest opportunity because, sooner or later, no-one would be able to pay out any more. At first these credits were the most attractive ‘shining stars' in the market which the banks, the speculators, the governments, all fought over, but they were very rapidly transformed into doubtful and devalued credits that investors avoided like the plague.

The failure of this policy was revealed with the brutal Wall Street ‘crash' in 1987 and the collapse of the American savings banks in 1989. This ‘neo-liberal' policy continued throughout the 1990s; but given the mountains of debt that were weighing the economy down, the costs of production had to be cut back by improving productivity and through outsourcing, which consisted in exporting whole parts of production to countries like China, where poverty wages and harsh working conditions dramatically affected living conditions for the world proletariat. This is when the concept of ‘globalisation' emerged: the bigger, richer countries demanded that protectionist trade barriers be removed and then swamped the smaller, poorer countries with their products to relieve their chronic overproduction.

Once again, these ‘medicines' only worsened the problem and the crisis of the Asian Dragons and Tigers in 1997-98 showed the ineffectiveness of these policies as much as the dangers that they held. But then capitalism pulled a rabbit out of the hat. The new century introduced us to what would be called the ‘net economy', in which excessive speculation in companies dealing in computers and the internet took place. In 2001 this quickly proved itself a staggering failure. Capitalism delivered a new magic trick in 2003 with a period of unrestrained speculation in the property market, with a growth in commercial and residential property around the world (in the process, adding to environmental problems). This gave rise to a terrible escalation in property prices, leading us to... the horrendous fiasco of the present day!

... or is it capitalism that's failed?

The current crisis can be compared with a gigantic mine field. The first to explode was the crisis of the subprimes in the US in the summer of 2007. We might have thought at first that things were going to fall back into place, after several billion dollars were paid out. Hadn't we seen it all before? But then the collapse of the banking institutions from the end of December was a new mine that shattered all illusions. The summer of 2008 has been breathtaking with a succession of bankruptcies of banks in the United States and Britain. By October 2008 another illusion that the bourgeoisie thought it could use to deflect our concerns went up in smoke: they said that the problems were immense in the United States but that the European economies had nothing to fear. As if. But the mines now began exploding in the European economies too, starting with the most powerful state of all, Germany, which looked on without reacting to the collapse of its principal savings bank.

When everything seemed to be ticking along for the bourgeoisie, what triggered the violent explosion of these mines? This is the product of 40 years of treating the crisis with palliatives that masked the problems and more or less allowed a system burdened with insoluble problems to carry on functioning. It resolved nothing, but it aggravated the capitalist contradictions to their breaking point, and now in this current crisis we are seeing the consequences unfold one after the other.

So can capitalism find a way out like it has done done before?

This idea is a false consolation:

  • The previous episodes of the crisis were ‘resolved' by central banks making several billions of dollars available (100 at the time of the Asian Tigers' crisis in 1998). Today states havedisbursed 3,000 billion dollars since a year and a half ago and they can't see if there is going to be any end to it [7].
  • The worst effects of the crisis had until this point been confined to a few countries (South East Asia, Mexico and Argentina, and Russia), while today the epicentre, where the worst effects are concentrated, is precisely in the central countries: the United States, Britain, Germany... and this is having a powerful effect on the rest of the world.
  • These previous episodes were, in general, with the exception of the one at the end of the 1970s, of short duration and lasted for a period of six months to a year before there was light at the end of the tunnel. It is now a year and a half since this crisis began and there isn't even a glimmer. On the contrary, each day, the crisis is more serious and the disaster more profound!
  • Moreover, this crisis is going to leave the world banking system very weak. The credit mechanisms are paralysed: owing to the general distrust, no-one really knows if the ‘assets' that the banks (and businesses) are declaring in their balance sheets are false or not. Property, businesses and plant are all losing value. As to the financial assets, according to the expression used by Bush, they are only "toxic assets", pieces of paper representing incredible, unrecuperable debts. ‘Liberal' state capitalism cannot function without strong and solid banks. The capitalist economy is so addicted to the drug of debt at the present time that if the credit system is incapable of supplying an abundant flow of money, production will be paralysed. The tap of credit is turned off despite the enormous sums made available to central banks by governments. No-one is clear how a system damaged throughout and losing its vital organs - the banks - one after the other, is going to recover. The crazy action of European states looking at who can give the biggest guarantees for their banks' deposits is a real sign of desperation. This overloading of ‘guarantees' shows clearly that nothing is guaranteed!

Some things are clear: capitalism is today experiencing its most serious economic crisis. There has been a brutal acceleration of history. After 40 years of a slow and uneven development of the crisis, this system is on course to sink into a terrible and extremely deep recession from which it will not emerge unscathed. But above all, from now on, the living conditions of billions of people will be severely affected for the longer term. Unemployment will hit a lot of homes, 600,000 in less than a year in Spain, 180,000 in August 2008 in the United States. Inflation is hitting prices of basic foodstuffs and hunger has been ravaging the world at breathtaking speed during the last year. Cuts in wages, temporary shut-downs of production, threats to retirement pensions... There is not the least doubt that this crisis is going to have consequences of unprecedented brutality. We don't know if capitalism can recover from this but we are convinced that millions of human beings will not. The ‘new' capitalism that will emerge from this crisis will be a much poorer society with vast numbers of proletarians having to face general insecurity, in a world of disorder and chaos. Each of the previous convulsions throughout the last 40 years has ended in a deterioration of the living conditions of the working class and with more or less major shut-downs of the productive apparatus. The new period that is opening up will take this tendency to a much higher level.

Only the class struggle can provide humanity with a way out of the impasse

Capitalism is not going to give up the ghost. Never has an exploiting class accepted the reality of its failure and given up power without a struggle. But we know that after more than a hundred year of catastrophes and convulsions, all the economic policies that state capitalism has used to solve its problems have not only failed, but have made the problems worse. We expect nothing from the so-called ‘new solutions' that capitalism is going to have to find to ‘come out of the crisis'. We can be certain above all that they will cause still more suffering, more poverty; and we have to be ready to face up to new, even more violent, convulsions.

This is why it is utopian to put any trust in any so-called ‘solution' to the crisis of capitalism. There is none. The whole system is incapable of hiding its bankruptcy. Being realistic means participating in the proletariat's efforts to regain confidence in itself, taking part in the struggles and discussions, the attempts at self-organisation which will enable the class to develop a revolutionary alternative to this rotting system.

ICC (8/10/08)

[1] An example of this is in the United States, presented as the Mecca of neo-liberalism. The US state is the main customer of companies and the computer companies are obliged to send a copy of the programmes they create and the components of the hardware they make to the Pentagon.

[2] It's a fairy tale that the American economy is deregulated, that its state doesn't intervene etc. The stock market is controlled by a specific Federal Agency, banks are regulated by a state commission, the Federal Reserve determines the economic policy through mechanisms like the rate of interest.

[3] The scourge of corruption is clear proof of the omnipresence of the state. In the United States, as in Spain or China, the ABC of the enterprise culture is that business can only prosper by having contacts inside the state ministries, and by sucking up to the political ‘men of the moment'.

[4] In the articles on ‘30 years of capitalist crisis', published in nos 96, 97 and 98 of the International Review, we analysed the techniques and methods with which state capitalism has accompanied this fall into the abyss so as to slow it down, succeeding in doing this in successive stages.

[5] Keynes is especially famous for his support for an interventionist state policy in which the state would use fiscal and monetary measures with the aim of offsetting the unfavourable effects of periods of cyclical recession in economic activity. The economists consider that he is one of the main founders of modern macro-economics. 

[6] We should remember here that, contrary to what is stated by all kinds of ideologues, this policy is not a characteristic of ‘neo-liberal' governments but was approved one hundred per cent by ‘socialist' or ‘progressive' governments. In France, the Mitterand government, supported by the Communist Party until 1984, had adopted measures as tough as those adopted by Reagan or Thatcher. In Spain, the ‘socialist' government of Gonzalez organised a ‘redeployment' that led to one million jobs being lost. 

[7] It is particularly stupid to think that this deluge of billions will not have any consequences. It is in fact preparing an even more uncertain future. Sooner or later, this folly will have to be paid for. The generalised scepticism that has met Paulson's financial rescue plan, the most gigantic in history (700 billion dollars!), demonstrates that the remedy is going to create new mine fields, more powerful and devastating than ever, in the subsoil of the capitalist economy.