The economic crisis didn’t start in 2007
The shock contraction of 0.5% in the last quarter of 2010 has been somewhat unnerving for British capitalism. Labour immediately seized on the figures as evidence that the Coalition cuts agenda was ill-advised and risked tipping the economy back into recession. Chancellor Osborne responded by saying that backing down on cuts would create worse turmoil in the markets and weaken the economy further.
While from the capitalist point of view there is a real debate on how to manage the economic situation, another aim of carrying out these debates is to obfuscate the true depths of the crisis now confronting the capitalist system. The ruling class present the recent economic disasters as the result of ‘greedy bankers’ and mistakes by government. In reality, however, the crisis is the product of the underlying mechanisms of capitalism. While government policy can influence or moderate the action of these mechanisms, it can never overcome them. The contradictions they seek to resolve are simply displaced – they change their form of expression but eventually return to haunt the ruling class.
Today’s economic situation did not simply fall from the sky. It is the result of decades of deterioration in capitalism’s underlying economic health and the successive failure of all the economic policies mobilised by the ruling class to try and prevent it.
The last phase of sustained growth experienced by capitalism was the post-war boom. While there had been recessions during the boom period, these were usually tackled successfully with ‘Keynesian’ state intervention. Recessions were short-lived and followed by vigorous growth.
While it was especially powerful in the West, the Eastern Bloc was also affected. The Soviet Union was at the height of its power, its economic and military power symbolised by the launch of Sputnik and then Yuri Gagarin into space.
This ‘economic miracle’ – as it was called in a number of countries – began to fizzle out by the late 60s. The first signs of stress were located in the Bretton Woods monetary system, based on dollar-gold convertibility. The US balance of payments had gone negative as early as 1950. Initially, this favoured the boom as the flood of dollars maintained liquidity but over time it began to erode confidence, a situation known as “Triffin’s Dilemma” after the economist who identified it. By 1967, the global monetary system was suffering serious stress and a run on Sterling was the first in a series of destabilising affairs. By 1971, Bretton-Woods was finished.
Monetary difficulties were accompanied by broader economic problems. The devaluation of the dollar badly hurt the oil producing countries and this (combined with the Yom Kippur war) produced the oil crisis of 1973, when the price of oil rose considerably. The overproduction incurred as a result of the crisis was symbolised by the steel crisis – the saturation of global steel markets. Two years of recession followed accompanied by the new phenomenon of ‘stagflation’ - a situation where inflation remains high despite low growth, unemployment and even recession.
The Keynesian consensus of the day appeared powerless to overcome the crisis and this opened the door to monetarism or neo-liberalism. This new policy, christened ‘Reaganomics’ or ‘Thatcherism’ after its most belligerent advocates, promised to overcome the chronic crisis (especially inflation) and return capitalism to the path of growth. Economically, this meant curtailing monetary growth; reducing taxation and state spending; deregulation (particularly of finance capital); and (in many countries) the withdrawal of the state from direct ownership of areas of the capitalist economy (privatisation).
Contrary to the ideology of both left and right, which presented this as a retreat of the state, it was nothing of the kind. The state retained regulatory control over the privatised industries and continued to control the metabolic rate of the economy through interest rates and monetary policy.
The state could no longer afford to resist the inexorable pressures of the market. For capitalism to function, it must be able to establish a sufficient rate of exploitation to allow it to grow. The working class had vigorously resisted the policy of wage cuts via inflation that the Left governments of the 70s had attempted to impose. In response, capitalism simply unleashed the competition that was a consequence of the international overcapacity engendered by a decade of stagnating growth. The market was allowed to do ‘economically’ what the state was unable to do politically. Entire swathes of manufacturing industry in the West were wiped out, with millions of workers laid off. Those that remained were forced to submit to a brutal haemorrhaging of wages and working conditions, and the amputation of the ‘social state’ – that is, reducing the provision of services such as health and education provided through the state while forcing the workers that provide them to do so more ‘efficiently’.
The decimation of manufacturing in the ‘mature’ capitalist economies had its natural counterpoint in the outsourcing to certain sectors of the ‘Third World’. Based on massive rates of exploitation, countries such as China were able to pick up the baton and became the workshops of the world. In the meantime, Western economies, through their financial dominance, could leech massive amounts of value from the new manufacturing centres. This capital naturally required reinvestment but despite the partial recovery from the disaster of the 70s, investment outlets were still inadequate. The deregulation of capital flows allowed enormous amounts of capital to flow quickly around the world in the search of profit and creating a vast pool of speculative finance.
This experimentation with the economic crack cocaine of speculation quickly developed into a full blown addiction. While bubbles and manias have always been a natural product of the capitalist cycle, they more and more came to dominate completely. This certainly provided a level of stimulus for the economy – although actual growth still lagged behind that achieved in the post-war boom – but at the price of increasing financial and monetary instability. 1987 saw the Stock Market Crash, swiftly followed by the Savings & Loan Crisis in the US, while 1990 saw the beginning of a new recession in the West. 1990 also saw crisis in Japan, until then a seemingly unstoppable growth engine, as it suffered the collapse of one of the biggest asset price bubbles in history. Consequently, Japan suffered a decade of stagnation and built up a staggering national debt, a situation that still haunts it today.
From the 90s onwards, currency meltdowns and financial crises became common-place. 1990 saw the collapse of Swedish and Finnish banking systems. In 1992, the European Exchange Rate Mechanism lurched into a crisis. Sterling was rapidly ejected and other currencies also came under serious speculative attack. Hard on the heels of the ERM crisis was the ‘Tequila Crisis’ of 94, another speculative attack on the Mexican Peso. The most serious financial panic, however, was undoubtedly the ‘Asian Crisis’ of 1997, a series of speculative attacks on various South East Asian currencies. This culminated in a storm that swept through the region and brought the vaunted economic ‘Tigers’ and ‘Dragons’ to their knees. This was swiftly followed by almost total economic collapse in Russia in 1998 – millions of people lost their life savings as the banking system toppled over and production ground to a halt. Argentina suffered a similar fate in 2000 while the US in 2001 saw the explosion of the dot.com bubble.
With each episode, the fiscal authorities responded with ever more powerful monetary stimulus, albeit with diminishing results. This has the effect of temporarily relieving the immediate crisis at the price of immediately stimulating another massive bubble. The rampant and malignant growth of ‘sub-prime’ finance that ultimately led to the credit crunch was thus the product of the loose monetary policy that followed the dot.com crash. This perfectly illustrates the chronic dilemma that has more and more confronted capitalism in the past few decades – pour monetary fuel onto the fire and risk the fire consuming everything or watch the fire be extinguished entirely.
There is no longer the possibility of capitalism resolving its economic stagnation in any progressive manner. Instead, all it can offer humanity is an ever more barbarous parade of economic breakdown, intractable and brutal wars, environmental catastrophe and social collapse. Only the class struggle of the proletariat offers an alternative.