No Olympic performance from the British economy

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As the blizzard of patriotism that surrounded the Olympics/Paralympics begins to subside, the crisis of the economy comes back in to view. And, unlike the sporting heroism of TeamGB, it’s increasingly difficult for the ruling class to find anything to celebrate in the face of lengthening stagnation.

The UK has now suffered three consecutive quarters of contraction, but the tendency to stagnation is more deeply embedded than this implies; “output has declined in five of the last seven quarters[1]. UK output is still “4.5% lower than it was when the economy peaked in early 2008[2].

Pressure on George Osborne to ‘change course’ and initiate a ‘plan for growth’ is increasing from all quarters. Most recently, some among the 20 economists who supported Osborne’s deficit-reduction programme in the run-up to the last election have begun to break rank[3]. In reality the latest figures show government borrowing up because of the decline in tax receipts.

Naturally, there is no shortage of helpful suggestions on how growth can be restarted. Ministers reportedly want to extend the ‘temporary’ relaxation of Sunday trading laws in the hope this will boost consumption. As expected, this provoked a chorus of criticism from various interest groups: unions talking tough to increase their control over shop workers; Christians worried about further degradation to the Sabbath; Tory MPs concerned about both the religious implications and disruption to ‘family life’, not to mention their irritation at being lied to about ministers’ intentions; small shops (who already can open on an unrestricted basis) afraid of being destroyed by competition with the big supermarkets; and lastly by Big Retail itself in the form of the chief executive of Sainsbury’s.

Could the idea work? One objection is that customers won’t have any more money to spend so simply opening longer won’t make any difference. This isn’t entirely true – longer opening would increase supermarkets outlay on wages, thus pumping a limited amount of demand into the economy. But as it would take a while for this to filter through the economy and the impact would be limited, the most immediate result would be declining profitability for the supermarkets that are already under pressure. Contrary to ruling ideology, capitalism has no intrinsic interest in consumption or production as ends in themselves but only in so far as they generate profit. An increase of consumption that leaves profits stagnant is detrimental to the system.

This underlying rule of the capitalist economy is vital to remember when assessing the worth of the other measures touted as offering a route out of the crisis. Critics of measures such as the above often critique the ‘lack of demand’ in the economy. Is this true? On the face of it, stagnating retail demand, difficulty in capitalists of all types to sell their goods, the general ‘crisis of overproduction’ would seem to support this. And yet, corporate cash reserves in the UK are reported to have reached £750 billion[4]! This is equivalent to twice the total cash pumped out under the Bank of England’s Quantitative Easing programme and is just under half a year’s total GDP. If even part of this reserve could be mobilised in the form of investment, the ‘problem’ of demand could be solved.

So why are businesses hoarding cash rather than investing it? To put it simply, once again, there is no profit in it. Part of the debate within the ruling class is therefore how to persuade business to mobilise their reserves. The irony, of course, is that the reason business supposedly won’t invest is because there is no demand in the economy.

We thus arrive at one of the central contradictions of the capitalist economy. Demand is insufficient because of a lack of investment; there is a lack of investment, because there is no demand! The critics of Osborne lay the blame at his door as the cuts have ‘sucked demand out of the economy’.

This can be overcome, they argue, by the government investing in infrastructure (new motorways, runways at Heathrow, etc.): money is pumped into the economy, increasing demand and thus motivating business to invest. Where does the government get this money? It can borrow it (ironically, from the very banks who hold these stacks of cash) or it can get it can from directly taxing business and workers.

Although something of a simplification, we can see that government spending is actually a forced mobilisation of cash reserves that business won’t invest due to lack of profitability. Such actions certainly create economic activity and will raise demand. But, once again, is this demand accompanied by an increase in profit? Certainly companies that win government contracts are happy – but at the expense of those companies who had their profits taxed in order to pay for it.

The contradiction can be partially overcome where the government borrows the money as the companies – through the intermediary of the banking system – receive a promise from the government to pay it back with interest. But the government’s capacity to pay back the money it borrows is dependent on future taxes that it can leech from the economy i.e. tomorrow’s profits and wages.

The capitalist economy is based on the extraction of profit from the labour force in the form of surplus value i.e. the value produced by the worker beyond what is needed for him to carry on working which returns to him in the form of wages. Crisis occurs when this ratio or the proportion of labour employed as opposed to capital investment (plant, raw materials, etc.) becomes too low. It is this core mechanic which induces crisis and manifests in overproduction.

None of the above strategies actually attack this root cause of crisis, acting only on the surface level of demand. This can certainly keep the economy functioning but unless there is a sufficient change in these core ratios, the underlying crisis is not resolved. Although overproduction is temporarily solved, the crisis manifests in the accumulation of unpaid (and eventually unrepayable) debts. The increasing complexity of capitalist finance kept this staggering explosion of debt hidden for a long time but when it became clear that they had grown beyond a point of no return, the whole edifice began to collapse like a pack of cards.

There is a way for capitalism to return to growth – assaulting our wages and working conditions to increase surplus value and changing the value ratio of plant to labour (the latter can only be brought about by mass bankruptcies, thus flooding the market with cheap equipment). In other words, a cataclysmic crisis which is the very thing the ruling class are trying to avoid as it threatens the stability of the entire system as we saw at the onset of the credit crunch several years ago.

And we finally arrive at the historical reality that this insane system has to offer humanity: its economic survival is dependent on widespread economic destruction. The increasingly desperate antics of the ruling class as they try and grapple with this reality can, at best, only delay this inevitable rendezvous with calamity. To return to the Olympic metaphor at the opening of this article, the capitalist system and its ruling class may have been able to win gold in its athletic youth but it is now aged and decrepit; it is the working class and its struggle for communism that now has the opportunity to go for a victory that will be shared by the whole of humanity. Ishamael 1/9/12

Note: The author of the article defends a minority position within the ICC that considers the rate and mass of profit as the core mechanic behind the economic crisis as opposed to the majority who defend the position of Rosa Luxemburg, which sees the problem of adequate demand as a basic element in the crisis. But although these respective positions differ on how they interpret the factors of profit-rates, demand, overproduction and their implications, both agree on the ultimate futility of ruling class efforts to avoid the decline of their system.

World Revolution 8/9/12


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Economic Crisis