The system of production currently dominating the globe is in crisis. The UK economy is 20% smaller than at the beginning of the year. The US and the rest of Europe are 10% smaller. World trade and finance are freezing up. This is a crisis of unprecedented proportions and threatens a new world depression. How did this happen? What has changed in economic management and policy since the last world depression that has brought us to this point in history?
Workers and their unions seemed to be on a path of uninterrupted progression in the post World War Two world.
Advanced capitalist societies in Western Europe, North America, Australasia and Japan, seemed able to adapt enough to provide basic democratic and social rights, including elected governments and union recognition.
For at least three decades it seemed that rights and living standards broadly progressed each decade. Gross inequalities appeared to be being muted not exacerbated.
Full-employment was the official goal of all governments. Conservative and social-democratic governments had a broadly “Keynesian” economic approach. The governments and their economic advisors were confident they could smooth out the ups and downs of the business cycle, maintain full employment, and achieve uninterrupted growth.
In the mid-1980s in New Zealand, real wages reached their highest level and workers had an almost uninterrupted right to strike over any issue. We exercised that right with increasing frequency whether it was over a workplace bullying or dismissals; political strikes against the Vietnam war, nuclear warship visits or sports contacts with apartheid South Africa; or solidarity with other workers in struggle in New Zealand – including general strikes if needed.
It also appeared that society was becoming more open-minded and progressive around issues of women’s rights, racism, and opposition to colonialism and apartheid. Peace movements targeted nuclear weapons and imperialist wars with mass support.
But an inflationary economic crisis emerged in these same countries in the mid-1970s that provoked a political and social reaction against that progress.
Coming out of World War Two the US was the pre-eminent economic and military super-power. The new world empire was based on the US dollar functioning as the world currency. The dollar in turn was guaranteed to be “as good as gold” by having a fixed exchange rate to gold.
However, financing the budget deficits needed to run their wars in Korea and Vietnam, saw US dollars being accumulated abroad and foreign holders starting to lose confidence that the US would be able to maintain price stability. Some demanded gold in return for their dollars. The first casualty of the weakening US dollar was its link to gold being severed. The US and therefore the world went off the gold standard altogether during 1971-73.
This policy was applauded by both Keynesian economists and their “Monetarist” critics around Milton Friedman and the Chicago School. But the immediate effect was to feed the inflationary tendencies already besetting the US and its allied currencies around the world.
US inflation moved from 1-2% a year in the 1950s and late 60s to over 5% then over 10% a year in the 1970s before hitting a high of over 13% in 1980. In New Zealand, it was, if anything, even worse.
An economic recession hit the US in 1973-75 that turned into a combination of stagnation and inflation dubbed stagflation. Printing more dollars to combat the recession simply fed the inflationary beast. The dollar price of gold soared as money traders started to dump dollars for gold. Hyperinflation threatened which would have ended the US’s role as the economically dominant empire.
The US rulers were determined to protect their dominance at almost any price including doing whatever was needed to break the inflationary spiral and restore the stability of the dollar as the pre-eminent world currency.
The man given the job by US President Carter was Paul Volker who was appointed to head the US Federal Reserve Bank in August 1979. Volker had also been involved in the earlier decision to go off the gold standard under former President Nixon. What was dubbed the “Volker Shock” required pushing the official cash rate up to a peak of 20% in 1981. Inevitably a deep recession ensued in 1981-82 pushing unemployment up to 10%. Saudi Arabia and other Gulf states also played a critical role by depositing their hundreds of billions of petro-dollars into US banks directly. If you wanted to know the secret behind the “unbreakable” US-Saudi alliance that is it.
The dollar was restored, inflation was broken, dropping from 14.8% in March 1980 to below 3% by 1983. The era of financialisation and de-industrialisation also ensued over the following decades. General Electric became GE Money because it was easier for capitalists to make money by being financial capitalists than it was by being industrial capitalists.
The deep recessions alongside shifting production in key industries to China and other Third World countries also helped break the back of the insurgent labour movements in the advanced capitalist world.
A new ideology that glorified free markets, free trade, and declared the resultant wealth accumulation and inequality as necessary and beneficial to society. Profit-seeking above all else was deemed the driver of capitalism and promoted productivity and efficiency because only the most efficient could win.
The fact it also created a small class of billionaires dominating global production through their vast monopolies was again just a necessary evil at worst and something to be glorified in reality. “Greed is good” became the capitalist mantra.
This system is ruthlessly efficient. But is also a system that requires uninterrupted growth and maximum exploitation of labour and the environment.
It is also a system that requires an endless growth of debt of all sorts to keep the next few decades of growth from ending in a new deep recession or depression.
The 1980s was the decade of the election of US President Ronald Reagan and UK Prime Minister Margaret Thatcher. Both were aggressive union-busters and promoted an ideological return to a reactionary promotion of individual self-interest over the collective interests of society. In fact, “there is no such thing as society” declared the pathological Thatcher.
Monetarists were put in charge of economic policy everywhere and they tended to discourage the accumulation of public debt but be rather indifferent to the expansion of private debt. Right wing governments didn’t necessarily follow their prescriptions, however, especially when it came to budgets for war and tax cuts for the rich causing deficit spending and debt accumulation. Reserve Banks were given “independence” from governement policy control with a policy prescription to target a low and regular inflation rate of 1-3% by targetting a steady expansion of the “money supply” which they incorrectly conflate as including both government-issued token money and bank-created credit money.
They promised that such policies would eliminate recessions and allow for the uninterrupted expansion of capitalist production.
Stability was restored, but the next three decades saw three business cycles that were anaemic compared to capitalism’s glory days after World War Two. And they seemed to require ever-larger doses of debt to keep expansions going or prevent even deeper recessions from hitting.
Every form of debt has grown enormously over the three decades from 1980 to 2010 – government, household, corporate and yet we ended that period with the “Great Recession” of 2007-8 which was the deepest crash in the capitalist system since the 1930s Great Depression. This has now been followed by what could be the “Greater Depression” of 2020.
Getting out of the Great Recession required the application of monetary and fiscal measures that had not been ever applied on that scale before and the abandonment of monetary orthodoxies imposed in the 1980s to protect against a new inflationary crisis as we saw in the 1970s to save the US dollar and world empire.
The US Treasury brought US government debt instruments directly to support the banks during the 2007-08 crisis and maintain liquidity in the system. This is an electronic version of “printing money.” As the crisis continued to deepen the treasury began buying distressed debt instruments connected to the housing market from banks and other financial institutions as well.
In normal circumstances printing money on this scale would result in the devaluation of the currency and an inflationary surge. This did not happen this time because the crisis had advanced to the point where money markets had already gone on a flight to safety into the US dollar. The 1% were happy to hold onto cash or retire debt rather than spending it more broadly. Inevitably this hoard did leak out into new financial bubbles in real estate and the sharemarket though.
But the US Fed had promised to stop the quantitative easing and begin to withdraw the extra dollars from the system as soon as normality was restored. A return to orthodoxy was considered inevitable. But every time they moved in that direction the market reacted by deflating the stock market and threatening a new recession.
US President Trump also reacted by trying to browbeat the Fed to maintain an upturn through to his re-election in November this year.
The end result was the longest but weakest post-war recovery ever in a business cycle. Industrial production at the end of the recovery was at 80% of capacity which was the number associated with the bottom of the downturn, not the peak of the boom, in the first three decades after World War Two.
This partial “recovery” had also needed the re-emergence of massive new levels of third-world debt, corporate debt, household debt. Government debt had also radically expanded to finance the 2007-08 bailout in the US, Japan and across Europe. Trump also doubled down by also providing new tax concessions to the super-rich in the US which drove up the ongoing deficit in government spending.
But before the corona-virus pandemic hit in March the world was already entering a new recession with durable sales like automobiles down significantly. Then in September 2019 and March 2020 what is called the “Repo market” froze up. This market is never meant to freeze. Howver, it did in 2008 and twice more recently. The Repo market is an overnight settling of accounts between banks, financial institutions, and major players that uses only the safest instruments like government bonds. If this market freezes it is saying that no one trusts each other anymore – even for 24-hours.
So the US Fed simply guaranteed every transaction in these markets to ensure “confidence” was restored and the market didn’t collapse altogether and take down a whole series of debt-laden companies unable to refinance even short-term debt as needed.
Trillions of dollars were poured into markets in the US and extended in credit to central banks across the globe to do the same in their countries. New Zealand soon followed suit with guarantees for government and city council bond purchases as our own form of quantitative easing. This was not required in 2008 in New Zealand because the banking system was less exposed to some of the financial chicanery perpetrated elsewhere and the recession less severe because of export support from China and Australia.
The Pandemic accelerated the impacts of the recession, required closedowns, blew up various bubbles (at least temporarily), and threatened to bring the whole house of debt cards tumbling down.
This time the US bailout of the system required gargantuan sums of money for all sorts of markets. Essentially any form of debt would be guaranteed by the US treasury. Initially, all US government debt instruments were guaranteed and purchasing them undertaken by the Fed to keep interest rates low and drive them lower if possible. This was followed by promising to buy almost any debt instrument, even private corporate debt. Printing money is becoming privatised.
The 2020 crisis of capitalism has resulted in the socialisation of all risks for the capitalists. Markets are not being allowed to “work their magic” in terms of allocating risk and rewards according to any economic rules.
There are laws that capitalism must obey. The first great economic thinkers associated with the birth of this system were Adam Smith and David Ricardo. They explained how the system worked. Smith coined the term of the “invisible hand” that guided the system and made it so revolutionary. As the pro-capitalist site Investopeadia explains:
“The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.”
This invisible hand is based on the law of labour value that Smith and Ricardo both accepted and that Marx incorporated into his writings and took to their final most scientifically developed form.
Marx showed in Capital that prices (exchange-values) are the form that labour values take. But as always there’s a contradiction between appearance and essence. Aggregate market prices can diverge from aggregate labour values (or at least what they would be if they accurately represented labour values). During a boom, prices drift above values.
Marx corrected the classical labour theory of value to show that a commodity’s price did not oscillate around a ‘natural price’ based upon actual labour time, but around a ‘price of production’ that took account of the ratio of labour and capital relative to the average, and the turnover time. An individual commodity goes to the market to see what claim it can make on society’s finite amount of labour time. In total aggregate values equal aggregate production prices, however, the credit system divorces the act of purchase from the act of paying.
Lenders can lend more than they have – they leverage. This pushes up aggregate market prices above their labour values. Claims are being made on future labour time that may never be realised. In a boom everything appears to be going swell, leverage continues to increase until the ‘Minsky Moment’ when some lenders start to panic they may not get their money back. We then get credit crunch, financial crisis and recession. The law of value acts.
Marx’s theory contrary to myth, fully integrates the market, as the value of a commodity cannot be known until it comes to the market. That is, it isn’t the actual amount of labour time inherent in the commodity that gives it value, rather the amount of society’s finite labour time it can claim in the marketplace.
Before fiat money, the capital devaluation was obvious in price deflation. With fiat money, we get currency devaluation, as in the 1970s and 2008. In both periods currency prices in gold rocketed. In ‘gold price’ terms there was deflation. And the reason gold still features in financial markets is it takes a certain amount of labour time to produce an ounce of it. It is still a measure of value, as distorted as it may be due to speculation.
The point of capitalism’s recurrent crises is to bring aggregate market prices back into line with aggregate values. Prices that have been inflated by leverage. Before 1971 crises took the form of price deflation. Since the decoupling with gold, currency prices can increase, but capital still gets devalued in terms of ‘gold prices’ as the currency itself depreciates. The 2007/08 deleveraging was short-lived, as the ruling class bailed themselves out and passed austerity onto everyone else. The debt bubble, and so the discrepancy between aggregate market prices and aggregate values remains.
Pro-capitalist economists can’t understand capitalism’s recurrent crises when they have the wrong, subjective, marginalist theory of value. Price and value are always equal in marginalist theory.
The operation of the law of value under capitalism leads to industrial cycles of boom and bust that ultimately produced a larger and more powerful system of production that conquered the globe. The system would rebound more strongly during periods of recovery if the laws of motion governing that system are allowed to do their magic.
That continued to be true after World war Two for three decades because of the depth of the Great Depression and the suppressed demand for consumer goods as a consequence of the War itself.
Since then, both the Keynesians and the Monetarists have attempted to stop the law of value operating with full force by using fiscal or monetary policies to stop a deep recession happening that would clean out the least productive capitalists (industrial or financial) and reward the most efficient and productive capitalists.
The only results possible have been either an inflationary crisis or an explosion of debt that can never be repaid. Protecting that debt from the operation of the market to reveal its true value, drags the entire system towards permanent stagnation and depression.
The current combination of policies to combat the pandemic and associated economic crisis – which involves both a monetary and fiscal explosion – will sooner or later lead to an implosion of the entire credit and monetary system and along with it the system of capitalist production itself.
The alternative is not to let capitalism operate without any limits in terms of subjecting all labour and the planet to its uncontrolled passion to exploit all and everything for the private benefit of a tiny class of owners. The planet cannot survive another few decades of the same old shit.
Working people need to put forward solutions in the here and now that protect our class and the planet we live on in an immediate sense. Those immediate demands can form part of a Green New Deal to transform the way we produce and live with each other. But we should do so with our eyes open to the fact that this system cannot accommodate what we need without generating new forms of crises. We must be prepared to go beyond a system based on private greed towards one based on human needs.
Two ways forward are being contested today. A road towards nationalism, fascism, and war or a road towards peace, solidarity, and internationalism.
In the words of Rosa Luxemburg, it is “Socialism or Barbarism”
I know my choice.