Michael Collins
11-08-2009, 07:52 PM
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Lost in the Shuffle – A Marxist Analysis of the Economic Crisis
John Reinman
http://tinyurl.com/yjmjr2q
From the far right to the radical left, all sorts of analyses of the ongoing economic crisis have been put forward. These range from the claim on the far right that too many poor people were allowed to buy houses to the claim that the mere existence of the Federal Reserve Bank (the “Fed”) is the cause. On the radical left, causes are alleged ranging from deregulation of the financial sector of capitalism to speculation and fraud. The mainstream media places the blame on the speculative housing bubble.
Lost in the shuffle is the question of the laws of motion of capitalism itself. These laws operate in good times and bad, in periods of war and peace, in periods of rampant speculation and periods of collapse of credit. They operate just as the laws of the weather operate in periods of drought and rainstorm, in hurricanes and mild weather.
Tendency Towards Overproduction & Tendency for Rate of Profit to Fall
Karl Marx explained that one central contradiction of capitalism is the tendency towards overproduction. Workers cannot buy back everything they produce because if they could, there would be nothing left for owners of capital – the capitalists. In addition, he explained that there is a tendency for the rate of profit to fall. It’s not that the absolute amount of profits necessarily falls, nor that the rate falls year-in and year-out, but there is a long term trend in this direction. This is because the actual profit is made on the workers’ labor and as this tends to become a decreasing proportion of the overall investment (with investment in machines, computers, etc. increasing proportionately), the per cent return on the dollar invested tends to decrease. The attempt to prevent this by cutting wages (either by cutting pay of present workers or by investing in newer, low-wage areas) only exacerbates the tendency towards overproduction.
One partial result of these tendencies is the tendency towards investing in pure speculation rather than in production. For the capitalist, it is always preferable to turn a profit without having to bother with actually producing anything. Also, as we shall see, the return on the dollar invested tends to be higher from capital invested in pure speculation rather than on production.
Barrier of Nation-State
On the other side is the existence of the nation-state in the era of world production and world distribution of goods. The productive forces have expanded so massively that they can no longer produce efficiently for one national market; they must produce for a world market. Yet the existence of the nation-states themselves serves to hinder this expansion. (It should be noted that some dreamers on the far right long to return to an earlier era of national markets and national production; they might as well seek to solve the problem of auto-caused air pollution by returning to the horse and buggy.) Major steps have been taken to try to overcome this contradiction, such as development of the euro. Also included in this attempt is the use of the dollar as the international measure of value, the international currency. Again, as we shall see, however, they cannot fully overcome this contradiction and in times of crisis it threatens to destabilize the entire system.
Laws Temporarily and Partially Overcome
Since WW II, and especially over the last 25 years, US capitalism partially and temporarily overcame these laws of motion.
On the one hand, there was an actual expansion of production. This was due to several factors: One was the collapse of Stalinism, which opened up new markets and new avenues for investment. Another was the rapid development of the new technology – the computer, the internet, etc. Among other things, these factors helped boost world trade, which expanded massively. From 1980 to 2002, world trade grew at a rate 50% faster than world production (source: Barriel, Maria and Dean, Mark, http://www. papers.ssrn.com/sol3/papers.cfm?abstract_id=700072) Thus was the barrier of the nation-state partially overcome during this period.
On the other hand, owners of capital – the capitalist class – partially offset the tendency of th rate of profit to fall by several means. One was cutting their labor costs. Ordinarily, this would have meant a reduction in “demand” meaning a reduced market, but this time, there was an enormous expansion of credit to partially compensate for it. From 1980 to 2005, personal consumer debt in the US went from 69% of disposable income to 127%. (Source: US Dep’t. of Commerce)
Speculation
One of the major factors, though, was the massive increase in pure speculation, as illustrated by the increase in finance capital as a percent of the total US economy. This has been so ever since the post WW II period. From 1950 to 2005, manufacturing went from 29% of the US Gross Domestic Product (GDP) to 12%, while the “finance sector” went from 10.9% to 20.4%. During these same years, the share of overall profits that manufacturing provided went from about 55% to about 5%, while “financial services’” share went from 10% to 50%. (Kevin Phillips, “Bad Money” p. 31) Note that the financial sector in 2005 stood at 20.4% of the economy but produced well over double that percent of overall profits while manufacturing’s profits were about half manufacturing’s overall share of the economy. Thus was the tendency for the rate of profit to fall partially and temporarily overcome.
Simultaneous with the rise of finance capital was the expansion of the “money supply” – the total amount of money in circulation. Measured in several different ways, the money supply is not only the number of physical dollar bills, but also the amount of debt present. (This is because both the one who borrowed the money and the creditor are considered to have that money.) Therefore, an expansion of the money supply also reflects an expansion of credit.
One point should be stressed here: Some on the far right are obsessed with the issue of “fiat money” and the de-linking of money from gold. The main issue is not that, but rather the link between money and production. Here is where the problem comes in. From 1980 to 2007, the US GDP increased by 111% (source: www.data360.org/dataset.aspx?Data_Set_Id=354) whereas the US money supply, as measured by “M2”, increased by 362% – over triple the increase in production. (source: www.economagic.com/en-cgi/data,exe,fedstk.m2sl) The fact that this did not cause generalized inflation was due mainly to the increased competition from foreign rivals/allies. However, it did help create the basis for rapid inflation in a couple of arenas – one was on the stock market and another was in housing prices
Now, since the bursting of the housing bubble, workers are no longer able to tap into inflated home values to buy stuff, so the tendency towards overproduction is reasserting itself with a vengeance. We also see how the rampant speculation, which partially and temporarily overcame the tendency for the rate of profit to fall, has enormously destabilized the economy.
The representatives of US capitalism – Republicans and Democrats alike – were able to forestall an absolute freefall in the US economy by a simple measure: socializing the debt. By doing so, they also pumped massive amounts of money back into the financial sector of the economy. Thus have they apparently dodged a bullet. But they have not solved the problem; they have simply expanded its scope, thus setting the stage for a new and even more devastating crisis.
The world economy used the international
role of the dollar to partially overcome the barrier of the nation-states. The dollar has been and remains the main measure of value for international trade. However, as is befitting any capitalist class, the US capitalist class used this role to gain an advantage on their allies/rivals. They forced them to help pay for US capitalism’s military adventures overseas as well as to help fund the speculative bubble which kept the US economy afloat. They were able to do so because the rest of the capitalist world had no alternative to the dollar; they had to accept and hold dollars.
Now, as they hold all those many billions, they are terrified of a collapse of the dollar since it would mean a collapse in the value of their dollar holdings. Even more important, they all recognize that such a collapse would mean a world economic crisis on a scale never seen before. Nevertheless, they cannot prevent capitalism’s laws of motion from asserting themselves; sooner or later, the ability of US capitalism to flood the world with a nearly unlimited amount of dollars will come to an end. Already, the rumblings of this are being heard and the result is that in 2009 the dollar has declined in value by some 15% when compared to a basket of other currencies.
Interest Rates
Also, of course, there was official policy of keeping interest rates artificially low to encourage home buying.
Five years ago, the individual who best represented these policies was Alan Greenspan, head of the Fed. He was lionized as a brilliant genius and a hero by the entire capitalist class. Now, they try to erase the collective memory of him and when his name does arise he is discredited. But it was not just Greenspan and it was not just the Fed – it was the policy of the capitalist class as a whole. And there is a reason for this: It was these policies that played such a big role in creating the conditions for the 25-year boom. Had they not followed these policies, had the speculative housing bubble not developed, then all this means is that this same crisis would have developed earlier!
In the past, Marxists tended to overemphasize the contradictions of the capitalist economy and tended to underestimate its reserves. This mistake should not be made now. However, the opposite mistake is also dangerous – to simply assume that because capitalism was able to avoid a serious economic crisis for 75 years it will do so again. It is impossible to know the timing, how soon the contradictions at work will fully play out. All that can be said is that the laws of motion of capitalism itself are now reasserting themselves and they will not be denied.
When coupled with the threats of war, resource depletion, and environmental disaster, it is clear that either that the working class will seize power in society or the result will be the common ruination of all classes.
Link: http://tinyurl.com/yjmjr2q
Lost in the Shuffle – A Marxist Analysis of the Economic Crisis
John Reinman
http://tinyurl.com/yjmjr2q
From the far right to the radical left, all sorts of analyses of the ongoing economic crisis have been put forward. These range from the claim on the far right that too many poor people were allowed to buy houses to the claim that the mere existence of the Federal Reserve Bank (the “Fed”) is the cause. On the radical left, causes are alleged ranging from deregulation of the financial sector of capitalism to speculation and fraud. The mainstream media places the blame on the speculative housing bubble.
Lost in the shuffle is the question of the laws of motion of capitalism itself. These laws operate in good times and bad, in periods of war and peace, in periods of rampant speculation and periods of collapse of credit. They operate just as the laws of the weather operate in periods of drought and rainstorm, in hurricanes and mild weather.
Tendency Towards Overproduction & Tendency for Rate of Profit to Fall
Karl Marx explained that one central contradiction of capitalism is the tendency towards overproduction. Workers cannot buy back everything they produce because if they could, there would be nothing left for owners of capital – the capitalists. In addition, he explained that there is a tendency for the rate of profit to fall. It’s not that the absolute amount of profits necessarily falls, nor that the rate falls year-in and year-out, but there is a long term trend in this direction. This is because the actual profit is made on the workers’ labor and as this tends to become a decreasing proportion of the overall investment (with investment in machines, computers, etc. increasing proportionately), the per cent return on the dollar invested tends to decrease. The attempt to prevent this by cutting wages (either by cutting pay of present workers or by investing in newer, low-wage areas) only exacerbates the tendency towards overproduction.
One partial result of these tendencies is the tendency towards investing in pure speculation rather than in production. For the capitalist, it is always preferable to turn a profit without having to bother with actually producing anything. Also, as we shall see, the return on the dollar invested tends to be higher from capital invested in pure speculation rather than on production.
Barrier of Nation-State
On the other side is the existence of the nation-state in the era of world production and world distribution of goods. The productive forces have expanded so massively that they can no longer produce efficiently for one national market; they must produce for a world market. Yet the existence of the nation-states themselves serves to hinder this expansion. (It should be noted that some dreamers on the far right long to return to an earlier era of national markets and national production; they might as well seek to solve the problem of auto-caused air pollution by returning to the horse and buggy.) Major steps have been taken to try to overcome this contradiction, such as development of the euro. Also included in this attempt is the use of the dollar as the international measure of value, the international currency. Again, as we shall see, however, they cannot fully overcome this contradiction and in times of crisis it threatens to destabilize the entire system.
Laws Temporarily and Partially Overcome
Since WW II, and especially over the last 25 years, US capitalism partially and temporarily overcame these laws of motion.
On the one hand, there was an actual expansion of production. This was due to several factors: One was the collapse of Stalinism, which opened up new markets and new avenues for investment. Another was the rapid development of the new technology – the computer, the internet, etc. Among other things, these factors helped boost world trade, which expanded massively. From 1980 to 2002, world trade grew at a rate 50% faster than world production (source: Barriel, Maria and Dean, Mark, http://www. papers.ssrn.com/sol3/papers.cfm?abstract_id=700072) Thus was the barrier of the nation-state partially overcome during this period.
On the other hand, owners of capital – the capitalist class – partially offset the tendency of th rate of profit to fall by several means. One was cutting their labor costs. Ordinarily, this would have meant a reduction in “demand” meaning a reduced market, but this time, there was an enormous expansion of credit to partially compensate for it. From 1980 to 2005, personal consumer debt in the US went from 69% of disposable income to 127%. (Source: US Dep’t. of Commerce)
Speculation
One of the major factors, though, was the massive increase in pure speculation, as illustrated by the increase in finance capital as a percent of the total US economy. This has been so ever since the post WW II period. From 1950 to 2005, manufacturing went from 29% of the US Gross Domestic Product (GDP) to 12%, while the “finance sector” went from 10.9% to 20.4%. During these same years, the share of overall profits that manufacturing provided went from about 55% to about 5%, while “financial services’” share went from 10% to 50%. (Kevin Phillips, “Bad Money” p. 31) Note that the financial sector in 2005 stood at 20.4% of the economy but produced well over double that percent of overall profits while manufacturing’s profits were about half manufacturing’s overall share of the economy. Thus was the tendency for the rate of profit to fall partially and temporarily overcome.
Simultaneous with the rise of finance capital was the expansion of the “money supply” – the total amount of money in circulation. Measured in several different ways, the money supply is not only the number of physical dollar bills, but also the amount of debt present. (This is because both the one who borrowed the money and the creditor are considered to have that money.) Therefore, an expansion of the money supply also reflects an expansion of credit.
One point should be stressed here: Some on the far right are obsessed with the issue of “fiat money” and the de-linking of money from gold. The main issue is not that, but rather the link between money and production. Here is where the problem comes in. From 1980 to 2007, the US GDP increased by 111% (source: www.data360.org/dataset.aspx?Data_Set_Id=354) whereas the US money supply, as measured by “M2”, increased by 362% – over triple the increase in production. (source: www.economagic.com/en-cgi/data,exe,fedstk.m2sl) The fact that this did not cause generalized inflation was due mainly to the increased competition from foreign rivals/allies. However, it did help create the basis for rapid inflation in a couple of arenas – one was on the stock market and another was in housing prices
Now, since the bursting of the housing bubble, workers are no longer able to tap into inflated home values to buy stuff, so the tendency towards overproduction is reasserting itself with a vengeance. We also see how the rampant speculation, which partially and temporarily overcame the tendency for the rate of profit to fall, has enormously destabilized the economy.
The representatives of US capitalism – Republicans and Democrats alike – were able to forestall an absolute freefall in the US economy by a simple measure: socializing the debt. By doing so, they also pumped massive amounts of money back into the financial sector of the economy. Thus have they apparently dodged a bullet. But they have not solved the problem; they have simply expanded its scope, thus setting the stage for a new and even more devastating crisis.
The world economy used the international
role of the dollar to partially overcome the barrier of the nation-states. The dollar has been and remains the main measure of value for international trade. However, as is befitting any capitalist class, the US capitalist class used this role to gain an advantage on their allies/rivals. They forced them to help pay for US capitalism’s military adventures overseas as well as to help fund the speculative bubble which kept the US economy afloat. They were able to do so because the rest of the capitalist world had no alternative to the dollar; they had to accept and hold dollars.
Now, as they hold all those many billions, they are terrified of a collapse of the dollar since it would mean a collapse in the value of their dollar holdings. Even more important, they all recognize that such a collapse would mean a world economic crisis on a scale never seen before. Nevertheless, they cannot prevent capitalism’s laws of motion from asserting themselves; sooner or later, the ability of US capitalism to flood the world with a nearly unlimited amount of dollars will come to an end. Already, the rumblings of this are being heard and the result is that in 2009 the dollar has declined in value by some 15% when compared to a basket of other currencies.
Interest Rates
Also, of course, there was official policy of keeping interest rates artificially low to encourage home buying.
Five years ago, the individual who best represented these policies was Alan Greenspan, head of the Fed. He was lionized as a brilliant genius and a hero by the entire capitalist class. Now, they try to erase the collective memory of him and when his name does arise he is discredited. But it was not just Greenspan and it was not just the Fed – it was the policy of the capitalist class as a whole. And there is a reason for this: It was these policies that played such a big role in creating the conditions for the 25-year boom. Had they not followed these policies, had the speculative housing bubble not developed, then all this means is that this same crisis would have developed earlier!
In the past, Marxists tended to overemphasize the contradictions of the capitalist economy and tended to underestimate its reserves. This mistake should not be made now. However, the opposite mistake is also dangerous – to simply assume that because capitalism was able to avoid a serious economic crisis for 75 years it will do so again. It is impossible to know the timing, how soon the contradictions at work will fully play out. All that can be said is that the laws of motion of capitalism itself are now reasserting themselves and they will not be denied.
When coupled with the threats of war, resource depletion, and environmental disaster, it is clear that either that the working class will seize power in society or the result will be the common ruination of all classes.
Link: http://tinyurl.com/yjmjr2q