Understanding the crisis
A response to the review by NC of The Failure of Capitalist Production by Andrew Kliman in the January issue of Socialist Voice.
Understanding the crisis is the key to addressing the political challenges we are facing today. A clear understanding of the forces behind the crisis and the contradictions that exploded in 2007 will help communists and class-conscious trade unionists to evolve the correct strategies and tactics for building class solidarity and consciousness, for pushing forward our class interests and the interests of humanity and the planet as a whole.
There are many great thinkers and activists who bring up to date and develop classic Marxist concepts to explain current events: the journal Monthly Review, the author of the book reviewed in January, Andrew Kliman, Michael Hudson, Samir Amin and researchers at RMF (Research on Money and Finance), to name but a few.
They may differ on some points in emphasis or on others in more fundamental understanding. But the aim should not be to choose one view over another and stick blindly to that view: it should be a concrete analysis of a concrete situation. And this is being achieved by using our collective knowledge and experience, combined with the most developed and coherent analysis of the system, placing it firmly in the historical trajectory of this country.
In short, it is to take the best critiques of the capitalist system today and add our experience to them.
Academics and professional economists (no offence intended) have a tendency to exaggerate differences in order to differentiate themselves from other thinkers. While they may lead the way in developing theories and providing the research that others can use, they cannot be relied on exclusively in explaining events, especially the present crisis. It is not about saying Kliman is right and Monthly Review is wrong but rather, in the best tradition of Marxism, taking the best features of the most advanced scientific thought to explain the world around us, and using this to help us change the world.
1. Financialisation of the accumulation process
The review seems to counterpose Kliman’s view of the declining rate of profit and the destruction of capital (or failure to destroy sufficient capital) to financialisation theory (in particular Monthly Review writers) in explaining the crisis and to suggest that it is either one or the other.
The reviewer writes: “The thesis presented in the book stands out in a number of ways from many contemporary radical interpretations (notably the financialised-underconsumptionist thesis advanced by the influential Monthly Review, which melds together a particular Marxian/post-Keynesian viewpoint and that of the Marxist political geographer David Harvey).”
I do not agree that either financialisation or insufficient destruction of capital is the root cause of the crisis. The system itself is the root cause, and both financialisation and insufficient destruction of capital in previous recessions are essential features of monopoly capitalism. Accepting both is not necessarily a contradiction when one understands them as features of monopoly capitalism in its current state.
Kliman’s calculations of the declining rate of profit for the system as a whole, I suggest, do not necessarily contradict the evidence that after-tax profits and wealth have been concentrating and monopolising, leading to an abundance of capital in fewer hands that required investment in financial innovations and that blew up speculative bubbles to avoid global stagnation.
The failure to destroy capital en masse since the Second World War has driven capital to these financial avenues as other, more productive avenues are shut off by over-production and the cheapening of production.
My understanding, for what it is worth, is that the financialisation of the accumulation process (finance as the main avenue for investment of excess capital and source of profit and growth within the system today) is a product of the very crisis Kliman explains so well. It is a result, not a cause, of the generally stagnating economy. It has been a systemic response to divert after-tax profits (and after what capital can be reinvested in the monopolies that finance controls) to financial or (in the case of property bubbles) finance-led investment avenues.
Financialisation was not a misled policy choice but rather a solution to the problem of excess capital in the system, which, without a massive destruction of capital, had no home to go to.
Take GE Capital, Pfizer International Bank or the Volkswagen Bank as examples. These are the banking arms of global manufacturing monopolies. They were not set up as a policy choice by those companies to divert their capital to finance and away from manufacturing: they were set up because even after tax (what little they pay), bonuses and reinvestment, global monopolies still had masses of capital to invest, and financial products offered an avenue.
But financialisation, or the failure to destroy enough capital, do not by themselves explain the crisis; because what drove them as processes?
To try to find this out it might be worth while looking at more of the dominant features and how they connect to financialisation and the declining rate of profit in order to better understand the crisis and the establishment’s response.
2. The monopolisation of power
Wealth, income and control are all features of power, and power is being monopolised and concentrated in fewer and fewer hands globally. Power over productive relations that mould the shape of society, human relations and indeed the environment are increasingly centralised in the hands of the big monopolies and their biggest shareholders.
Even during this recession, global wealth increased, from $195 trillion in 2010 to $231 trillion in 2011, with the top 1 per cent—those with more than $712,000—accounting for 44 per cent of that $231 trillion and the top 10 per cent owning 84 per cent, while the bottom 50 per cent have barely 1 per cent.
Recent research found that of 43,060 transnational corporations analysed, a little over 730 entities control 80 per cent of these corporations, and a mere 147 control more than 40 per cent. Of these 147 controlling entities, 75 per cent are financial institutions.
This is how monopolised and uncompetitive production is. The automobile industry is dominated by about six companies, semiconductors by about twelve, music production about four; there are about ten big pharmaceutical companies, three soft drinks companies, and only two major commercial aviation companies.
And, as described above, these are then controlled by a few—often the same—large shareholders. This would suggest that a willing destruction of capital (or devaluation of assets) will be unlikely, given the power possessed by this handful of people who would take the biggest hit.
3. The internationalisation of production
Hand in hand with the process of monopolisation, and driven by the same accumulation process, production has become internationalised.
The dominant form of production and exchange is not local: it is truly global. A pair of Nike shoes contains about fifty parts, which are made in dozens of different factories in half a dozen countries. The total cost of a pair of Nike runners is about $1.50; they sell for over $100.
This means that workers are pitted against each other globally in a race to the bottom, with only one winner: profit. The amount of money big monopolies can accumulate through the internationalisation of production is huge. This is what has led to an over-accumulation of capital in the system.
The increasing size of monopolies means they can control the production and distribution networks within their field, and pit one against another. Labour becomes de-skilled as workers merely complete one task rather than completing an entire commodity. And more and more is produced through this cheapening and fragmentation of the production process.
However, the drive to pursue profits and ensure a return for shareholders does not pass on price reductions to consumers, as seen in the Nike example; and as workers in the “West” are cheapened by this process, consumption and demand are weakened, resulting in a continuous state of over-production.
Supply is not driven by demand but by the creation of surplus value through the application of labour in the production process. Capital emphasises the need to get the most out of labour, increase and cheapen production. Demand often suffers as a result and rarely meets supply. The extension of debt, or credit, has been a useful tool in artificially trying to match demand to supply. However, it is like putting a plaster over a gunshot wound and cannot seriously create an equilibrium between contradictory forces.
4. The proletarianisation of peoples
One of the great myths is that “globalisation” is destroying the working class and making everyone some kind of middle class. The artificial growth of a middle class has been shown to have been merely superficial and based upon mounting debt and rising asset values. The reality is that, as the internationalisation of production has developed, and in particular the monopolisation of land, this has brought with it the proletarianisation of peoples. More and more peasants and subsistence farmers are driven off their land and forced into cities to work in factories. This also has damaging and negative consequences for the environment, in both rural and urban settings, and has led to the development of horrific slum dwellings around cities.
In addition to this, as the monopolisation of production and retail outlets has progressed, the number of small businesses has also declined globally, being replaced with megastores and transnational companies.
The number of small businesses closing during this crisis is evident. Equally, during a time of crisis, with little real avenue for investment, many companies pursue aggressive take-over strategies to reduce their competition and increase their market share. Often small businesses are absorbed by their larger competitors, again reducing the number of self-employed and increasing the wage class: workers.
5. The growing reserve army of labour
As the system expands into almost every corner of the earth, by open warfare at times, and the working class is expanded, so too is the number of global unemployed—the number of potential workers the system has at its disposal. Marx called this group of potential workers the reserve army of labour, and this has truly expanded as monopoly capitalism has grown.
The proletarianisation of peoples and the defeat of the socialist economies have greatly expanded the number of potential workers, to 2.4 billion today, approximately 65 per cent of the potential global work force.
Supply and demand in influencing the cost of labour (our wages) has an obvious and speedy impact, but the cheaper cost of maintaining a worker in southern parts of the globe is the main driving force behind this process. As production has become so internationalised, the speed at which it can seek out and move to the cheapest parts of the globe has increased. The ever-growing reserve army of cheap labour is part of a race to the bottom and of the assault on trade unions and working conditions in the West.
The retreat of social democracy is less an ideological or policy retreat than a result of the fact that its material base—strong domestic industry in the central economies—has vanished as a result of the monopolisation and internationalisation processes and with it the leverage that workers in those countries could bring to bear on political economy.
6. The pauperisation of the working class in monopoly centres
This process of imposed division and competition between workers is leading to the pauperisation of the working class in the centres of monopoly capital and the gross exploitation and abuse of workers in the South.
As major economic activities have moved away from the West, social democracy has withered. These economies have been forced to become more “open” to deal with the new speed and direction of capital in undermining the terms and conditions of employment.
While real wages have largely stagnated, debt has driven consumption. Inflating asset values, such as houses and shares, have provided a false growth in consumption by working people in the West. This has been shattered by the burst of this latest speculative bubble.
The extremely weak foundations that consumption was reliant upon have been exposed, and increasing “austerity,” to shore up finance capital, is only exacerbating the overproduction of real goods.
7. The role of debt
Credit, and its negative—debt—have always played a role in the capitalist production process. However, it is fair to say today that the role it plays now is far greater and more global in its effect on production and the usual cyclical functioning of the system.
As capital concentrated, those accumulating it could more easily direct and control production to suit their needs through investment and ownership in companies. Equally, the amassing capital required ever more investment avenues. Monopoly production killed off many “real” investment opportunities, and the processes outlined above closed off avenues in reinvestment.
For every extension of a loan, or every bet on a future price or event, debt within the system is created. Debt-based “products” became a significant source of investment and return, including the purchase of and speculation in government bonds or collateralised mortgage products.
Banks created hundreds of debt-based androids that acted as investment avenues but also as security for further loans. This side of the accumulating process (M—M, in the terms used by Marx in Capital) created capital out of itself, and with it volumes of personal, corporate and government debt in the system as debt became an asset and a source of further investment and growth.
The scale of systemic reliance upon this system of M—M growth can be seen in the unusual length of the investors’ “strike” and the negligible effect of hundreds of billions in quantitative easing. During a recession, investors are afraid, and a hoarding of capital is not unusual. However, it would normally pick up after a number of “corrective measures” and an appropriate avenue is found for it.
Today this fear is still clear to see; and reading the pages of Bloomberg or listening to many of the speeches at Davos one can see that it is not going anywhere in the near future. The scale of debt in the system means that investors don’t know how to hedge their bets, as the likelihood of default is ever present and very real. With “sure things” having totally collapsed, investors don’t know where the next Lehman Brother or Irish economy is.
Equally, any quantitative easing that has taken place has not created new jobs or oiled the wheels of production: instead it has been used by those same corporate hoarders to pay off some of their own debts.
8. Speculation and bubbles
While the processes described above have concentrated ever more capital in fewer controlling hands, growth in monopoly centres, such as the United States, Britain, and Europe, would have been negligible over the last couple of decades had it not been for speculation-led financial growth in a series of bubbles.
In the German economy, the driving engine of the economy in the European Union, growth never reached more than 4 per cent but was more often 1 or 2 per cent (and this is including finance-led growth). In Ireland, if one knocks off the 25 per cent or so of GNP attributable to the property bubble each year of the so-called Celtic Tiger, our economic growth was more of a mirage than a miracle. Even recently published reports show that the economy is still stagnant; the only small bit of growth is in foreign monopolies.
Mergers and acquisitions, commodity bubbles and futures speculation, energy and “dot-com” bubbles, sovereign debt and currency speculation, property and mortgage bubbles (and throw in some legal, and illegal, money-laundering)—these have provided the system with its major source of growth, investment, and the creation of new capital through profits.
Speculation is different from investment; it is different from the run-of-the-mill extension of credit to a business or company. In a capitalist sense, investment follows an analysis of the company or product and a belief in its ultimate success. That is to say, the investor has “bought in” to the product. Speculation is less thorough. Little analysis is done, or no thorough analysis can be done, as it may be a blind bet on a future event.
The nature of speculation leads to bubbles, as a spike or inflation of asset prices resulting from the investment of capital attracts more capital, leading to further inflation and consequently to a bubble. While this does provide an avenue for a “quick fix” for capital to invest in and get a return, providing growth in the system, it is quickly flooded with all that other capital seeking an investment opportunity. What may have begun as a spike in valuation grows into a bubble and ends with no soft landing but with an explosive burst.
A system in deep and lasting crisis
The phenomena described above are all dominant features of capitalism today, and they cannot be undone. This is the situation from which any capitalist recovery must come, or from which any transformation to socialism will be born.
These features, and the extent to which they have developed, are what make the present crisis distinctly different from previous recessions, in a number of
1. The crisis is universal. It is not confined to one area of the accumulation process. It is not merely a banking or finance crisis. It is not merely a crisis of under-consumption. It is not merely a crisis of over-production of houses or over-investment in energy.
2. The crisis is global. It is not just in one area or one hemisphere. The United States, the European Union, Japan and the global South are all affected.
3. It appears to be continuous or permanent. Rather than being a two-year or three-year “downturn” with a gradual recovery, this is now the fifth year of the crisis, and there are few signs of a recovery.
This is what makes the crisis truly systemic and structural. This is what makes this crisis different from previous ones. The result of this crisis, and any so-called solutions to this crisis, will deepen the contradictions and accentuate these features even more.
Wealth is already being concentrated even further. Production is monopolised even further, with mergers and acquisitions being used as an investment avenue for the abundance of capital in the system. Production is moving to ever-cheaper parts of the globe, reducing the cost of production to maximise profits out of a contracting customer base. The global number of unemployed is increasing, and the impoverishment of working people in the West will further reduce consumption for goods but also lead to the further indebtedness of both individuals and countries.
Without a massive destruction of capital, the stagnation and contradictions that were only superficially covered up by finance-led growth will lie exposed for some time, wreaking hardship and misery on the vast majority while benefiting only a few.
The structure of monopoly capitalism, and the proliferation of nuclear weapons, with monopoly rivalry and the control of monopolies through shares that are dominated by a few hedge funds and finance companies, may well prevent the global destruction of asset value on the scale that Kliman suggests, leaving us with the understanding that this is not a normal cyclical crisis or recession but one whose features are so accentuated, structural and systemic, and with contradictions so great, that it may well constitute a phase of capitalism in aggressive decay.