Wednesday 21 October 2009

Roots of the Recession

A couple of weeks ago Keele was treated to the inaugural professorial lecture of Bülent Gökay. Having attended a number of his thought-provoking lectures over the years (including this one on peak oil), I thought it would be relevant to my interests, and so it proved. Bülent's paper, 'Tectonic Shifts and Systemic Faultlines: A Historical Perspective on the 2008-9 World Economic Crisis' was written from the perspective of the heavily Marxian-influenced world systems approach and set out to make sense of the present crisis. Is it the case the crazy actions of rogue bankers were to blame, or is there something deeper going on?

Unlike those that have gone before, the present economic crisis stands unique in the speed at which it happened and how no corner of the globe has remained untouched. However, as far as Bülent was concerned most mainstream commentators are at a loss to explain why it happened (see, for example, Alan Greenspan in the BBC's The Love of Money - with his theories in shreds he is forced to blame the crisis on that hoary old canard, human nature).

For those that go beyond essentialist arguments, one needs to look at the processes and longer-term historic trends that are involved. Most immediate, of course, was a boom driven by credit, overlaid with sophisticated speculative financial instruments and the fact economic decision-making happens away from the public gaze and in secret away from the eyes of competitors. Exacerbating and causing this overheating of the global economy were the policies of successive US administrations. As the world's hegemonic power and economic policeman, through the World Bank, IMF and direct aid it encouraged global deregulation and speculative, unproductive economic activity. In so doing capital became almost footloose and seemingly able to roam the world at will, seeking out the most profitable opportunities. This way national economies overlapped and enmeshed with one another at ever greater speed. So when it started unravelling and plunged the world into deep crisis not only were all the failings of neoliberal globalisation exposed, the crisis represented a challenge to the US's leadership.

In many ways this is a crisis made in America. Sub-prime lending, which is widely blamed as the trigger for the crisis was an exceedingly speculative activity. Lending mortgages at (initially) extremely low interest rates on repayments and without the need for a down payment proved attractive to many working class Americans. The lenders naively assumed that once the higher rates kicked in, larger repayments could be met by ever increasing incomes and/or the climbing house prices. Lenders believed this was the chance for risk-free profit, and so did many others, which was why investment banks like Lehman's funneled massive funds into this sector. The other side to this was the US's decline as a manufacturing power. With US-led overseas restructuring via the World Bank and IMF it became easier for capital to uproot plant and transport it half way round the world to churn out goods at a fraction of the labour costs of the home market. But in that market itself, with a drying up of profitable productive uses to which capital could be put, fiddles like sub-prime mortgages seemed like a good outlet.

There's no need to repeat the rest of the story. But there is a danger the crisis might, at some point in the future, repeat itself. The only lesson seemingly taken on board by governments, policy wonks, bankers and economists is the need for more regulation. It goes deeper than this, it was a crisis of the structural changes inaugurated by neoliberalism that encouraged particular kinds of economic behaviours, rather than reckless actions per se. However, the powers that be have stuck with subjective Greenspan-style "explanations" because it suits them to do so. None of them would dare admit the economic policies they foisted on the world these last 30 years have been wasteful, irresponsible and extremely damaging.

For Bülent the present crisis is an outcome of ongoing tectonic structural changes. On the one hand there has been the growth of finance at the expense of manufacturing, and on the other has been the loss of US power and the rise of alternative centres of capital accumulation.

Turning first to finance, in the West and particularly Britain and the US, the switch to the economic dominance of finance capital was rooted in their response to the falling rate of profit. Up until the late 1960s capitalism was booming as it basked in the high water mark of manufacturing. The ratio of profit to (productive) capital investment increased and economies expanded, fuelling full employment and the expansion of welfare states. From the late 60s the tendency for the rate of profit to fall reasserted itself. Rather than being locked into a long-term decline, UK and US capital looked for a way out. The election of Thatcher and Reagan saw them undertake attacks on labour movements and welfare, The resulting restrictive labour laws allowed capital to hold down or cut wages while increasing working hours. Governments attacked welfare spending to fund tax cuts on profits. Privatisation of state assets allowed for new accumulation opportunities. And overseas, weak developing economies were laid open to the predations of Western capital. Productivity rose but real wages lagged well behind. The proportion of wealth coming to workers stopped growing and went into reverse. Widening inequality gaps became the order of the day. Credit assumed an ever greater role in the economy and managed to lubricate the wheels of capitalism, but they could only delay and not stop them from coming off. But at least for a period mega profits poured into the coffers of the wealthy and super rich.

The second point is hegemonic. After the end of the Second World War, the devastation inflicted on the metropolitan centres of capital outside the US (Western Europe, Japan) meant they had no choice but to accept the restructuring of the global economy in America's interest. As they recovered under US leadership they became very effective competitors. While US profit rates were declining Japan and West Germany boomed. Relative economic decline however did not set in until the end of the Cold War, at which point the economies of south-east Asia took off in a rocket of state-directed development. China and India in particular are responsible for most of this growth, and not just because of their massive reserves of cheap labour. Not only are they workshops for the world, their internal markets are growing too. Presently China possesses the third largest domestic market. For Bülent this is the stirring of a new world order to come, one where the West is no longer hegemonic.

This is why the regulatory "solutions" proposed by Western politicians are clearly inadequate. No amount of regulation is going to alter the tectonic shift in capital accumulation toward the East. The uni-polar world of US dominance is rapidly becoming a thing of the past - the world is heading toward a multi-polar phase. And in the economies at the heart of the global crisis, governments are moving to cut public spending, and companies (even ones relatively untouched by the recession) are shedding jobs and freezing wages. Holding these down - in the absence of cheap credit - is storing up more trouble for the future.

In sum, I thought the talk was very interesting, but I have a couple of issues. First, Bülent talked about the present crisis as an economic and ideological crisis. Undoubtedly that is true - Greenspan's comments are echoed in New Labour's continued neoliberal habits of mind, albeit one that has been much toned down. The Tories on the other hand (and Republicans in America) cling on to the sinking neoliberal ship for want of anything else. But Bülent did not expand on the relationship between ideology and economics and how they reinforced each other through the 80s until recently. Second there is class struggle. Its importance is acknowledged as capital (aided and abetted by the state) took on and won battles with trade unions in America and Britain. This found short-termist answers to the tendency for the rate of profit to fall. But I think class struggle is the main missing actor in this narrative. Neoliberal deregulation and privatisation, and firms' ability to hold wages down while intensifying the rate of exploitation would have proven impossible had the key battles of the 1980s been won by labour movements. The credit bubble, the downgrading of manufacturing and today's economic crisis are the bitter fruits of what happened 20 or so years ago.

Will capital ride out the present crisis by successfully making the workers pay for it? Time, and struggle, will tell.


Condominiums in Toronto said...

Hello. I definitely agree that "in many ways this is a crisis made in America". The whole country has been in debt for a long time and most of the American population is used to taking loans hoping there will be enough money to pay for them one day. The problem is that there is not enough money and probably even won't be as the unemployment rate is growing. In my opinion, the housing "bubble" which triggered the financial crisis wasn't the last one and we can expect another ones.
Take care,

Boffy said...


Great post. I think it reinforces some of the arguments I have amde over the last few years. Just some cursory comments.

1. The financial bubble in the US was not "irrational" within its own context. It was a necessary consequecne of the monetary stimulus used to keep the US economy afloat during the Long Wave downturn, and the process of structural adjustment referred to. There was a really good programme on BBCFour the other night about Britain in the 1930's. It showed how the picture we have of mass unemployment was only half the picture. In the South-East, the new industries that were to lead the post-war boom were developing, and there was considerable affluence. It was also interesting that it was during this period - when the workingc lass was very weak - that Neville Chamberlain developed most of the basic ideas that were to become the post-war "Welfare State"!

2. Although there was "de-industrialisation" in the US during the 80's/90's downturn, it could only go so far. Big Monopolies like Ford and GM continued production. Without them during this period its unlikely anything could have prevented a Depression. Their monopoly position and huge Balance Sheets allowed them to sustain losses over many years, and allowed workers in them to maintain living standards to some extent. The important point is that although the crisis has shown the problems of globalisation, it is a fact, and from a Marxist perspective a progresive fact.

But, a consequecne of the fact is that ultimately the high wages in the US, UK etc. for many of these products like cars are unsustainable. Approaches based on more militancy to try to defend those wages simply cannot work in this environment. Marxists should not pretend they can. We need political solutions, and solutions based on creating new industries in the West where high wages can be sustained.

Boffy said...

I have just one other comment which is about what you say about class struggle. Marxists cannot exclude class struggle from any economic analysis as you say. However, I think its necessary to udnerstand that it is a dialectical interrelationship.

During the Long Wave boom as Glynn and Sutclifffe showed workers were able to raise wages at the expense of profits. This is one factor that played into the particular degree of neglect and udnerinvestment in the British economy. Income shares ar always to some degree at least a function of class struggle. But, as Marx pointed out only within limits. Capital has the whip hand and will respond - underinvestment being one example, de-industrialisation and golobalisation being another.

The longer term aspect of this is that the ability of workers to resist, to assert their interests is itself a function of the economic reality. It is no accident that in the boom of the 19th century workers organsiations gained size and strength, and declined in the long downturns. Nor that in the Long Boom at the edn of the 19th century beginning of the twentieth large workers organisations and parties developed.

But, nor is it a coincidence that in the 1920's and 30's they were put seriously on the back foot, or that in the 60's and 70's workers again strode forward only to be knocked back in the 80's and 90's.

The conjunctural turns with the Long Wave are undeniable. There is a period of around 10 years or so from the end of the Long Wave boom during which the strength of the workers built up during it exerts itself to defend the workers against the icnreasing attacks of the bosses in response to the downturn. If workers fail to produce political solutions during that period i.e. a revolution, then the material conditions impose themselves, the repeated struggles of workers during that period udner increasingly difficult conditions - closures, redundancies etc. - make themselves felt in the workers spirit and conscioussness, and defeat is inevitable.

Phil said...

Excellent points, Arthur. As I'm not an economist by any stretch (albeit with an amateur and very occasional interest in political economy) I welcome your input on this and other forays I make into economics.

Re: declining industries, when I was writing about the miners' strike fives years ago for my Weekly Worker columns I remember coming across some old NUM documents. They were interesting because they accepted the decline of king coal was inevitable, instead they were about managing that decline without consigning pit-dependent communities to the scrap heap. This talked about new industries coming in as alternatives to the mines. But as we know these never saw the light of day.

Boffy said...


Thanks. On the pit communities, I'm not sure. Most of these communities actually do not have "new" industries locating within them. They tend to be low paid, low status jobs in warehouses, Retail parks etc. but they are new, and to an extent reflect the shifting nature of the British economy a bifurcated labour market split between large numbers of such low paid jobs, and another sector of very highly skilled, highly paid workers - within which I'd include the financial sector.

In other words what I's saying is that Capitalism does resolve its problems, but does so on its terms, and only through a series of crises. That's one reason I'm a bit dismissive of Environmentalism. Capitalism in developed coutnries has cleared up the mess of the Industrial Revolution, it has an interest in not destroying itself, and has an even greater interest in making profits out of new technologies and industries that deal with soem of those environmental problems. But, precisely because it cannot do that in a rationally planned way, and because the driving force is profit, that resolution comes about only through environemntal crises. Oil efficiency for example icnreased hugely after the Oil crises of the 1970's.

You know my own feeling on this. The workers at Tower Colliery took matters into their hands by setting up a Co-op that kept them in jobs, and its only workres who have the incentive for using any breathing space to consider what jobs, what industries might be sustainable to provide decent employment into the future.

Joe said...

The crisis was casued by the lending of money to people who could not pay it back for reasons of government-motivated social intervention. NGOs were permitted to sue and to threaten to sue banks that would not lend more uniformly by postal code - meaning - that they weren't lendeing enough to people in neighborhoods where people with low incomes live.

Socialistic intervention by government and pressure groups (motiveated by the class warfare model of society) who themselves bear no responsibilities for their actions is at the root of this problem.