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The dotcom bubble

In the 1990s, with the world's economy and stock markets driven largely by the dotcom internet telecommunication advances, it was claimed by capitalist spokesmen that this would result in ever-increasing productivity along with rising prosperity. This was the view propagated by Greenspan in the United States and by Gordon Brown in the UK.

House prices soared, along with internet stocks, to record levels. Borrowers already highly in debt borrowed even more against their assets in what has become known as the feel-good factor.

In spite of the optimistic forecasts by Greenspan and Gordon Brown the boom ended, in a slump as socialists had forecast. Capitalist politicians struggled to adopt measures to halt the economic deterioration by juggling with interest rates and money supply, attempting to avoid the inevitable downturn. The fact of the matter is that we are in an environment which is now inevitably accompanied by rising business failures and unemployment. Hardly a week passes without the announcement of some pension scheme being unable to meet its obligations, Marconi and Equitable Life to mention only two.

It is not uncommon for workers to lose not only their jobs but a large part of their pensions as well. Due to the greater life expectancy it is doubtful whether pensions as we know them will survive. How the funding of pensions conflicts with adequate pensions schemes was explained in the August 2002 Socialist Standard (“Pensions, pay and poverty”). Members of Parliament will have no worries, however, as they regularly vote for generous increases in salaries and pensions.

In France recently there have been large demonstrations against the extension of the contribution period to 41 years in order to qualify for a full pension as a government employee. Pension funding problems in Italy and Germany greatly exceed those of the UK. Why has this happened? Why did the dotcom internet “revolution” fail to produce the lasting upsurge in production, profits and prosperity that the official spokesman promised?

To claim, as do present-day economists, that new inventions in production based on faster communications increasing turnover are novel developments of capitalism is fallacious. Marx and Engels were well aware of this but, unlike the present-day politicians, were aware of its consequences.

In chapter 4 of Volume III of Capital, Marx (in fact Engels from Marx's notes) describes how in his day the introduction of wireless telegraphy, the Suez Canal, and the resultant reduction in shipping time led to a reduction in the time of circulation of capital and refers to “the entire globe being girdled by telegraph wires”. Marx was aware of the effect of improved communications on circulation of capital and its period of turnover and the resultant effect on profits. But in no sense did he see it as producing a permanent social change for the better in the form of steadily rising prosperity. He pointed out that the resultant decrease in the period of turnover leads to a rise in the rate of profit. The dotcom “revolution” had this same effect, which led to capitalists investing in the new technology attracted by the prospect of bigger profits. As usual, there was too much investment leading to what is commonly called a “bubble” which inevitably burst.

The claims of orthodox economics to be a science is dubious. To be so it would have to have measurable units just as chemistry, for instance, has atomic and molecular weights. Having no precise units of measurements, they resort to terms such as “confidence”, “market outlook”, and “aggregate supply and demand factors”. Central to their theories is the belief that the capitalist economy can be managed without periodic economic crises. Clearly, history shows that this does not happen.

We are now in a situation where rival capitalist powers cut their respective interest rates in order to lower currency values against their rivals. One of the main factors in determining a currency value is real interest rates (nominal rate minus the rate of price increases). Nominal rates rise with inflation but this does not mean that real interest rates do. However, if inflation falls and nominal rates remain the same then real interest rates rise. This effect can currently be seen in Germany with a soaring euro reflecting high real interest rates.

Nominal interest rates in the UK today are at their lowest for fifty years. As prices fall consumers do not automatically increase spending if they feel the goods will be cheaper in the near future. If goods are sold more cheaply to clear stock, this will result in a fall in profits. The result of this pushes the economy towards recession, the opposite of the brave new world we were promised as the result of the internet dotcom “revolution”.

At the same time the economy sees the unwinding of debt. As businesses are liquidated so the money goes out of the system. Those economic historians who base their opinions of the view that economic history commenced in 1945 have seen steadily rising prices as a permanent feature of capitalism. Many are now saying it cannot go much lower than it is now.
Because a downward pressure on prices, other things being equal, is an inevitable corollary of depressions, Greenspan has made if clear that he is prepared to buy US government bonds in order to maintain liquidity although interest rates are already 1.25 percent in the United States.

Gordon Brown, the King Canute of Economics, has even stated that, by balancing public expenditure and taxation, the economy could be managed without economic crises. GDP has failed to achieve the levels he forecast. When he and other world leaders congregate at their G7 and G8 meetings, as they did last month in Evian, their ruminations fail to come up with any measures to remedy capitalism's problems. Its problems are inherent as are its inbuilt contradictions which cannot be managed away.