Capitalism fails again
Tigers in Trouble. Ed. Jomo K.S. Zed Books. £14.95.
The current crisis in Asia is usually said to have begun with the forced devaluation of Thailand’s currency, the baht, in July 1997. It then spread to the other countries of the region, in particular Indonesia, Malaysia and South Korea which also had to devalue their currencies as outside banks and financial institutions stampeded to withdraw their money.
It would, however, be a mistake to see this as just a financial crisis. As most of the contributors to this book make clear, the financial crisis was a reflection of the situation that had arisen in the real economy where, spurred on by rising export sales which they expected to continue, private capitalist firms had expanded productive capacity beyond what could profitably be sold on world markets. As various different contributors put it:
“In Japan the post-Plaza recovery [i.e. after 1985] was based on a very strong investment boom, but only to result in excess capacity subsequently. Again, the current difficulties in East Asia are traced back to excessive investment in the region since the beginning of the decade” (p. 42).
“Alternatively, it may be termed an over-investment crisis which, in a way similar to Japan, has caused massive over-investment and over-capacity which will produce downward pressure on the prices of traded goods and thus deteriorate the terms of trade of these countries” (p. 57).
“Insofar as it is possible to isolate the original sin in this particular Asian drama it must lie in the deceleration of export growth experienced by the entire region from about the middle of 1995” (p. 66).
“[In Korea] Lack of investment co-ordination led to overcapacity, which resulted in falling export prices, falling profitability due to low capacity utilisation, and the accumulation of non-performing loans in a number of leading industries, including semi-conductors, automobiles, petrochemicals and shipbuilding” (p. 228).
This became a financial and currency crisis because much of the investment in productive capacity that proved to be excessive in relation to markets had been financed by loans from local banks which in turn had borrowed the money from financial institutions in the industrialised world (US, Europe, Japan) where interest rates were.
Contrary to what some claim, banks do not make profits by “creating credit” by the stroke of a pen but are, as this crisis has again confirmed, intermediaries who make profits—or not—out of the difference between the rate at which they lend out money and the rate they pay those they themselves borrow the money from.
When exports began to slow down some of these loans became “non-performing”, i.e. the interest on them was not being paid. Which meant that the local banks were not going to be able to pay interest to those they had borrowed from. When these international lenders got wind off this they decided to get out. This put pressure on the dollar exchange rate of the local currencies which eventually collapsed, so making the situation of local banks worse as they had in effect borrowed in dollars which now became more expensive. This “credit crunch” meant that they were unable to lend so much to local businesses, even those which were still profitable, so obliging them too to cut back on production and lay off workers.
The slump in production which always follows over-investment and overproduction set in, with countries which had enjoyed in the decade 1985-1995 sustained annual growth rates of over 7 percent returning negative figures and seeing unemployment more than double.
In time—after the excess capacity in relation to the market has been destroyed (capitalism’s solution to the problem of poverty admidst potential plenty)—growth will resume but two contributors (Chandrasekhar and Ghosh) doubt that this will be at the same rate as previously. These countries’ growth has been based on “export-oriented industrialisation”, but “the fundamental problem of insufficient world markets for very rapidly increasing exports still remains” (p. 82). Another, Kregel, is even more pessimistic. He thinks this situation could lead to a rise in protectionism which “is precisely the scenario which was the prelude to the global crisis of the 1930s” (p. 66). We shall see.
Economics and Reality by Tony Lawson, Routledge 1997
The “Social Sciences” are in a mess and a few workers within the various subjects know it. The public in general has lost interest, and those engaged in the Natural Sciences are either incredulous or contemptuous—John Gribbin, a physicist, says the expression “social sciences” is an oxymoron, a self-contradiction.
Few people in Europe take psychology seriously any more. Bernard Crick says books on political science are unpublishable; nobody knows what sociology, a bastard half Latin half Greek word, means, and Paul Ormerod wrote in The Death of Economics that his life’s work has turned out to be worthless.
Meanwhile a whale named Karl Marx has surfaced in the most unlikely pages of the New Yorker, the Financial Times and the Observer amid claims that he is the only one who has ever made sense of the whole mess.
Tony Lawson, a Cambridge mathematician turned economist analyses in this book why the “mainstream experts” have failed to provide an explanation of what is wrong with the world and, as a consequence, what to do about it. He begins with methodology.
Their procedure, he says, is simply “deductive”. Reasoning from premisses which are either not disclosed, or when they are, simply do not fit any world that we recognise—they assume a world full of greedy, aggressive loners, squabbling over “scarce means”, they end up with a rag-bag of isolated scenarios and anecdotes. Their world is one of atomic events, of isolated phenomena, unrelated to each other. Then, because this does not supply an explanation, many of them move into “econometrics” i.e. algebraic mumbo-jumbo, or computer modelling, GIGO—Garbage In Garbage Out. You can’t get out of a machine what you did not put in.
All of the procedures (algorithms) of mathematics and logic are tautologies, or equations, and you can’t have unequal equations. They can’t tell us anything about the world but they can help to straighten out our thinking.
Tony Lawson’s analysis of economists’ failure to explain events is that they do not look below the surface for patterns, structures, processes, which are as real and verifiable through their effects as physical things are. Isolated events, individuals, things, have no explanatory power. He points out further that their attempts to use the criteria of physics and chemistry, of the “if x then y” variety, simply collapses human behaviour into that of the non-living world: “Given the open nature of human action—the fact that each person could have acted otherwise—the social structure can only ever be present in an open system”
As a consequence, economic “laws” cannot explain human behaviour mechanically. All living things share some degree of autonomy. And it is in their failure to recognise this that their problems lie, rather than in the conclusions that they draw from them.
The behaviour of humans in society is not unpredictable, but it has to be done appropriately. “If x then y”, a simple causal connection, cannot give us the results that we need.
This book is for students of economics who despair of making sense of the subject. The style is heavily academic, much of it arising from the need to deal with the wilful obscurantism or the hopeless muddle of the advocates of the system. For example, there is some discussion of ontology or being (what the world is really about) and epistemology or knowing (how and what we know about the world), which is not quite the same thing. The problem for us is that the World or the Universe is infinite, and we are very finite. Add to that our inability to investigate more than one thing at a time. Yet reasoning from one thing to many can give false conclusions because we are moving through different levels of abstraction. The whole is greater than the sum of its parts.
A better title for this book might have been Political Economy and Reality which is how Marx characterised the study of capitalism, as opposed to other socio-economic arrangements in history. The capitalist system has occupied less than one percent of human existence and it is only by comparing it with other systems—hunter-gatherer, herder, homesteader, etc and possible future societies—that it can be satisfactorily analysed. Bourgeois apologetics usually fight shy of history, of an economic past, since that might imply a (possibly different) future.
Comparing our unfree society with autonomous past or future arrangements can permit a better understanding of our present predicament. Science supplies only relative or partial truths. “Whole truths”, as A. N. Whitehead pointed out, “are the very devil”, and he could have added: from fundamentalist religion to molecular biology (“genes explain everything”) or any other single cause explanation.
There is an alternative to capitalism but no research funds are being awarded for investigating it. Meanwhile millions of words are being ground out by economists in press, radio, television and books, which leave neither them nor us any the wiser.