This article has been reproduced from the Socialist Standard<\/em> (October 1998), the\nmonthly journal of the Socialist Party of Great Britain. <\/p>\n\n\n\n <\/p>\n\n\n\n Thirty countries covering a quarter of the world’s population are officially in recession. Even defenders of capitalism are now compelled to use the term “world economic crisis”.<\/p>\n\n\n\n It had to happen. Given the chronic state of overcapacity and potential overproduction\nin relation to the market in all the key sectors of global industry-electronics,\ncomputers, vehicle production, pharmaceuticals, shipbuilding, steel-the boom in Asia had\nto come to an end sooner or later. It already had in Japan, by far the biggest economy in\nthe region and in fact the second biggest in the world after the US. Now the rest of East\nAsia-Korea, Malaysia, Thailand, Indonesia, Hong Kong and other so-called tiger\neconomies-has followed. <\/p>\n\n\n\n It is difficult to believe that at the beginning of the decade Kinnock, when leader of\nthe Labour Party, went into the 1992 general election holding up the Japanese model of\nincestuous government-corporation partnership as the way forward for Britain. Those who\npointed to the relatively rapid rate of capital accumulation in East Asia to deny the\nsocialist contention that world capitalism has been in a depressive state since the end of\nthe post-war boom in the early 1970s have also had their come-uppance. Marx was right.\nThey were wrong. There can be no such thing as a permanent boom. That’s only a dream\npeddled by smooth-talking politicians and ageing Keynesian professors.<\/p>\n\n\n\n Marx, the first person to provide a convincing analysis of how the capitalist economic\nsystem worked, concluded that, whereas capital accumulation-or economic growth, if you\nlike-was a key feature of capitalism, this did not take place smoothly. Capital\naccumulation proceeds by fits and starts, periods of relatively rapid growth being\nfollowed by periods of contraction and stagnation. The graph of long-term growth under\ncapitalism is not a straight line moving up from left to right but a jagged line with\npeaks and troughs, with each peak normally higher than the previous one. Marx argued that\nthis cyclical pattern of growth was not just accidental but was inevitable under\ncapitalism-it was the way capitalism functioned and developed, its “law of\nmotion” as he put it-with each period of rapid growth ending in a slump and each\nslump preparing the conditions for the next round of growth.<\/p>\n\n\n\n The history of capitalism since Marx’s day has amply proved the validity of this\nanalysis. In order to maintain or increase their share of the market and realise the\nsurplus value embodied in their products, capitalist firms are compelled by competition to\nreduce their costs by improving their productivity, in particular by the introduction of\nmore productive machines. This leads to an increase in overall productive capacity. During\nthe period of recovery that follows a slump this poses no problem as the market is\nbeginning to recover and expand again.<\/p>\n\n\n\n However, as the competitive pressures to increase productive capacity continue, the\npoint is eventually reached when productive capacity in a key industry or group of\nindustries comes to outstrip the market demand for its products. At this point a crisis of\noverproduction breaks out. As profits fall, production is cut back, workers are laid off\nand, through the knock-on effect on other industries, the market shrinks, so inaugurating\nthe period of slump. During the slump, the least productive machines are taken out of\nproduction and capital is depreciated or simply written off. This purge of\nunder-productive machinery and over-valued capital eventually creates the conditions which\nallow capitalist growth to recommence, so beginning the boom-slump cycle again.<\/p>\n\n\n\n This is how capitalism has developed and continues to develop, only now that (as Marx foresaw) capitalism is a global system the periods of rapid growth and purging slumps also occur on a world scale. The big slump of the 1930s was a world phenomenon, as was the post-war boom of the 1950s and 1960s which ended in the early 1970s. So of course is the current world economic and financial crisis. For more on the Marxian theory, see Booms and Slumps – What Causes Them <\/a><\/p>\n\n\n\n Just because the 1930s slump was preceded by the Wall Street Crash of October 1929,\nsome people jump to the conclusion that it is financial crashes that cause slumps.\nActually, it’s the other way round: financial crashes usually reflect the situation in the\nunderlying real world of economic activity. Where they occur this is a sign that something\nhas already gone wrong in the real world, that, to be precise, productive capacity and\nproduction has come to outstrip market demand or is threatening to. As J. K. Galbraith\nshowed in his book The Great Crash<\/em>, this is what happened towards the end of the\n1920s; when the gamblers on the stock exchange realised that overproduction was occurring\nthey tried to convert their paper wealth into real wealth and provoked a crash. The slump\nfollowed but as a result of the preceding overproduction not of the stock market crash,\nwhich at most only exacerbated the economic crisis.<\/p>\n\n\n\n It’s the same today in Asia. The financial crisis there is a reflection of the fact\nthat stock exchange and foreign currency gamblers have realised that the countries of East\nAsia have expanded their productive capacities beyond market demand. This has been obvious\nfor a few years in the case of Japan where overproduction has led to full-scale recession\nwith lay-offs and factory closures. But Korea, Malaysia, Thailand, Indonesia and the\nothers were in the same situation of potential overproduction since a significant part of\ntheir growth had been in the same industries which Japan had overexpanded: car and other\nvehicle production, and electronics and computer hardware.<\/p>\n\n\n\n The reason why governments and central bankers in Europe and North America are so\nworried about the financial crisis in Asia is that their own real economies are in the\nsame state of potential overproduction as the Asian countries and that this could provoke\na financial crash in their countries too. The king is naked here as well.<\/p>\n\n\n\n So far they have managed to avoid this though current indications are not good. Even if\nthese countries avoid a full-scale crash this does not mean that they also have to power\nto avoid an economic slowdown or downturn. Such slowdowns and downturns can occur without\na financial crash. Indeed this to an extent is what has already happened. Since the early\n1970s the world economy has been in a period of slow growth, punctuated by falls in\nproduction from time to time. This is a reflection of the a lower rate of profit and of\nthe unresolved problem of productive capacity having outstripped market demand in key\ntechnologically advanced industries such as aerospace, petrochemicals, pharmaceuticals,\nand computers.<\/p>\n\n\n\n One consequence of this period of slow growth is that significant amounts of profits\nare not being reinvested in production but, instead, are being held in liquid form and\ninvested in financial assets with the aim of making as large a short-term profit in as\nshort a time as possible. All the multinational corporations and other big companies now\nhave treasury departments engaged in financial speculation of one form or another whether\non the stock exchange, the bond market, currency transactions, commodity markets or dodgy\nhedges such as derivatives. In France in recent years many major companies have even set\nup or taken over banks for just this purpose.<\/p>\n\n\n\n This extra demand for financial assets, deriving from non-reinvested profits, has\ndriven up their price, so creating the anomalous situation of a stock exchange boom in\nwhat is essentially a depressed economy. Nothing could illustrate more clearly how\ndivorced is the world of finance from the world of reality. Most of the financial\ntransactions that take place on the world scale today are not investments of productive\ncapital-are not used to set up factories or to buy machinery, equipment or raw\nmaterials-but are to buy and sell shares or bonds or foreign currencies or commodity\nfutures or property or failing companies to asset strip them.<\/p>\n\n\n\n Such purely financial transactions are utterly unproductive, even from a capitalist\npoint of view. Not only do they not result in the production of a single extra item of\nwealth but they don’t even increase the amount of surplus value available for sharing\namongst the various sections of the capitalist class. It’s a zero-sum game. As socialists\nhave always maintained, stock exchanges are places where capitalists gamble and try to\ncheat each other with a view to acquiring as large a mass as possible of the surplus value\nthat has already been produced by and robbed from the workforce.<\/p>\n\n\n\n Rising share prices-and despite dramatic falls from time to time, there has been a\nsteady long-term rise in the share price indexes of most stock exchanges-do not represent\nan increase in real wealth. They merely amount to a rise in the book value of the real\nwealth-the productive capital of the companies in question-that shares are supposed to\nrepresent. It’s a rise in paper values not real value. When a share goes up in price this\nmeans that you can get more for it if you sell it. If you don’t sell your shares all it\nmeans is that their book value has gone up, but if everybody or even large numbers tried\nto realise this book value by selling their shares, the real situation would soon reassert\nitself. The price would fall, bringing down the book value of the corresponding productive\ncapital to its real value.<\/p>\n\n\n\n Even some supporters of capitalism, among them the arch-speculator George Soros\nhimself, have begun to express concern about where the parasitic and volatile nature of\nglobal finance capital may lead the world. At a congressional hearing in Washington on 15\nSeptember Soros even spoke of the danger of the “disintegration of the global\ncapitalist system”<\/em>. We have always been cautious in predicting a 1930s-scale\nslump, but if even supporters of capitalism are discussing this as a serious possibility\nwho are we to insist that they’re wrong?<\/p>\n\n\n\n One thing is certain, though. Until the problem-for capitalism-of excess productive\ncapacity and potential overproduction in relation to market possibilities is resolved,\nthere can be no return to any period of rapid economic growth as in the post-war boom when\ngrowth rates were twice the maximum that has obtained in any of the already industrialised\ncountries since the early 1970s. But the only way this problem can be resolved is by a\nbigger slump than we have yet seen since the war in which the system would be purged of\nits excess productive capacity and overvalued capital.<\/p>\n\n\n\n If this does not happen, then global capitalism will continue in its present state of\nslow growth against a background of high unemployment and declining welfare provisions,\nstaggering on from financial crisis to financial crisis and from mini-boom to mini-slump.\nCan this really be the end of history?<\/p>\n\n\n\n Author: A. Buick <\/p>\n\n\n\n Please email your comments about this article to feedback@worldsocialism.org<\/a><\/p>\n\n\n\n Back to the Global Economy Index<\/a> <\/p>\n\n\n\n
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\n\n\n\nMarx was right<\/h3>\n\n\n\n
Mad money<\/h3>\n\n\n\n
\n\n\n\nIs the Big One coming?\n<\/h3>\n\n\n\n
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