Capitalism at its Brink

The Capitalist World is at its brink!

America is facing its worst crisis today.  The AAA credit rating of America is on the verge of collapse.  The growth rate in the biggest economy of the world is today only 0.4%.  There was an attempt to show that it was higher but the hard fact could not hide the sad situation at the growth front.  US debt is around $14.3 trillion and it owes to chine the most.  The dollar is slipping down; the markets are down.  The unemployment if as high as 9.2% as recorded and it may be even more.  The political experts are also claiming that US is also suffering from the “dis-functioning politics”.  After the 2008 crisis the recovery during 2009 was painfully slow but it has not held out long enough and now the chances of America soon slipping into recession is very high.  Hilary Clinton in her recent visit to the South and East Asian countries declared that the future is in the Asian economies.

 “The second half of 2010 is really characterized by a sudden worsening of the crisis marked by the end of the illusion of recovery maintained by Western leaders and the thousands of billions swallowed up by the banks and the economic « stimulation » plans of no lasting effect. The coming months will reveal a simple, yet especially painful reality: the Western economy, and in particular that of the United States, never really came out of recession. The startling statistics recorded since summer 2009 have only been the short-lived consequences of a massive injection of liquidity into a system which had essentially become insolvent just like the US consumer. At the heart of the global systemic crisis since its inception, the United States is, in the coming months, going to demonstrate that it is, once again, in the process of leading the economy and global finances into the « heart of darkness » because it can’t get out of this « Very Great US Depression». Thus, coming out of the political upheavals of the US elections next November, with growth once again negative, the world will have to face the « Very Serious Breakdown » of the global economic and financial system founded over 60 years ago on the absolute necessity of the US economy never being in a lasting recession. Now the first half of 2011 will dictate that the US economy take an unprecedented dose of austerity plunging the planet into new financial, monetary, economic and social chaos.” 

- Public announcement GEAB N°47 (September 16, 2010) -

Why is US economy not able to really come out of the crisis? 

The answer is not very complex.  It is just that Capitalism as economic system has reached at its brink.  I will enumerate some of the issues in point form and then elaborate each of these points.

·       CAPITALISM BASICALLY MOVES FROM CRISIS TO CRISIS:

If we look at the history of capitalist development we will understand that it has gone through several ups and down.  Some of these downs have been so down that it has resulted in the World War II.  What we saw in 2007 - 2008 was another such deep crisis.  Though it did not result in any war or revolution against capitalism this crisis has been dragging on and it will continue to drag on and what will be the outcome of this long drawn crisis will be unfolded in the future.  As far as war is concerned these are being carried out in instalments and we have deep social crisis of world scale terrorism.

In 1929 the capitalist world witnessed its deepest crisis.  This crisis led to the World War II.  Soon after the war during the years 1945 till 1975 the Capitalism was at the upswing.  It is called the golden years of Capitalism.  It is paradoxical to learn that the Wold War II had destroyed all gains of the civilization and developments that this setting suited for the capitalism to take a leap forward.

 After the World War II Keynesian measures helped the world to come out of the crisis.  Keynes believed that if the economy had to come out of the depression then the state should have a big role in the economy.  The state should have a strong control on the market even to the extend of regulating the market.  Secondly the state should have an aggressive monitory and fiscal policy.  Such policy should aim at minimizing inflation and stagnation of economy.  State should generate employment through state investments to ensure that the wages would remain high so that the average high wages could create demand and urge economic growth. 

At the international level Keynes proposed formation of institutions that would bring the world economic order on a strong foundation.  He proposed:

·         International clearing union, a central bank (International Monitory Fund) with its own currency to help ease balance of payment difficulties of the member countries; there was a proposal to penalize countries holding trade surplus with global tax of 1% per month.  This is because they would be keeping the world’s effective demand low by their under purchase of goods produced by other countries.

·     

           Fund for the economic Reconstruction: There was a need to undertake reconstruction work in the Europeans countries ravaged by war.  He suggested institution of International Bank for Reconstruction based on a Plan for Relief and Reconstruction.

·      

I    International Trade Organization: To promote international trade and to facilitate growth instituting an International Trade Organization was proposed which will hold and operate a Commodity Buffer Stock of primary goods, in order to stabilise the prices.  The ITO would purchase goods when prices are low and sell when prices are high.

These noble plans were not followed whole heartedly.  The powerful nations like The United States of America has better of it.

• No common world currency was floated by IMF.
• In contrast to the recommendation the deficit countries were penalized as if they alone were responsible for their trade deficits.
• European reconstruction was carried out by the US sponsored Marshall Plan with a huge budget of $ 13 billion.  The major benefits of the reconstruction went to the United States of America.
• The development of the least developed countries (LDCs) was not on the agenda of the Bank of Reconstruction as suggested by Keynes
• ITO was never born thanks to US opposition, though its charter was drawn up and other formalities were completed.

Inspite of the half heartedness these measures worked for a period of time.  The Europeans and American economies advanced tremendously.  There was a tremendous work of reconstruction went on in the European countries, particularly in Germany and in Japan.  This work gave employment to people and it created tremendous demand and the industrial production went to the peak.  The rapid industrial growth happened not only in America, Europe and Japan but it extended to South Korea, Taiwan and Brazil.  There was a rise in the productive capacity of the society.  Specifically the productivity of labour also increased tremendously.  There was a tremendous advance in science and technology.  New industries with far more advanced technology emerged. 

International Trade also increased.  There was competition at the global level which gave further boost to improving technology and increased productivity of labour

We used to get reports from the elders in Europe who had lived through the great depression.  They had faced the brunt of the war.  The after math of the war brought untold suffering to the people.  These people also saw the recovery and the luxury of life after that.  The elders would say that the younger generation born after 1942 had not experienced the hardship they had.

Along with this recovery and progress we also saw the end of colonial rule in the Asian, African and Latin American countries.  There was a big contradiction between the prosperity of the advanced capitalist countries and the poverty, deprivation in the third world countries.  These colonised countries, though freed, were exploited through the new imperialism of the west.  The Breton Wood institutions like World Bank and IMF did not work in favour of the third world countries.  These institutions were used to subjugate and exploit the third world and the benefits would go to the first world.   By 1971 the Bretton Woods system collapsed.  The USA ended the convertibility of dollars to gold, ushering in a new era of free-floating currencies and international capital flows (Hutton 1995).

The tremendous productive capacity of the western advanced capitalist countries needed greater international market.  The market within these advanced countries was not adequate.  And within these advance countries too there were inequalities which restricted the market within.  The poverty of the third world countries could not absorb the goods produced in the western capitalist countries.  The failure to institute International Trade Organization that would hold buffer stock of essential commodities initially worked to enhance the profits of the advanced countries.  But in the long run demand went down internationally.

This led to another phase of crisis in the Western and American capitalism, - ‘structural crisis’ of the falling rate of profit, that is, the declining return on capital invested in machines and technology. There was combined crisis of inflation and stagnation, stagflation crisis, when both unemployment and inflation rose dramatically.  While there was high productive capacity and vast store of commodities there was no matching purchasing power with the people within the advanced capitalist countries and in the international market which comprised primarily the third world countries.    The situation of over production on the one hand and under consumption on the other hand came into existence.  There were attempts to build a purchasing power among the poor nations by offering development projects through bilateral government to government aid and aids through private aid agencies. 

There were attempts to muzzle the political powers in Latin American countries, in the Middle East, African and Asian countries.  We had the examples of Chile, Iran and Philippines where the America imposed rulers friendly to their imperialist interests.

These efforts did not give much result in expanding market for the industrialists of the advance countries.

To give a massive blow to the declining economy of the advanced capitalist countries there was a massive rise in the oil prices in the seventies.  The spurt in the oil prices literally led the common people in American and Europe to a miserable life.

Introduction of Neo Liberal Economic policies:

In 80is there arrived two major personalities, Ronald Reagan and Margaret Thatcher who tried to introduce changes in the course of the economic policies to overcome the crisis that the world was confronted with.  This marked the rise of Neo Liberalism.

The two main foundational tenets of neoliberalism were, first, in the view of Ludwig von Mises, “egoism is the basic law of society”; and, second, in Friedrich von Hayek's view that “free markets lead to ‘spontaneous order’ that solves the problem of economic calculation”. These two individuals - Ludwig von Mises (1881-1973) and Friedrich von Hayek (1899--1992) - represent the founding fathers of neoliberalism, providing the theoretical backbone for the political and ideological claims made by others. In this sense, neoliberalism was very much an ideological project, one that attempted to counter what neoliberal thinkers saw as the inherent totalitarianism of collectivist and state planning of the economy by drawing on economic theories which, in turn, posited the impossibility of economic planning in the first place.

The Neo Liberalism came as an attack on Keynesianism. It was the only way to increase profit by controlling labour costs.  Neoliberalism can be seen as a political project intent on restoring class power (Harvey 2005). The new economic project was founded on neoliberal assumptions about economic efficiency, reduced state intervention and free markets.

This economic project found its advocates in a number of new right-wing politicians around the world exemplified by Margaret Thatcher (1979-90) in the UK and Ronald Reagan (1981-9) in the USA, whose policies became known respectively as Thatcherism and Reaganomics. Other countries have followed suit by implementing neoliberal policies, whilst some started even earlier than the UK and USA. For example, the ‘Chicago boys’ - Chilean economists trained at the University of Chicago where Milton Friedman worked - helped the dictator Augusto Pinochet to privatize and deregulate the economy after the coup that ended Salvador Allende's socialist government and his life in September 1973 (Harvey 2005).

“The neo liberalism is characterized by five core principles (Hall 2003; Hay 2004; Mudge 2008): privatization of state run assets (firms, council housing et cetera); Liberalization of trade in goods and capital investment; monetarist focus on inflation control and supply-side dynamics; deregulation of labour and product markets to reduce `impediments' to business; and, the marketization of society through public-private partnerships and other forms of commodification. These principles are all meant to enable individual freedom through recourse to a ‘free’ market that is efficient in allocating resources across society and the world because only the market can coordinate all the information signals from numerous agents (such as sellers and buyers).”(Kean Birch and Vlad Mykhnenko, A World Turned Right Way Up.

Neoliberalism shifts state intervention to new forms of governance underpinned by a ‘logic of competitiveness’, including: ‘active’ and flexible labour policies; new commodification regimes such as intellectual property rights and carbon trading; fiscal austerity; and public spending on supply-side inputs (e.g. education, infrastructure, et cetera). Thatcherism and Reaganomics represented a ‘rolling-back’ of regulation, state ownership and welfare services during the 1980s, driven, in large part, by a monetarist preoccupation with inflation that encouraged different forms of privatization (Prasad 2006).

Washington Consensus:

In 1989, John Williamson proposed ten policy reforms included an imposition of a tight fiscal discipline (with virtually no public budget deficit allowed); an end to subsidies and re-direction of public expenditure on basic health, education and infrastructure; tax cuts; financial liberalization; free-floating exchange rates; trade liberalization with a unified low tariff; openness to foreign direct investment (FDI); privatization; deregulation; and secure private property rights. Williamson dubbed his list of reforms a Washington Consensus because ‘both the political Washington of Congress and senior members of the administration and the technocratic Washington of the international financial institutions, the economic agencies of the US government, the Federal Reserve Board, and the think tanks' had reached by then an explicit agreement that ‘prudent macroeconomic policies, outward orientation, and free-market capitalism’ had to be urged on the rest of the world (Williamson 1990, 1993).

The Washington Consensus promised that the combination of stabilization, liberalization and privatization and globalization would integrate semi capitalists, non capitalist and pre-capitalist economies into global market economy to shore up profits in advance countries.

1. Gaining new market (though limited)
2. Gaining access to cheap labour
3. Gaining access to.
4. Gaining new areas of investment in infrastructure.

To achieve this integration use:

a.        Trade liberalization.

b.      Remove barriers to the mobility of global capital.

c.       Abolishing barriers to foreign investments.

The Washington Consensus promised that the combination of stabilization, liberalization and privatization would bring `renewed growth', and along with it prosperity, to the most remote corners of the globe by `the unleashing of markets - the basic enabling reform from which all the potential benefits of transition [to free-market capitalism] follow' (World Bank 1996: 7).

It was expected that Neo liberalism and Washington consensus had effectively transformed the major economies of the third world countries in to countries where there would least intervention by the state in the market forces, where most of the state run enterprises are disinvested and the free flow of foreign direct investment come easy along with the reform in the labour laws that would suite the interests of the foreign investments. It was expected the advanced capitalist countries would reach out to the remotest part of the poor nation to exploit cheap labour and the rich reserve of natural resources (cheap agricultural and raw material products). 

The success of Neo liberalism gave rise to contradictory results.  The multinational corporations and transnational corporations enjoyed maximum freedom to shift their capital to which ever country that gave maximum profits.  In the last 25 years China was integrated into the global capitalist economy to counter declining profits. There was rapid industrialization of China. In the last 25 years tremendous amount of manufacturing capacity was added to China.  China became the fastest growing economy with an unbeatable growth of 13%.  Fortune 500 corporations moved their significant part of their operations to China to take advantage of China price and inexhaustible cheap labour.  By 2005 roughly 40% to 50 % of the profits of US corporations were derived from their operations and sales abroad, prominently in China.  Similarly India and many east Asian countries experienced rapid economic growth.

The outcome of the Neo Liberalism did not augur well for the advanced capitalist countries.

1.       These countries suffered de-industrialization.  These countries would have got rid of polluting industries but along with it these lost the capacity for manufacturing good for their needs.  They came to depend heavily on import of goods from China and the Asian countries.  The markets in the west and US are flooded with the goods manufactured in China, India, South Korea, Vietnam and others.  Loss of industries and manufacturing capacity resulted in the growing unemployment in the advanced capitalist countries.

2.       The United States of America now is able to export only arms and fighter planes.  America’s involvement in Afghanistan, Iraq and their war against terrorism, which paradoxically nurtured by US has brought the economy to grinding halt.

3.        Capitalism has come to the stage where it is not able to develop the productive forces any further and has lost its potential of bringing any further profits to the capital.  The driving force of profit as we know is through reduction of labour by advancement of technology.  Essentially the production of commodities for mass consumption has lost its ability to revolutionize productive force any further. 

4.       Capital employed in manufacturing goods is not able to generate more profit for the capitalists. 

5.       The maximum growth in the production has been in the area of consumer durable and automobiles.  Consumer durables do not find market in the great mass of people.  It is only the top 20% of population consume the consumer durables and since these commodities are durable their market gets exhausted rapidly. The automobile production too had limited scope of market.  Yet the contradiction in the automobile industries is the earth as a whole and the cities where automobiles operate has exhausted its carrying capacity.  The cities are overcrowded with cars, paradoxically in the countries which at present have the largest market for cars.  Consumption of fossil fuel is ever on the rise.  Now a days there is more production of cars driven on diesel than on petrol.  The cities over crowded by car people have to drive on the road bumper to bumper which contradicts the very purpose of having a car as this has turned the cars into inefficient mode of conveyance.  The big cities all over have become the most polluted.  Carbon emitted through automobiles contributes the most to climate change and global warming. The idea of producing green fuel is a misnomer.  The agriculture would shift from food grain production to production of bio fuel and would result in food crisis.  The world already has face food crisis number of time.

6.       There is a real energy crisis in the world.  One level of crisis is inequitable consumption of energy.  The advance capitalist consume far too high per capita energy compared to the developing countries.  Their consumption of energy and production of green house gases contributes about 80% to the global warming.  The people in the advanced capitalist countries are not willing to change their way of living.  Per capita consumption of energy in the developing countries is very low in proportion.  The countries like China, India, South Korea which have recorded high growth rate are in need of greater energy.  There increase in the production of power through carbon base technology.  China has recorded very high emition of carbon through their power generation units.

7.       In the guise of production of clean energy many countries have resorted to nuclear energy.  China, the world’s fastest growing economy will be also a leading country to have maximum nuclear energy plants.  India wants to build the world’s largest nuclear plant at Jaidapur.  Chernobyl nuclear disaster not enough we had three such nuclear disasters in Fukkoshima through a massive earth quake and tsunami in Japan in March 2011.  There will always be a great challenge to dispose the nuclear waste, which eventually leads us to having to live with greater hazardous nuclear waste than having energy.

8.       The growth and technological advance has become unsustainable.   One cannot escape from the cost of environment degradation.  If we take the price of environment degradation one does not get any further with growth and technological progress.  The ever growing environmental degradation has brought the planet earth in crisis.  If the global economic crisis on 2008 with the ever enduring recession does not indicate the limits of capitalism the climate change and global warming does pose the greatest challenge before the world.  Every attempt at progress under the neo liberal ideology is eating up into the planet earth making the very survival of humanity very critical. 

Neo liberal restructuring had poor record in growth:

In 1980s -------- 1.4% growth.

                                    In  1990s ------- 1.1% growth

           The growth in the 60s and seventies was better.

                                   In 1960s ------- 3.5% growth

                                   In 1970s ------- 2.4% growth

           According to one index the profit of Fortune 500 went from:

                             7.15% in 1960 - 1969 to

5.30% in 1980 – 1990 to

2.29% in 1990 – 1999 and to

1.32% in 200 – 2002.

 Financialization:

1. All efforts towards over coming dwindling profits did not yield much result. In the countries of late capitalism investment in industry and agriculture were yielding low profits.  Financialization, namely using finance as capital without converting into means of production, was one attempt made by the neo liberals to gain profit.   The large amount of funds were circulating and being invested and reinvested in the financial sector.  In India the corporate involved in manufacturing also resorted to finance to make profit.  Tata Empire started ‘Tata Finace’ and ‘Tata-Aig insurance’.  There are hosts of industrial corporate like Reliance, Mahendra, Bajaj got into using finance to earn more profit to make up for the dwindling profits in the manufacturing units.

“Securitization was the key vehicle for the explosive expansion of the financial sector.  It is described as the process of turning non-marketable, non-tradable financial assets into tradable securities: for instance, claims on debt (such as government bonds), claims on ownership (such as ordinary shares), or ‘derivatives’ - a wide range of financial products whose value is derived from the actual or expected price of some underlying asset, which may be a commodity, a security, a currency, or indeed any economic variable. Used as a hedge to reduce risk or for speculation, derivatives can be exchange-traded as well as ‘over-the-counter’ (OTC) instruments, including futures contracts, forwards, options and swaps. Whilst the main market-traded derivatives are futures options, the OTC trades are off-balance-sheet, specific and customer-tailored instruments (such as asset-backed securities, collateralized debt obligations or credit default swaps), involving seemingly esoteric practices such as the pooling of assets, the trenching of liabilities and the creation of ‘special purpose vehicles' ostensibly to reduce risk. (Moles and Terry 1997).” (Kean Birch and Vlad Mykhnenko, A World Turned Right Way Up.

2. The financial sector was not relating to the creation real wealth but was revolving within financial sector.  Financial sector should reflect or mirror the real wealth of the society, namely, goods and services.  Finance is embodiment of the value of goods and services and outside this finance makes no sense.

3. Financialization (trying to generate profit out of finance alone) brought about bifurcation between the financial sector and the real economy comprised of goods and services. Financial sector was not any more representation of the real economy.

4. Financial economy grew in a fantastic manner far beyond whatever growth achieved in the real economy.  Entry of foreign funds seeking quick and high returns went to real estate and the stock market.

5. Financial sector became unsustainable.  It was disconnected from the real economy and had gone at tangent away and above the real economy.  Financial growth became empty of real value. 

6. Investing in financial sector operation amounts to squeezing money out of money. Investing financial sector may create profit, but it does not create new wealth and therefore new value. Only in production – agriculture, industry and service sector – where labour is involved value is created.  Profit is not based on value that is created.  Profit is creation of new value, new value called surplus value.  Profit or surplus value created has objective existence in the society in commodities. If one tries to make profit through usury investments then these become very insecure and prices of stocks, bonds, and other forms of investment can depart very radically from their real value.

“With the financial sector placed firmly at the heart of global financial capitalism, Western governments have been quick to abandon all the tenets of free and self-regulating markets, rushing to commit themselves to full financial support of financial institutions, opening the era of massive bail-outs and stimulus packages. By mid2009, the US government had committed $8.5 trillion to support its battered financial system, with $5.8 trillion earmarked for Federal Reserve lending, credit guarantees and asset purchase schemes; $2 trillion in other schemes; and $700 billion in the Troubled Asset Relief Programme, a new ‘public private partnership’ aimed at buying ‘toxic’ assets from banks. It is worth noting that the US government’s commitment to the financial sector amounted to two-thirds of its GDP. The size of the UK rescue package for banks was $2.12 (£1.22) trillion, or 87 per cent of the country’s GDP, with £585 billion allocated to asset protection; £300 billion to bank credit guarantees; £185 billion to central bank loans; £94 billion to bailing out five banking institutions (RBS-Royal Bank of Scotland, Lloyds TSB, HBOS-Halifax Bank of Scotland, Northern Rock and Bradford & Bingley); £50 billion to the Bank of England corporate debt scheme; and £10 billion to a working capital fund for small businesses.” (Kean Birch and Vlad Mykhnenko, A World Turned Right Way Up.

“The 2007-9 financial turmoil appears to be rather unique in at least three ways. First, geographically, it has broadened to include households, corporations and the banking sectors in both advanced and emerging capitalist countries. Second, this has been the largest crisis in terms of capital loss. According to a recent estimate by the IMF, subject to a number of assumptions, the write-downs on US originated assets to be endured by all holders since the outbreak of the crisis until 2010 could reach a total of around $4 trillion, two thirds of which would be incurred by banks (IMF 2009: xi). Third, the sub-prime credit crunch has led to the demise or restructuring of several giants of the corporate world, including Lehman Brothers, Bear Stearns, Royal Bank of Scotland, Lloyds TSB, Citigroup, AIG, Fannie Mae, Freddie Mac, Bank of America, Northern Rock, Bradford & Bingley, Halifax-Bank of Scotland, Merrill Lynch, and Alliance & Leicester.  As a consequence, the current financial crisis has highlighted a dramatic shift in baking’s centre of gravity, with potentially dramatic geopolitical repercussions.” (Kean Birch and Vlad Mykhnenko, A World Turned Right Way Up.

Whatever measures the US state, the European Union or the G7 or G20 took up did not work.  These measures at best have postponed the crisis and are preparing ground for greater crisis.  To give an example, to overcome lack of profitability and increase demand in the market the governments introduced stimulus packages, giving liberal financial advances to the people, by reducing the interest rates further, in other words making money cheap.  Money had already become sterile and formed itself into a bubble.  When money is made further cheaper it will further aggravate the crisis.  This is exactly what has happened today in 2011. 

 There is need to reflect on the following points:

a.       We need to reject once for all the view of Ludwig von Mises, “egoism is the basic law of society”; and, of Friedrich von Hayek that “free markets lead to ‘spontaneous order’ that solves the problem of economic calculation”.  These great personalities and their views that guided the Neo liberal policies are so fraud.  There is no scientific basis for holding such theories.  These theories have led the capitalist world economy to the brink of collapse.  

b.      That there should be no role for the government in the market and there should be no regulation of economy by the state is another myth that has been exploded.  Where ever there were some regulations by the governments there we find some level of insulation of their economy from the global melt down.

c.       All collectivization and socialization is bad and smell of evil empire. But the so called evil empire did not experience the crisis of the great depression of 1929 and even the great Wall Street melt down of 2008.

d.      Social and economic inequality itself will be a driving force against the all the efforts to avoid or overcome global crisis.  The lack of equity in energy consumption will go a long way in bringing about the collapse of the world order with ever greater speed.  Expropriation of profit and the wealth of the world by a few have brought our civilization to this precarious stage.

e.      “Monetization of carbon emission would solve the problem of environment” is a capitalist myth that shakes their responsibility off from their shoulders and passes it on to those who organize their life in a sustainable manner.

f.        Environment, climate change and global warming are not going to exclude the rich and developed word of its impact.  The developed work will not be able to protect itself from the global disaster with the money they may have amassed.

g.       Finally we should recognise that it is time for the capitalist phase of human history to be superseded by another advance phase that will save the world and more make the history move to a more humane, sustainable civilization.  With this we should also recognise that the economic theories that have been churned up by the capitalist intellectual need to be revised.  The objective situation in which we have found ourselves demands for such revision.