A lot has been and is being written about the current economic crisis which is staring world capitalism in its face. As the figures for estimated losses and number of unemployed are rising, the realization that this is a crises at par with if not bigger than the great depression of the 1930s is slowly setting in. What needs to be done to pull the world economy out of this downturn has become the most important question at the current conjuncture. It is in this regard that an understanding of what are the roots of this crisis is an extremely important issue. This is so because, without a correct diagnosis of the factors which are responsible, appropriate measures for ensuring a recovery from this downturn would remain elusive,writes Roshan Kishore, Ph D scholar, Centre for Economic Studies and Planning, JNU.
A lot has been and is being written about the current economic crisis which is staring world capitalism in its face. As the figures for estimated losses and number of unemployed are rising, the realization that this is a crises at par with if not bigger than the great depression of the 1930s is slowly setting in. What needs to be done to pull the world economy out of this downturn has become the most important question at the current conjuncture. It is in this regard that an understanding of what are the roots of this crisis is an extremely important issue. This is so because, without a correct diagnosis of the factors which are responsible, appropriate measures for ensuring a recovery from this downturn would remain elusive.
One view which has been advanced by many economists including the likes of Professor Joseph Stiglitz is that the crises arose because there was not enough regulation in the financial markets, which in turn helped “dishonest and corrupt practices” by those in the financial sector leading to a proliferation in “toxic loans”.1 To put it simply, these arguments say that these “toxic” or high risk loans, which were bound to lead to defaults, have resulted in a collapse in the financial sector in the United States. This collapse because of the integrated world markets has spread to other countries directly proportional to the degree of financial liberalization and is also having repercussions on the real economy because of the fall in incomes as a result of the financial crises. It should then follow automatically that the solution to the present crises lies in putting into place “appropriate regulatory mechanisms” in financial markets. This paper tries to provide an argument that to take such a view about the roots of the present crises would amount to a superficial reading of the situation. What I will try and argue for is a different position, shared by those who look at the present crises from a Marxian perspective, which says that it is the fundamentally crises ridden nature of capitalism and unquestioned adherence to the hegemony of finance capital in the last few decades in particular which have landed the world economy into this crises.
The debacle which capitalism suffered during the great depression had clearly demonstrated to the policy makers and economists across the world that capitalism as a system was prone to slumps and had a tendency to settle well away from the full employment mark. Keynes’ epic work demolished the Say’s Law which discounted the possibility of any crisis in the capitalist system, where supply was to create its own demand. Keynes had clearly said,
“Thus our four conditions together are adequate to explain the outstanding features of our actual experience;-namely, that we oscillate, avoiding the gravest extremes of fluctuation in employment and in prices in both directions, round an intermediate position appreciably below full employment and appreciably above the minimum employment a decline below which would endanger life.
But we must not conclude that the mean position thus determined by “natural tendencies, namely by those tendencies which are likely to persist, failing measures expressly designed to correct them, is, therefore established by laws of necessity. The unimpeded role of the above conditions is a fact of observation concerning the world as it is or has been, and not a necessity principle which can not be changed.”(Chapter 18, The General Theory of Employment, Interest and Money)
Concerned as he was to protect capitalism, Keynes had clearly advised for a “socialization of investment” where he visualized the government taking steps to ensure that investment decisions were tethered to goal of full employment. It was this policy prescription which was followed in the advanced capitalist countries in the post war years. The results of these demand management policies were quite phenomenal and they produced the biggest boom with rising employment and welfare levels in the history of capitalism. No wonder this phase is referred to as the Golden Age of Capitalism in history. Such was the impact of this period of well being in the advanced world that it was argued that in Keynesian demand management capitalism had found its solution to being a crisis ridden system. However, that was not to be. The inherent dynamics of the capitalist system which led to the demise of Keynesian demand management and with it the Golden Age has vindicated the crisis ridden nature of capitalism.
Renowned Polish economist Michael Kalecki had written about the political economy of state intervention to boost the level of economic activity in details in his essay Political Aspects of Full Employment. Kalecki explained why the capitalist class at large would be averse to any intervention by the state in matters of stimulating economic activity, which he broadly divided into three parts: (i) the dislike of government intervention in the problem of employment as such; (ii) the dislike of government spending (public investment and subsidizing consumption); (iii) dislike of the social and political changes resulting from the maintenance of full employment. He said that the first kind would be objected to because the level of employment and hence economic activity was supposed to reflect the confidence level in the economy. This level of confidence is an important tool for the capitalist class to maneuver government policies and any outside stimulus to employment and hence economic activity which would surpass the confidence levels in the market would reduce the capitalists’ power to influence policy making and hence would be considered objectionable. The second method is considered bad because an increased investment by the state might encroach upon the areas in which the private sector is operating and hence bring down the level of profits in that sector. Any attempts to subsidize consumption are not acceptable because this comes into conflict with the “ethics” of the capitalist mode of production which holds that “you shall earn your bread in sweat”. Speaking generally such subsidies would come in conflict with the fundamental division of haves and have nots in capitalism. The third objection is related to the basic requirement of capitalism which is the reserve army of labour. If government intervention would lead to maintenance of full employment levels in the economy capitalists would loose their biggest power: the threat of sack. For capitalism is indeed a “free system” in which the capitalist has no extra economic power like other pre capitalist mode of productions. This is because the workers are free not to work for the capitalist unlike their counterparts like serfs or slaves who were tied to their masters and feudal lords. The capitalist derives its power from the fact that it is he who owns the means of production and if the worker is to survive he must sell his labour power to the capitalist and hence face exploitation. The other choice the worker has is to remain in the reserve army of labour and starve to death, because he owns nothing but his labour power. Now if full employment were to persist there would be a great reduction in the power which the capitalists enjoy, for the threat of being thrown out into the reserve army of labour and starving would cease to exist. Another important factor which Kalecki said would strengthen this aversion was a strong aversion to inflation (which might arise with increasing employment) from the rentier classes, because it would entail a fall in the value of financial assets. It was because of this fact that Kalecki called them “boom-tired”. Keynes also saw this fact and had called for “euthanasia of the rentier class” to prevent another slump like the great depression.
Now the period after the golden age has seen exactly the things Keynes had warned against. The demise of Keynesian demand management policies was also accompanied by the increasing influence of finance capital in the world. The results of this reversal have also been on expected lines. There was a significant increase in inequality within and between countries and employment and rate of growth of GDP have slowed down in most countries. Table I and II give an idea about the slowdown and increase in inequalities which followed the rise of neo-liberalism in the world economy.
Annual Per Capita Income Growth Before and During Globalization Era
|REGION||Rate of Growth|
|Middle- East Africa||3.2||0.2|
|Developing World excluding India and China||2.5||0.7|
|India and china||1.7||5.8|
Non- Industrialized World constitutes of the countries excluding the Developed World.
Developing World excludes the Industrial world and countries of Eastern Europe.
Source: World Bank, World Development Indicators
Trends in Income Inequality from the 1950s to the mid 1990s for 73 Countries
|Sample countries in each group||Sample countries in each group||Sample countries in each group||Sample countries in each group||Share of population of sample countries||Share of GDP-PPP of sample countries|
|of which U shaped||--||--||--||29||55||73|
Source: Cornia 2006, taken from Cornia with Kiiski (2001)
Cornia adds that the November 1998, version of the WIID (World Income Inequality Database) based on which these results are given extends only up to 1995 and therefore does not capture the inequality changes during the last 7-8 years in India, Cote d’Ivorie, South Korea, El Salavador and Philipines. Taking these 5 countries to the increased inequality category thus raises the number of 48 to 53 and for the developing country this number went up to 21.
The story of the US economy is even more stark in terms of increase in inequalities. Chart I shows the increase in inequalities in the US economy over the years. It is clearly visible that there has been a massive increase in inequalities in the US economy since the 1980s.
The inequality is such that the top 10 % of the population earns close to 40% of the total income. The inequality has increased in the US since the early 1980s primarily because of two reasons. On the one hand, the income of the poor has got squeezed due to a decline both in the legal minimum wages as well as the unionisation rates. On the other hand, the payrolls of the top executives, especially CEOs, has increased manifold in the absence of either the wage controls of the World War II or the social norms of the Golden Age period which restricted the growth of high-end wages. Table III and Chart II show these trends for the US economy.
|Minimum wage||Period averages|
|Year||Current $||2006 $|
Source: United States GNP Report 2007
Union coverage in the United States: 1977-2004
Source: United States GNP Report 2007
The result of such a massive increase in inequality should have resulted in a slump in the US economy much earlier as classical political economy would suggest to us. But the US had managed a “creditable” if not a very high rate of growth in the past two decades. This had generated a lot of enthusiasm among the advocates of neo-liberal policy regime who were claiming that the US economy, courtesy the improvements in productivity had entered a different phase where economic cycles were a “thing of the past”. It is in this perspective that one needs to look at the nature of economic growth in the United Sates in the last two decades, because the roots of the present crisis lie within this growth process itself.
Given the increasing inequality in the US economy and the declining intervention by the state the main component of aggregate demand would have to be from the consumption of the capitalists and the other upper classes if the economy was to be prevented from going into a slump. Since the 1990s the US economy has thrived on a credit driven consumption boom which had two components: housing (mortgages) and consumer durables (credit cards). This is evident from the increasing debt-income ratios i.e. total household debt as a proportion of total disposable income for the US economy which rose from 67% in the 1960s and 70s to 95.6% in the 1990s. The fact is that this economic growth was based on speculative bubbles which helped trigger a consumption boom in the economy. This was so because the speculative boom earlier in the stock market and later in the housing sector generated what can be called “notional increase in incomes”. The increase is notional because those who had invested in these assets believed that their wealth had increased considerably owing to the increased prices of these assets. However if everybody would have tried to realize this increased wealth at the same time by selling these assets the increased prices would collapse and hence this increased income would not be realized. This increase in wealth also convinced the people that they need not save more for their future needs as the capital gains they had made were enough to cover these needs. In fact it even made sense to increase borrowings to finance consumption expenditure or undertake new investments in the assets (housing or stocks) to make more capital gains. While it was the stock market boom which led the growth charge in the 1990s, the housing boom has been the main carrier of the US economy after the dotcom bust and the subsequent stock market collapse. It was the ability of the system to shift from one bubble to another after the dotcom bust which ensured that the growth process was not seriously jeopardized and the boom continued. Now the basic problem with any boom that rests on speculation is the following: speculation in any financial or real asset rests on the premise that the prices of that particular asset would keep on increasing in the future. Initially, the belief that the prices would keep on increasing draws investment in that sector and the prices actually start increasing. Often, as was the case in the housing boom such investments are financed by lending. What made matters worse in the US was the fact that this lending was done without any consideration whatsoever about the credit-worthiness of the borrowers.2 Also the astonishing financial innovations which led to opacity of the risks associated with those who were selling it and the ones buying it, created huge amounts of loans which were sure shot recipes for disaster. Once these defaults started, the prices of these assets stopped increasing. But once the prices reach a plateau, those who had invested in these assets realize that their expectations are not going to be fulfilled. What then follows is a rush to take out funds from that particular asset and this in turn triggers collapse in the asset prices. The burst of this bubble is bound to lead to a slump in the economy unless there is another sector which can generate yet another speculative boom. It can be said that the attempt to shift into speculative activities in oil and other primary commodities which led to the inflationary upsurge in the recent times was another attempt to shift from the housing bubble following the sub-prime crisis. However the consequences of this speculation turned out to be dangerous to the very sustainability of the current economic order because of the increased inflation.
And because it is the US economy which has taken a hit the repercussions of this are bound to affect every other country. Those who had opened up their financial sector (primarily banking and insurance) to the highly mobile global finance have experienced a collapse of their financial institutions like in the United States resulting in huge losses in incomes and savings. Those who were wise not to liberalize their financial sector (or were prevented from doing this) like India and China are also doomed to share the impact of this slump because of the crucial role the US economy has played in driving the growth process in these economies.
The arguments in the preceding section can be used to say that the crisis which faces capitalism today is not because there was a lack of regulation or there were loopholes in the regulatory mechanism. Had regulation been in place these speculative bubbles would not have been sustained in the first place i.e. the roots of the crisis lie not in loopholes in the system but in the system itself.
In the previous section we have tried to argue that the boom which lasted for almost two decades in the US economy was basically related to a consumption driven speculative growth. It was speculative in nature in the sense that the rationale for spending came from notional increases in income which promoted credit driven consumption and credit financed investment in housing (in the expectation of making capital gains to a large extent). This speculative boom, though it lasted for almost two decades, however has not been successful in preventing a slump (one can say it was delayed) which should have set in because of a demand constraint arising out of withdrawal of state intervention and worsening distribution of income (leading to an overproduction crisis).
Having said all this and reckoning with the fact that the current crisis has given a serious blow to the pioneers of financial liberalization it is important to understand that who have been the real gainers and losers. Even though the larger than life corporations like Lehman Brothers, AIG etc have either gone bankrupt or been doled out by the government, the people who were calling the shots before the crisis struck have been able to manage “golden parachutes” for them, through various kinds of arrangements. The biggest losers are the people who had spent their money (even life long savings) with these firms, only to realize that everything has simply vanished, or millions of people in the US who have become homeless because of continuing foreclosures or millions of others in the third world countries who have lost their jobs because there has been a the fall in the demand for exportables in the US or other developed countries. This only vindicates the inequality which marks capitalism as a system. Rich Executives and financial analysts who were busy producing and selling financial securities to “diversify” risks had the feeling deep embedded in their hearts that they are “too big” to be allowed to go down, i.e. the government would always be willing or forced to bail them out, or what is termed as a problem of moral hazard in the literature.
Today with the crises looming large it appears that the “supremacy” of neo-liberal economics which had financial liberalization at its core is coming to an end. While this will mean the end of a boom for a miniscule section of finance capital beneficiaries who have never had it so good, the larger masses are doomed to bear the pains of these speculative activities even though they never enjoyed the benefits of the kind of economic growth path it entailed. What went into sustaining the boom in the United States and hegemony of finance capital was not just a worsening of income distribution in the US alone, it also entailed a massive squeeze on the population through out the world, especially in the third world countries. This was done with two objectives in mind as discussed below.
Firstly, finance capital which looks at the entire world as its area of operation would like to have policy regimes in place which are suited to its interest. This would mean that the determining factor behind any macroeconomic policy regime becomes how to cater to the wishes of finance capital (rather than the conventional objectives of attaining full employment and balance of payments). This becomes necessary because even if the macroeconomic policy instruments are used to guide the economy towards full employment, the results might be quite opposite in case there is a capital flight as a result of “loss in investor confidence”. For example, if a government were to try to put a tax on FIIs or capital gains in the stock market to finance some investment programme (in which case even the FRBM would not be violated) there might be capital flight from the economy leading to a balance of payment crises. Similarly once the economy is exposed to free mobility of capital the rate of interest also does not remain an exogenous variable. For the rate of interest must be fixed in a manner so that it covers the risk premium and expectations of any change in price levels which face a representative wealth holder.
There is only one country in the world which has autonomy in matters of fiscal and monetary policy, which is the USA. This is so because the dollar enjoys a special position among all the currencies in the world. This is because of two reasons: majority of the world’s assets are held in dollar based deposits (and everybody has a vested interest in maintaining the stability of the dollar) and there is a belief that the American state would never allow the value of its currency to depreciate vis-à-vis important commodities (what can be compared to old notion of the dollar being as good as gold). This special position of the dollar helped the US economy in a big manner in sustaining the huge debt on its economy because there has been a continuous flow of capital from the developing countries at very low rates of interest. In today’s world one can say that the most important commodity with which people associate the dollar is oil. It is widely accepted now that the ongoing war in Iraq was started to strengthen American control on the oil reserves (Iraq being the second biggest oil reserve in the world). None other than Allen Greenspan, who headed the US Federal reserve, has accepted this fact. However, these efforts have boomeranged, with the US efforts to capture Iraq turning into an albatross around its neck. Not only did the oil prices started rising as shown in chart III, but the attempt to sustain dollar hegemony has also led a massive devastation in a country which had good enough living standards for the common people.
Such developments only highlight the contradictions which capitalism poses in front of us where in order to sustain its hegemony the leading capitalist state was forced to wage a war and is bearing the costs of it.
The second objective which was very much a part of the agenda of globalization was making available the natural resources of the tropical lands in the third world countries without any serious inflationary pressure in the metropolis. This has always been an agenda of imperialism because despite making significant advances in technology and scientific knowledge the developed countries in the northern hemisphere still can not produce the diverse range of tropical products which are quite essential for maintaining the high standard of living in these countries. Now any excess demand for these commodities might lead to inflationary pressures in an economy, where the prices of these commodities would rise relative to the level of money wages. For a phase of capitalism which is dominated by finance, inflation is not a desirable thing because it leads to erosion in the value of financial assets compared to other commodities. Also high inflation levels are not politically desirable for any government. In the days of colonialism this feat was achieved by establishing direct control over the natural resources of the colonies. But under the present phase of neo-liberal policies this has been achieved by forcing open the markets of developing countries and unleashing a very strong demand deflation for the larger masses in these countries. This policy regime which has been implemented with the help of the Bretton Woods institutions ensured that excess demand pressures were handled by deflating the demand of the working classes particularly in the third world countries and shifting the terms of trade against food grains without any inflationary upsurge which might harm rentier interests. A proof of this fact can be seen in the fact that from the 1980s to 2000 while the per capita cereal output for the world went down from 355 to 343 kg, the terms of trade for cereals vis-à-vis manufacturers in the world economy declined by 46%. Now since the world economy had shown a moderate rate of growth in income for this period logically there should have been an excess demand for food items and terms of trade should have improved. This is what globalization has achieved for current day capitalism, where excess demand situations have been handled through income deflation and preventing any inflationary upsurge which might have harmed financial interests.
But then like the earlier example of US trying to control oil reserves for maintaining its hegemony, this method also has its own contradictions. This is because of the fact that there is a limit to which capitalism can impose income deflation for a prolonged deflation is bound to have supply side effects as well. This constraint was not so clear when capitalism could conquer new territories and dispossess native population from their lands, but with no such new frontiers left the constraint starts to show itself. Any further income deflation then carries with it two risks: it can be politically difficult to handle and it can affect supplies. The recent inflationary upsurge which had generated a big concern about the sustainability the growth process was primarily an outcome of this phenomenon.3 Here lies the other contradiction of capitalism where it requires a continuous squeezing of the non-capitalist sector which still provides livelihood to a very large section of the world population to sustain itself. And any downturn like the present one will inflict even more hardships to those employed in this sector because they will face further deterioration in the terms of trade because of falling demand levels in the advanced countries.
Having said all this the question arises where does one find the solution to this crisis? The ongoing attempts to stage a recovery by injecting liquidity into the system will not yield a result is agreed upon by many people who are not even Marxists. This is because of the fact that no matter how much liquidity is injected into the system, unless there is confidence among the economic agents that they can generate returns by investing that money there would be very little scope for any kind of recovery. But since, the crisis has led to a massive fall in incomes and therefore consumption levels of a vast majority of the population i.e it is now a crisis of aggregate demand such confidence is naturally not there. The second and a more correct approach would be to the state providing a fiscal stimulus to the economy which would drive up the level of employment and incomes. But then if this were to be done by a single country there is a possibility of the effects leaking out to other economies unless significant protectionist barriers are put in place, which might to lead to further conflicts. Also it might provoke capital flight given the aversion of finance capital to increased state intervention, which though destabilized still enjoys both considerable political and ideological hegemony. Huge bail-outs given to financial giants in the Wall Street without any obligations on how the money was to be used or the decision of the Indian government to increase FDI cap in the insurance sector in the country which is nothing short of putting common sense upside down are a few examples of the continuing dominance of finance capital.
It is in this regard that the question of strengthening the struggle for bringing a fundamental change in the existing balance of political forces becomes important. Unless this is achieved no matter how correct are the arguments which point towards the erroneous prescriptions of financial interests even from the point of view of sustaining capitalism (like Keynes had tried to) there would be no end to the downturn which is only deteriorating. Even after the great depression of the 1930s it was not Keynes’s bright ideas in The General Theory which convinced the capitalist states about the absurdity of maintaining sound finances. It was the increased strength of the working classes in the advanced capitalist countries who had made great sacrifices in the war against fascism, together with the threat of the socialist camp which forced the policy makers to resort to demand management policies.
For when it comes to the question of praxis any victory in the battle of ideas must be supported by a decisive advance in the realm of class struggle as well. To quote from the Communist Manifesto, “What else does the history of ideas prove, than that intellectual production changes its character in proportion as material production is changed? The ruling ideas of each age have ever been the ideas of its ruling class”.
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