Workers Vanguard No. 927

2 January 2009


Karl Marx Was Right

Capitalist Economic Crisis: Bosses Make Workers Pay

For Class Struggle Against Capitalist Rulers!

Break with the Democrats! For a Workers Party!

The following is an edited, expanded and updated version of a presentation by Spartacist League/U.S. Central Committee member Joseph Seymour given at a recent plenum of the International Executive Committee of the International Communist League.

On one occasion a Dutch banker described conditions in the London stock exchange as resembling “nothing so much as if all the Lunatics had escaped out of the Madhouse at once.” The occasion occurred almost three centuries ago, at the time when the so-called South Sea stock market bubble burst. So not all that much has really changed.

The current international financial meltdown and severe economic downturn began and is centered in the U.S. So, I want to begin by placing the crisis within the broader historical framework of the decades-long decline of American capitalism. However, it’s useful to first consider the nature of bourgeois class consciousness, especially that of the American bourgeoisie. The bourgeoisie is not a collectivist class. Both in their business practices and in the government policies they advocate, capitalists are primarily motivated by immediate self-interest, not some conception of the larger, long-term interests of the class. To be sure, the income and wealth of all individual capitalists derive from the total pool of surplus value generated by the exploitation of labor. But in their day-to-day activities, capitalists, especially financial capitalists, are mainly motivated by increasing their own wealth at the expense of other capitalists.

I’ve been reading this book, Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006), by a veteran derivatives trader, Satyajit Das. It’s very entertaining, really funny. At one point Das was working for an investment bank that was seeking to induce a Japanese pension fund manager to become its client:

“The bank had courted him ceaselessly for years, to no avail. It turned out the fund manager had a weakness—a clichéd partiality for very tall, long-legged, blue-eyed, blonde women. The bank assumed the woman need not be Japanese.

“A global search was undertaken and the human resources (HR) department performed admirably. The bank found a stereotypical Scandinavian woman to cover the fund manager. The woman—please don’t laugh—was called Ulrika. She was bright, pleasant and efficient, but there was one problem—she had no knowledge of derivatives. She had a background in cosmetics. The bank hired her anyway, figuring, correctly it turned out, that the fund manager wasn’t that interested in her derivatives.”

Reading this book as a Marxist, what particularly struck me was that there was no discussion whatsoever about the division of social product between wages and profits, or more broadly, surplus value, including rent and interest. The entire book was focused on the division of surplus value between financial and non-financial capitalists, and among competing groups of financial capitalists. It showed that for the most part capitalists are out to screw each other to the max. The politically decisive section of the bourgeoisie will subordinate their own immediate self-interest to what they see as the broader and longer-term interests of their class only when they feel sufficiently threatened by the working class from below or from hostile states from without. And when not, it’s a Hobbesian world of all against all.

End of U.S. Post-World War II Economic Hegemony

Keeping that in mind, let’s schematically view the postwar history of the American capitalist economy. For the first two decades following the Second World War, the U.S. dominated the world market in industrial products. It consistently ran very large balance of trade surpluses with almost all other capitalist countries. However, by the mid 1960s, West Germany and Japan had rebuilt and modernized their economies such that they could compete effectively with the U.S. in world markets, and also in the U.S. domestic market. So the flow of trade magnitudes was reversed. The U.S. began to run large balance of trade deficits.

Within a few years, this reversal destroyed the postwar international monetary system established at a conference in Bretton Woods, New Hampshire, in 1944. This was called the gold-dollar exchange standard. The currencies of most important capitalist countries were fixed for long periods against one another and anchored by the dollar. Washington promised—and the emphasis here is on “promised”—that other governments could freely exchange all the dollars they had for gold at a rate of $35 an ounce.

By the beginning of the 1970s, that was no longer objectively possible. The volume of dollars held by foreign central banks far exceeded the U.S. stock of gold at $35 an ounce. The French government of Charles de Gaulle, who resented American international dominance and aspired to restore the “grandeur” of France, started exchanging its dollar holdings for gold. So in August 1971, U.S. president Richard Nixon closed the “gold window,” ending the convertibility of the dollar into a universal commodity of intrinsic (labor) value. After a few ineffectual international conferences, what emerged was a non-system of fluctuating exchange rates. Since then currency exchange rates have been determined by market conditions modified by occasional government intervention. The reason I’m going into this is because the regime of fluctuating exchange rates had two long-term consequences, which underlay the present financial crisis.

One: it created a large new element of uncertainty, that is, risk of loss, in all international financial transactions, especially long-term financial transactions. Hence, currency exchange rates became a major sphere of financial speculation. A large part of Das’s book on derivative trading discusses hedging against and speculating on changes in currency exchange rates.

Two: by severing the tie between the dollar and gold, American capitalism, at both the corporate and governmental level, has been able to massively increase its foreign debt, the only upper limit being the willingness of foreign governments and investors to hold dollar-denominated assets. The dollar is now worth only about 20 cents in 1971 terms. This aspect of the current world crisis was recently underscored in a commentary by Richard Duncan in the London Financial Times (24 November 2008):

“When Richard Nixon destroyed the Bretton Woods International Monetary System in 1971 by closing the ‘gold window’ at the Treasury, he severed the last link between dollars and gold. What followed was a spiralling proliferation of increasingly spurious credit instruments denominated in a debased currency. The most glaring and lethal example of this madness has been the growth of the unregulated derivatives market, which has ballooned in size to $600,000bn, the equivalent of almost $100,000 per person on Earth.”

Increasing the Rate of Exploitation

In 1974-75, there was a major, very sharp world economic downturn. Though it didn’t last long, it had important consequences especially in the U.S. Coming out of the economic downturn, the American capitalist class made a concerted effort to increase the rate of exploitation of the proletariat—that is, the ratio of surplus value to wages. They demanded, and got, giveback contracts and two-tier wages from the trade-union bureaucracy. They shifted production from the unionized Northeast and Midwest to the non-union South and Southwest and to low-wage countries in Latin America and Asia.

This anti-labor offensive, which began under right-wing Democratic president Jimmy Carter, was then escalated under the even more right-wing Republican president Ronald Reagan. It was signaled by the smashing of the PATCO air controllers strike in 1981, and the subsequent union-busting during the Greyhound strike and other strikes. We addressed the need of the labor movement to combat the capitalist offensive at the time, especially in the piece “Labor’s Gotta Play Hardball to Win” (WV No. 349, 2 March 1984). What we said in “Hardball,” that labor can’t play by the bosses’ rules, remains just as valid for the U.S. labor movement today.

Here I want to emphasize an aspect of the anti-labor offensive in the early-mid 1980s that was not so obvious at the time. The ascendancy of monetarism and financial “deregulation” as a doctrine and policy in Reagan’s America and also in Thatcher’s Britain was in part based on and conditioned by the crippling of the labor movement. In Britain, the decisive rightward shift in the balance of class forces was the defeat of the 1984-85 miners strike. Comrade McDonald’s recent note on the impact of the economic crisis in Britain pointed out that in 1986 the Thatcher government “deregulated” the City of London. It was, as they say, no accident that the unleashing of speculative finance capital in Britain took place right after the defeat of the miners strike.

In the U.S. in the 1980s, which liberals often call “the greed decade,” there was a massive upward redistribution of income, combined with a massive increase in U.S. foreign indebtedness. The Reagan administration cut taxes for the rich while greatly expanding military spending in the escalating Cold War II against the Soviet Union. To finance the resulting large government deficits, a large proportion of newly issued Treasury bonds were sold abroad, mainly to the Japanese. Within the space of two or three years, the U.S. went from being the world’s largest creditor nation to the world’s largest debtor nation.

The upward redistribution of income and the increasing U.S. foreign indebtedness was organically tied to the deindustrialization of America. Large parts of the Midwest came to be called the “rust belt.” In the mid 1960s, manufacturing accounted for 27 percent of U.S. gross domestic product and employed 24 percent of the labor force. By the early 2000s, the weight of manufacturing had been reduced to 14 percent of total output, and employed only 11 percent of the total labor force.

Basically, real hourly wages for non-supervisory workers peaked in the early 1970s. For most of the past three and a half decades, real compensation per unit of labor has been less than that level. Only occasionally and briefly, for example during the last phase of the 1990s economic boom, has real hourly take-home pay approached or exceeded what it was in the early ’70s. Insofar as working-class families increased their income in recent decades, it was by having both husband and wife work full-time, working a lot of overtime and even two jobs, if such work was available.

However, by the beginning of the 2000s this extensive means of increasing family income was pretty much exhausted. At the same time, working people were faced with a sharp increase in certain basic expenses—housing (both buying and renting), medical care and college tuition for their children. So they had recourse to ever greater debt. By the eve of the current crisis in early 2007, average household debt was 30 percent greater than annual disposable income. This was possible mainly because families were borrowing against the equity in their homes by “taking advantage,” so to speak, of the then expanding housing-price bubble.

Dot-Com Boom and Housing-Price Bubble

To understand the housing-price bubble of the early-mid 2000s, we have to backtrack a bit and look at the so-called dot-com boom of the mid-late 1990s. This was a classic boom-bust cycle as described by Marx in Capital. A burst of investment mainly in new technology—in this case, computerization, Internet services and telecommunications—increased what Marx called the organic composition of capital. This is the value of the means of production (the labor time embodied in it) needed to employ living labor. In bourgeois economics, it’s called capital per worker. A rising organic composition of capital drives down the rate of profit. Even if productivity rises and wages don’t, increased profit per worker does not offset increased capital per worker.

This dynamic was clearly seen during the 1990s boom in the telecommunications sector, one of the mainstays of the “new economy” or “IT (information technology) revolution.” The return on capital for telecommunications companies fell steadily from 12.5 percent in 1996 to 8.5 percent in 2000. At the time, a Wall Street analyst, Blake Bath, described in his own way the law of the falling tendency of the rate of profit with regard to telecommunications. “It looks like the sector is way overcapitalized,” he judged. “Spending has grown at absurdly fast levels relative to the revenues and profits produced by that spending” (Business Week, 25 September 2000). Or as Marx put it in volume three of Capital: “The real barrier of capitalist production is capital itself” (emphasis in original).

In 2000-01, the dot-com boom went bust, ushering in a recession. Seeking to soften the impact of the economic downturn, Alan Greenspan, head of the Federal Reserve (the U.S. central bank), flooded financial markets with money. The Fed cut the interest rate charged on short-term loans to member banks from 6.5 to 1 percent by 2003, at the time the lowest rate in half a century. During most of this period, the so-called federal funds rate was less than the rate of inflation. In effect, the government was giving away money to Wall Street financiers. In late 2004, the London Economist warned that America’s “easy-money policy has spilled beyond its borders” and “has flowed into share prices and houses around the world, inflating a series of asset-price bubbles.”

At the core of the current crisis is a class of financial instruments known as derivatives. Traditional, primary financial securities—corporate shares and bonds—are in a formal, legal sense claims on commodities, i.e., goods and services that embody both use value and exchange value as a product of labor. Derivatives are based on, or otherwise tied to, primary securities. A typical and important type is a credit default swap. Formally, and I emphasize formally, this is a kind of insurance policy against a corporate bond defaulting. However, you can buy a credit default swap without owning the corporate bond. In that case, it’s a form of speculation that the corporation will default. Imagine that 20 people hold fire insurance policies on the same building, 19 of whom don’t own the building. Well, welcome to the world of derivatives. Moreover, you can also speculate on price changes of a corporate default swap through what are called put or call options.

The basic point is that derivatives have been piled on top of derivatives on top of other derivatives. To quantify: in 2005, if you added up the nominal market value of all derivatives in the world, they were three times greater than the primary securities on which they were supposedly based. To understand the extreme severity of the current financial crisis, you have to recognize the sheer magnitude of what Marx called “fictitious capital” generated over the last few decades. In the early 1980s, if you added up the nominal market value around the world of all corporate shares and bonds and also government bonds, they were equal to about the annual output of goods and services, what bourgeois economists call the global gross domestic product. In 2005, the International Monetary Fund calculated that if you did the same operation, the value of only primary securities to global gross domestic product was almost four times greater. And if you put on top of that derivatives, the amount of risk in the financial system has been multiplied many times over.

Charles R. Morris, a critically minded financial journalist, described how this Everest of spurious paper “wealth” was concocted:

“How could leverage get so high? In the class of instruments we’ve been talking about, there are relatively few ‘names,’ or underlying companies, that are deeply traded, several hundred at most. And a relatively small number of institutions, basically the global banks, investment banks, and credit hedge funds, do most of the trading. In effect, they’ve built a huge Yertle the Turtle-like unstable tower of debt by selling it back and forth among themselves, booking profits all along the way. That is the definition of a Ponzi game. So long as a free-money regime forestalled defaults, the tower might wobble, but stayed erect. But small disturbances in any part of the structure can bring the whole tower down, and the seismic rumblings already in evidence portend disturbances that are very large.” [emphasis in original]

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash (2008)

As the tower of debt collapses, it is relentlessly pressing down the prices of all financial assets other than First World government securities. And they, too, may soon go.

Impact on West Europe and Japan

The financial crisis has greatly exacerbated the interimperialist tensions and conflicts of interest in what is increasingly becoming the European Dis-Union. The various national bailout schemes have intensified intra-EU financial competition. Short-term speculative money capital flows into those countries—for example, initially Ireland—in which government policies appear to make the banks and other financial institutions more secure. And then it flows right out again when other governments offer seemingly more generous bailout packages.

We’ve also seen an increasing rift between the two core countries of the EU and euro zone: Germany and France. The vainglorious French president Nicolas Sarkozy, who perchance also happened to hold the revolving-door “presidency” of the EU during the second half of 2008, has presented himself as the savior of world capitalism. He has pushed various ambitious financial regulatory and economic “stimulus” schemes on both an EU-wide and international basis. Needless to say, Sarkozy’s posturing has not endeared him to the rulers of non-French imperialist states.

In particular, the German ruling class, represented by the coalition government of the Christian Democrats and Social Democrats, has rudely squelched the Frenchman’s various schemes. No German geld, they declaim, will be spent to pay for the profligacy and economic foibles of its European “partners.” More generally, the powers that be in Berlin have insisted that it’s up to other countries—read the U.S.—to fix their own economies in a way that will help Germany as well. In the words of German economics minister Michael Glos: “We can only hope that the measures taken by other countries…will help our export economy” (Financial Times, 1 December 2008). Dream on, Herr Minister!

Japan, which is a very big player in the international economy, has not gotten sufficient attention from the American financial press. Japan is the second biggest economy in the world. Even more importantly, it’s the largest creditor nation in the world. While China has recently overtaken Japan as the biggest holder of U.S. government securities, Japan holds a far larger volume of private debt from corporations all around the world.

In 1989-90, a real estate and stock market bubble in Japan burst, and it ushered in a decade of stagnation, what later came to be known as “the lost decade.” The monetary authorities pushed interest rates down to effectively zero in order to stimulate investment. As it happened, the policy worked but not in the way the government authorities intended it. The huge overhang of excess industrial capacity and “nonperforming bank loans” discouraged additional investment in Japan itself. So Japanese financiers and investors all over the world borrowed cheap money in Japan and then invested it in other countries where for one reason or another the rate of return was higher. In the financial press this was known as the “yen carry trade.”

The yen carry trade is now being pushed hard into reverse gear. That is, investors are selling their assets all over the world, at rapidly diminishing prices, in order to repay their loans to Japanese banks and other institutions. But this has become a self-defeating process. Because as this money floods into Japan, it drives up the value of the yen relative to the currencies of almost all the countries in which the debtors have invested. So that increases the real burden of their outstanding debt and future debt repayments. Imagine that you were bailing out a large tub of water and that for every bucket you threw out, a bucket and a half flowed back into the tub through an underground pipe. Well, that’s basically the situation now facing foreign and also the Japanese investors who have taken advantage of the more than a decade-long yen carry trade.

At the same time, the appreciation of the yen is driving up the prices of Japanese goods in world markets at a time of rapidly declining global demand. The core of Japanese industrial capitalism is taking a big hit. Toyota expects a loss in its auto/truck business this fiscal year for the first time in seven decades. Sony has announced it is laying off 5 percent of the workforce in its electronics division and closing down up to six factories around the world.

Global Crisis Jolts China’s “Socialist Market” Economy

So what about China—which we understand is not capitalist, but a bureaucratically deformed workers state? During the 1997-98 East Asian financial-economic crisis, China effectively offset the impact of the crisis by substantially expanding investment in industrial construction and infrastructure. And the Beijing Stalinist regime is trying to replicate that policy now. In early November, it announced a big stimulus package (equivalent to $585 billion) centered on expanding infrastructure—railways, roads, airports, ports and the like. Subsequently, however, it was reported that the actual amount is much smaller than initially indicated. Only one-quarter of the funds will be provided by the central government; the other three-quarters are supposed to come from local government bodies and state-owned banks. But these institutions have far more limited financial resources. Stephen Green, an economist with the Standard Chartered Bank in Shanghai, commented in this regard: “With revenues falling, it is difficult to see how local governments, banks and companies can make up the rest of the Rmb 4,000bn” (Financial Times, 15-16 November 2008).

Comrade Markin and I have discussed the impact of the global crisis on China. And we both think that this time around, unlike in the late 1990s, the Chinese economy is not going to get by basically unscathed. To begin with, this is not a regional but a global economic downturn. And it’s centered in the U.S. and West Europe. All indications are that it’s going to be very severe and fairly prolonged. One consequence is that this increases the likelihood of anti-Chinese trade protectionism in the U.S. and in West Europe.

We are going to see, and are now actually seeing, the downside and inflexibility of what the Chinese Stalinists call a “socialist market” economy. There are tens of thousands of factories in China employing tens of millions of workers owned by domestic entrepreneurs, offshore Chinese capitalists in Hong Kong and Taiwan and foreign corporations that produce commodities specifically geared to the advanced capitalist countries, commodities like toys, CD players and global positioning systems for cars. These factories cannot quickly and easily shift production to, say, producing household appliances for Chinese workers and peasants. And that would be the case even if the People’s Liberation Army flew helicopters over working-class neighborhoods and rural villages and dumped bundles of money for the inhabitants.

Furthermore, the Beijing regime has encouraged its own version of a housing-price bubble and a residential construction boom. The large and increasingly affluent urban petty bourgeoisie—Chinese yuppies—borrowed money to buy, build and expand houses not just to live in them but as financial investments. They expected that the market price of these would continue to spiral ever upward. Well, the housing bubble has now burst. In one upscale Beijing neighborhood, the price to purchase new apartments fell 40 percent between February and October of last year. The London Economist (25 October 2008) commented: “The housing market provides some nasty shocks to China’s new middle classes.” Of course, we’re not that concerned about the travails of Chinese yuppies. We are, however, very much concerned about the effect of the collapse of the housing-price bubble on our class: the proletariat. It’s had a depressing effect on the residential construction industry, most of whose labor force consists of male migrant workers from the countryside.

The upshot is that China, unlike almost all capitalist countries, is not going to go into a recession. But the likelihood is that it is going to experience a sharp decline in the rate of growth, which in the past couple of decades has averaged around 10 percent. Correspondingly, there’s going to be a large increase in the number of urban unemployed, both from workers, who are laid off in the private sector, and from peasants, who are coming into the cities looking for work but not finding any. According to official figures, by the end of November, ten million migrant laborers were laid off from their jobs in urban China. And this economic distress is going to produce increased social unrest. There have already been angry protests by laid-off factory workers in the Pearl River delta, the main region in China producing light manufactures for First World markets. What we do not and cannot know is whether the increase in worker unrest will destabilize the political situation. That is beyond the scope of our current knowledge.

The Revival of Keynesianism

What’s likely to happen? All indications are that this is going to be an exceptionally severe and prolonged world economic downturn, especially bad in the U.S. and Britain. At the level of ideology, and to a lesser extent, policy, we are going to see, and have already seen, a shift from the right wing to the left wing of the bourgeois political spectrum: fiscal policy based on increased deficit spending, partial nationalization of the banks and other financial institutions, attempts at expanding and tightening regulation of financial transactions and the like.

Comrade Robertson and others have observed that monetarism as a doctrine has been completely discredited and Keynesianism is back in fashion. I have seen more positive references to John Maynard Keynes in the English-language financial press in the last six weeks than I have seen in the last ten years. Comrade Blythe pointed out that it is a deeply ingrained American liberal myth that Franklin Roosevelt’s New Deal, based on Keynes’s doctrines, got the U.S. out of the Great Depression of the 1930s. No, what got the U.S. out of the Depression was the expansion of “public works” during World War II, the “public works” being tanks, fighter planes, aircraft carriers and the atomic bomb.

We have written about Keynesianism in the past, unfortunately the rather distant past in terms of our tendency’s history. I recommend in particular three pieces. In the early 1960s Shane Mage, a founder of our tendency, wrote a doctoral thesis, “The ‘Law of the Falling Tendency of the Rate of Profit’: Its Place in the Marxian Theoretical System and Relevance to the U.S. Economy” (Columbia University, 1963). Incidentally, his thesis adviser was Alexander Ehrlich, the author of The Soviet Industrialization Debate 1924-1928. Mage’s work contains a section explaining the difference between Keynes’s and Marx’s understanding of the basic cause of economic downturns. In the 1974-75 world economic downturn, I wrote a piece called “Marx vs. Keynes” (WV No. 64, 14 March 1975), which was partly theoretical and partly empirical. And in 1997-98, WV ran a five-part series under the general heading of “Wall Street and the War Against Labor.” Part Three, “The 1930s New Deal and Labor Reformism” (WV No. 679, 28 November 1997), contains an analysis of Keynes at the theoretical level as well as an empirical analysis of the U.S. during the 1930s, the actual policies of the New Deal and the economic developments during the Second World War.

I want to conclude with a couple of points where the current situation is very different than in the 1930s. As I previously indicated, the current situation is very different in that the sheer volume of nominal, legally contractual debts that cannot be repaid far exceeds, by large multiples, the financial resources of capitalist governments. Already, Britain and Italy have encountered difficulties in financing the increased budget deficits resulting from their various bailout schemes. The Financial Times (1 December 2008) quoted Roger Brown, a financial analyst with the Swiss bank UBS, who pointed out:

“Governments are already running into problems, which does not bode well so early after the [bank] recapitalisations and extra funding needs have been announced.

“We do have to ask whether there will be enough investors to buy the bonds, or at the very least over whether this will push yields substantially higher to attract them.”

So all these bailout schemes can at most offset a small fraction of the losses.

The second is that the U.S. is going into this deep downturn with an enormous existing overhang of debt, much of which is held by East Asian governments and investors. And this puts a pretty tight upper limit on additional deficit spending. In his first post-election pronouncement, Barack Obama sought to dampen, not encourage, expectations that the U.S. is soon going to return to “prosperity”: “I have said before and will repeat again: It is not going to be quick, and it is not going to be easy for us to dig ourselves out of the hole that we are in.” Thus spake the new chief executive of the most powerful capitalist country in the world.

So what is the solution? It is, as we know, both simple and radical. The working class has to take over the productive resources of society—the factories, transport systems, electric power generating systems—from the capitalists and, through the establishment of a planned economy, use these resources in the interests of the working class and society at large. But in order to do that, you need a political party that represents the interests of the working class against the capitalist class. In the U.S., such a party would also stand for the rights and interests of the black and Latino oppressed minorities, for the rights of immigrants and all other oppressed sections of society. To build such a party, the workers have to break with, in particular, the Democratic Party—that is, the more liberal, or at least more liberal-talking, party of American capitalism. It is also necessary to oust the existing pro-capitalist labor bureaucracy and replace it with a leadership that fights for the interests of the workers, and again, of all of the oppressed. And it’s only when that is done that it will be possible to realize a basic principle, namely, that those who labor must rule.