The real causes of our economic distress

Posted on June 24, 2015


(This is a slightly updated version of a 2009 article that received very limited circulation)

Like fish stranded by a fast retreating tide, most mainstream economists, commentators and governments continue to flap around frantically and aimlessly, unaware of the real cause of their distress. They have been doing so for the past seven years. The more cautious among them still express hope for a slow return of the tide; most merely hope against hope that somehow, sometime, all will return to what it was. It almost certainly will not.

None of these orthodox economic gurus saw this economic crisis — or the extent or duration of it — coming. That foresight remained the province of a very few hetrodox pundits. And it is certainly true that most mainstream economists and commentators continued to talk up the economy even as the first serious signs of collapse became clearly evident in 2008. And most also tended to refer to it — at least initially — as a purely financial affair.

They did so out of an almost religious belief in the market and, in most cases, an obvious absence of knowledge about economic history. Clearly blinded by the chimera of Stock Exchanges and the smoke and mirrors of booming futures and derivatives trading, they lost sight — if ever they had it — of the real productive economy. Their god was profit and their church, the market.

So when the economic bubble began to deflate, punctured by what was an effective pyramid scheme based on sub-prime mortgages in the United States, they did not question church or deity; the search was for individual sinners, those who had abused the rites and rituals that they believe guarantee profits ever after. So instead of rational appraisals, there were frequent outpourings of dogmatic incantations and calls for regulatory patches to repair the sub-prime hole and then for very real billion dollar bailouts for banks.

At the same time, in much the way it continues today, there was the insistence by any number of economists and commentators that the crisis could not have been foreseen; that its precise cause and probable consequences remain a mystery. But this is simply not true. For 20 years and more, the warning signs have existed — and have been pointed out, although usually from the more radical margins of economic debate.

However, even that standard bearer of free market capitalism, The Economist magazine, warned in 1999 that the spectres of over-capacity and over-production were haunting the world economy. A survey by the magazine of international demand, supply and capacity resulted in the conclusion that a time of glut leading to stagnation, was on the cards.

Even earlier, the economic historian Robert Brenner in the United States raised similar fears as, in the 1950s, did US economic commentator T. N. Vance. The so-called oil price crisis of 1973 also led to a veritable flurry of analysis on the margins of economic debate, illustrating what probably lay in store.

However, these commentators and economists not only looked to productive capacity and the related sources of supply and demand in the world economy, they based their analysis on the much earlier work of Karl Marx and his collaborator, Frederick Engels. In 1848 Marx and Engels wrote that the then relatively new capitalist economic system needed to expand its market globally; it needed to “nestle everywhere, settle everywhere, establish connections everywhere”.

It was a system, they wrote, that has “conjured up such gigantic means of production [that it] is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells”. This, they maintained, would lead to crises and to “an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production”.

But even John Maynard Keynes, the reformist and decidedly non-Marxist British economist, noted in 1933 that there was a danger of widespread technological unemployment. He wrote that this would be “due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour”

But the mass of free market praise singers grew as the world recovered from the barbarity and destruction of the second world war and a lengthy economic boom began. The collective attitude of the praise singers was well summed up by economics Nobel laureate Paul Samuelson. In 1970 he told a conference of his peers that the days of crises — of boom and bust — were over. “The National Bureau of Economic Research has worked itself out of one of its first jobs, namely business cycles,” he claimed.

Three years later came the first crisis. But it failed to dent the pseudo-religious belief in the market and the system as it existed. Sinners were found: the oil producers and their “artificial” lifting of the oil price. What was needed was merely some adjustment; there had apparently been too much tinkering with the market.

This attitude was summed by British Labour Party prime minister James Callaghan in 1976 when he said:

“We used to think you could just spend your way out of recession by cutting taxes and boosting government borrowing…that option no longer exists…it worked by injecting inflation into the economy. Each time that has happened…unemployment has risen.”

Callaghan’s statement announced the turn away from what was known broadly as the Keynsian approach to that advocated by Milton Friedman and the Chicago School, an approach now labelled neo-liberal. Nearly 40 years later, neo-liberalism has been found wanting and, without apparent irony, history repeated itself in recent years with several governments increasing their borrowing, trying to “spend their way out of recession” — and getting into greater difficulties.

But this begs the main question: is what is going on merely another recession/depression, one of the cyclical slumps inherent in the system, or is it something different? The answer is probably both yes and no: yes, it is one of the slumps inherent in the system and no, it’s underlying cause is no different from those preceding it. However, it is by far the greatest crisis the system has suffered, the cumulative result of decades spent ignoring a growing and fundamental fault.

The economic history of the modern, capitalist, world is peppered with examples of booms and slumps, of struggles for economic supremacy by individuals and exploiting minorities in regions, countries and blocs. All the while, productive capacity and the ability to manufacture more with less grew as mechanisation and the bloody history of colonial plunder replaced plantation slavery and the dehumanising horror of the workhouse.

Peasants and self-sufficient communities, driven off their lands by force or taxes, swelled the ranks of the sellers of labour who, at one and the same time, became the purchasers of the very products they helped to make, distribute or provide the raw materials for. Their wages and conditions improved only after desperate and often bloody struggles.

However, there were always some employers who realised the link between the worker as producer and as consumer. None more so than Henry Ford. He had little regard for workers, but understood that the survival of the system demanded the ability to sell, at a profit, the products that the sellers of labour create — and buy.  In his 1922 autobiography he noted:

“…Our own sales depend in a measure upon the wages we pay.  If we can distribute high wages then that money…will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales”.

But he too did not foresee the looming absurdity of over capacity and over production that now afflicts almost every manufactured item, but is especially obvious in the textile, garment and motor vehicle industries. This ongoing global economic decline has also meant a slump in commodity prices which, in turn, means more and more unemployment and less and less purchasing power. Profits come increasingly under threat as competition intensifies and this, in turn, leads, on a global basis, to a race to the bottom in terms of wages and conditions.

South Africa — and especially the garment centres of Cape Town and Durban — have already borne the loss of tens of thousands of rag trade jobs. And the steady loss of jobs in the mining sector is likely to increase over coming months.

So far, government and its “social partners”, business and labour, have continued to react in a largely ad hoc manner in the almost certainly forlorn hope that there will be an economic revival in the short to medium term. The hope is forlorn because the mircrochip revolution is continuing apace, 3-D printers producing everything from teacups to cars being one of the latest developments. These slivers of silicon lie at the heart of vehicle assembly lines, televisions, cell phones, the national power grid and the automated machines in factory and home. They make work faster, easier and cheaper, using less and less labour, and not only in repetitive, less skilled work.

Yet these technological advances could herald a world of plenty for all. They could liberate humanity from drudgery and poverty and repair the destruction already wrought on the physical environment. But this could only happen on the basis of collective action for the benefit of the majority.

Our present anarchic system of minority ownership, based competition and the need to accumulate increasing levels of profit in order to compete even more successfully, works against such a development. It works, in fact, against the very essence of democracy. There is already evidence of where this may lead: to fortified islands — whether suburbs, cities, or regions — of affluence in a global sea of desperate poverty and increasing savagery.

So we are faced with a stark choice, not just nationally, but internationally: start to transform radically the economic system to one based on co-operation, under collective, democratic control — or persist with the existing system of competitive, minority control, whether by individuals, companies or states. It may amount to a choice between planetary survival or annihilation.

© Terry Bell, 2009/2015 – use by commercial publications requires payment by negotiation; free to trade unions and non-profits

Posted in: Commentary