The following article is taken from the centre page spread of the July issue of The Socialist newspaper.
IN 2006 the world economy grew by 5.4%. That annual rate is comparable with growth in the years of the post-war economic upswing of the 1960s. The ability to endure crises, such as the 1997 East Asian/Russian financial collapse or rising oil prices has led many to believe that the world economy has undergone a long-term structural change. Has it created the basis for a new economic upswing on the scale of the post-war boom that lasted from 1950 until the 1973 oil crisis? JARED WOOD comments.
THE COLLAPSE of Stalinism and Maoism has allowed the restoration of capitalism in the USSR and increasingly in China. This adds billions of well-educated and skilled workers to the global workforce as well as opening up potential new markets for producers. But global production has increased at a far slower rate than the increase in available workers.
With more workers available for each job, employers have been able to drive down wages. This effect has been multiplied because the new workforce is paid very little and, in China, is tightly controlled by a totalitarian state. With barriers, both technological and political, to trade being overcome China has developed rapidly as a low cost manufacturing centre, exporting goods to the USA, Europe and SE Asia. (See section on ‘free trade’)
The incorporation of China into the world capitalist economy, in many ways, represents the triumph of globalisation. Bush, Blair and other capitalist political leaders speak of globalisation as a natural phenomenon that we just have to accept. In fact globalisation describes the spread of neo-liberal economic and political rule across the globe. This is not natural but is the inevitable consequence of a world controlled by multinational corporations and their political appointees.
The current period of economic growth is very different to that of the 1960s. That boom was based on record levels of investment in new technology which facilitated a rapid growth in the productivity of manufacturing workers. With each worker turning out more and more each hour, wages could rise while profits could also soar to unprecedented rates.
This was the economic basis for social democratic reforms including advances in health care, improved access to education, social housing, rising wages and better conditions of work. Social democracy became the economic orthodoxy after the Second World War.
Even so, these reforms were only accepted by the main owners of capital (the multi-national companies, banks and financiers) because of the constant threat to their power posed by the labour movement and because of the presence of Stalinist regimes (states where capitalism had been overthrown and a planned economy introduced, though with no democracy).
Today, in spite of profit rates that have returned to the levels of the post-war boom, capital cannot agree to a new ‘social consensus’ of rising wages and welfare for workers. This is largely because the current growth in the world economy is not, in the main, based on rising manufacturing productivity but on direct redistribution of income away from wages and into the profits of corporations. Any real improvement in workers’ wages and conditions would undermine the very basis of the ‘boom’. (see Capitalists drive down real wages)
So by taking advantage of a huge new pool of low paid workers, global capital has pushed down wages and restored its profitability but this has not been reflected in new investment. Despite talk of an ‘information technology revolution’ the overall level of global investment is weak, falling over each successive economic cycle since 1960 in the USA, Europe and Japan. (Glyn, Capitalism Unleashed, Oxford University Press, 2006)
There has been a rise in investment elsewhere, especially China, but this does not offset the fall in what are still the major manufacturing regions, North America, Europe and Japan.
GLOBAL CAPITAL now faces a sharpening contradiction. Profits have been boosted but if wages are falling, especially in the world’s largest market, the USA, who will buy all the goods? Falling prices in some sectors have helped lessen the impact of this contradiction, as have new markets in China and elsewhere but these have very limited effects. In the main, demand has only been maintained through an explosion in the availability of cheap credit.
Historically low interest rates have allowed people to borrow more than ever before to support consumer spending but this growth in credit has stored up huge imbalances between individuals, corporations and nations. In particular China has been supporting the US economy to a massive extent that is unsustainable in the long term.
Recent rises in productivity in the USA have been concentrated in retailing where longer hours (for no more pay) and speed-ups have been introduced. But this cannot go on forever. There are physical limits to what a worker can do and political limits to what they will accept. `
As the Financial Times recognises: “One of the key points about the US economy in recent years has been the spectacular rise in corporate profits, in absolute terms and as a percentage of GDP. Now, there are clear signs that this is changing.” FT 29.3.07
And just as profit growth is slowing, the central banks face the need to increase interest rates in order to control inflation (see section on cheap credit). So important are low interest rates to the global economy that any significant increase could tip the world into recession.
Karl Marx described capitalism as a system of cycles, veering from boom to crisis. Capitalists stress recent growth. But the 21st century global upswing is not a new post-war boom and has not benefited workers in the way that was possible during the 1950s and 1960s. Instead neo-liberal globalisation has piled up major imbalances that will inevitably destabilise capitalism and could tip the global economy into a steep reverse.
A recent survey of Chartered Financial Analysts found that only 9 per cent thought recent global growth was “a consequence of lasting low economic volatility. 47% think low volatility is temporary and agree with the statement: ‘it isn’t different this time'”. (FT 3.4.07)
It isn’t different and the laws of capitalism identified by Marx in the 19th Century are as valid today as ever. Capitalism remains a system of exploitation, class struggle and crisis… even while the economy is still growing.
Capitalists drive down real wages
Karl MARX explained history as a history of class struggle between those who own the means of production and those who work for them.
The struggle between these two classes is conducted daily over the share of company income that goes to the capitalists, as profits and to the workers, as wages.
Paul Krugman, the prominent US economist says that the way income has been transferred from wages to profits is “the central economic fact about life in America”. (Gore Vidal, Dreaming of War, Clairview, 2003). Now, even key figures from Clinton’s neo-liberal former administration are articulating the concerns of Middle America about wage levels.
Larry Summers, the Clinton administration’s last Treasury secretary, has highlighted stagnation in wage growth for most workers in the US economy. “The US is now in its fifth year of growth since the last recession. Yet median weekly earnings (wage earners who are at the 50th percentile of income distribution, with half the workforce earning more and half less) have fallen by 3.2 per cent in real terms since the start of the recovery in October 2001.” (FT 9.4.07).
In fact, a median wage earner in the USA today has only just exceeded the real income of a median earner in 1976. That means that since 1976, in spite of all the economic growth recorded in the USA, most workers are no better off at all!
This situation cannot go on for ever. After an initial boost to profits by cutting wages and forcing workers to work faster and harder there is no basis for further increases in productivity.
Corporations are now confronting dual upwards pressures on wages. Economic growth in China and India has begun to create labour shortages in skilled employment sectors which has led firms to bid up wages in order to attract key staff. But an even more significant challenge will come from the labour movement.
Trade unionisation remains at an early stage in China but reports of industrial unrest are growing and their significance is not lost on top merchant bankers, UBS: “UBS thinks that spare labour capacity has receded and that unit labour costs may now start to rise. In other words, the workers may start demanding their share of the pie.” (FT 28.7.06)
Driving down wages has been absolutely central to the current phase of global economic growth but there are now concerns, from a capitalist viewpoint, that labour shortages and the labour movement will stop the squeeze on pay.
Neither ‘free trade’ nor protectionism
INTERNATIONAL TRADE has grown at a faster rate than economic production ever since World War two. As a proportion of global economic output it has doubled since 1960. Like wages, trade is becoming a big issue, especially in the USA.
Many American workers blame free trade for the loss of manufacturing jobs in the USA. There is also a growing US political lobby that wants to see the US engage China in a trade war in order to defend the US’s long-term position.
China is now ‘lending aggressively’ (according to the IMF) to Africa while also moving to protect key industries, like TV stations, from foreign ownership.
Meanwhile the President of the European Central Bank has criticised protectionist measures taken within Europe. (FT 8.1.07)
Although free trade has been central to the neo-liberal project some opportunist political leaders are now blaming trade for job losses and wage erosion at home.
Like wage cuts and low interest rates free trade is creating its own problems. The answer for socialists cannot be a retreat into the economic nationalism that led to two world wars.
Socialists should fight for a democratically controlled plan of production and distribution in each country followed by building links with other workers’ movements towards a worldwide democratic and socialist confederation.
Cheap credit is building inflation
MARX EXPLAINED that inflation is not the product of rising wages but occurs when the supply of money runs ahead of the increase of goods produced. In such a situation there is more money chasing the same goods and consequently, following the laws of the market, prices are bidded up. In spite of the cheapening costs of production in China, the huge supplies of cheap credit available today are now feeding into rising inflation.
The world’s central bankers have begun to raise interest rates. This is an attempt to prevent inflation from developing to the point where it would threaten economic stability by eroding the value of wages and savings. An interest rate rise should make it more expensive for individuals or corporations to borrow and will therefore restrict the amount of money in the economy, thus helping restrict price rises.
But such is the level of debt owed by consumers, businesses and governments that any major increase in rates could lead to waves of bankruptcy, unpayable loans, defaults and home repossessions.
The Bank for International Settlements (BIS), comprising the various central banks of the world including the Bank of England and the US Federal Reserve, aims to “foster monetary and fiscal stability”. Earlier this year the BIS claimed that central bankers may have kept interest rates too low for too long, leading to a bubble in the market for assets including shares and property.
The Federal Reserve slashed US interest rates to encourage spending after the Russian and Asian economic crises in 1997 and the policy was adopted by central banks globally. The recovery of the world economy since 2000 led to the Chairman of the Federal Reserve, Alan Greenspan, attaining almost mythical status amongst financiers. Some even claimed he had eliminated capitalism’s boom/bust cycle.
However, interest rates cannot be low all the time without stoking inflation. Recognising this, the BIS now asks whether the central banks got it wrong.
But in a sense Greenspan and the others did not get it wrong. They did what they had to do to avert a crisis at that time – the mistake was to believe that they had solved the crisis of a capitalist economy entering a cyclical downturn.
Had the US not cut interest rates the recession feared after 1998 would not have been delayed. But a delay is all they have achieved and the longer the imbalances build up the greater the crisis will be when they tip the global economy into reverse.
Socialist planning – the only alternative
WHEN THE Berlin Wall came down and the Stalinist and Maoist states abandoned their projects to develop the planned economy, it appeared to many that Marx’s idea for a socialist economic alternative had failed. But Stalinism developed in conditions of economic backwardness in the USSR.
These conditions facilitated the growth of a privileged bureaucracy that feared and hated workers’ democracy. It was authoritarian control by this bureaucracy, not Marx’s vision, that failed in the USSR, China and throughout the Soviet block.
Now, the failure of global capitalism to raise living standards for billions of people has raised the question of an alternative again. If lower wages and cuts to public services are the order of the day during a profit and growth upswing what on earth will workers face when the cycle turns to recession?
After a difficult period for the ideas of socialist planning the abject failure of global capitalism to provide humanity with a just economic system that allows all people to fulfil their potential is laying the foundations for resurgence in socialist ideas globally.
The top companies and finance institutions that dominate in each country must be taken into public ownership, but under democratic workers’ control and management.