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"Capitalism has had a rotten time lately", says the big business magazine The Economist. "Not as rotten as in 1917..." (when the Russian workers took state power) it adds, in case its readers panic. Indeed not. Yet Paul Krugman, the USA's best-known orthodox economist, reckons "there's an Ice Age just over the horizon". Both those opinions were written before the big telecom company WorldCom collapsed after revealing that it had fraudulently puffed up its profits by no less than $3.8 billion. The WorldCom fiasco Ð belonging to the same type as the Enron crash and the more recent scandal at Xerox Ð highlights the underlying problems.
Profit rates in the USA have been declining since 1997. According to recent detailed Marxist analyses, they have been squeezed essentially by the ballooning of the "unproductive" sectors of the capitalist economy, sectors like finance, insurance and real estate, which produce no new value but suck in value created in other sectors. Add up the figures for total value-added in the US economy, subtract the amounts paid out in wages Ð which can be done straightforwardly from official US government statistics Ð and the conclusion is clear. Try to estimate profits by adding up the figures reported by individual companies, though, and you get a very different result. Those "profits" still look quite good.
In other words, lots of companies are fiddling their figures, in small ways and big ways, to make their profits look healthy and keep their share prices high. In a period of boom, and for a short time, that sort of fiddle can "work" without disasters. The disasters come when growth slows down. The fiddles become larger and more desperate. Eventually, some of them are exposed. Companies collapse. Share prices crash.
Debt bubbles set to burst
The share-price bubble has burst. There are three
other large bubbles which the tumbling wreckage could pierce and explode. US
households have a huge mountain of debt Ð credit card bills, overdrafts, mortgages.
US corporations, too, are operating with historically high levels of debt. And
the whole US economy depends Ð has depended for many years Ð on a constant influx
of foreign capital. In a few years' time, on current trends, the resulting pile
of US debt to the rest of the world will have risen so high that just paying
interest on it will keep the debt expanding indefinitely, with no obvious way
of controlling it. In all of those four ways, the relative prosperity of US
capitalism Ð its boom in the 1990s, and the relative mildness of its recent
recession Ð depends on credit continuing to spiral up. If credit starts to implode
on any of those fronts, then the whole economy is likely to spiral down, and
credit will probably start imploding on the other fronts. The US government
and the Federal Reserve Bank can do some things to stop or limit an implosion.
They have done some of those things already, reducing interest rates for example.
But their tools are limited, certainly in proportion to the size of the bubbles
(see review of Robert Brenner's The boom and the bubble further on in
this page).
WorldÕs biggest economy
The US economy is by far the world's biggest, and a sizeable downturn in the
USA will produce a downturn world-wide. And worse. The dollar is still the basic
currency of world trade. If international capitalists stop pouring their funds
into the USA, then the value of the dollar will drop relative to other currencies,
even faster than it has already dropped. The process will feed on itself Ð why
put your stash into dollars, when dollars are losing value relative to other
currencies? Such are the vast amounts of "hot money" sloshing round the capitalist
world that it is quite possible for such a self-feeding process to escalate
beyond the point where all the world's central banks put together can do much
to stop it. And a decline of the dollar would do more than shift the relations
of the USA to other capitalist economies. It would disrupt the basic fabric
of world trade. No-one knows how long the US economy's credit bubbles can hold
up. It is not impossible for them to be shrunk gently, rather than imploding
catastrophically. But there is certainly more to the WorldCom
and Enron scandals than a few individual capitalists cutting corners.
The Boom and the Bubble, Robert Brenner, Verso 2002.
Reviewed by Martin Thomas
Robert Brenner's new book carries forward the argument of his much-discussed survey of the whole course of capitalism since 1945, The Economics of Global Turbulence (1998), to deal with the USA's bubble-boom of 1997-2001 and the prospects now.
The USA of the 1990s was not a "New Economy". It had a boom, but an ordinary, even mediocre, one. The official figures for rapid productivity gains in the USA at the end of the 1990s are probably about right, Brenner reckons, but even on their basis the productivity improvement, averaged over any reasonable period, was not sensational.
In the first half of the 1990s, "all three great capitalist economic blocs" Ð the USA, the European Union, Japan Ð "experienced their poorest economic performance for any five year period since 1945". However, US capital had advantages.
It had pushed down real wages and stomped on the unions. Through that, and through a vast purge of less-successful businesses in the early 1980s, it had set profit rates on an upward trend from about 1982, with only a mild dip in the early 1990s. After 1993, manufacturing capital investment rose. From the Plaza Accord of 1985, through to 1995, the US had also kept the exchange-rate of the dollar low against the mark and the yen, so that US producers, with their costs in dollars, could compete more easily with German and Japanese capitalists paying their costs in marks or yen.
Asian crisis
The US boom reached
its dizziest only after the "reverse Plaza Accord" of 1995. The plight of the
Japanese economy, lit up in scary vividness by the glare from the Mexican peso
crisis of early 1995, led the US government to start elbowing the exchange-rate
of the dollar back up again.
This move helped trigger crisis in 1997 in the East Asian economies whose currencies were linked to the dollar. The US Federal Reserve Bank responded to that Asian crisis by drastically easing credit. The eased credit sent the modest US upturn underway since 1993 into a frantic up-spiral.
Consumer demand and share prices both rocketed. Yet while speculative fortunes were being made on the share markets, bottom-line industrial profits were actually falling. The many Internet businesses which saw their share prices soar high even though they had never made any actual profits were only the top-shine of a large general speculative bubble.
In fact several bubbles expanded simultaneously. Consumers Ð or, rather, the best-off 20% of households Ð greedily sucked up easy credit to go on shopping sprees. Corporations borrowed both to invest and to drive up "shareholder value" by buying back their own shares. "By the first half of 2000, corporate, household and financial sector debt as a percentage of GDP were all at their highest levels in postwar US history".
The US ran huge, expanding trade deficits, and paid for them by sucking in funds from the rest of the world. "Gross US assets held by the rest of the world reached $6.7 trillion, or 78% of US GDP" Ð double the figure of 1995. Most of those assets were US Treasury bonds, corporate bonds, and shares, held by foreign capitalists (and liable in a crisis to be quickly sold by them).
Three spirals
The boom was thus propelled
by three spirals of "spend-today-pay-tomorrow" debt. There is always a limit
to such spirals Ð especially when the real profits from which the "paying tomorrow"
can be done are actually declining. The stock market has nose-dived since March
2000.
Can the bubbles can be deflated slowly and gradually Ð slowly and gradually enough, at least, to avoid large dislocations Ð to reveal an underlying economic base which the new investments and reorganisations of the 1990s has fitted for a long expansion? Or were they just bubbles, likely to be followed by a period of economic depression for the USA similar to that which Japan has seen since 1991?
In the first chapter of The Boom and the Bubble, Brenner summarises his argument from Global Turbulence about ruinous competition being the root of world capitalism's shift from long upswing in 1945-73 to turbulence and depression in the last thirty years. His conclusion is the ruinousness of world-market competition has not been overcome, and depression is the more likely prospect now.
He has done heroic work Ð and very useful work, whether you agree with his conclusions or not Ð in drawing together a vast amount of information into a documented narrative. I am still doubtful about his basic ruinous-competition thesis.
Capitalism always involves competition. Capitalist competition is always ruinous for some, and often and regularly ruinous for many. How then is modern world-market competition, since the late 1960s, especially ruinous? Why is it ruinous for the overall dynamic of the system rather than just for particular capitalists?
In Global Turbulence Brenner developed two arguments. The first was about specific circumstances in the late 1960s. In that period, he argued, the productive strength of German and Japanese manufacturing capital, and the freeing and cheapening of world trade, reached a critical level at which German and Japanese manufactured exports started to flood into the USA. The German and Japanese producers had much lower costs. They were willing to accept modest profit rates in order to win US markets. Their competition forced US producers to abandon hope of getting their accustomed returns of profit on the vast investments they already had in place, to cut prices, and to make do with a normal profit rate only on their current new investments. Result Ð a general lowering of profit rates, driven by a drop in the US manufacturing profit rate.
Brenner's second argument was much looser and more general. It said that after that first lowering of profit rates, ruinous competition became permanent. World manufacturing industry got stuck in a trough of "overcapacity" from which it has been unable to escape. Even when some governments have organised ruthless purges of manufacturing industry in their countries, the "overcapacity" has immediately been recreated by the entry of new producers, for example from East Asia.
There has been "not only too little entry, but too much entry". "The struggle for markets in a global manufacturing sector that [has] remained haunted by over-supply [has] continued to take the form of a zero-sum struggle, with winners and losers determined heavily by the movement of exchange rates".
Overcapacity
I see some problems in Brenner's
first argument about ruinous competition in the late 1960s, but a lot more in
his second argument about long-term ruinous competition. Of course there is
often (at times of downturn) general "overcapacity", and there is longer-term
"overcapacity" in some lines of production. But available statistics do not
suggest that the general problem for capital is that there are chronically too
many factories in proportion to other sectors of the economy. In the USA, average
capacity utilisation from 1967 to 1996 was 81.1%, only slightly down from the
1948-65 average of 82.4%.
Even if there were long-term "overcapacity", artificially preserved, that would explain an economy poorer than it would be if not for the redundant enterprises, but not depression. China has large overcapacity in industry, yet is not economically depressed. Japan had huge "overcapacity" in agriculture and retail trade throughout its "economic miracle".
In fact Brenner seems to use the term "overcapacity" loosely, assuming that lower profit rates, ruinously excessive competition, and "overcapacity" are pretty much synonyms. For example, he writes: "Despite the fact that, throughout the advanced capitalist world, demand and capacity utilisation rates stayed high throughout the year 2000É the burden of overcapacity and overproduction on manufacturing vitality was manifest everywhereÉ". And again: "The world's leading manufacturing economiesÉ continued to find it difficult to expand and prosper together, in the face of incipient overcapacity and overproduction in manufacturing lines". I have added the italics: given the inherent instability of effective demand in a capitalist economy, incipient overcapacity (the sort of "overcapacity" in force even when capacity utilisation is high?) always exists, even in the gaudiest boom.
Brenner's second argument, about long-term ruinous competition, thus tends to reduce down to a narrative of how first one national economy, then another, gained exchange-rate advantage, with reports of industry in the exchange-rate-disadvantaged economy sagging and industry in the exchange-rate-advantaged one gaining only modestly. The narrative is not a theory.
Nonetheless it is valuable. One example: Brenner's description of how the USA got its way in tussles with other big powers on world-economy issues at repeated crisis points (1971, 1974, 1978, 1985, 1987) sheds light on the current idea that the USA has so dramatically reinforced its hegemony since the early 1990s that the world is now a "US empire". The US government must surely hope that the extra clout and prestige from its military victories since 1991 will help it get its way more easily in world-economy disputes. But, on the record, does it actually get its way more easily, or more surely, than before 1991? I doubt it.
For theory I would rather look to two considerations. The first builds on an argument which Brenner develops in Global Turbulence but does not reprise in The Boom and the Bubble. The long capitalist upswing from 1945 to the end of the 1960s depended on imbalances in the world economy. The USA's great hegemony enabled the world economy to move from protectionism to relatively free trade, and allowed the USA without pain to concede increasing shares of increasing world trade to economies like Japan's and Germany's. But the imbalances tended to even out. Once the world economy had become more "balanced" Ð with relatively free trade and the USA no longer enjoying automatic productive superiority Ð it also become more fluid; it had fewer "dampers" on its oscillations; it became more crisis-prone.
Secondly, that greater instability operates on a background of downward general pressure on profit rates exercised decisively by the inexorable rise of capitalistically unproductive costs (public services, armaments, but also finance, insurance, real estate, advertising, lawyers, accountants and so on).