On the materialist analysis of the economic crisis

As regular readers may be aware, Socialism or Barbarism! attempts to provide a rigorous marxist economic analysis. This is in contradistinction to the sort of 'surface-only' analysis propounded relentlessly by main media sources and also to the oversimplified analysis coming from centre-left proponents of tax and spend Keynesian style responses to the current downturn.

While the socialist left has provided a consistent criticism of the right-wing laissez-faire economics which dominates all the mainstream parties, it has exhibited a tendency to simplistically fall back on the 'tendency of the rate of profit to fall' without fully appreciating its limitations (and thereby its full authority). While it would appear to be undoubtedly the case that the rate of profit does tend to fall over the very long-term there are other elements which are critical to economic analysis and which play a far more immediate role in determining the contingent elements of the onset of crises.

One problem for the left is that it tends to identify every downturn in the standard (10 year) economic cycle as the final collapse of capitalism due to the rate of profit falling to levels not much above the interest rate. The long-standing existing marxist analysis of the ten-year industrial cycle which was adopted by such luminaries as Schumpeter need to be retained as core to the arsenal of marxists everywhere - although even these are incapable of explaining longer dynamical changes to economic up and downswings. In this regard the long-cycle theory originating from the social revolutionary Kondratiev, the semi-cycles of Ernest Mandel or the gold-based long cycles promoted by critique of crisis theory would appear to deny the role of contingent (exogenic) factors underlying periods of depressionary or inflationary bias in the economy. Interestingly, both Trotsky and the marxist left-Keynesian economist Sweezy argued for contingent rather than exogenously determined period cycles.

Socialism or Barbarism! do not wish to engage fully in this debate as it quite clearly an issue that would require substantive research and time. Our priority is to promote the concrete analysis of concrete circumstance in Ireland today with the aim of promoting an agenda of revolution. The question is, therefore, whether the current downturn will last and what the implications of that will be for organising.

Some will answer that it is all but impossible to determine with any assurity anything about the market economy going forward; that in the last instance trends reflect the psychological dispositions of the 'kings of the universe' who assume such critical importance in the capitalist market. Yet, such a retreat to mass psychology would undermine the monist principle of marxism - that it is the means of production which are of final decisive importance in the determination of superstructural outcomes, i.e. history and society. Morover, the belief in the psychological independence of traders and the like stands in bold contrast to the materialist conception of reality. In this, the human mind is part of and reflects (albeit imperfectly) external reality rather than reality being shaped by the mind. Ideas spring from material conditions and are given historical effect in accordance to their relation to the forces of history rather than the idealist conception that ideas exist in the aether only to change history in their own nature.

While mass psychology has a clear role to play in the market (and it is the anticipation of mass psychological responses to data which is critical to effective short-term trading) it is clear that those making decisions influencing price levels are only reflecting fundamental realities. That is: recessions are not caused by mass psychological responses but by market fundamentals. Yet again in highlighting the 'animal spirits' of the market as the cause of recessions, the academic (right-wing) economists are constructing a surface-only mode of analysis avoiding the central reality of the production process in the capitalist mode.

Another Crisis of Overproduction?

Yet can we simply put the current recession, entering depression, into the category of a standard crisis of overproduction. It is clear that there is a central problem of overproduction on a global scale. The collapse in exports in China and Germany attest to a classic crisis of overproduction but also provide evidence of the fundamentally changed nature of this crisis over previous ones. The US and other similar (consumptive) economies were not impacted by a crisis of production but a crisis of finance. The East largely escaped the crisis of finance but were sunk by the collapse in export demand for the means of production.

This reflects the way in which the global economy grew incredibly imbalanced through a massively inflating deficit-fired consumptive boom in the USA, the UK as well as Eastern Europe. This was facilitated by the perpetual willingness of the Chinese (and Japanese to a lesser extent) to continue to purchase the debt issued by the western economies. In the case of the Republic of Ireland, our expansionary boom was financed by historically low interest rates set by the ECB - effectively, Irish consumers borrowed at low interest rates from the common European pool of credit.

Never before in world economic history has any government allowed itself to be so extended in debt terms as is the USA today and, incredibly, never before has another country allowed itself to be exposed to credit liabilities as has China. These are contingent outcomes arising from the economic growth strategies pursued by both countries but are clearly unsustainable in the medium term.

In a very real sense, this financial arrangement has facilitated the overextension of the standard industrial cycle to a point where its downturn is now far exacerbated over that which might have been associated with the standard ten-year cycle.

If the standard Keynesian loose monetary response to recession is effective in staving off minor recessions it achieves such success at the price of pushing off the crisis for another day. Lowering the interest rate and printing money may stimulate growth but the fundamental contradictions inherent in overproduction will merely come to the fore at a new (lower interest rate) equilibrium.

Furthermore, loose monetary policy buys the way out of crises within the financial services sector at the risk of future inflation. That this situation has not arisen in the context of the USA effectively printing dollars by the trillion reflects two things - first the retrenchment within the financial services sector which is absorbing dollars to recapitalise and to reduce exposure to excessive leverage but secondly to the willingness of the Chinese to buy dollar-denominated debt. This latter factor looks increasingly shaky as they scour the third world for raw materials to buy. This money alongside the dollar-financed credit release within mainland China will result in a gradual but substantial release of dollars across the global economy potentially lowering the relative value of the dollar across a whole basket of currencies.

Over time, it is clear the dollar will be devalued on the global market - whether that happens gradually or in a sudden slump is unclear and may depend on whether the US manages to escape the 'perfect storm' on the horizon - i.e. a debt repayment crisis as it finds itself increasingly unable to repay debt without simply printing dollars and creating hyperinflation.

Capitalism: finding its own balance

It is an inherent strength of capitalism that it will find its own balance over time. The most obvious problem for those of us without capital is that this point of equilibrium is often only achieved when our standards of living are further depressed or where the long-term externalised costs to the environment may even challenges the possibility of life on this planet.

The lowering of western living standards is the natural outcome of the crisis. The dollar must fall so that the relative cost-base of the West and the East narrows. It is only through this mechanism can a new economic equilibrium point be found where the fundamental advantage experienced by post-industrial western economies over newly industrialised third world economies will find balance. The net result will be a narrowing of the gap between the living conditions and standards of the western working class with the working class in places like China. Just as water will always find its own level, so too does the capitalist economy tend to level for the living standards of workers everywhere. The relative imbalance in the 'productive forces' means that there will remain a significant gap but that this gap cannot remain as great as it is today. Over time, the tendency for capitalism will be to reduce the gap.

The logic of this analysis is that while the recession in the west may well be largely over the depressionary period (i.e. that until growth returns to pre-recessionary levels) will be extensive. Anotherwords, even if we avoid a W-shaped dual recession the growth on the other side will be sluggish. At the same time, Chinese and Indian growth can, all other things being equal, expect to dramatically advance. The net result of this will be rising international costs for raw materials and oil. The consequences will be for a tendency for imported inflation (even beyond that accruing from currency inflation) at a time when government's will be encouraging workers to keep tightening their belts further. By these means will living standards for western workers come down over time.

In the next post, Socialism or Barbarism will review the reports that suggest that the British economy is beginning to pull out of the recession in parallel to the economies of Japan, Germany and France (China never went into recession). These reports are of particular significance to the politics of Northern Ireland but the economics of Britain will also significantly influence those of the Republic.