Is the Current Economic Crisis a Crisis of Overproduction?
[This is a self-explanatory letter I emailed to friends on July 11, 2008 which argues that the currently developing economic and financial crisis is at bottom a classic overproduction crisis of the sort Marx described. I have done some slight editing to the letter, including the addition of a few remarks in brackets. —S.H. (12/15/08)]
Yesterday I sent out an email summing up the view that the U.S. and world economy have been following Japan into a fairly prolonged period of something close to overall stagnation—in and out of a long series of recessions with only very feeble recoveries in between them, with even those generally short and feeble recoveries being possible only because of massive and continuing bouts of Keynesian deficits which cannot possibly continue indefinitely.
In response to that email, a friend of mine raised a couple points for further consideration and discussion. Since these are important questions that we should all be thinking about, I’m responding not just to that one friend, but to a wider group. (That also means that I’ll be saying some things which many of you might well already fully understand, but which a few people might not be completely clear on.)*************** Hi Scott, Thanks for continuing to pay attention to the economic situation. It’s increasingly important and we’re not very well armed to analyse it. I tend to agree with your assessment about where things are going in the imperialist system. I have one question and a comment. First, you characterize this as a classic overproduction crisis. What is the best evidence for this, for the US and for the world economy as a whole? Is the driving force in the development of the crisis in the system? Second, I think there needs to be more analysis of how the imperialist countries shift the burden of the crises in their own economies onto the backs of the countries they dominate, or which are dependent on them. D. ***************
The first big issue is whether the current crisis (including the mortgage and credit crisis in the U.S.) is appropriately characterized as part of a general overproduction crisis. (Of course we are talking about overproduction in relation to the actual market, not in relation to what people want and need.)
I think the main answer to this is that almost all economic crises in the capitalist era are at bottom overproduction crises.
In Capital, Marx does allow that crises for other reasons are possible, such as due to massive natural disasters, widespread crop failures, and the like. The continuing economic and social crisis in Myanmar (Burma) due to the tremendous damage of the recent cyclone seems to be an example of that. Of course the intensity and duration of those Burmese economic problems are also due to additional factors, such as the general indifference of the military junta there to the plight of the people, their failure to adequately prepare for such emergencies (which are inevitable), their refusal to accept prompt and extensive international aid, and—most basic of all—the semi-capitalist, semi-feudal socioeconomic system of that country in the first place.
In advanced capitalist countries like the U.S., at least, natural disasters such as hurricanes also lead to extensive local damage and considerable short-term economic damage, but—amazingly enough!—their net overall, and long-term effect is to boost the capitalist economy. For example, Hurricane Andrew in Florida in 1992 eventually resulted in 214,000 new jobs in the area and a local economic boom. Something similar has even been happening in New Orleans in the aftermath of Hurricane Katrina. Of course the initial response of both the Federal and local governments was totally inadequate and even criminal, and even today their responses are in many respects inadequate for the poor. Nevertheless, there is today a small economic boom in New Orleans and the city is now the fastest growing of any in the U.S. (New Orleans may never fully recover to where it was before the storm, however. It probably depends on how soon the next severe hurricane strikes the city.)
The reason that natural disasters in fully developed capitalist societies generally have a net positive effect on the economy is that it is (as Marx said) the overabundance of capital which is itself the main obstacle to the expansion of capital. So when there is massive destruction the ground is cleared for new factories and new markets.
Another approach to this first question is to ask “if the current crisis is not a crisis of overproduction then what is it?” (This is a specific instance of maintaining that the only thing that will really disprove a theory is a different, better theory.) So are there any candidates for an alternative “better” theory of what is going on in the present U.S. and world economic crisis? Well, there are a few possibilities to consider, including globalization, the mushrooming cost of petroleum, serious missteps by those managing the economy, and global warming.
Globalization does lead to the redistribution of much capitalist production from the relatively high labor cost areas to the lower cost areas, and to many other economic dislocations. This hurts some parts of the world while helping others. (Of course bourgeois ideologists deny this obvious fact.) [And of course in saying that this “helps some parts of the world” I mean that this helps the capitalist econonomies of those areas where production is shifted to, which is very far from saying that it necessarily helps the people there!] Currently much production is being shifted to China, especially, but also to India and other “Third World” countries. Manufacturing, which is the basis of any sound economy, is rapidly sinking as a percentage of the economy in the U.S. and other advanced capitalist countries. Actually, it is even shrinking proportionally to the whole economy in China itself, because of rapidly improving productivity and other factors! But overall the shift of production to China and the Third World is doing major long-term damage to the economies of the U.S. and many other advanced capitalist countries. But this damage is primarily structural, and does not (yet, anyway) show up in terms of rapidly collapsing GDP.
And while the GDP growth rates in China, India, etc., are much higher than in the U.S., it is a current fact that GDP growth rates are slipping everywhere including in China and India. If the basic problem was that some countries were gaining, while others were losing, then the world capitalist system as a whole would not be affected. But what we actually see is that the entire world economy is now worsening. That means that the shift of production to China can’t be the basic problem.
Moreover, a longer perspective brings this out much better. After World War II there was a quarter century worldwide capitalist boom in production (interrupted by short and weak recessions from time to time). This was made possible by the destruction of capital during the war, which cleared the ground for a long new boom. But in the period from about 1973 on, the growth rate of GDP in the leading capitalist countries (the U.S., Japan and Europe) has been cut in half compared to the 1950-1973 period! In fact, overall the world GDP growth rate has declined every decade since the 1960s—even when the U.S. “New Economy” boom of the second half of the 1990s is included. (Many of the statistics showing this are to be found the books Capitalism Since 1945 by Philip Armstrong, et al., and The Boom and the Bubble by Robert Brenner.) This long overall slide began decades before globalization began its new thrust in the 1990s, so that can’t be the basic explanation.
What about the oil crisis then? Is this the deep explanation for the overall current economic crisis?
I’ve done a lot of research on “peak oil”, the reasons for it, and the effect it is having and is likely to have on the U.S. and world economy. There is no doubt whatsoever that the rapidly rising price of oil is aggravating the world economic crisis and in the long term will continue to do so. I expect that as this crisis further develops, more and more blame for the situation will be put on oil (and Middle Eastern regimes). [Note added 12/15/08: This didn’t actually happen to any great degree because the financial crisis in late 2008 was so sharp that it caused a massive decline in commodity prices, including oil!] The capitalists will never admit that it is their own system which is at fault! [That much is still certainly true!]
But the fact is that this overall economic crisis has been developing for decades now, and mostly quite independently of the price of oil. Hard as it is now to believe, it was only a decade or so ago in the late 1990s when the price of oil was down to just $10 per barrel! It is true that at the current price of over $140/barrel the world economic situation is being further damaged. But this is still a very secondary factor, and not at all the basic explanation for what has been going on for 35 years already.
Global warming is also an aggravating factor. It seems it may be contributing to more ferocious cyclones and hurricanes, for example, like the one in Myanmar. Global warming would actually be a much greater negative factor for the world’s economy if it were really being rationally dealt with! But pitifully little, and pitifully late, has been the story so far, and will undoubtedly remain the story as the climate problem gets steadily worse over the next century. Moreover, the problem of global warming has only become serious over the past 15 years or so. But the overall world economic crisis, as I have been saying, is already 35 years old, so global warming can’t possibly be the explanation for it.
Government missteps, wrong policies by the Fed or the IMF, etc., can’t be the basic explanation either, for the same reason—unless we are to suppose that the world’s governments are always incapable of coming up with policies which are good for the health of their capitalist system! Sure, they do make plenty of mistakes, and do have all sorts of unscientific theories which often lead them to make such mistakes. But the facts also show that overall they have been focusing on the things which do make sense from their perspective: 1) Pushing more and more of the burden of the economic crisis onto the masses both at home and abroad; 2) Promoting the massive expansion of consumer and business credit to keep the economy going; and 3) Using enormous government deficit spending to keep things going. With regard to the last point, it is not for nothing that Nixon said, while President, that “we are all Keynesians now”. And George W. Bush has proven to be the most determined Keynesian of them all (so far).
While none of these three general policies can resolve a crisis of overproduction, they are all of some effect in mitigating or postponing its worst results (for the capitalists) for a while! So, I conclude that for those who refuse to abandon capitalism, the overall guidance of the world economy has been roughly as rational as it can possibly be. Promoting more and more private and state debt, and promoting greater and greater speculative booms and bubbles are really all they have to work with.
My general conclusion with regard to all these “alternative” explanations for the current economic crisis is that none of them make any sense, and all are obviously completely inferior to the Marxist explanation as a classic crisis of overproduction. Yes, these other factors can and do aggravate the situation, but they are not the basic cause.
The fundamental cause of capitalist crises of overproduction is that the capitalists do not, and cannot, pay their workers the full value of all the commodities that these workers produce for them. Consequently, the workers and the rest of the masses—which form by far the greatest part of the market for goods—cannot possibly buy back all that the capitalist factories produce. Things can only be kept going (for a while) by extending credit to the masses, by having the government buy the excess production through deficit spending, and by putting more and more of their profits into building unused factories or various kinds of speculative financial bubbles. All these means have definite limits, and all collapse into crisis in the end. Overproduction crises are thus inherent in the capitalist mode of production, and in the very existence of the category of surplus value, as Marx demonstrated so long ago.
* * *
I would agree with my friend’s suggestion that a lot more needs to be said about just how imperialist countries like the U.S. shift the burden of crises in their own economies onto the backs of the countries that they dominate. In fact—really—what is capitalist imperialism for at all, if not to do this?!
Lenin, in his great pamphlet “Imperialism, the Highest Stage of Capitalism”, talks about the absolute need for the imperialist powers to expand their markets to the rest of the world, to export their excess capital to other countries, and to exploit and constantly intensify their exploitation of the people of other countries. But why do they need to do this at all? It is because their home markets are not big enough to sell all that they produce in their factories there, and because their home markets are not big enough to justify using all of their money capital derived from exploiting workers at home to build more factories at home. Imperialism has become a necessity for capitalism in the modern era, as Lenin carefully explained. (This is part of the reason that the liberal notion that imperialism is merely a “wrong policy choice” is so ridiculous.) In addition, there are super-profits to be made by shifting production to low-wage countries (at least until all the other of the world’s capitalists do the same thing).
There are many ways in which the burden of a crisis can be pushed onto other countries, especially if an imperialist country is able to control—directly or indirectly—the governments of those other countries. If repressive lackey governments can keep wages low, and workers there unorganized, for example, that is obviously to the benefit of imperialist corporations hiring those workers. Arranging unequal terms of trade is another mechanism. Keeping oppressed economies dependent on producing just a few things, especially raw materials, is another good ploy. (But this ploy is now often undercut by other imperialist corporations themselves who want to relocate their factories to these countries.) Another mechanism is to use the U.S.-controlled international agencies like the IMF and the World Bank to control the economies of the oppressed countries, to keep them from more effectively competing with the U.S. and other imperialist powers, and so forth. The IMF also forces currency exchange adjustments which favor the imperialists, etc.
I am aware that I have not written much about all this, and I need myself to look into it all much more deeply. But on the other hand, there are many anti-imperialist writers who focus on things like this, while only a few people are seriously focusing on trying to correctly explain in further detail the essential nature of the unfolding capitalist economic crisis itself, and to clear up many confusions in that area even among Marxists. That’s why I have been primarily working on that.
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