An Introductory Explanation of Capitalist Economic Crises
Chapter II: The Surface Layer of Contradictions
(Last update to Chapter II: 8/7/08)
2.1 Artificial means to expand markets.
But we are by no means at the end of the story! Things are actually quite a bit more complicated than what I have indicated so far. Everything so far is just the underlying essence of the situation, but there are many more complications (and contradictions) that develop on top of this.
In reality, the capitalists do not try to keep things going by just continuing to invest their growing pile of surplus value in “Department I”, the means of production. They also try to find artificial means to spur the consumption of consumer goods (produced by factories in “Department II” of the economy). One such means is by selling personal consumption commodities in other countries. But the problem with that is the second country will also want to sell things in the first country, which could more or less balance things out by stealing each other’s markets. Even if one country could arrange things to its advantage (which of course is an essential characteristic of capitalist imperialism, in either its colonial or neocolonialial forms), the world capitalist system considered as a whole would still remain in overall equilibrium in this respect.
When there were major parts of the world which remained basically outside the world capitalist system, then goods sold to such countries (for products produced under feudal or slave conditions, say) could alleviate to some degree the overproduction problem in the capitalist countries. However, what could the capitalists then do with the goods they received in trade from the non-capitalist countries? This only amounts to exchanging one group of commodities for products which must then become other commodities in the home market, if profits are to be realized from the original commodities. But if there was no market for the original commodities among the masses (because of their impoverishment) there could also be no market for the foreign goods among those same masses (for the same reason). It seems that these exotic foreign goods of non-capitalist origin can really alleviate overproduction at home only to the extent that the capitalists themselves find more of a personal use for their own surplus commodities by exchanging some of them for these exotic goods.
Thus the importance of non-capitalist markets to the continued economic health of capitalism has been greatly exaggerated by some Marxist economists, especially Rosa Luxemburg. Moreover, the penetration of capitalist markets (and foreign capital) into originally non-capitalist economies fairly quickly turns them into full-blown capitalist economies too, as Luxemburg pointed out. Since almost the entire world is now capitalist in all its essentials, this mitigating effect of marketing to non-capitalist regions—which was always much smaller than some people imagined in the first place—has now almost entirely vanished.
2.2 The export of capital.
Similarly, the capitalists do not just try to keep things going by investing their capital in their home country. On the contrary, in the age of imperialism, they search all around the world for investment opportunities. The export of capital becomes as important for the system as the export of commodities. But once again, the imperialists soon come up against severe limits. Investing in each other’s home countries, while safer than in the “Third World”—which tends to be so unstable and more prone to revolution—doesn’t really allow the sum total of investment to go much higher than it would if each bourgeoisie invested only in its own country. And investing in the poverty-stricken oppressed countries of the Third World has other negative aspects too. When the factories are built, where will the goods be sold? Sure, they can be shipped back to the home countries, but then production will have to be cut there. Of course the transfer of production to extremely low wage countries under the thumb of the imperialists will produce super-profits at first, but as more and more production is shifted there by competitors (from other countries, if not their own), the rate of profit will fall again. And there will also be more and more disgruntled workers everywhere, including in the imperialist mother countries.
As production is cut at home, the workers there who are laid off will be unable to buy most of the products they could before; in other words, the market will shrink at home. Of course since workers are now employed in this new production in Third World countries, the market there will increase. But since the wages for workers in the new Third World plants are much less than the wages at home were, there will be a net overall decrease in wages worldwide, and hence a net overall decrease in the consuming power of society worldwide. Thus the shifting of production to cheap-labor Third World countries aggravates the basic problem of overproduction.1
2.3 Consumer credit.
By far the most important, and most effective means (for a time!) of artificially increasing the consumption of the masses is to simply extend them credit. If the capitalists are not paying the workers enough to buy back the goods they produce, then they can just loan them the money (at interest of course!) to buy those goods.
One problem here, however, is that the level of mass consumer debt (in home mortgages, auto loans, credit card debt, and all the rest), must constantly increase to make up for the ever-expanding exploitation, the continuance and constant growth in the extraction of surplus value. For this scheme to actually work, the financial capitalists who make the loans to the masses must believe that they will eventually be repaid. And, more than that, for the scheme to continue to work “indefinitely,” they must continue to believe that they will eventually be repaid even as they continue to allow the masses to expand their level of debt to enormous, and even obviously ridiculous levels.
Inevitably, however, the credit bubble builds up to such a degree that it becomes obvious to even the most enthusiastic promoter of credit that many of these loans are just never going to be repaid. (This usually happens during some financial crisis, which we will discuss later.) When that finally dawns on them, the very same people who once pushed the continual expansion of credit start to deny further credit to more and more consumers. Instead of an ever more rapid overall expansion of credit, there starts to be a major slowdown in this expansion, and then even an actual contraction in the total level of credit. At that point instead of growing credit promoting the growth of the economy, we have shrinking credit becoming an additional drag on the economy. And the chickens have really come home to roost.
The truth of the matter is that loaning people money to buy what the capitalists do not pay them enough to buy, is always going to come out badly in the end. It is a way of making things work for a while, by making things even worse in the future. Massive credit expansion can and does create longer periods of “prosperity”, but only at the price of making the eventual crash and economic recession or depression all the more severe.
2.4 Keynesian deficit spending.
Another important mechanism for artificially increasing consumption is Keynesian deficit spending. Keynes (as well as others before him, including a number of German economists and Gunnar Myrdal in Sweden) suggested that if the masses could not buy all the commodities that are produced, then the government should hire the unemployed for public works projects and pay them enough to buy those otherwise unsold commodities. Keynes pointed out that, as far as spurring the economy goes, it does not matter in the least what work is actually performed in these government projects—even digging useless holes and then dumping the dirt back into them, he said, would do quite nicely.2 (It would also serve just as well to simply give people the money without requiring any work at all from them, but of course the thought of that scandalizes the bourgeois mind!)
However, many ruling class politicians are ideologically opposed to any public works projects—even when hard work is involved. (They incorrectly view it as “socialism”, and a theft of investment opportunities for private businesses.) So a more common form of Keynesianism today is for the government to buy the unsold commodities directly. The idea here is that if the masses cannot afford to buy all that is produced, then the government will buy a big chunk of it. Of course production is then shifted toward the specific commodities that bourgeois governments are most interested in buying—such as weapons and other military materiel.
Mere government purchases of commodities don’t necessarily spur the economy beyond what would otherwise occur; it depends on where the government gets the money to buy those commodities. The government gets most of its income in the form of taxes on the working class. But when the government spends a dollar of tax money taken from a worker, that only means that the worker has one less dollar to spend. So there is no net stimulus to the economy. Things can sometimes be a little different when the government spends money it got from taxes on corporations or the upper classes, who—unlike the working class—do not always spend almost their entire income immediately. (A recent survey showed that the wealthiest Americans currently save an average of 22% of their income.3 But when a serious economic crisis develops, the rich cut way back on further investment, which is the biggest part of their “spending”.) For the most part, government expenditures only give a significant additional boost to the economy when the money does not come from taxes at all, but rather from either borrowing it, or from simply printing it. One or both of these is inherent in any form of deficit spending.
Deficit spending can be arranged in two ways: 1) by increasing expenditures beyond what the government takes in in taxes, and 2) by cutting taxes so that expenditures exceed income that way. Either approach can in theory be effective—provided it puts money into the hands of those who will actually spend it. However, in the U.S. the Republicans tend to be more in favor of reducing taxes to give the economy a fiscal boost, while Democrats—at least in the past—tended to favor increasing expenditures for social programs. (All ruling class parties favor huge military spending—which, insofar as this causes budget deficits, is properly considered to be “military Keynesianism”.) But tax cuts are usually granted mostly to the rich, who are much more likely to just save the money, especially in periods of economic difficulty. Even the so-called “middle class” tends to “save” rather than “spend” when the economy is in trouble.4 Therefore increasing expenditures by hiring the unemployed for public works projects would be a significantly more effective form of Keynesian deficit spending, if the ruling class had the sense to use it.
But Keynesian deficit spending of any kind eventually creates serious problems. If the government simply prints up the money, this will cause inflation (although there are factors I won’t get into here that can delay this result). The more it prints, the more inflation.5 Eventually, in extreme cases, the money becomes essentially worthless. Even long before that, high levels of inflation can themselves also lead to severe disruptions to an economy.
And if the government finances its deficit spending by just borrowing the money, then the government debt will continue to increase without end, and at a faster and faster rate. After a while lenders will get dubious about the government’s ability to repay all that debt and will start demanding higher interest on their loans to offset that rising risk.
The level of government debt does not determine the interest rate the government pays on its debt most of the time. Thus during the period 1980-2002, U.S. government debt rose from just under $1 trillion to over $13 trillion, while the interest rates on 10-year Treasury notes zigzagged down from the 10 to 15% range to less than 4%. But few people are yet worried about the ability of the U.S. government to repay its debt. When such worries seriously arise, interest rates will begin to jump up far above the prevailing market rates. We see this going on at present with Japan, which in 2002 had its credit rating on government debt lowered below that of desperately poor Third World countries like Botswana. In 2002 Japan’s government debt topped 140% of GDP; by the end of 2003 it topped 150%; in June 2005 it was almost 160%; and by 2007 it was estimated to be 194% of GDP.6 That’s a very rapid rate of increase which cannot possibly continue indefinitely! Eventually, if a government’s debt grows too huge, investors will refuse to loan that government any more money no matter what the interest rate.
So Keynesian deficit spending has definite limits. Like consumer debt, this expanding government debt can indeed keep a capitalist economy going for a while, but only for a while. And like consumer debt, it leads to worse problems in the end. It is another way of making things better in the near term, and much worse in the long term.
2.5 Monetary manipulations.
There are other ways, too, that the government tries to keep the economy going. Most of them, however, are in the “fine tuning” category. That is, methods of dealing with relatively superficial problems, and not the basic contradictions of overproduction. However, many times nipping a superficial problem in the bud is just what is needed—before that surface irregularity in the economy leads to progressively deeper contradictions coming to a head. (Eventually they will come to a head anyway, however, as the underlying pressures continue to build up.)
Many of these “fine tuning” methods involve monetary manipulations by the central banks of various countries. Here is where the U.S. Federal Reserve’s frequent adjustment of interest rates for commercial banks (and hence indirectly for the customers of those banks) comes in. If interest rates are high, companies are less likely to borrow money to build new factories or upgrade their machinery, and consumers are less likely to borrow money to buy cars and houses. On the other hand, if interest rates are too low during economic upturns, there can be such a rapid expansion of investment and production that shortages of various commodities develop—including skilled labor, new cars and housing—which can lead to temporary inflation and other even more negative results (such as a huge increase in dubious loans and investments).
The Fed tries to keep the economy on a more or less even keel by lowering interest rates whenever there are signs of weakness in the economy, such as when the volume of business inventories rises too much, or business investment is relatively weak, and by raising interest rates when the economy “becomes overheated”—when inflation is getting out of hand, or when there is a lot of “irrational exuberance”, such as a wild speculative boom in the stock market like that of the late 1990s in the U.S. (Ironically, however, that particular speculative boom was to some degree engineered by the Fed on purpose in order to keep the Asian financial crisis of 1997-98 from going world-wide.)
However, it is worth considering that even very low interest rates do not always lead capitalists to borrow money for new investment. Suppose that a company can expect to make a “reasonable” profit when it borrows investment money at 6% interest. When the money is only available at 8% interest it won’t borrow it and won’t invest. But suppose there is already such a glut of commodities and investment that there is no prospect of being able to sell the output of a prospective new factory for any profit at all. Then it doesn’t make sense to borrow money even at close to zero percent interest! And in fact we see this result in Japan today where banks cannot locate credit-worthy companies to loan money to (and who want to borrow that money) even though they are only charging them 1% or less! (The Keynesian term for this situation is “a liquidity trap”, though that phrase obscures what is really going on, rather than clarifies it.7)
Another thing central banks can do is adjust the rate of growth of the money supply (or, actually the multiple types of money supply, which can include things like bank deposits, savings certificates and other easily liquidated investments, as well as actual cash).
Governments (the central bank and/or the Treasury Department or Finance Ministry) can also try to influence the exchange rate of the nation’s currency vis-à-vis other currencies. This, however, can go beyond fine tuning; it is really a method of trying to dump part of the economic problems of one country on to others. And this too has its limits, and it doesn’t help the world capitalist economy as a whole.
2.6 The service economy.8
An ever-greater part of modern capitalist economies—especially in the U.S. and other imperialist centers—is devoted to providing services rather than producing goods for sale (material commodities). Partly this is due to the actual expansion of service industries, but it is also due to the ever-higher productivity in manufacturing, and to the shift of more and more manufacturing to China and other “Third World” countries. As of 2007 services made up 60% of the U.S. economy, up from 55% a decade earlier and 52% a decade before that.9
Some services are an auxiliary part of the process of creating and marketing commodities. Merchants who sell commodities on a retail basis are actually providing a service—the service of gathering commodities together from a large number of producers, and making them more conveniently available to the public. But most services today are not like this; they more typically involve the hiring of individuals to do work which itself does not produce commodities nor involve the marketing or distribution of commodities. This includes everything from hiring a neighbor kid to mow your lawn, to a giant corporation hiring an investment bank to arrange for a successful takeover of another huge company.
Since this service sector is becoming ever larger in relation to the manufacturing sector, could this possibly provide a solution to the inherent tendency of capitalism towards overproduction? The idea here is that goods that cannot be sold to the workers in the manufacturing sector (because they are paid wages equivalent to only a small portion of the value of the goods they produce) can instead be sold to the workers in the service sector.
Part of the flaw in this notion becomes apparent when we consider where these service workers get most of their income. If a factory worker pays an auto mechanic $300 to tune up his or her car, the mechanic will then have $300 more to spend, but the factory worker will have $300 less. (I’m ignoring the small part of the money that might go for actual commodities like spark plugs.) It is true that the factory worker gets something useful out of this change in the ownership of that money, but the total amount of money available for the purchase of the commodities that all the capitalist companies produce is still exactly the same.
But what about the money bags, the capitalists themselves? Don’t they individually spend much more on services than individual workers do? And couldn’t they spend even more than they already do, on all kinds of services? Isn’t it conceivable that all the excess surplus value—which they otherwise don’t know what to do with—could be used in this way, thus avoiding any overproduction crises?
It is “conceivable” in the same sense that it is conceivable that the capitalists might continue to build factories to build more factories ad infinitum, and thus avoid overproduction crises that way. In other words, while it is a logical possibility that the capitalists might spend all their excess surplus value on an endless array of ever more exotic services, it is just never going to happen. After even the richest capitalist has hired a dozen maids, two or three cooks, a couple chauffeurs, a couple butlers, six gardeners, and perhaps another 100 servants just for good measure, he really has no need for any more. One of these Rockefeller or Bill Gates types could afford to hire thousands, or maybe even hundreds of thousands of service workers, but he has no rational reason to do so.
A deeper part of the explanation for why service workers employed by capitalist companies cannot alieviate the overproduction problem is that this form of service work actually generates overproduction itself! The corporate owners of a bank or financial services company, for example, receive much more from their customers for the services that their employees render than those employees end up getting paid for actually rendering those services. In other words, these service industry capitalists also extract surplus value from their workers in much the same way that capitalists in manufacturing do, and this surplus value contributes in the same way to the mountain of excess value that the capitalists as a whole have no idea how to effectively (i.e., profitably) use.
So even the great expansion of the relative size of the service sector of the economy that we have seen in recent decades cannot possibly prevent the development of overproduction crises.
Nevertheless, it is true that this rapidly expanding service sector can be viewed, to a considerable degree, as an “artificial construct”, created on top of the more fundamental capitalist production of material commodities. As such, it may serve as a partial and temporary outlet for a small portion of the great excess of surplus value that the capitalists accumulate over time. They really can spend a great deal of money on hiring the services of business consultants, advertising agencies, investment banks, and many other “business services”. Much of this is in reality largely a waste of money, which therefore negatively impacts profits. The competition of companies which are not so wasteful, especially leaner Asian companies in this age of “globalization”, severely limits how far the American capitalists can go with this sort of thing.
When an overproduction crisis gets really acute, there is always a sudden and severe contraction of previous excesses. The next time around this will certainly include a tremendous crash in the service economy, even greater, perhaps, than the crash that occurs in world manufacturing. The fact that the service sector (and especially the financial service sector) is at present the strongest part of the American economy should be taken as a major warning sign of bad things to come.
2.7 The “casino economy”.
There is one more thing that the capitalists themselves can do to keep the whole game going for a while—and the word ‘game’ is carefully chosen here. Namely, they can invent more and more new investment “instruments” and “derivatives”, and build up the speculative aspect of investment to greater and greater heights of absurdity.
The stock market itself is basically a gambling house, and one that is rigged. An owner of stock sometimes receives a periodic payment of a portion of the company’s stated profits (which comes, of course, out the much larger volume of surplus value ripped off from the company’s workers). This used to be more common; 66.5% of companies listed on the major U.S. stock exchanges paid dividends in 1978, but by 1999 only 20.8% of listed companies did.10 But dividends or not, the prices of stock shares fluctuate, and these fluctuations thus become the basis for intense gambling. The goal, of course, is to buy low and then later sell high, and this is the real reason most investors buy stocks—not for the dividends, even when there are any.
And, worse yet, during boom periods a pyramid-scheme (or Ponzi-scheme) sort of atmosphere almost invariably develops, “bull markets” in which stocks are purchased only because their price is more or less continually going up. People buy stock primarily because of the “promise” that they can sell it later at a big profit. Eventually all such stock market bubbles collapse, and a bunch of suckers get stuck with “investments” in stock which are worth a whole lot less than what they paid out.11
But over the past century, and especially in the past couple decades, the gambling aspect of investment has gone far, far beyond this basic gambling in stocks—so far, indeed, that even many bourgeois commentators themselves have been calling America “the casino economy”. Of course there is the buying of stocks “on margin” (borrowing money to buy stocks). There are “options”, the right to buy or sell a certain amount of stock (or of some commodity) at a given price at a given time. Then there are “puts” and “calls”, obligations to buy or sell some specified amount of stock at a given price some time in the future. There are also commodity “futures”—contracts to buy or sell commodities at some future time, at some given price, whether the “seller” owns the commodities now or not. Such things as futures contracts are justified in the business world as a method of minimizing risk. It is true that judicious use of such contracts by a user of that commodity can lead to this result. But if the user, or “hedger”, minimizes his risk, it is only because the risk has been transferred to another person, a speculator.
Besides stocks themselves, there are other “financial futures”, including futures markets for international currencies, treasury bonds, and even “futures” keyed to various stock market and bond market indices. Thus it is easy these days to directly gamble on whether the S&P 500 stock index will be going up or down over the next few months. The “world’s most heavily traded stock”, at present, is not the stock in any single company, but rather the Nasdaq 100 Index Trading Stock, which “trades nearly 100 million shares per day—half again as many as Intel or Microsoft”.12
All of these sorts of things—options, futures, swaps, warrants, etc.—are collectively known as financial “derivatives” (because they derive from real ownership shares), and there seems to be no end to the inventiveness of the financial capitalists in creating and promoting such things.
Perhaps the ultimate (for now!) in this sort of high-stakes, high-risk leveraged gambling comes in the recent so-called “hedge funds” which have appeared in the U.S. in a big way over the past couple decades. During the Asian Crisis of 1997-98 the near collapse of one of these huge speculative companies, Long-Term Capital Management, so threatened the U.S. and international financial system that the Federal Reserve had to intervene and arrange for the multi-billion dollar bailout of the company.
And then there is Enron, which collapsed in late 2001. Though originally a pipeline company, Enron rapidly evolved into what was essentially a generalized commodities hedge fund—an elaborate speculative operation which succeeded for a time in hiding its exceedingly risky operations from public scrutiny through “creative bookkeeping”. Enron had a capitalization of some $80 billion dollars. Was this real capital that went up in a poof of smoke? No, it was what Marx called “fictitious” capital, that is illusory capital. (Fictitious capital is the capitalization of promised future interest or so-called “earnings”.)13 But fictitious capital is so pervasive and so important in contemporary capitalism that cases of its sudden disappearance can themselves generate or intensify crises.
Even though the collapse of WorldCom (in 2002) and Enron were the two biggest bankruptcies in U.S. history (as of this writing!), it does not yet signify the end of the speculative and casino economy that has been built up to such heights in this country. The entire American economy may not be “one big Enron”, but an amazingly large and important part of it is.
2.8 New industries.
In addition to the artificial means the capitalists and their governments have to keep the economy going, there is one more or less “automatic” factor that helps them to some limited degree: scientific discovery and new technology, which from time to time leads to whole new industries. In the second half of the 19th century these new industries included railroads, steamships, and then at the end of the century, electric lights and motors. In the early 20th century they included automobiles, radios, and airplanes. Later on in the 20th century came aerospace and computers, and in the 1990s, the Internet.
The advent of new industries means whole new areas where what would otherwise be “excess” capital can be employed. Great new areas ripe for profitable investment are opened up. But there are also some secondary negatives about this. Some older industries usually collapse (at least partially), as newer industries replace them. Generally, however, there is a net positive gain in capital investment opportunities. But this is a one-time sort of thing for each new industry.
Another negative factor comes about because new technologies usually allow for an increased productivity of labor. To the extent that this increased productivity leads to higher wages, the overall market is expanded. But higher productivity also means, by its very definition, that fewer people can do the work that once required more people—in other words, it leads to more unemployment—which reduces the overall market.
Moreover, under monopoly capitalism, the capitalists themselves tend to keep a disproportionate part of the increased value produced due to productivity improvements. This increases their rate of surplus value, and thus (for a time) their profits. But by the same token, it then also tends to aggravate the basic contradiction of capitalist production by increasing the amount of excess capital available. Especially as the new industries become well-established and the rush of new investment falls off, it turns out that they no longer ease the “excess capital” problem, but instead now actually begin to aggravate it.
From the point of view of the rational allocation of resources, one further problem with new industries is the tendency toward “gold rush fever”, real manias of excessive and extraordinarily wasteful investment. While a new industry is indeed built up, tremendous amounts of capital are typically wasted and lost in the process. The absurd excesses of the Internet bubble of the late 1990s certainly reaffirms the truth of this general observation. However, from the point of view of the health of capitalism this waste—like all waste (see section 2.13 below)—is actually beneficial! In other words, new industries actually open up more perceived investment opportunities than there actually rationally are, which tends to mitigate (to a small degree) the fundamental problem of excess capital.
In sum, new technology and new industries cannot resolve the contradiction between the forced restrictions on the consuming power of the masses and the tendency of the capitalists to keep expanding production without limit. Initially new industries help a bit—perhaps more because of the wastefulness of the rush of new investment than because of any rational need for new investment—but then they go on to actually worsen the fundamental contradiction. As scientific and technological progress continues, this negative final consequence of more and more industries tends to dominate over the initial positive impact of each new industry. In short, the ability of new technology to ease the plight of the capitalists progressively loses its efficacy.
2.9 Credit bubbles.
Thus there are quite a few things that companies and governments can do to try to boost consumption, employ excess capital, and thus keep production going. They vary in their effectiveness, and whether or not they truly address the basic problem—that the consuming power of capitalist society grows much more slowly than the producing power of society (because of the contradiction between the restricted consumption of the masses and the tendency of capitalists to expand production without limit). Those methods that do address this basic problem, and actually resolve it for a time—such as ever-increasing consumer debt and ever-increasing Keynesian budget deficits by the government—all collapse eventually, and lead to even bigger disaster.
When credit bubbles start to collapse (whether they are bubbles of consumer credit, corporate credit, or government borrowing, or even stock market and real estate bubbles) they usually constitute, or result in, a financial crisis. And when a financial crisis breaks out it often spreads to other spheres. Noting the uncertainty, capitalist corporations turn leery and often cut back on investment plans. Businesses that choose to go forward with their plans find bankers giving their loan requests a more skeptical eye. Consumers find their credit requests being denied. These sorts of events reinforce each other, and lead to other contradictions coming to a head, in something like a chain reaction. People stop buying a lot of things that they otherwise would have. Retail sales fall off, and inventories spike up. There is a sudden recognition that markets for many commodities have contracted, and more investment plans get postponed. Companies start laying off workers, who then buy less with their reduced income (even if they get unemployment insurance for a while). Laid off workers can’t get credit as easily as before. And so on and on, in a potentially devastating vicious cycle.
When tremendous forces like these get unleashed, the economy is in danger of spiraling downward into an ever deepening overproduction crisis. Sometimes government action can shore things up, and put off complete disaster until another day. And sometimes it can’t.
In other words, it is usually financial crises that trigger the onset of overproduction crises.
2.10 Credit exists to facilitate overproduction.
So we need to look into the nature of financial crises a bit. First, a bit more about credit. What is the purpose of credit in the economy in the first place? Why did it come into being?
Marx notes that “the credit system itself [arises] out of the difficulty of employing capital ‘productively’, i.e., ‘profitably’.” And a sentence or two later he says:
In fact, credit exists in order to facilitate overproduction—that is, production beyond the limits under which capital can otherwise be profitably employed. (Of course this is not the way the bourgeoisie views things!)
Credit bubbles of one or more kinds (e.g., consumer, business and governmental debt) are not things which can be avoided under capitalism, but rather are things which are necessary to the functioning of capitalism. The more that mechanisms are built up which foster the creation of such credit bubbles, the more successful the capitalist society will be (until the bubbles pop!). When the bubbles break and the crisis breaks out, it always seems like there was tremendous irrationality on the part of banks, industry, consumers and the government, in allowing such bubbles to build up in the first place. But if these bubbles had not been “allowed” (and strongly encouraged) to build up, then the crisis would have broken out much earlier. Indeed, if there were no credit bubbles building up, then there would be no capitalist booms at all.
One of the reasons for the massive, and ever-worsening stagnation which developed under the Soviet form of state capitalism during the revisionist era (1956-1991) was that they had relatively undeveloped mechanisms for the creation of credit bubbles. The biggest bubble they created was in the form of state debt to foreign countries. But they had “inadequate” mechanisms for building up consumer credit bubbles; few credit cards, and virtually no home mortgage debt, for example. This is also why the overproduction crisis in the revisionist Soviet Union did not take the usual form it does in the West, starting with a credit bubble collapse and financial crisis.
2.11 Collapsing bubbles.
Modern capitalist economic crises (except under Soviet-style state monopoly capitalism) usually start with, and always prominently feature, financial crises. This is partly because, as I mentioned above, credit has become a major means of temporarily overcoming the basic problem with capitalist production—that the capitalists do not (and cannot) pay the workers for all the value that they produce (and therefore the workers, as the bulk of the consuming public, cannot buy back what they produce unless they are granted continuously expanding credit).
All the major forms of debt are ordinarily created—directly or indirectly—for the purpose of temporarily circumventing this basic contradiction of capitalism, including not only consumer debt, but also government debt and even a lot of business debt. In addition to this, there are speculative bubbles (the outcome of the “casino economy”), and valuation bubbles of similar kinds (such as real estate speculation bubbles).
There are several points which must be understood about the collapse of such bubbles:
All of these points are especially valid since the time of the (first) Great Depression, when government intervention in the economy first became so extensive and important. If events are left to themselves, then the collapse of one bubble very much threatens to lead to the collapse of others, in another kind of economic chain reaction. But if the government intervenes strenuously before this can happen, the chain reaction can often be interrupted (provided the underlying contradictions have not built up to an extreme level!).
An example of this occurred during 2001-2002. Because of the recession and (partial) collapse of the U.S. stock market, the Federal Reserve drastically lowered bank interest rates in 2001. This had the effect of allowing more people to buy homes, and for those who already had homes to refinance them at lower interest rates and/or get major new home equity loans. All of this led to a rapid expansion of home prices—the housing bubble, and the “wealth effect” from that bubble—at about the same time the stock market bubble was partially bursting (and decreasing the “wealth effect” from that quarter). As The Economist recently said, “To put it crudely: as one bubble burst, another started to inflate.”16
One further point about credit bubbles and speculative bubbles: Contrary to what many people believe, these bubbles are not really the “cause” of recessions or depressions. As I said earlier, credit bubbles are actually ways of postponing recessions, depressions, and stagnation. On the other hand, their bursting (or partial bursting) often does trip off or coincide with the beginning of economic downturns (either primary or secondary). Contrary to the notions of many bourgeois economists, the fundamental problem does not lie in the financial sphere, but rather in the very nature of capitalism itself as a system of exploitation (via the extraction of surplus value). The crises often first break out, however, in the financial and credit spheres that were constructed as a means to try to overcome the fundamental problem.
2.12 People’s psychology.
One of the contradictions near the top surface of economic crises is based on people’s varying psychology. As long as lenders think they will be repaid, they will keep lending. As long as consumers think they will eventually be able to pay off all their expanding debts, they will keep borrowing. As long as capitalists think that they will be able to profitably sell the output from new factories, they will keep building them. As long as governments think they can get away with it, they will keep expanding public debt in order to keep the economy going. In short, what people think matters a great deal in economics—whether or not there is any rational basis for what they think.
But this raises the question of just why people believe what they do. Of course there is always a lot of wishful thinking among human beings. An important principle of Marxist historical materialism is that people tend to believe what is in their perceived interests to believe. This is a corollary of the more general, and more amorphous, psychological principle that people tend to believe what they want to believe. Capitalists seek opportunities for profitable investment, and so they naturally tend to believe that many such opportunities exist—even where they really do not. Lenders have money to lend, and must believe that those they lend it to will pay them back. And even the working class and the poor, many of whom are just scraping by, have to tell themselves that things will improve, and that they will then be able to pay back the debt they are piling up.
To a degree, these sorts of wishful thinking actually tend to be somewhat self-fulfilling—for a while. An example of this is the Ponzi-like aspect of “bull” stock markets during boom times. The more that stock investors believe that the stock market will continue to rise, the more they are willing to invest in the stock market, and the more it actually does rise. In reality, the entire capitalist boom-time economy (and not just the stock market) is a bit like a Ponzi scheme. Capitalists convince themselves during booms that there is virtually no end to new investment opportunities, and so plunge into new investments with ever greater fervor. Wages tend to rise somewhat during booms, and so workers imagine that they will rise enough in the future to allow them to pay off all the debt they are incurring. Because businesses are making big profits, banks are willing to lend them more for new factories and the like. And because all of this sort of thing is going on, the economy really does zoom ahead for a while.
But if the “power of positive thinking” can help lead to such a powerful boom for a while then why can’t things just keep booming along forever? The problem is that there is no objective basis for it (for the reasons we talked about earlier), and people can only fool themselves into thinking otherwise for so long. But when fears about the economy first begin to be raised there are those who object most strenuously, including many ordinary people as well as professional bourgeois ideologists. Here is one recent lament:
Folks like the author of that letter seem to imagine that people’s psychology is all there is to economics, and that if we can just keep on a happy face all will be well. That is in fact what people want to do, but painful reality eventually intrudes and makes it impossible for them to continue doing so. At that point, starry-eyed optimism can sometimes turn overnight into pessimistic gloom. This gloom can then serve to amplify the downturn in the same way that the irrational exuberance served to amplify the boom.
It is not true to say that people’s varying psychology is the root cause of either booms or busts. But it is true that the general psychological atmosphere tremendously amplifies already strong tendencies and trends which have developed for more objective reasons.
Because people’s psychology is so important in economics, there are many important surveys which try to determine “consumer confidence”, “business confidence” and the like. These are indeed worth paying attention to, though they serve more to confirm the current economic trends rather than to forecast future trends.
And because people’s psychology is so important, during times of economic weakness bourgeois economists, the media, and the politicians fall all over themselves to act as “economic cheerleaders”, trying to talk the economy back into a healthy frame of mind. It’s too bad these sorts of wishes and cheers cannot alter fundamental reality.
One final point to mention here: Because people’s perceptions of the economy are so important, the publication of truthful economic statistics is fraught with peril. This is why all modern capitalist countries lie so much about the actual unemployment rate, capacity utilization figures, and so forth.
2.13 The secondary contradiction of the anarchy of the market.
We need to say a little bit more about a secondary contradiction of capitalist production that can also contribute to economic crises, or sometimes serve to either initiate or aggravate them to some degree.
As I mentioned in section 1.6, this secondary contradiction is due to the “anarchy” of the capitalist market. Recall my more formal description of this as the contradiction between the social nature of production within each enterprise and the anarchy of the overall market which connects all the various capitalist enterprises. The basic problem being addressed here is that if there is no overall production plan for all of society, then too much of some goods will be produced, and too little of other goods. (This, like most points of economic good sense, is disputed by bourgeois economists who glorify the market. But I’ll ignore their objections here.)
Of course, even where this sort of overall production plan does exist, such as in a state-capitalist economy of the Soviet revisionist type, or even in a genuine socialist society, there may still be errors in the overall plan, or unforeseen changing circumstances, which lead to disproportionalities in any case. No matter what the economic system, it is impossible to arrange things so that exactly the right amount of everything is produced, and produced when and only when it is needed.
If this economic anarchy and its resulting disproportionalities were as important as some people seem to think, and if it were the primary cause of economic crises, then such crises would exist under all systems of production including socialism and communism! True, we would expect them to be less common and less severe in socialist and communist economies, because there would be less anarchy there (because of the existence of an overall production plan for society). And it is certainly the case that a properly run socialist or communist economy (with the proper balance between centralization and decentralization) provides the best means of minimizing the economic anarchy of production.
Moreover, if this absence of an overall production plan due to the “anarchy of many capitals” (many independent capitalist producers) were really the basic cause of crises under capitalism, then it would seem that the capitalists themselves could lessen or minimize such crises (though not entirely eliminate them) through more consultation and collective planning by the separate producers. In fact capitalists today do much more collective planning than they did during Marx’s day. Some of this is done through the capitalist-controlled state, though this has been much more important in some countries (such as Japan and South Korea) than it has been in others (such as the U.S.). And this state coordination and planning was greater still in many fascist regimes such as that of Nazi Germany and Mussolini’s Italy.
But today the largest part of this inter-capitalist production coordination is either voluntary by all participants or else enforced through dictates by the largest corporations upon their suppliers. For instance, today most big corporations generally demand that their major suppliers provide them with the products they need on a “just in time” basis. This allows them to eliminate much of their inventory of raw materials and to avoid most of the waste that might occur if their own production cutbacks forced those excess raw materials to go unused. Since they demand “just in time” shipments of raw materials, any changes they require in those shipments have to be quickly communicated to their suppliers, and big increases in orders will have to be communicated to them as far in advance as possible so that the suppliers will be able to crank up production themselves to fill the orders. I.e., the corporation must necessarily coordinate closely with those other companies. In other words, though still independent in a legal and ownership sense, these companies are no longer truly completely “independent” with regard to production plans. Even where individual companies are not directly coordinating their production plans, there are today many industrial surveys and marketing investigations which allow companies to keep a fairly close eye on changing market demands. This amounts to an indirect (though sort of half-assed!) form of general coordination of production.
There also should be less overall anarchy in capitalist production today (as compared to the 19th century) simply because there has been so much industrial consolidation. In most major industries there are now just a few oligopolistic corporations who keep pretty close eyes on each other and the other companies’ production plans. This is, after all, the era of monopoly capitalism and the age of massive industrial spying.
If in fact the anarchy of production under capitalism were the main cause of capitalist crises, then the actual fact that there is now less overall anarchy in modern capitalist production should mean that crises are now fewer and less frequent. This has actually been argued by some bourgeois economists who point out that all the recessions that have occurred since the Great Depression of the 1930s have been very mild in comparison. But do those Marxists who champion the “anarchy theory” of crises really want to concede that capitalism has become less prone to crisis or even that crises must never again match the seriousness of the 1930s? Actually, there is an alternate explanation for the fact that recessions have been relatively mild over the past two-thirds of a century: basically what has happened is that the industrial cycle has “split in two”, with mild recessions every 5 or 10 years, but major depressions at much longer and more irregular intervals. (See Chapter V for an elaboration of this theory.) If this idea is correct, then the relative mildness of recessions in the recent past in no way supports the notion that this is a result of better overall planning and coordination by all the major capitalist enterprises.
My own view is that while the “anarchy of many capitals” can indeed sometimes aggravate or contribute to capitalist crises of overproduction, this is not at all the main cause of them, nor will such problems as the inevitable small disproportionalities as may still exist in socialist or communist production be severe enough to lead to economic crises (except conceivably in some exceedingly rare and bizarre circumstance).
The anarchy of capitalist production, even if it is only a very secondary crisis factor, can in fact lead to too many of some things being produced and too few of other things. Let’s start by considering the second situation.
In any economic system (including any form of capitalism, and also socialism), if there is a shortage of some key commodity, this may create a bottleneck. If there is a shortage of ball bearings, for example, then all kinds of machinery and vehicles which require ball bearings cannot be built—even if all the other parts are readily available. This in turn may negatively impact production in many other spheres (kindly note pun!). (Incidentally, it is now thought that the British/U.S decision to concentrate on “area bombing” of German population centers—i.e. mass murder of civilians in revenge for the Blitz—rather than on key economic facilities such as ball-bearing factories and oil facilities probably prolonged World War II in Europe by 9 months or more and thus led to the deaths of many more people on both sides.)18
Under socialism, the production of any great excess of some particular goods will also negatively impact the overall production of society—since goods which were actually needed could (and should) have been produced instead of those unneeded items. But under capitalism, the situation is actually quite different here. Amazingly, any nominally “excess” production under capitalism—even outright wasteful production—almost always serves to expand the overall useful production of society beyond what it would have otherwise been. The reason is that the productive capacity of society is limited in practice by the lack of profitable markets (since workers are paid for only a portion of the value they produce), and hardly ever by any misallocations caused by excess production in another area. Even the production of useless items expands the market for useful items, since the workers producing the trash have been paid something (which they will then use to buy mostly necessities).
Of course this in no way indicates the “superiority” of capitalism over socialism! On the contrary, it is additional evidence of how irrational capitalism really is when the production of waste and trash becomes a positive factor for the economy! Any truly rational form of economy, like socialism, will of course benefit from a rational allocation of resources.
The “anarchy theory” of crises focuses not so much on the occasional bottlenecks in production as it does on the more typical tendency of the “anarchy of many capitals” towards overproduction. Most versions of this theory do not deny that overproduction (of both commodities and capital) occurs under capitalism, but they erroneously maintain that the primary (or maybe even the only) cause of this overproduction is the lack of an overall production plan for society. The adherents of this theory do not understand that most overproduction is a direct consequence of the extraction of surplus value from exploited workers rather than anarchic and foolish production decisions by the capitalists.
Actually, the sort of overproduction that results from the anarchy of many separate producers can sometimes be—as I hinted at above—a factor which serves to slightly mitigate or help postpone overproduction crises! How can this be? Recall that any production requires the payment of some wages to the workers and therefore generates a market demand for a portion of the value that the workers produce. If new workers are hired for this new production, ones who are not already up to their neck in debt, then—since they now have jobs—they can also be granted consumer credit for a while, and the combination of their wages and credit just might approach the value that they produce. It is therefore conceivable, at least, that what might otherwise be overproduction might not seem so at the time, even to the most astute and calculating capitalist. In short, the secondary source of overproduction from the “anarchy of many capitals” is apt to be “hidden” from the capitalists themselves initially, and may continue to be hidden from their consciousness for some time. And partially because it is hidden, it may help keep the economy going for a while.
There is no doubt, however, that over time the additional overproduction arising out of the multiplicity of capitals is a secondary, contributing factor to the overall expansion of overproduction. But we must be very clear that it is merely a secondary factor, and not the basic explanation for overproduction.
Some further discussion of production shortfalls and bottlenecks due to the “anarchy” of the marketplace is in order, however. Just how important in practice has this proven to be in economic history? Actually, not very important. Even when it does happen, the bottlenecks are usually overcome very soon.
One potential exception to this occurred in California in 2001. In what was largely a conscious plan to drive up prices by energy producers and energy speculators (including the notorious Enron Corporation), plants to produce electricity in California and the western U.S. were not being built for several years. By late 2000 and into 2001, there was a major electricity shortage in California. It is conceivable that a problem like this could have caused a bottleneck that lasted a couple years or more, and which might have severely impacted production in the state. But as it happened, the impact was minor, partly because of the recession that led to major cutbacks in production for other reasons. (The “dot.com” collapse, in particular, considerably eased the demand for electricity in California. Many Internet “server farms”, for example, which used large amounts of power, were shut down, and many planned new ones were not brought online.)
Most of the infrequent serious economic bottlenecks that have occurred (like the oil crisis of 1973), or which sort of occurred (like the California electricity shortage), have not really been due to the accidental “anarchy” of capitalist production at all, but rather to monopolistic (or cartel) manipulations of production—i.e., due to purposeful planning on their part. However, this sort of planning is not in the interests of the entire capitalist economy, but only in the interests of particular groups of capitalists. So I suppose we should say that there are really two types of capitalist “anarchy” here—the accidental, and the purposeful.
Moreover, it is probably fair to say that the anarchy of the marketplace, even if it usually only amounts to mild and temporary bottlenecks here and there, can add up in the aggregate. Considered as a whole, many little bottlenecks may indeed negatively impact the overall level of production to some degree.
Nevertheless, it is also true that much too much has been made of this by those Marxist writers who have unaccountably accepted the validity of “Say’s Law”, and have failed to recognize the vastly greater importance of the contradiction between the restricted consumption of the masses and the tendency of the capitalists to keep expanding production without limit. Those who don’t understand the most important contradiction at work in a situation will have to cast about for some less important contradiction to press into service as the supposed “basic explanation” for what is going on. This, of course, is a failure to correctly analyze the situation, though those with incorrect analyses always have a harder time coming to understand the truth than those with no analysis yet at all. People become wedded to their initial ideas.
Sometimes a certain amount of economic anarchy is brought about by major natural disasters, like hurricanes. Situations like this are worth considering because—inexplicably, for those who imagine that capitalist production is limited primarily by disproportionalities and the anarchy of market-based capitalism—these events usually tend to spur the economy, more than to impede it. Of course there is always some initial economic harm, but the disaster then proves to be a net benefit for both the local and national economy by opening up a wide range of new demand for products, jobs, and investment opportunities. Thus hurricane Andrew in Florida in 1992 resulted in 214,000 new jobs in its aftermath.19 Some capitalists have even learned to welcome hurricanes and other disasters, for this reason. As hurricane Emily approached in 1993 a lumber broker remarked “There was some speculation that if there was enough serious damage to structures, you would have additional demand for wood supplies,” in explaining why speculators ran up the price of lumber futures.20 This brings to mind the old capitalist slogan, “One man’s disaster is another man’s opportunity.” And it really is true that while disasters are of course not good at all for the people directly affected, they are generally good for capitalism as an economic system.
Finally, I should note that even to the extent that the anarchy of production exists, this is often merely a side-effect of the more basic economic contradiction of overproduction. As one example of this, the developing new economic crisis in 2008-2009 has already led to a number of bankrupcies of manufacturers and many more are expected. Among these are numerous parts suppliers for other companies. Sometimes a particular part is only made by one supplier, and if that company goes out of business that one part is no longer available. This creates a production bottleneck until a different company starts to produce the item (which might take months). This is one of the reasons that as of the spring of 2009 the U.S. government is thinking about bailouts for automotive parts suppliers as well as for big car companies like GM and Chrysler.21
2.14 Summing up the relationship between surface contradictions and the underlying contradictions.
We have then a great number of “surface contradictions” on top of the underlying fundamental contradictions in capitalist economic crises. To really understand such crises we must first be clear that there are all these many contradictions at work, and we also must be very clear about which of these contradictions are the most fundamental. But, beyond that, we must also have at least a general understanding of how all these contradictions—at various levels—can interrelate and affect each other. This is one of the hardest things to fully grasp in crisis theory because there are so many interacting contradictions that it makes for a very complex stew. It is hard to hold all of these elements and their complex interactions in your mind at one time.
Furthermore, things definitely don’t develop in a linear way, with contradiction one coming to a head, and triggering contradiction two to come to a head, which then triggers contradiction three, and so forth, like a row of dominoes falling. Instead there is a complex web of contradictions—big and small, fundamental and more superficial—that are all developing at once, and which are all affecting each other in very complicated ways. Some contradictions, especially those near the surface, may fairly easily become acute, but then may also be fairly easily mitigated for a while.
As a brief example of the sorts of interactions I am getting at here, consider a few of the events of the first decade of the new century. Following the partial collapse of the “New Economy” stock market bubble in 2001, the U.S. economy cooled off, new investment was cut way back, and inventories built up. In response to this, the Federal Reserve drastically cut bank interest rates, which didn’t have much initial effect (though it helped lead to the eventual inflation of the housing bubble). But the Bush Administration, for both pre-established ideological reasons (due to their absurd belief in voodoo “supply side” economic theory) and also in immediate response to the weak economy, instituted massive cuts in Federal taxes. This in turn led to enormous levels of deficit spending. This positive Keynesian stimulus has proven to be fairly small, considering the tremendous size of the deficits, but by early 2004 it led to a modest economic recovery. Inventories then were quite small, and later that year the Fed began gradually raising bank interest rates. Thus a measure affecting a deeper contradiction (i.e., the government deficits which temporarily but positively impacts the contradiction that the working class is not paid enough to buy all that they produce) has had the effect of mitigating more superficial contradictions (concerning inventory levels and interest rates).
In late 2007, however, the positive effects of that last burst of Keynesian deficits began to falter (despite continuing deficit spending on a slightly more modest scale). Moreover, the housing bubble—whose inflation supposedly “saved the world” according to The Economist—itself began to pop, and then began to spread to the credit markets generally. This has led to turmoil in the stock market, falling retail sales and the virtual certainty that a new recession is developing—if it has not already arrived. Thus the more surface contradictions, which were only very temporarily resolved by massive Keynesian action that mitigated the deeper contradiction for a time, have now reemerged. Consumers are way over their head in debt how, especially because of the continuing collapse of the housing bubble, and the spread of the problem to credit cards and other forms of debt. So there is only one thing that can be done at present to ease the developing economic chaos: another massive round of Keynesian deficits. Assuming that occurs, it will also falter before too long, and yet another deficit boost will be needed as the surface contradictions once again come to a head. Then there will be still another round of Keynesian deficits (and/or possibly another form of artificial stimulation of the market), and another temporary mitigation of more superficial contradictions. Eventually, and not all that long in the future, Keynesian deficits will begin to reach their maximum limits, and there will be nothing to keep all the more surface contradictions from coming to an acute and chronic crisis stage where nothing much at all can be done to end it.
Because there is this complex knot of contradictions developing all at once, and interacting with each other in complex ways, every major economic crisis has its own peculiar history of development. For example, for a variety of reasons, including which problems the government chooses to focus on, the various bubbles can pop in different orders. Then too, one bubble might pop more or less all at once in one historical crisis, but in another it might partially pop, re-inflate to some degree, and then pop again later. Or a government that is more concerned about promoting trade may follow different policies than a government that more single-mindedly focuses on interest rates, say.
Thus it is wrong to think that because the Great Depression of the 1930s played out in one particular way, that all major economic crises must play out in the same or closely similar way. Just one of the many reasons for this is that the previous experience of the Great Depression has led the capitalists and their governments to create stronger institutions of state intervention into the economy. The U.S. Federal Reserve, for example, will not again act in exactly the same way it did in the 1930s partly because of that past experience. This does not mean that major economic crises (including outright depressions comparable to that of the 1930s) can no longer happen! It only means that the development of another major crisis will be substantially different in many particulars. (And, in particular, there will be much more Keynesian intervention this next time.)
The underlying, fundamental contradictions in every capitalist overproduction crisis are the same, but these deep contradictions work themselves out through many much more superficial contradictions. And the way these more superficial contradictions relate to and affect each other is highly variable depending on many very “inconsequential” factors—including things as small as the peculiar economic notions and biases of specific government leaders. Thus every actual major economic crisis has its own peculiar path of development.
Notes for Chapter II1 It is true that things are a bit more complicated here than I indicated in the text. While the total amount of world wages falls due to the shifting of production to Third World countries, it is probable that the quantitative volume of goods sold might not decline nearly as fast—because the lower wages and lower total costs of production in Third World countries allows the capitalists to lower the price of their products. Still, on balance, both the overall world market, and overall world profits should eventually decline from this shift of production to the Third World.
2 One reference to digging useless holes occurs in Keynes’ The General Theory of Employment, Interest, and Money, (NY: Harvest/Harcourt Brace and Company, 1964 (1935)), p. 220. I’m told he elaborated on the notion elsewhere.
3 Survey data from U.S. Trust Corporation of 150 respondents with annual income over $300,000 or net worth over $3.75 million, conducted in June 2002. Reported in Business Week, Aug. 12, 2002, p. 10.
4 In the winter of 2008, at a time when the U.S. ruling class was already in something close to a panic because of the developing economic crisis, Congress passed a law granting tax rebates expected to be around $600 per person. But would people actually spend this money once they received it, or would they just save it or use it to pay off their debts? Business Week (Feb. 25, 2008, p. 9) commented: “In a survey by American Century Investments, only 27% said they would spend the rebate right away, while the rest figure to sock the money into savings, invest it, or use it to pay down debt. But take that with a grain of salt. In a Gallup survey from 2001, just 17% of respondents said they would spend rebates the IRS sent out that year. Economists later discovered that households actually spent between 50% and 70% of the money.” However, while it is no doubt true that people will spend more than they contemplate before they actually have the money in hand, even so spending only 50% or 70% of it is obviously considerably less effective from a Keynesian perspective than putting the money into the hands of the previously unemployed, or those otherwise so poor that they must immediately spend virtually all of it!
5 Actually, the government needs to increase the money supply by a small amount each year in order to avoid deflation (because the economy is expanding and the money supply needs to expand in step along with it). But I am talking about increasing the money supply at much faster rates than that, when discussing how “just printing money” can cause inflation. I am also ignoring here international effects. Thus if American dollars are spent overseas, and stay there (as currency reserves of foreign countries, say), they may not cause inflation in the U.S. On the other hand, if foreign countries start to use other currencies such as the Euro as reserves, then there can be a sudden spurt in dollar inflation—even if there is not an increase in deficit financing. At present (March 2008) the U.S. government is cranking up the printing presses at the same time that foreign countries are dumping the dollar, which is leading the dollar to sink (inflate) at a rapid and dangerous pace.
6 The 2007 estimate for the ratio of Japanese public debt to its GDP was 194.4% according the the CIA World Factbook, online at: http://www.cia/gov/library/publications/the-world-factbook/geos/ja.html (accessed on 3/19/08).
7 In Keynesian lingo a “liquidity trap” is a situation where lowering interest rates no longer brings about an incremental demand for loans. Keynesians seem to have little in the way of a coherent explanation for just why such a thing might happen. But happen it sometimes does. Japanese interest rates were around 9% in 1980 and were steadily lowered throughout the 1980s and 90s in an attempt to bring Japan out of its long funk (in and out of recession with very weak recoveries). The Bank of Japan rate for funds that it loaned to commercial banks actually sank to just 0.10% (yup, just 1/10 of one percent), and the rates that commercial banks were charging their best customers was not much greater.
8 This particular topic is connected with Marx’s category of “unproductive labor”, which I don’t explicitly refer to in this section. (See the long discussion of productive and unproductive labor in Marx’s Theories of Surplus Value, vol. I.) Marx defined service (work) in vol. I of Capital as “an expression for the particular use-value of labor where the latter is useful not as an article, but as an activity.”
9 James C. Cooper, “Services: A Heavyweight in a Hard Fight”, Business Week, May 19, 2008, p. 9. Somewhat surprisingly, for a bourgeois economist, Cooper does go on to correctly state: “However, despite that growing influence, the more important engines of the business cycle have always been the goods-producing sector and construction...”.
10 From a study by Eugene F. Fama of the University of Chicago and Kenneth French of MIT, reported in a column by Robert Kuttner, “The Case of the Disappearing Dividend”, Business Week, Sept. 9, 2002, p. 28.
11 A few days after I wrote these lines, and feeling proud of myself that I noticed this Ponzi-scheme aspect of “bull” markets, I discovered that a bourgeois economist, Robert J. Shiller of Yale University, had beaten me to the punch in his book Irrational Exuberance (NY: Broadway Books, 2000), especially pp. 64-68. Shiller calls this a “naturally occurring Ponzi process”. He points out that stock prices can also remain abnormally low (that is, fail to keep pace with real economic growth) through other lengthy periods (such as between January 1966 and January 1986 in the U.S., he says), though it seems to me that this opposite aberration tends not to be nearly so pronounced. However, Engels also came close to scooping Shiller by over a hundred years when he wrote to Bebel in 1893 that “The stock exchange is an institution where the bourgeoisie exploit not the workers but one another.” (Of course in the modern stock market not only capitalists gamble, but also the “middle class”, and even many workers—and those who manage the workers’ retirement and savings accounts.)
12 “ETF Strategies for Long-Term Investors”, a special advertising section in Business Week, Nov. 8, 2004, p. 29. The exchange symbol for this so-called Exchange-Traded Fund “stock” is QQQ.
13 Karl Marx, Capital, vol. III, (NY: International, 1967), pp. 465-6.
14 Karl Marx, Theories of Surplus Value, Vol.3, p. 122.
15 Robert Kuttner, writing in Business Week (April 15, 2002, p. 26) said the current price/earnings ratio for Standard & Poor’s 500 stock index was about 22 based on expected future earnings, and over 60 based on current earnings. The historic norm, he said is around 14. Using a somewhat different method, The Economist noted on March 30, 2002 (p. 64) that “the average price-earnings ratio for S&P500 companies, based on five-year forward profits, stands at 19. Compared with the 50-year average of 11, this leaves share prices still alarmingly overvalued.” Kuttner’s figures would put the spring 2002 p/e ratio (based on expected “earnings”) 57% greater than the historic average, while The Economist’s figures would put the spring 2002 p/e ratio more than 72% above the historic average. In the year and half following this, stock prices have gone up, and p/e ratios are higher still. Recently the Economist reports another study (using yet another methodology) showing American stock prices are now “at least 60% overvalued”. [Jan. 31, 2004, p. 74.] This amounts to a partial reinflation of a bubble that only partially collapsed in the first place.
16 The Economist, March 30, 2002, “The houses that saved the world”, p. 11.
17 Letter to the editor from James E. Huffman, of Sears, Michigan, in U.S. News & World Report, Feb. 19, 2001, pp. 5-6.
18 See Jonathan Glover, Humanity: A Moral History of the Twentieth Century, (Yale University Press, 2001), chapter 11. Large parts of this book consist of bourgeois propaganda against Marxism and socialism, but I have no reason to doubt Glover’s conclusions with regard to area bombing during World War II. Nazi economics minister Albert Speer wrote specifically that the Allied decision to stop bombing ball-bearing plants gave Germany a respite just when it was first nearing defeat: “Thus, the Allies threw away success when it was already in their hands. Had they continued the attacks of March and April  with the same energy, we would quickly have been on our last gasp.” [Quoted by Glover, p. 76.]
19 Harper’s magazine, “Harper’s Index”, April 1994.
20 Time magazine, Sept. 13, 1993, p. 16.
21 According to Industry Week magazine (April 2009, p. 36), more than 40 major auto suppliers had filed for Chapter 11 bankrupcy restructuring in 2008, and about one-third of all suppliers were in “imminent financial distress” while another third expected that they would be in the same situation by the first quarter of 2009. “Without financial assistance [from the government] ... significant supply chain disruptions were practically inevitable.”
Chapter III: How Are Capitalist Economic Crises Overcome?
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