'Capitalism isn't collapsing' shock
Phil Mullan puts George Soros right on the prospects facing the world economy
'I am very concerned', says famed international financier George Soros, 'because it will lead basically to the breakdown of the global capitalist system'. 'Global capitalism', writes Robert Samuelson in Newsweek, 'whose triumph once seemed inevitable, is now in full retreat, perhaps for many years'. World leaders like Bill Clinton and Tony Blair, who used to extol the merits of globalisation with the chorus 'you can't buck the markets', are unashamedly discussing the need for imposing tough controls and regulation. Karl Marx is even coming back into fashion among serious commentators, as a seer of capitalist doom.
So is it time to worry about a global crash? The answer is no. There is certainly a lot of instability about, with currencies diving, weak governments threatening to default on debts, major stock markets yo-yoing, and speculative investors - along with the banks who lent to them - getting their fingers badly burnt. But all this turmoil should be kept in perspective.
There is in fact not one, but two world economies. The first is a financial one of capital and credit flows, exchange rates, and lots of bits of paper (or on-screen data) with fancy names and fancier prices. The second is a real world economy where goods and services are produced and traded. Over the past 30 years the financial economy has spurted ahead of its real counterpart. Or, to get the direction of causation right, the way that the real economy has lagged since the early 1970s has meant that a lot of money which cannot find a profitable home there has gone into the financial economy instead. The result has been to inflate prices of shares and other financial assets. From time to time - as with the 1987 stock market crash - the financial economy gets over-extended, and what the money men call a 'correction' brings the financial economy closer back into line with the real economy.
This is what is happening at the moment. Today the immediate problems, from east Asia to Russia, from Latin America to Western stock markets, are in the financial sphere. The financial economy is contracting, and that will cause problems for the real economy. But this is neither symptomatic of, nor will it be a cause of, a real economic collapse.
It is wrong to assume, as the globalists do, that the world economy is now homogenous and that the 'contagion' of crisis will spread like wildfire from the east. Over the past 15 years the international character of capitalism has certainly come to the fore, with the expansion of foreign trade in goods and services and of cross-border capital flows. The main effect of this, however, has been to reinforce the unevenness and inequality between different parts of the world economy.
When it comes to understanding developments in the real world economy it is still the case that some countries matter and others are pretty insignificant. The key economic actors over the past two decades have been Japan and the USA (and to a lesser extent Germany), as befits their positions as the world's largest economies. The tail does not wag the dog. What happens in Thailand, Malaysia or Russia, or even Canada, does not determine the real fortunes of US capitalism in any decisive way. Things are different in the more fanciful world of the financial economy, where such ephemeral factors as 'confidence' hold sway. This is why the Asian financial problems could so easily unsettle the Western stock markets, and create the impression of a fast-spreading contagion.
In reality, however, problems in one part of the world will not spread inexorably to engulf the entire globe. Of course every economy operates as part of the world market, but they all remain national economies with specific strengths and weaknesses. America, which still accounts for over one quarter of world output, may never have been as strong as the 'new economy' theorists have claimed in recent years. But more importantly it is nowhere near as fragile as the global pessimists now assume, and there is no way it is about to be knocked out by what happens to relative economic lightweights such as a Malaysia or a Russia.
The panic about an impending economic crash tells us more about the state of mind of the world's economic elites than it does about the state of the real economy. This is not to belittle the impact of panic. Fear tends to be self-fulfilling in the world of finance - if everybody thinks prices will fall then the market makers will probably mark down those prices. But there is a bigger problem than this with today's gloomy mood.
The exaggerated sense of crisis is encouraging the view that capitalism's problems come from excess, from growing too fast, and that it needs to be reined back. With governments everywhere announcing action plans involving some extension of regulation, control and containment, today's instinct for restraint in business and finance can only be reinforced.
The real danger in the major economies is that the hype about a global crisis will strengthen the impulse of business and political leaders to downplay capitalism's potential for growth. The mentality which both inflates the difficulties and then reacts by saying 'hold back' is a bigger threat to economic and social progress than either the possibility of a traditional economic crisis in the West, or the fall-out from the financial disarray.
This distinctive problem of our times throws up an irony of Marx's recent rehabilitation. When Marx developed his theory that the capitalist economy tends to crisis he was identifying systemic features, which necessarily held back the universalising, expansive possibilities of capitalism. He was criticising too the market's apologists who saw capitalism as the 'best of all possible worlds'. Today, however, capitalism's spokespeople invoke Marx to talk down the prospects of capitalist growth. They seem to have lost faith in their own free market system, and that can become debilitating in itself. The actions and policies that follow tend to stymie the potential for expansion. Just as the fear of financial crisis can be self-fulfilling, so this mindset is self-fulfilling in restraining growth.
The impact of the loss of nerve at the top of capitalist society can best be seen in the world's largest economy - the USA.
American business has wasted genuine opportunities to move the US and world economies forward - not least the advantage of huge Japanese investment in the eighties. The negative assumptions these days about economic growth have inculcated a culture of restraint. While most critical attention has focused on an overvalued Wall Street, the real problem holding back the US economy is the instinct in business that over-production is the biggest danger. The ubiquitous sense of business 'uncertainty' spawns an aversion to risk and a cautious attitude to major investments. As a result, potentially vast economic gains from applying new technologies are being squandered. Genuine breakthroughs in technological innovation, especially in the spheres of information technology and genetic engineering, are being applied in only sporadic and limited ways.
The US economy has become a leading example of what could be called 'restrained depression'. This is not the sort of absolute economic contraction experienced in the 1930s, but rather a failure to realise economic possibilities. The short-term upside is that, because growth in the real US economy has been relatively weak for so long, the danger of a sharp recession in production is non-existent. What does not go up very far will not come down too hard.
Of course, the business cycle exists, but it is tending to take a more flattened-out form. An economic slowdown was on the cards for the next couple of years, regardless of the financial problems in east Asia, Russia or Latin America. On the basis of economic fundamentals this slowdown should be much less acute than the recessions of the 1970s, 1980s and early 1990s. In the immediate term this seems a more favourable state of affairs: the much-feared collapse is not coming. But the longer-term consequences of restrained capitalism are equally wasteful, and can be even more harmful for social progress.
The real danger of the current situation is that it will reinforce the outlook of caution and self-restraint across the capitalist world, both domestically and internationally. The calls for greater international financial regulation may not lead to many effective practical measures, but they will strengthen the short-termist mentality that already eschews economic possibilities. In the longer term this outlook can only serve to frustrate the development of the economic and human potential. There is no cause for those of us who have criticised capitalism to crow about the current mess; the loss of nerve at the top could mean lost opportunities for us all.
Reproduced from LM issue 115, November 1998