The making of another Great Depression
The current capitalist slump in Britain is not as bad as that of the
1930s; in many ways it is far worse. Phil Murphy explains
Is the current British recession the longest, deepest or steepest since
the Second World War'? That was the discussion raised during the election
campaign. But it missed the main point. The fact is that such comparisons
are inadequate, because British capitalism is in a worse situation today
than it has ever been in its history.
Domestic and international factors have combined to put Britain in a much
weaker position to manage its affairs during this slump than it was during
the previous two great depressions, in the last quarter of the nineteenth
century and in the 1930s.
What sets today's economic downturn apart from most others is not just the
length or the severity of the decline. It is the lack of effective ways
to manage the current crisis and escape from the economic slowdown which
has transformed this recession into a full-blown economic slump.
For months, Living Marxism has insisted that British capitalism is
experiencing a slump. The term 'slump' does not simply mean a bigger-than-normal
dip in the economic cycle. It signifies a protracted period of sluggish
activity stretching into the future. Many would say that it is precipitate,
unduly downcast and politically motivated scaremongering to talk about the
1990's as the third great slump or depression.
After all, past slumps have usually been identified only retrospectively,
after they have been going on for a few years. So how can we be sure that
the present and future are so bleak for capitalism in Britain?
Tory chancellor Norman Lamont was technically right to say that recessions
must eventually come to an end, in the sense that national output will not
keep falling for ever. But, as Lamont would never have said, the end of
a recession is not the same thing as the start of a recovery. Production
levels will stop falling at some point but that doesn't lead to an automatic
upturn; things will just trundle along the bottom unless there is a positive
stimulus to economic activity.
In respect of this problem, two matters are clear enough. First, there is
no possibility of the global economy staging the type of recovery which
pulled Britain out of the recessions of the mid-seventies and the early
eighties. And second, British capitalism itself has far fewer options than
it had in the past. Let's look at these issues in turn.
In the late 1970s and again in the 190s, Japan and West Germany - the two
most dynamic economies - acceded to American pressure to act as global locomotives,
setting the world recovery in motion by buying foreign goods and extending
international credit. The relative prosperity of these two nations enabled
them to implement the appropriate monetary and trade policies. Today, Japan
and Germany have more economic problems of their own; they are much less
willing or able to make the same concessions to stimulate or finance recovery
in the rest of the world. And no other economy is in a position to act as
the world's locomotive. This more than anything else points to a future
of extended depression.
The first major postwar slowdown in the world economy began in 1973. Ever
since, international economic affairs have been dominated by cooperation
among the major powers to keep capitalism going, to manage the crisis, to
postpone the slump. The global measures which have kept the depression at
bay for the past 20 years are now all but exhausted. The international route
through which Britain has escaped from other modern recessions has effectively
If things look bad for British capitalism abroad, prospects for recovery
are bleaker still on the home front. Debate about the British economy tends
to centre on arguments about how many percentage points this or that economic
indicator has moved over the last couple of years. But such a narrow focus
fails to recognise the historic deterioration in the very foundations of
British capitalism. What are the key structural changes?
The centre of profit-making in any major capitalist country remains the
manufacturing sector, the production of material commodities. Today Britain
does not have much of a manufacturing sector left. At the time of the thirties'
depression manufacturing still represented well over a quarter of national
output. Today it accounts for about one fifth.
More significantly for the future, British companies are much less competitive
internationally. Britain's share of world manufactured exports is only about
one third of the level it was in the thirties. Britain will not be able
to produce and export its way out of the nineties' depression.
The one positive factor here is Japanese manufacturing investment in Britain,
concentrated in car plants producing for the European market. This is something
of a boon for British capitalism, but cannot compensate for the breadth
and depth of national industrial decline. Britain has gone from being the
workshop of the world at the time of the first great depression a century
ago, to being a shed for assembling Japanese car kits. Being a base for
foreign assembly plant operations provides a most uncertain future, as the
experience of many a third world country testifies.
Britain's service sector has expanded, but it is not an adequate substitute
for the decline of manufacturing. Much of the service sector, including
all of the financial operations in which the City of London specialises,
does not create genuine new wealth in its own right. Instead it is parasitic
on the creation of real profits elsewhere in the world.
The City makes its money in the form of dividends and commissions charge
for investing, insuring and selling other people's assets. When the world
economy appears to be going well, Britain's financiers and consultants can
prosper. But in time of slump, when the global production of profits shrinks,
Britain's dependent character is exposed.
If other capitalists are not making profits, there is less for British companies
to service. Hence the difficulties reported by many British insurance companies,
securities firms and banks. The sell-off of Midland Bank, until the fifties
the world's biggest bank, is a significant milestone slump capitalism in
the further decline of UK Plc. So is the crisis in the Lloyds insurance
market, the international jewel in the City's crown. Far from services offering
a way out of the slump, Britain's share of world trade in this sector has
been falling even faster than in manufacturing.
Britain also used to have international power and an empire which it could
rely on in times of need at home. In the first Great Depression from 1873-1896,
British capitalism used the gains generated from its vast overseas investments
to keep its head above water. In the slump of the thirties, the Empire came
into its own as a protected market for British trade and a continuing source
of cheap foodstuffs and raw materials.
End of empire
Today, Britain has no empire to fall back on. Its remaining overseas assets
cannot make up for the collapse at home. For example, Britain entered the
1930s with a long record of almost unbroken surpluses in its current account
balance with other countries. This meant that its trade deficit was balanced
out by 'invisible earnings'- mainly profits on overseas investments and
international earnings on the financial markets. By contrast, in today's
depression Britain's basic trade deficit is so great that earnings from
overseas investments are not enough to compensate.
In fact, the very existence of a basic trade deficit at this stage of a
recession is unheard of. The slowdown in economic activity during past recessions
always cut imports and so produced a trade surplus. Now British industry
is so weak that it cannot even meet the needs of a home market shrunk by
recession. So imports continue to outpace exports.
Also in the thirties, public spending by the state provided a big bonus
to help stimulate the economy. Government spending was pretty insignificant
before the thirties, equivalent to about one tenth of the whole economy.
The doubling of public expenditure during that depression was a substantial
injection of investment for the other nine-tenths of the economy. That is
another option no longer open to the British establishment.
Today, Britain goes into the slump with an economy dependent on state activity.
During the election campaign the mainstream parties promised changes in
government spending equivalent to one or two per cent of national output.
These are big figures for the government borrowing requirement, but they
would have minimal impact so far as kick-starting the economy is concerned.
British capitalism has become so reliant on state spending that it is almost
immune to the wonder-drug of an earlier age.
No way out
Even if the new government wanted to start a big programme of public investment,
it could not. The treasury is already overstretched just meeting the massive
day-to-day costs of keeping the system limping along. As the Guardian
newspaper revealed during the election campaign, the British government's
current account spending now exceeds its income from taxes and revenues
(23 March). Far from using state spending to stimulate recovery, the government
is likely to have to squeeze the economy more tightly - and push Britain
further still into the depths of depression.
Politicians and experts have offered various excuses for Britain's economic
woes. Jon Fryer takes apart four of the best
Britain's economic analysts did not predict the current slump. They did
no know it had started, they predicted recovery just as things got worse
and they have no idea when the slump will end. The reason is straightforward.
A look at their most popular explanations for the recession shows that politicians
and economists have little idea why it happened in the first place.
Leading Tories have tried to pass off the British slump as a foreign import.
The lean and fit UK economic machine was supposedly dragged down by a worldwide
slowdown. But the world economy grew by 0.9 per cent last year, while British
output shrank by 2.6 per cent. In Britain the slump began earlier, has lasted
longer and struck deeper than elsewhere.
- 'World recession made British recession inevitable'
During past recessions, British governments tried to blame oil sheiks or
the banking gnomes of Zurich. This time round, there are no easy foreign
scapegoats to hand. In March, Tory chancellor Norman Lamont's budget speech
associated the British slump with the German economic slowdown. When the
German embassy informed Bonn that Lamont was claiming Britain's troubles
were somehow Germany's fault, frontbench Tories quickly had to change their
tune. British governments might have been able to insult Arab oil sheiks
in the seventies; they cannot get away with scapegoating the economic giant
of Europe in the nineties.
And what if the Tory argument that Britain has been held back by developments
in the world economy was true? It would make a nonsense of the other Tory
argument about a British recovery being just around the corner. Japan and
Germany, the world's two most dynamic capitalist powers, are only now moving
into recession. A depressed national economy would, by the logic of the
Tories' own argument, rule out a British revival in the foreseeable future.
Labour and the Liberal Democrats have tried to depict the British slump
as a direct result of Tory policies, which they claim could have been avoided
under a different government. But the truth is that Tory policy has had
only a marginal impact on the return of recessionary trends.The weakness
of British capltalism would have made itself felt whatever any goverernment
had tried to do.
- 'Economic slowdown was a result of Tory policy'
Take the matter of high interest rates, often pointed to by the Tories'
opponents as a policy whicb helped cause recession. In the first place,
a Labour or Liberal-run government would have kept interest rates just as
high in a bid to avoid a sterling crisis and compensate for the weakness
of the pound within the European Exchange Rate Mechanism - a system which
all parties support.
In the second and far more important place,it is a myth to believe that
low interest rates - even if possible - would have warded off the British
downturn. Interest rates have been falIing in the USA since 1989. But cutting
them to the bone has had a negligible impact on the deep American recession.
What subdues economic activity under capitalism is not a high rate of interest,
but a low rate of profit. If the returns are high enough, capitalists will
always be willing to borrow and invest. But when their profits fall, they
cut back. According to the bank of England, profit rates in Britain were
down from an estimated 10.5 per cent in 1988 to 6 per cent in 1991. Low
profitability, leading to stagnant investment and industrial slowdown; these
are the real causes of capitalist slump, not the ups and downs of interest
rates or the shifts of government policy.
Some economists argue that the Bntish economy was really too successful
for its own good in the eighties; it 'overheated' then, and has to 'cool
off' now. In fact if you refuse to be blinded by the brief credit-financed
upturn towards the end of the decade, and look at the period as a whole,
you will find that the eighties were the poorest decade for British economic
growth since the war.
- 'The British economy grew too fast in the 1980s'
The economy grew by a paltry average of 1.5 per cent a year from the spring
of 1979 to the end of 1991. Even this dramatically overestimates the true
picture. Government figures for output or gross natianal product include
as 'growth' investment which merely replaces worn out machinery, plant and
equipment. With more relistic estimates, the credit-based boom of 1987-88
was just a flash in the pan.
Since the 1960s, there has been a worldwide slowdown in growth rates punctuated
by brief and increasingly flimsy upturns. Economists may now try to rationalise
this by talk of 'excessive growth' and 'overheating' in the eighties. But
the idea of 'excessive growth' in the economy is irrational at a time when
the basic needs of society have clearly not been met. The real barrier to
economic growth today is the requirement that production can expand only
if it will increase capitalist profits.
Many economists now point to an eighties over-expansion of credit as the
cause of the current slump. Financial deregulation supposedly stimulated
an orgy of private borrowing, piling up debts which have dragged the economy
down. In fact, far from causing the current slump, the credit explosion
of the eighties was the one thing which postponed it for so long.
- 'We borrowed too much in the 1980s'
The City of London's leading position in the world credit and money markets
enabled Britain to stave off recession through the 1980s. Rich pickings
from servicing foreign capital and currency flows helped to offset the chronic
trade deficit of British manufacturing industry. Now that City earnings
are falling, and world capital allows contracting, London looks set to lose
its eighties' international lifeline.
Similarly, it was only record levels of borrowing in Britain which enabled
the decrepit domestic economy to keep going and even expand in the late
eighties. Without the boom in corporate and consumer credit the recessionary
trends would have made themselves felt far earIier. The current shake-out
of company and personal indebtedness signifies not thearrival of conditions
for a new boom but the end of the old stop-gap measures for avoiding stagnation.
Reproduced from Living Marxism issue 43, May 1992