A slump-ridden, devalued system
The currency crisis in September intensified the sense of deep economic
malaise in Britain. But while everybody can see that things are getting
desperate, there is great confusion as to why. So what's behind the slump?
And why does the government seem incapable of doing anything about it?
At times of dramatic and tumultuous events such as those on the currency
markets in September, one thing is fairly predictable: some of the more
pretentious journalists will dust off their copies of WB Yeats' The Second
Coming, written in the period of crisis leading up to the First World
War, and quote the famous line, 'Things fall apart, the centre cannot hold'.
It complements the picture they like to present of an economic crash as
an irrational, unpredictable, incomprehensible chain of events.
Phil Murphy looks behind the jargon and the anti-German propaganda, and
identifies a problem far more fundamental than the ERM or high interest
rates. The appropriate acronym for economics in our time, he suggests, is
not TINA (There Is No Alternative) but CHARLES: Capitalism Hasn't Any Real
Lasting Economic Solutions
This time a lot of attention focused on the instability of the currency
markets and the actions of those who work them. Free-marketeer John Major
himself pointed to the 'irrationality' of the markets as one cause of what
went wrong. Others blamed wrong policies, inept government economic management
and even global warming for sterling's collapse. All of these explanations
are wrong. At best they identify symptoms rather than causes of the crisis;
at worst they are mischievous attempts to hide the truth.
The reason the economy is in such a mess today has nothing to do with technical
factors, such as market volatility or policy mistakes. Nor is the slump
caused by incomprehensible 'natural' forces. All of this evasion misses
the fundamental point: there is an inherent problem in the capitalist way
of organising society and production, which ensures that the economic system
will eventually suffer such a breakdown.
Capitalism is driven by the race for profit. This is the dynamic behind
the development of production; capitalists will invest resources only if
the product can be sold at a decent profit. If profitability falls, as it
tends to do historically, then the profit system itself becomes a barrier
to the further progress of capitalism. This is the position that has been
The current problems of profitability mean that capitalism is no longer
able to reproduce itself effectively. This strain afflicts all of the developed
nations, but is a greater drag on the more mature, older and decrepit economies
Let's try to get behind all of the mystification and opaque terminology
which we've been exposed to since the summer. A good way to look at capitalism
today - and British capitalism in particular - is to understand that there
are really two economies in operation. There is the 'real' economy, where
things are produced and sold to realise real profits; and there is a parallel
'paper', financial economy - the economy of exchange rates, of trading in
bits of paper, of futures and options markets, of massive financial flows
of up to $1000 billion each day on the foreign exchange markets.
The fundamental problem for British capitalism is that its real economy
is weaker than that of its major competitors. So corporate profitability
has tended to fall faster in Britain than elsewhere. This poorer capacity
to make profits sets off a damaging chain of events. There is no shortage
of funds to invest in Britain, and there is certainly a crying need for
investment. But the question for capitalists is, what return do you get
on your investment? If the rate of return on capital invested in, say, car
production is only five per cent, then it is much more attractive for capitalists
to put their money into a bank, a financial investment, or abroad - anywhere
where returns are higher.
The consequence is that productive investment, in new technology, new machines,
new plant, etc, is restricted, and productivity lags behind. The fact that
many British products are made using old techniques explains why British-made
goods are much less competitive than goods produced in Germany, in Japan,
in America, or even in France and Italy. Production lines close at Rolls-Royce
or British Aerospace, output falls, people are made redundant, unemployment
rises. British economic activity contracts and the trade deficit widens,
as companies and people buy cheaper goods made abroad, and British exporters
lose foreign markets.
There are now only four areas in which Britain remains the world's leading
exporter - racing cars, whisky, popular music and financial services. The
patriotic Nigel Mansell may be pleased to know that he can drive a British-built
racing car (albeit with a foreign engine), drink Teachers' whisky and listen
to Dire Straits as he steadies his nerves, and arrange extra accident and
life insurance cover with a financial company based in the City of London.
But it hardly adds up to an impressive or lucrative export performance by
the one-time workshop of the world.
Britain's real productive economy has been lagging further and further behind
its main competitors for years. But this has been disguised by the apparent
success of Britain's other, paper, economy. Financial services were the
key growth area of Thatcher's economic 'miracle' of the 1980s, almost doubling
their share of national output (to about one fifth of the total). More than
half the growth of the entire economy came from this one sector.
But even this understates the significance of the financial economy over
the past decade. During the eighties, more and more 'manufacturing' and
'commercial' companies all but abandoned their notional tasks and shifted
into financial operations. No longer able to produce and sell commodities
at a sufficient profit, British capitalists have been forced to seek profits
from manipulating bits of paper on the financial markets. The financial
directors and the corporate treasurers replaced the production and sales
managers to become the vital people in British Capitalism plc.
The problem is that a paper economy is an unstable and inadequate substitute
for a real productive sector. Financial services do not create genuine new
wealth in their own right. Instead they are parasitic on the creation of
wealth elsewhere in the world. The City makes its money by charging dividends
and commissions for investing, insuring and selling other people's assets,
and for conducting foreign exchange operations.
Pack of cards
Without the solidity of a productive sector, the credit-financed paper economy
is something of a pack of cards. One shake, and the whole thing can begin
to fall apart. In such fragile circumstances, things can move very fast;
the pound can collapse, property prices can slump, the stock market can
nosedive. Look at what happened to Anita Roddick's Body Shop shares in September,
coincidentally on the same day the pound fell out of the ERM.
Body Shop is supposed to be one of Britain's last remaining successful niche
retailers. Yet, when it projected a £1m drop in profits, its share
price tumbled by 40 per cent in a single day, cutting the company's financial
market value from £494m to £293m. In other words, a forecast of
a £1m drop in profits led to a £201m drop in market value. That
is a graphic illustration of the gap between the production of real and
paper wealth. It demonstrates how tenuous is the financial 'success' of
The sudden collapse of company share prices and currency values has brought
the whole financial services sector in Britain close to the edge. For a
time the paper economy could cover up the cracks in the real economy, but
not for ever. At some stage the underlying weakness of the real economy
has to make itself felt. And because the financial sector has become so
prominent of late, it is here that the deeper economic crisis tends to reveal
itself. That is the hidden meaning behind the pound's fall. It is an exposure
of the abject weakness of the real British economy.
Leave aside all the jargon about the sterling collapse - floors, ceilings,
ERM, sterilised intervention, etc. The exchange rate of a currency is ultimately
a reflection of that nation's economic well-being. The pound fell against
the deutschmark (and most other currencies) because the British economy
is frailer than Germany's, its productive capacity is more feeble, its levels
of productivity are lower and its goods are less competitive.
Missing the mark
Many commentators have tried to compare recent developments to Britain's
past sterling crises, in 1967 and 1976, and concluded that, as the problems
were resolved then, they will be sorted out easily enough this time too.
Such comparisons seriously miss the mark. Since those sterling crises, the
real economy has declined precipitously and the paper economy has become
much more dominant in Britain. The complacent view that Britain has survived
sterling crises before and can therefore easily do so again is profoundly
misguided. British capitalism has much less of a real economy to fall back
Many onlookers were confused by the British government's apparent refusal
to do anything decisive to stop the rot after the currency crisis blew up
in September. Yet once the problems of sterling are properly situated as
a consequence of a profound capitalist slump, it becomes clear that John
Major and Norman Lamont could not have made much difference anyway. Indeed,
the notion that the government could develop policies to turn the economy
around has things back to front. In reality, it is the slump which is continually
forcing the government to turn around what it says and does.
The instability in the economy is reflected in an instability at the level
of people's perceptions and statements about what is going on. This instability
is expressed in about-turns and the sudden substitution of one firm conviction
for another. It is a sure sign that the crisis is out of control.
Look, for example, at views about the prospects for British economic recovery.
After the British departure from the Exchange Rate Mechanism (ERM) many
commentators made fun of chancellor Lamont by resurrecting some of his past
predictions of recovery. They are worth repeating here if only to reveal
the chancellor's acute understanding of the dynamics of British capitalism:
March 1991: There are good reasons to expect that the recovery will
begin around the middle of this year.
April 1991: Victory is in sight. Recovery will come in the second
half of the year
June 1991: The economy will begin to pull out of recession in the
July 1991: Better economic news is on the way. Recovery will come
October 1991: It is clear that Britain is coming out of recession
and confidence is returning...the green shoots of economic spring are appearing
December 1991: The recession has technically ended.
Yesterday's fine words have made Lamont look foolish today. Yet he is not
the only one. Not so long ago, especially after the Tory election victory,
almost every serious politician, economist and newspaper in the country
accepted his absurd statements about the green shoots of recovery. Typically,
the post-election economic review produced by Britain's biggest bank, Barclays,
was entitled 'Managing the Upturn'. It was all fantasy stuff about how,
with a Tory government returned, consumer confidence would increase, business
confidence would rise and the economy would move upwards again. They even
concluded that the main risk was that the upturn would be too strong!
This was a serious contribution which corresponded to the mood a few short
months ago. Yet today, these same experts deride the idea of a recovery
as obvious nonsense.
The recent sterling crisis revealed the volatility of thought and policy
most starkly. Remember Lamont in July telling the European Policy Forum
how he knew 'from bitter experience that devaluation doesn't work for Britain'
and how leaving the ERM 'would certainly be the end of the battle with inflation - we
would have surrendered'. Or what about his early morning press statement
in August, on the steps of the treasury: 'There are going to be no devaluations....We
are absolutely committed to the ERM...it is at the centre of our policy.'
Just days before sterling collapsed, John Major told the Scottish CBI that
whatever else happened in the ERM, the British government would never pull
out or devalue. That was a quack doctor's remedy, he said, a betrayal of
Yet having been forced into it, all of a sudden they were espousing the
great advantages of a floating currency. The quack doctors's remedy one
week became sound advice the next, the best policy for Britain. What had
hours earlier been declared as at the centre of government policy,
a fixed exchange rate in the ERM, was now an encumbrance with, Major said,
'fault lines' running through it. And he said it as if he had been right
Most economic experts followed the government's turnaround. After the Italian
lira was devalued, most of them stood firmly by ERM membership and a fixed
parity as the best way forward. Three days later, when the pound had been
devalued, these same people were talking up the virtues of floating currencies;
how it would even bring forward recovery, removing the fetters of close
ties to the Bundesbank and allowing interest rate cuts.
What this volatility of mood and instability of thinking reveals is that
the British establishment - along with its ministers, its ideologues, its
advisers - hasn't a clue about what is going on. One month or one week or
one day they are firmly of one view, the next of another. Their system is
out of control, and they do not have the first idea what to do about it.
When Margaret Thatcher argued in the early 1980s that 'There is no alternative',
known by the acronym TINA, it was informed by a certain sense of class conviction
and purpose. When Major and Lamont have repeated this phrase, it's more
like a limp admission that they are unable to come up with an alternative.
Indeed, they didn't really have an existing policy to which they could develop
an alternative. They simply drift along with events.
The appropriate acronym for the 1990s is not TINA but CHARLES: Capitalism
Hasn't Any Real Lasting Economic Solutions.
It doesn't even mean much to talk about 'policy' any more. Ministers simply
react to the latest problem. When one short-term survival measure becomes
exhausted they readjust to the new state of affairs and then declare that
this is what they had in mind all along. One day it's the ERM, the next
it's free floating currencies; one day it's 10 per cent interest rates,
the next day it's 12 per cent, the next it's 10 per cent, the next it's
9 per cent. One week, being linked to the German economy was the best way
of making the British economy strong again. A week later, Germany became
the scapegoat for all the problems of the British economy.
The inconsistency in government policy over Germany, the ERM or interest
rates reflects much more than the incompetence of Major or Lamont. It shows
that the slump is something outside of their control; a fundamental crisis
at the heart of the capitalist economy which cannot be resolved by anything
the government might do.
The Tories' incapacity to control events doesn't mean they are going to
give up. They may have no way to resolve the slump using any of the conventional
methods of postwar economic management. But we can expect them to try to
survive at our expense. The only certain statement which Lamont could come
up with in the emergency commons debate on the economy was that 'the strictest
control of public expenditure, including public sector pay, is at the top
of my political agenda'. An offensive against public spending and the welfare
state will be the most prominent feature of British life within the very
The sterling crash, and the Tory government's reaction to it, have confirmed
a simple truth: that capitalism isn't working, that it cannot be made to
work and that its replacement by a system based on production for need not
profit is long overdue.
Reproduced from Living Marxism issue 49, November 1992