The slump is here to stay
Many economists are hailing the end of recession in America and the
beginnings of an upturn elsewhere. But even if they can demonstrate some
statistical improvements, says Phil Murphy, it will not mean a recovery
from a global depression that is deeply rooted in the workings of the capitalist
Although more people now talk about the world economy being in a slump,
what has happened over the past couple of years is not yet fully appreciated.
The word slump is still most often used as a synonym for a particularly
bad recession. As a result, people wrongly assume that, as the end of the
recession draws nearer, so the slump is ending too. This mistaken assumption
rests upon the popular prejudice that however bad the economic news is now,
things will improve at some time. Recessions end, and recoveries follow.
This sentiment is so strong only because the alternative seems so forbidding.
The idea that the slump is something much more profound, that the economy
has reached an impasse, is one which few are prepared to countenance. After
all, if that is true, it means that whether or not statistics can show that
the recession has technically ended, things will carry on roughly as they
are now. With mass unemployment and stagnant, if not falling, living standards
the order of the day across the Western world, this is not an inspiring
prospect. So people avoid such a conclusion.
Hence the apparently bizarre co-existence today of a general mood of gloom
about the immediate future - especially a fear of losing your job - with wishful
thinking that the economy will get better sooner or later. Some think that
time on its own will be the healer; others may be inclined to give time
a helping hand with lower interest rates, higher state spending or whatever.
But the common assumption is that things will eventually come right, and
an upturn will put the horrors of today behind us.
With the standing of contemporary economic science at an all-time low it
is perhaps not surprising to find professional economists and politicians
merely repeating a more pretentious version of this 'commonsense' attitude
towards the economy. The Group of Seven international finance ministers,
meeting in London at the end of February provided a good illustration.
This gathering exuded the general, and well-founded, sense that the world
economy is in a worse condition than at any time since the Second World
War. Indeed the meeting was convened specifically to review the uncertain
prospects for economic recovery in the industrialised world. But the participants
also managed to retain an underlying faith in capitalist renewal. The 'good'
news that the recession is over in America and, technically speaking, has
been for over a year, was used to declare that a world recovery must emerge
some time. Set against this, the hard fact that Germany is in recession
and is now being joined by the rest of continental Europe and Japan was
presented as if it was a minor inconvenience.
In America all the talk this year is of a recovery based on 'sound fundamentals'.
American commentators now refer to rapid productivity growth and the low
level of inflation as the strongest proof that their new president Bill Clinton
'seems set to preside over the healthiest economy of any president since
Lyndon Johnson' in the 1960s (Newsweek, 22 February 1993). On this
side of the Atlantic this translates into the Major/Lamont line that 'all
the vital ingredients are in place for recovery'. In reality the fundamentals
that matter are not so healthy. One vital ingredient, the most vital ingredient
in a capitalist economy, is missing.
The record losses announced recently by key companies of America's industrial
base - including IBM and General Motors - point to the drag which is preventing
sustainable recovery: the problem of low profitability. Unless and until
profitability levels are restored to where they were in Lyndon Johnson's
time - in America and everywhere else in the industrialised world - there
is no escape from crisis and slump.
It is quite conceivable that there could be bursts of output growth in different
countries in the 1990s, but the world will remain in slump. Recessions can
come and go but the slump will continue. Those who today are speculating
about the advent of the 'roaring nineties' might recall how the US economy
had four years of statistical growth from 1933 to 1937, yet still remained
stuck in the Great Depression. But, of course, memories of and lessons from
the past tend to be very selective.
The fall in profitability has been behind all of the problems experienced
by world capitalism over the 20 years since the recession of 1973. And it
is this same fall in profitability which shapes the full-blown slump today.
The ability to make sufficient profits is the driving force of capitalist
society. Capitalists will only invest in productive capacity if they can
make a decent profit. And, in turn, if they do not make sufficient profits,
they will not have sufficient funds for future investment.
Profitability is the bottom line in company accounts, determining which individual
businesses grow and prosper and which founder and collapse.
This is the normal process of capitalist production. But when profit levels
fall across society as a whole, it creates a period of systemic crisis.
The less the system is able to generate sufficient profits for continued expansion,
the more sluggish economic activity becomes.
The average profit rates of society cannot be precisely captured in a statistical
sense. Apart from the vagaries of different accounting procedures, there
are numerous features of everyday market relations - price volatility, credit,
the banking system, etc - which complicate the picture. However, published
figures for the rate of return on investment do provide an approximation
to the movements in the rate of profit. They do not make good reading for
Across the Group of Seven leading industrial countries, average profit rates
measured in this way reached their postwar peak in the late 1960s; then
secular decline set in. A few years later, from 1973, the world drifted
into recession. The golden age of the postwar boom was over. Since then
profit rates have fallen fairly steadily. Upward blips in reported profit
rates, such as occurred in the latter half of the 1980s, have never been
sustained and renewed profit downturns - from the winter of 1988-89 in most
countries - have foreshadowed the re-emergence of recession.
The reassertion of national and international profitability problems has
set in motion the trends underlying today's economic slump. As profitability
fell from the late sixties, so falling investment followed. In just about
every major country, and taking them together, real investment has fallen
steadily since the 1960s. Figures for gross fixed capital formation as a
percentage of gross domestic product were lower in 1980-89, compared to
1974-79, which were themselves lower than in 1968-73. And on the back of
slower investment come all the other features of an economy seizing up:
lower productivity growth, more closures of firms which have fallen behind
in competitiveness, higher unemployment.
Any economist who looks at the figures objectively would have to admit that
profitability has fallen in recent times. 'But so what?', they might say.
You have upturns and downturns, good years and bad, and it doesn't signify
However, when you have such a sustained trend towards falling profitability
over a period of 25 years, it suggests something more than a cyclical downturn
or statistical blip. It points towards falling profit rates as being a problem
at the heart of the modern capitalist economy. This is the key point to
be grasped in understanding the slump. The fall in profit rates is an intrinsic
feature of an economy driven by profit.
Crisis is not an occasional abnormality of the system. It is the inevitable
by-product of the process of capitalist production. Indeed, the seeds of
a period of economic crisis are laid in a time of prosperity. This is because
of the peculiarities of the capitalist way of raising productivity, the
amount produced by each person at work.
Capitalist profits are ultimately derived from labour. They come from the
difference between the wealth created by working people and the amount that
they are paid in wages. The amount of profit created for his or her employers
by one worker can vary within certain limits; for example, it depends upon
how many hours he or she works a day. But bearing in mind this scope for
some variation, as a general rule the more workers employed the more profits
will be created. And vice versa.
The problem is that capitalism tends to undermine its own capacity for profit-making,
by reducing the number of workers employed relative to the amount of machinery
and plant used. Here we are not just talking about redundancies imposed
in a recession. We are identifying an inherent feature of the capitalist
economy which can be observed even during the times of boom.
Every employer seeks to raise productivity, so as to be more competitive
in the marketplace and realise more profits. At the overall level of society,
this is expressed as the replacement of profit-creating labour with investment-intensive
technology. Of course, more and better equipment for each worker means each
one can produce more. A worker in today's hi-tech, computer-organised factory
will be far more productive than one in the low-tech factories of a century
ago. However, he will also have far fewer others working alongside him.
And that is storing up trouble for the capitalists.
Although an employer who raises productivity by replacing workers with technology
is increasing his total investment, a smaller proportion of it is going
into the one factor which creates new profits: human labour. The company's
all-important profit rates are measured by setting the overall mass of profit
produced by the workforce against the total outlay on employing machines,
inputs and people. Which means that these profit rates are bound to tend
to fall over time, as the ratio between labour and technology shifts.
The workings of this law of capitalist economics can be temporarily offset
by various factors, but in the end falling profit rates will be the dominant
tendency. The point comes when profit rates fall so far that there is not
enough profit to fund the next phase of investment in new and more costly
plant and machinery. This is what caused the business downturns of the nineteenth
century, and it has also ultimately been behind the series of economic crises
in the twentieth century. The very drive to make more profit will unleash
the forces which create the crisis.
Bearing in mind the limitations which apply to all analogies between social
processes and natural phenomena, think of the capitalist economy as an animate
body. It is the normal process of life itself which brings the end closer.
As the body grows older so it becomes more frail. Various factors can prolong
its vitality. Even in a period of senility you can see temporary revivals.
But nobody should be fooled into thinking that the body has regained its
youthful dynamism. You can look better for a while, but a relapse is inevitable.
(Unfortunately the major difference between capitalism and a body is that,
no matter how old and sick it becomes, it will not die of its own accord.
It requires an outside agent to finish it off. But that is a separate question.)
Falling profitability has been behind the economic crisis experienced across
the industrial world over the past two decades. For much of that time its
most severe consequences were held back or disguised by various offsetting
mechanisms. As the beneficial effect of these counter-crisis measures has
worn off, so the economic crisis has developed into a slump over the past
couple of years.
Most of the things pointed to as causes of the current difficulties are really
the products of past attempts to solve the crisis. For example, too much
taxation and national indebtedness are often blamed for today's slowdown.
But these are products of the high levels of state spending which have been
vital to prop up an increasingly undynamic economic system. Too much personal
and company debt are also blamed. But these liabilities were built up during
the years when easy credit helped to oil the workings of an economy which
would otherwise have dried up.
A precarious, overstretched financial system is pointed to as another cause
of the current problems. In fact financial activity by the banks and other
big institutions got so out of hand because there was so little happening
in the productive sphere of the economy; when the system can no longer succeed
in making real profits from producing real things, it turns to producing
paper profits from producing bits of paper.
In sum, all of the so-called structural problems which afflict economies
today are simply the repercussions of past measures which were used to help
sustain a system which had lost any positive momentum of its own. The crisis
has turned into a slump in the past few years as these measures have become
The old medicines - state spending and credit expansion in particular - are
no longer very effective. They have been used so much that, while the patient
is dependent upon them, they lack the positive kick which they once stimulated.
They can no longer hide the chronic condition of low profitability.
Lease of life
For as long as these measures did have some effect - between 1975-79, and
1982-90 especially - they provided the economy with an additional lease of
life. But it was rather like taking drugs to kill pain so that you can continue
running despite an injury. You are building up problems for the future;
and, in the long run, ignoring the underlying problem makes it worse. The
longer unprofitable economic activity was kept going with credit and state
spending, the more profound the impact of falling profitability was going
to be in the end.
Today the old palliatives have themselves created unfortunate side-effects.
They are not the prime cause of the contemporary difficulties, but they don't
make life any easier. For example, high interest rates don't cause the crisis,
but if high levels of state borrowing keep them up they do make it harder
for businesses to use credit to tide them over today's problems.
Symptoms of decay
There are no silver linings to the clouds of depression. The 'sound fundamentals'
they talk about are really symptoms of decay. Look again at America. Its
recent high productivity growth is not a sign of dynamism, but of weakness.
It has not been brought about by any significant boost to real productive
investment. Instead, capitalists have been closing older, less productive
plants and cutting back on the labour force. By simple arithmetic these
cuts provide an inevitable one-off boost to productivity figures. But they
are hardly a sign of economic health.
Low inflation is also a source of pride, but this too is more a sign of feebleness.
If the economy is so stagnant that nobody can get away with putting up prices
to try to boost profits, then inflation rates will fall. How a low level of
price rises could ever translate into a revival of profitable production
is a secret which none of the experts appears to be prepared to divulge.
Worse and worse
If there are no grounds for wishful thinking, there are none for complacency
either. The feared notion that things might carry on as at present is only
partially true. For most of us, things can get worse, as governments and
employers take emergency measures to ease their problems. State expenditure
is under the axe across the West, especially spending on welfare rather
than aid to business. From a capitalist perspective, cutting levels of social
provision can at least curb some of the pressures of high taxation, government
borrowing and high interest rates which exacerbate the problems posed by
low profit levels.
Rationalisation, reducing capacity, and above all cutting jobs is another
capitalist survival measure which hits most of us hard. Job-cutting cannot
restore profit levels decisively, but it can temporarily boost the accounts.
This is why mass unemployment is here to stay. And, as the recent spate
of redundancies across the industrialised world highlights, there is no
reason to suppose that it will stop rising at the current level of about
one in ten of the workforce. The slump which began with a fall in capitalist
profitability has moved on to the savaging of working people's living standards.
Eastern Europe comes to Oxford Street: hard-up workers pay out for tat
Reproduced from Living Marxism issue 54, April 1993