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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 economy

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.

Wishful thinking

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.

Hard facts

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.

Bottom line

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 capitalists.

Golden age

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 anything profound.

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.

Iron law

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 exhausted.

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

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