Profit rises and capital’s adjustments

What are the potential ramifications of the credit crunch? Does it represent a financial bubble, a possible recession in the USA or even a great depression - the greatest crisis that capitalism has faced in decades?

If you listen to the gamut of left opinion, all of these positions have been expressed. Peter Taaffe says it is the greatest crisis in decades. Robert Brenner says it is the greatest crisis since 1929. On the other hand, you have Marxists like Fred Moseley, who recognises the escalation in the rate of profit since globalisation. Similarly Jim Kincaid, ourselves, the French Marxists and so on. There is a split of opinion about what this financial crisis means for world capitalism.

The key point for us is that if we are going to understand the crisis today we need to situate it in a historical context. The reason why we say it is not likely to be the great depression is because the great depression took place in a period of intense crisis for world capitalism, where it had been unable to solve colonial problems in World War I. After the war the colonial system remained in place and compressed and constrained the ability of capitalism to develop in terms of both production and markets. Hence, what you saw in the 1920s was a period of intense crisis for capitalism, with the USA pretty much the exception in that period. The inability of the United States to lift the world out of recession was proven by the 1929 crash.

Look at the period of the long boom after World War II and you will see that through the victory of America the fundamental structural problem of capitalist development could be solved, opening the market to free exploitation by imperialism. The effective destruction of working class organisation via Nazism and so on was lingering and as a result there was a massive development of capitalism. The fact that a third of the world was taken out of capitalism through the expansion of Stalinism was not a fundamental limit on the ability of capital to grow, but in the late 1960s the development of productive resources was such that this was an intolerable barrier on the ability of capitalism to expand as a system. Hence there was a period of stagnation and crisis through the 1970s and 1980s.

In 1991 the USSR collapsed. By 1995 the Chinese bureaucracy had restored capitalism and China can today be described as a state capitalist entity. The restoration of capitalism between 1989 and 1991 had a fundamental effect on the functioning of the capitalist economy.

This process is illustrated by world steel production. Through the 1980s there was genuine stagnation, with growth at between one and two percent through the course of the decade. The restoration of capitalism in eastern Europe produced a massive increase from around 2000 onwards, as the former ‘socialist’ states were integrated into world capitalism.

The first effect of the restoration of capitalism was a massive expansion of production worldwide, which was based simply on the transformation of planning into capitalism. Anomalous statistics from the OECD/IMF arising from their approach to capitalism as a system meant that the collapse of the plan in the CIS and eastern Europe in the 1990s was actually represented as a collapse of capitalism. What is in fact a massive addition to the size of the capitalist world market is paradoxically seen as a decline of capitalist production. This is a perverse result of the OECD/IMF’s inability to differentiate between planning (or whatever you want to call it) and capitalism. This is why, for example, Chris Harman, Robert Brenner and so forth say that capitalist decline has increased through the course of the 1990s and globalisation.

The statistics for steel are mirrored in the growth of other commodities - electricity, coal, gas. There was also the doubling of the size of the working class that can be exploited by capitalism, through the integration, particularly, of China into the global system.

From the point of view of Marxist theory you can say that the crisis of the 1970s and 1980s arose because of a rising organic composition of capital - too much fixed capital, expensive wages causing a falling rate of profit. The restoration of capitalism in eastern Europe, etc, meant that a massive segment of infrastructure came under capitalist control for free. When people think about Russia, for example, they think about Lada factories and crap like that. But Russia still has the largest railway system in the world - four times bigger than China’s, even after the massive expansion of Chinese railways over the last decade. Or, as the IMF points out, there was no housing market in China before 1996.

So there is a massive increase in the size of the working class and at the same time a massive reduction in the cost of fixed capital, together with a massive opening of what we would call semi-colonies - the exploited nations of the third world. In the heartlands of imperialism the working class defeats of the 1970s and 1980s have been consolidated, the working class movement has been disorientated and a huge, ongoing neoliberal offensive has been launched.

What all of this does is to restore the rate of profit worldwide: in the USA, for example, it was 19% in 1990, peaking at 27% in 1998, falling to 23% at the crisis period of 2002 and recovering to a peak of 29% in around 2006. It has slightly fallen off in the last year. And this is repeated worldwide, particularly in the emerging markets of China and Russia.

This is the context of the profoundly changed world economy since the 1970s and 80s that we are looking at in relation to the credit crunch.

The bursting of the high-tech bubble in 2000 produced the first crisis in globalisation. How deep was that crisis? In Britain it resulted in no more than a very mild recession worldwide, notwithstanding the fact that this was the second biggest financial crash in the history of capitalism.

In response to that crisis the US Federal Reserve cut interest rates and thus spurred another financial bubble, this time in housing. The same phenomenon took place in the UK, with a move of speculative capital into property. In the United States this produced the by now familiar ‘sub-prime lending’ crisis, which peaked in the first half of 2007, with about $2 trillion-worth of dodgy lending.

The securitisation and trading of mortgage debt of course means that it is very difficult to keep track of the real value of these loans. There is an explosion in speculation. The period since last August has seen a brutal correction in the value of these securitised financial instruments, which has so far resulted in about $320 billion of write-downs, split roughly 50-50 between the United States and the rest of the world. Obviously the withdrawal of domestic demand on this scale has thrown US demand into total crisis, with personal expenditure actually falling for the first time since 1980.

This points to a very interesting counterbalancing feature of this recession - if, indeed, it is a recession. The US has shipped its manufacturing abroad. There is a collapse in domestic demand. This produces a reduction in imports from China and so on, which actually translates into an increase in GDP. So paradoxically, through domestic demand falling, there is a statistical improvement in US balance of trade figures, and this trend will continue.

By cutting interest rates in order to give workers the possibility of meeting mortgage and other debt commitments, the Federal Reserve has allowed the dollar to fall, which is producing a huge surge in US exports and increases the value of repatriated profit from its multinationals.