Chris Harman

Thinking it through

The past catches up with capitalism

(March 1992)

From Socialist Review, No.151, March 1992, pp.6-7.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

Capitalism is a funny system. Only three years ago most of the media – serious as well as popular – were exulting in what they saw as the prospect of endless economic prosperity. There was a problem, they recognised, in slowing down an ‘overheating’ British economy. But that could easily be resolved, just as the threats raised by the Wall Street Crash of 1987 had been.

Now the talk is mainly of recession, and often of recession turning into slump. This is as true of right wing monetarist economists who advised Thatcher through the 1980s as of dissident Keynesian liberals.

But what has caused the turnaround in the fortunes of the system?

The usual explanations are in terms of mistakes in government policy in the mid-1980s – although the monetarists and the Keynesians naturally disagree as to what these mistakes were. But, in any case, this leaves open the question as to why mistakes should have taken place on such a scale, and not only in Britain but elsewhere as well, particularly the United States. After all, for more 30 years, from the mid-1940s through to the mid-1970s, governments of all complexions presided over economies which experienced only the mildest of recessions.

Faced with such problems of analysis, many pro-capitalist commentators simply retreat into mysticism. The most marked recent example is former Times editor William Rees Mogg (best remembered for his enthusiastic defence of the Chilean coup), who justifies his recent turn to apocalyptic pessimism by claiming that ‘each century divisible by five has witnessed a major transformation in Western civilisation.’

A slightly saner version of the same theme is to claim that there are ‘long waves’ in economic life, with alternations between periods, each several decades long, of prosperity and crisis. As the Financial Times Lex column has put it, ‘those who believe this recession belongs in the context of a long economic cycle need look no further than the latest Bank of England Quarterly.’

Just as the tide goes in and out, the argument goes, so capitalism moves from times when it offers people a better life to times when things are worse – and back again. This is reassuring to supporters of the system, because it portrays even the most devastating crisis as part of a natural cycle of growth, decay and further growth, as something as inevitable as the rising of the sun each day or the alternation of summer and winter.

They would do better to return to Marx. His account of the system explains not only the short term ups and downs of the market – booms and recessions – but, more importantly, the long term tendency for booms to get more superficial and recessions to turn into slumps.

At the centre of his explanation was what happens to the key motivating force in a capitalist economy, the rate of profit. Economists before him had noted a tendency for this rate to decline over time. Marx pointed to the mechanism within capitalism that made this happen.

Capitalism is based on competitive accumulation: individual capitalists can only stay in business if they expand the investment under their control more rapidly than their rivals, continually cutting down on labour costs by bringing in new and more expensive machinery.

But what helps the individual capitalist keep ahead does enormous damage to the long term future of the system as a whole. For it is labour which is the ultimate source of the profits. If, through the system as whole, the amount of investment grows more rapidly than the amount of employed labour, there will be a downward pressure on profit per unit of investment – the rate of profit.

There are things that can counter this tendency – for instance if capitalists are successful, as they have been in the US in recent years, in persuading workers to work longer and to accept lower real wages. But in the long term the tendency will express itself in a worsening of profit rates and a deepening of recessions, unless the recessions themselves are so severe as to destroy huge quantities of investment and the fortunes of the individual capitalists who own them, leaving the remainder space in which to prosper once more.

This trend towards declining profits deepening crisis was very clear in the 1970s. The arguments at the time were not about whether profits were falling, but over what had caused the fall, with non-Marxists – and a few would be Marxists – blaming wages pressure or oil prices rather than the inbuilt tendency of the system.

But in the mid and late 1980s things seemed very different. Profit rates were up, until they reached more or less the level they had been at before the 1974 crisis. It was this which led to ruling class euphoria of the mid-Thatcher and mid-Reagan years.

Yet the rise in profitability was precarious in the extreme. It depended on the ratio of investment to labour rising more slowly than previously (in Britain the rise was 4 percent in 1970, but only 2 percent in 1982), and increasing the rate of exploitation of a working class which still had not recovered from the impact of the previous recession.

Once economic recovery was fully under way, we argued in this Review at the time, both factors would cease operating. The ratio of investment to labour would grow quickly again, and workers would put up more resistance to increased exploitation.

This was certainly happening by about 1987. But firms were still able to boost their individual profit rates by various forms of financial chicanery – of which the leveraged buy out boom was the most blatant expression – and governments could be relied on to keep the whole financial system afloat if it was threatened by these, pouring in tens of billions after the 1987 stockmarket crash.

The most visible expression of the growing crisis of profitability for the system as a whole was not, at that stage, in the balance sheets of individual firms, but in the growing level of business and personal debt and, with it, the growing burden of interest payments.

But the moment of reckoning could not be put off indefinitely. At a certain point the pressures on profitability of individual companies were bound to show, which happened two years ago for giant firms like Ford, General Motors and IBM. And when this happened the level of debt and interest payments suddenly became something many of the small – and often not so small – fry could not bear. Firms began to go bust and pull other firms down with them, leading us to the situation today where quite big firms like Amstrad feel threatened and even giants like British Aerospace, British Petroleum and Natwest do not feel very secure.

This does not mean the system is immediately going to slide into a slump of 1931-32 proportions – to reach that unemployment in the US and Britain would have to be nearly three times its present level. It does mean, however, that there are no easy options for ruling classes anywhere.

There are two ways in which they could, hypothetically, relieve the short term pressures on the system. They could deliberately allow the recession to deepen in the hope that enough unprofitable and overborrowed capitals would be wiped out to provide new opportunities for those that remained. Or they could pursue a deliberately inflationary policy, massively reducing the real amounts to be paid back to the banks by capitals that had overborrowed.

But either policy would hit parts of the ruling class itself as well as the mass of workers. As a result it is difficult to see any government following either whole-heartedly.

So even if there is eventually some partial economic recovery it is unlikely to last for long. The long term tendencies inbuilt into the system have caught up with it, and its greatest admirers just don’t know what to do.

Last updated on 18 June 2010