Chris Harman


Returning to haunt them

(October 1992)

From Socialist Review, No.157, October 1992, pp.9-11.
Transcribed & marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

The scale of economic crisis internationally is now terrifying the world’s rulers. So it should, argues Chris Harman, author of Explaining the Crisis, who outlines their problems to Duncan Blackie

Marxists say that crisis is endemic to capitalism. Have we been vindicated by events?

The key thing to start with is the intractability of the present crisis. During the 1980s, the period of the Thatcher boom, the argument developed that capitalism could expand forever and that slumps were irrelevant. Just four years ago the Financial Times ran a piece arguing that because of just-in-time production methods, never again would there be imbalances in the inventories between firms, and therefore never again would there be a business cycle.

The present crisis brings home both the reality of the cyclical boom of capitalism, and also the way in which the cyclical booms themselves become more intractable the longer the system goes on.

What are the particular features of the current crisis?

There are three dimensions to the current crisis. There is the international crisis, the crisis in Europe with the ERM and the crisis in Britain.

Capitalism entered a period of crises in the early 1970s. For the thirty years before that, the massive expenditure on armaments had been able to postpone the crisis, so you had a very long period of capitalist growth.

In Europe there were no real recessions between the 1940s and the 1970s. Even in the low points, growth rates were normally 1 or 2 percent. In the US they had a couple of recessions but they were very short and not very significant.

From 1973 onwards there was a new period of deep recessions, with negative growth in the mid-1970s, and then in the late 1970s and early 1980s. In the mid-1980s there were signs of a recession developing which never materialised.

That was the time of the so-called Lawson, or Reagan, boom. The established wisdom was that of the ‘economic miracle’. The front page of an issue of the Economist in 1987 had the headline, Up She Goes and argued Thatcherism had solved the endemic weakness of British capitalism. The notion was of unlimited expansion.

In retrospect it’s absolutely clear that two things happened. Governments tried to avoid recession around 1985-86 by loosening controls on credit and on the money supply. At the same time, individual firms were able to compensate for pressures on profit rates through a combination of borrowing from the banks and inflating the prices of the various bits of property and real estate which they owned. They were able to give the impression that their balance sheets were much healthier than they actually were during 1987-89.

The chickens came home to roost in 1989 and 1990, when governments discovered they were losing control of the money supply and there were inflationary pressures in the system; to counteract these, governments took measures which had the effect of revealing the true state of company accounts and pushing the system into crisis.

This confirms the old Marxist contention that when capitalism is at its most successful – when it is accumulating rapidly – the rapid accumulation means the assets of capitalist companies grow much more rapidly than the number of workers they employ. For capitalism as a whole that means investments grow much more rapidly than the source of profits, which is the exploitation of workers. That creates pressures on the rate of profit. This is the central Marxist explanation of the crisis.

From the 1970s onwards, there were enormous pressures on the rate of profit in all the advanced capitalist countries. This led to the crisis in the mid 1970s and in 1980-1, and would have led to crisis in 1985-6 had it not been for governments allowing inflationary pressures to build up. When governments took action against the inflationary pressures, you saw the reality of the crisis breaking through.

It is very fashionable to talk in terms of this crisis having been created by mistakes made in the 1980s. The explanation you have given shows that the Lawson boom was necessary in order to stave off an earlier recession. But have there been particular shifts in the balance of finance and manufacturing which have given a particular edge to the current crisis?

Without the loosening of finance in the early 1980s, the boom in the 1980s could not have been nearly as prolonged. Furthermore, governments responded to the Wall Street Crash in 1987 by pumping in billions, which prolonged the boom further. But these measures, basically allowing greater and greater credit for companies, greater and greater mark ups in the property market and so on, created a situation in which no one had any real awareness of what the actual balance sheets of the giant companies were.

It’s clear today. If you look at the balance sheets of Olympia and York or the various companies belonging to Maxwell and Murdoch in 1987 and 1988 no one was really aware what the real profitability of those companies were. Therefore the moment they took control of the expansion of credit, it cut into profits.

This adds enormous difficulties in the present recession because it means it takes place against the background of a vast debt overhang, both government debt and private debt. The overall effect is a crisis in which past debts lead to very high levels of interest which then choke off any automatic recovery from the crisis for profitable firms. During the crisis ten years ago, there were high interest rates, in Britain there were also relatively high rates of inflation, so real interest rates were only 1 or 2 percent.

Today you have a rate of inflation in Britain of 3 or 4 percent and even after the cut in the base rate you have a rate of interest of 9 percent, so you have a real rate of interest of 6 percent. That cuts off growth and makes it very difficult for firms to restore profitability to their balance sheets. At the same time, the banks are very wary about lending any more money. This means that it is very difficult for them to get out of the present crisis.

Many commentators argue that pushing down interest rates could spark recovery. How do interest rates fit in with our overall account of the crisis?

Interest rates are not something determined subjectively by governments. The forces which operate the system exert enormous pressures and governments can attempt to mediate between them to a certain extent, but they can’t unilaterally determine how the system operates. This applies as much to interest rates as to anything else.

More importantly, the financial system borrows resources from the rest of the economy, from firms not needing to invest the money immediately. At the same time the financial system is continually lending to other firms. So, a fair chunk of whatever profit ICI makes this year will in the short term be lent to the banks. At the same time Ford, for example, might want to undertake some new investment, and it will borrow from the banks or if British government wants to cover the £30 billion on the budget, it borrows from the banks.

At any point in time the supply and demand of credit from the banks essentially determines the level of interest rates. The supply to the banks depends mainly on profits made by companies, so if the rate of profit in the system as a whole is very high, the supply of funds to the banks is substantial and the demand remains fixed, so the rate of interest will fall. If the rate of profitability of the system is low, that means the supply of funds to the banks is low. At the same time there is a large number of firms which are indebted, and have to borrow to undertake investment. Therefore the demand for funds is very great and so the rate of interest is high.

Marx made the point when he wrote Capital that the rate of interest moves in the opposite direction to the rate of profit. The high rates of interest at the moment are a reflection of the fundamental weakness and low profitability of the system.

In terms of putting the current situation in context it’s very useful to say it is the third major recession in a 20 year crisis, but it also seems that in two respects things have moved on quite decisively. One is the depth of the crisis, but to what extent has the reshaping of the world especially the collapse of Eastern Europe, also contributed to the changing nature of the crisis?

The history of capitalism until the 1930s is essentially one of deepening crisis. In the 1930s the major capitalist powers found a way of emerging from the crisis which involved two components. One was very high levels of arms expenditure. The other was that the state effectively intervened in pushing together the private companies and forcing them to invest, even if they had relatively low individual rates of profit. Military state capitalism dominated development in Germany and Japan, and during the Second World War, in Britain, France and many other countries.

After the Second World War there was no return to the old pattern of private market capitalism. Every state played a major role in industry and everywhere military expenditure was much higher.

In that situation the Keynesian picture of the state being able to intervene in industry to stop the crisis seemed to fit. State capitalism was a way of overcoming the features of crisis which had emerged from the 1920s. Russia and Eastern Europe were the more extreme versions of the state capitalism which developed in the West and in Third World countries.

That model began to break down in the 1970s. No longer was it possible for the major states to maintain the high level of arms expenditure, which had stabilised the system. At the same time the growing importance of both international trade and international production, which increasingly cut across national boundaries, prevented state intervention from being so effective. Therefore the crisis of 1973 was the beginning of the end of the period of state capitalist organisation of the world system. This was marked ideologically by the way in which in the mid-1970s all the old Keynesians turned towards monetarism overnight. In Britain, the Labour government announced in 1977 that it could no longer ward off economic crisis by government expenditure.

You can understand the crisis which hit Eastern Europe in the 1980s as a more extreme form of the crisis which had hit Western state capitalism earlier. Many regimes attempted to open up their economies to the world market, to break down the control of the state over industry, increase international agreements and so on, and were then drawn in to the crisis of the world system.

We have now reached the stage where the whole world system is in crisis to varying degrees. When that led to political collapse in Eastern Europe three years ago, the orthodoxy was that if the countries in Eastern Europe followed the pattern of Western Europe and the US, they would experience a boom. The market and democracy would work together.

The reality is that hardly had the East European collapse taken place, than you had the onset of crisis in the West, and now the onset of crisis in the East. These crises reinforce each other.

Can there be a solution by moving back in the other direction of more state intervention, even in the short term?

The crisis from 1973 onwards showed that there is no way out of the crisis through increased state intervention. Capitalism operates increasingly as an international system. In that situation states can try and cut themselves off from the system but they lose out on the most advanced forms of production which have developed at an international level, or they can break down their barriers to the system and just allow the system to operate.

If they allow the system to operate, it is in effect going back to the stage it was in before 1929. There will be short booms and very deep slumps and it becomes more difficult for them to escape the slumps. I don’t believe the answer is for them to move back towards state intervention as such. The forces at loose in the world are too great for individual capitalist states to be able to resolve the situation. They will shift from one to another.

In Sweden the government is committed to reducing the level of government intervention in industry, to opening the economy up to market forces. This led to the near bankruptcy of all the Swedish banks. The government has taken over two of the minor banks, it is very worried that it will have to nationalise the whole of the banking sector in Sweden to stop the cumulative collapse of the economy. It doesn’t want to take it over as it goes against the way the system is becoming more internationalised. Either way it is caught.

If you look at the system in a completely abstract way, there are two ways the system can escape from a crisis like the present. One is to allow the crisis to deepen, that means eventually enough sections of capitalism will go bankrupt to enable the rest to buy up their capital on the cheap and for workers to be so demoralised they accept very low wages.

The other sectors, hypothetically, should be able to return to profitable accumulation.

The difficulty with that is that since the 1930s the size of the industrial units is so big that if any major firm goes bust, instead of leaving leeway for another firm to make more profits, it can pull them down. In reality, however much they talk about non-intervention, capitalist governments in the last decade of the twentieth century, faced with that prospect of cumulative collapse, will intervene to stop what they say is the natural way for the system to resolve its crisis.

About 10 years ago the Economist suggested letting the whole banking system go bust as a way of solving Third World debt. The implications of course would have been a huge political and economic crisis throughout the system. Faced with a much smaller operation, the Savings and Loans in the US, the Bush government intervened to prop up that financial system.

The other alternative, which has been previously used by the system faced with a crisis is to say that the central point for the recovery from the crisis is the level of indebtedness, and therefore to follow an inflationary strategy, pumping money into the system which will ease the liquidity problems of firms and will enable them to invest. At the same time inflation wipes out debts very very quickly.

This is again a hypothetical way out. But it would cause immense turmoil in the system. If you have huge chunks of lending taking place from one section of capital to others, and an inflationary outcome, the sections of capital which made the lending lose in the process. This isn’t conceivable without a state of near civil war within the individual ruling classes.

In addition to this, the inflationary solution can act as an enormous spur to class struggle. High levels of inflation are invariably accompanied by high levels of class struggle. Workers would fight back very quickly in order to try to keep their wages matching the level of prices. Therefore the ruling class are caught between two solutions – neither of which works. In reality they will vacillate between the two.

After the devaluation of sterling a huge row took place among the Tories over whether they should try and maintain a deflationary strategy by going back into the ERM, or whether they should go for an inflationary strategy of low interest rates, allowing the pound to sink and hoping for the best. When they raised interest rates to 15 percent it became clear they couldn’t hold that politically. If they go for the inflationary strategy, they will face enormous political rows – particularly in Britain, as an inflationary strategy means pulling in imports, making the balance of payments problem worse and introducing all sorts of difficulties which they can’t get out of.

To what extent is Britain in a uniquely dismal position?

The situation for British capitalism is extremely dismal. We always have to be careful, as Lenin once said that if the workers would put up with it, there is always a capitalist way out of the crisis. In the short term things can happen which will provide them with a very weak lease of life, but it doesn’t solve their crisis.

The real problem for British capitalism is that for 100 years, its relative position in world capitalism has been declining. That decline has been accelerated over the last 20 years, to a situation today where British capitalism no longer competes in whole areas of manufacturing industry. Over the last 20 years Britain’s share of world manufacturing exports has fallen by something like two thirds. But that was in a situation of expansion, in which relative decline was accompanied by real growth. If you are talking now about the system stagnating over the next four or five years, as many respected bourgeois economists do, a declining share of world exports causes enormous problems.

I don’t see any easy way out. The deflationary situation is not just making workers suffer, but making very important sections of industry scream out loud. Neither the devaluation in 1967 nor the one in the early 1980s solved the problems of British capitalism. There have been a number of occasions on which governments have reduced interest rates in the hope of economic recovery – it has always meant a much more rapid growth of imports than of exports.

In the present situation they have the added twist that given the level of debt overhang it is not even guaranteed that if they have low interest rates they will get a growth of consumption and capitalist investment anyway. And if there is recovery its going to be on the basis of imports. They seem to be snookered.

Why is the Labour Party unable to promote any alternative?

The Labour Party has the same problem it had in the slump of 1929-1930 – it doesn’t have any solution to the crisis. In 1929-1931, as the crisis got deeper, the Labour Party more and more accepted the conventional bourgeois attitude to the crisis – deflation, balance the budget, don’t do anything to rock the boat. In the crisis in 1931 the Labour Government wouldn’t even do what the National Government did afterwards, which was to break from the gold standard and then begin to adopt interventionist measures.

When the Labour Party NEC met in late September, there were only five votes challenging the Smith-Brown policy of continuing to put their faith in ERM. This means that ideologically Labour has nothing to offer about the crisis of the system.

Last updated on 18 June 2010