Chris Harman

Thinking it through

Asian pneumonia

(January 1998)

From Socialist Review, No.215, January 1998.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive at
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

As 1997 draws to a close, even the most short sighted capitalist commentators were admitting the crisis in the Pacific economies was not simply, as they had claimed earlier, a mere ‘market correction’.

It suddenly became clear in November that the sickness in Asian capitalism did not only affect the ‘Tiger cub’ economies of Thailand, Indonesia and Malaysia – which combined amount to no more than a couple of percent of world economic production. It was also very serious in the case of South Korea, easily the biggest ‘Tiger’, although still only a third the size of the British economy and a minnow in world terms. Two of the dozen biggest Korean conglomerates, the chaebols, have now gone bust and estimates suggest half the others are operating at a loss.

Most seriously, by the end of November it was clear something was fundamentally amiss in Japan – easily the world’s second biggest economy after the US. Even before the collapse of the giant Yamaichi broking firm, the Financial Times could quite seriously warn of a rerun in Japan ‘of American experience in the 1930s’. In the early 1930s, it is worth recalling, industrial output in the US fell by half, millions lost their savings as hundreds of banks went out of business and unemployment rose to above 30 percent.

No wonder the day after the Yamaichi collapse the Financial Times wrote of: ‘A new and a dangerous phase in Asia’s economic crisis ... If Japanese, Korean and international authorities fumble ... the consequences for world markets will be dire.’

No wonder, either, that one top US official has warned of ‘the first crisis of the 21st century in terms of the speed at which it has been propagated’.

There has been a lot of loose talk in recent years from both pro-capitalist market enthusiasts and left critics of the system about ‘globalisation’ reducing the importance of the national state for the economy, or even of making it redundant. But faced with the horrendous risks involved for them all in a possible economic ‘meltdown’ in Japan and South Korea, all serious capitalist commentators were agreed their states had to rush to take prompt counteraction.

Where they were at a loss, however, was on what was to be done.

So the Financial Times was urging the Japanese government to pour in money to keep the country’s banking system intact, yet at the same time its ‘Lex’ column was warning of the dangers involved in doing so.

There were similarly contradictory opinions on the IMF loan to South Korea. The loan is meant to allow the South Korean government to make sure the liquidation of unprofitable and inefficient giant firms does not damage the profitable and efficient ones. But, numerous voices warned, the government bureaucracy was too involved with the giant firms to be trusted not to try and keep the whole lot going.

These profound disagreements over what should be done are not accidental. They are rooted in the very character of present day capitalism.

There have been two main camps among pro-capitalist economists in the present century. The first, the free market camp, historically tended to ignore economic crises completely – although one variant, the so called ‘Austrian school’, sometimes sees them as a transient phase in a process of ‘creative destruction’ which makes the system ‘dynamic’.

The free market school was virtually unchallenged until the catastrophic crisis of the early 1930s. But as the crisis dragged on with no sign of a conclusion, some of its former adherents, most notably the English economist Keynes, switched to another view. They continued to support capitalism, but claimed it could only avoid crises if the state intervened in the economy. Their view became the orthodoxy for almost all bourgeois economists for the first 30 years after the Second World War.

But then it in turn went out of favour when government intervention proved incapable of stopping renewed crises in the mid-1970s and early 1980s.

The old free market economics, now usually called ‘monetarism’ or ‘neo-liberalism’, was once more in the ascendant. Many former Keynesians now argued that ‘globalisation’ meant state intervention was ‘out of date’. But a few, led in Britain by people like the Observer’s editor Will Hutton and its business editor William Keegan, used the descent of the Thatcherite British economy into the recession of the early 1990s to argue with added force that Keynes was still relevant.

The new bout of crisis in the Far East has upset all the arguments of both camps. Such is the scale of the threat to Japan that few ‘neo-liberals’ dare argue openly for simply letting the market wreak havoc. Most are having to call for rapid state action, even if they try to cover themselves by calling at the same time for ‘deregulation’ and an end to ‘state capitalism’.

The arguments of the Keynesians are also thrown into question. It is, after all, only a few years ago that Hutton and Keegan published books which insisted that the level of state intervention that existed in Japan and South Korea would enable them to avoid the crises then affecting the ‘Anglo-Saxon’ economies of Britain and the US!

In fact, neither approach can grasp the roots of the East Asian crisis. Both rest on the same set of assumptions laid down by the founders of modern mainstream ‘marginalist’ economics in the 1880s. Hutton, for instance, insists in his Observer column that ‘no one with any serious knowledge of current economic theory can challenge the fundamental principles’ underlying the Blair government’s policies. It is hardly surprising that Hutton is as bewildered by the crisis in East Asia as are the free market economists in the Treasury.

To get a real grasp of what is happening you have to go back to Marx’s account of capitalism. He insisted there were tendencies towards ever deeper crisis inbuilt into capitalism’s central dynamic – the drive to accumulation that resulted from the life and death competition between rival firms.

He also saw, however, that the very recessions that resulted could, to some extent, slow down the long term drive to crisis. For recessions allowed some capitalists to gain in terms of profitability as their rivals went bust. Free market economics could never understand crises. But it could seem to present a convincing picture of the world so long as recessions did seem to resolve themselves automatically in this way.

By the 1930s another tendency Marx had pointed to was also making itself powerfully felt. As strong capitalists displaced weaker ones with each recession, a few big firms increasingly dominated each national economy. But this meant that the bankruptcy of any one of these firms did enormous damage to the markets of all those that remained. Far from the crisis automatically ending, it got worse and worse, with each unprofitable firm that went bust pulling down other previously profitable ones as well.

Eventual recovery from the slump – first in Japan and Germany, and then in Britain, France and the US – only came with rearmament and the drive to world war. Through war and Cold War, military state capitalism was able to provide an impetus which had been lacking in the 1930s, leading to the longest boom ever known by the system. The Keynesian approach to economic management got the credit for all this – although, in fact, analyses of the British and US economies show that ‘Keynesian’ techniques were hardly used at the height of the boom in the 1950s and early 1960s, since the economy was expanding anyway.

But the very scale of the boom eventually undermined it. Economies which undertook very little arms spending themselves but which benefited from the spending of others expanded rapidly. By the mid 1970s the proportion of world output going on arms was less than half the 1950 figure. After an unprecedented short term surge upwards in 1973, all the advanced Western countries went into recession in 1974-76.

Now governments did try ‘Keynesian’ measures – only to find them ineffective. Nationally based firms, increasingly oriented towards world markets and transnational investment, were now able to circumvent the limited state direction preached by mainstream Keynesians. Since then the world has increasingly reverted to the old cycle of boom and slump.

That is not the end of the matter, however. The concentration of capital into fewer hands has proceeded at a rapid pace through slump and boom. The late 1980s saw a series of megamergers – a pattern which is beginning to be replicated in the late 1990s, especially in the US – while the recession of the early 1990s witnessed bigger bankruptcies than any since the 1930s.

At the same time, there has been a massive expansion in the international movement of finance capital, so that disturbance anywhere in the system has a rapid impact right across the world.

The overall result is that the prospect of enormous firms going bust produces fear in business and government circles of a repeat of the 1930s, and there is irresistible pressure for government, or, if necessary, intergovernmental intervention in the economy. But this is mixed in with just as great a fear that the intervention will be counterproductive and simply encourage unprofitable firms to leech off profitable ones. This is expressed in arguments among government advisers and financial journalists as to whether the greatest danger is ‘deflation’ (firms going bust and the economy tipping over into slump) or ‘inflation’ (causing prices to rise all round by government or bank handouts to keep firms from going bust).

The arguments cannot be won by either side, since the system has entered a phase in which neither approach can restore it to the sort of health it seemed to enjoy 30 years ago in its ‘golden age’. It is this which makes the arguments so intense. It also ensures the crisis will lead to political splits between rival gangs of mainstream politicians as they try to cope with events they feel are beyond their control.

None of this means that the most apocalyptic predictions about the course of the crisis will necessarily be fulfilled.

Governments and central banks will, in a muddled way, try to prop up firms, and the IMF will try, in an equally muddled way, to prop up governments and central banks. This will not be able to restore the Japanese or Korean economies to full health or halt fears of a further spread of the crisis to other countries. But it might be just enough to prevent an immediate cumulative 1930s style collapse, even though the price of doing so will be to store up further and more intractable problems for the future.

In the meantime, weak and internally divided governments are going try to dish out nasty medicine to workers who have come to expect something better. That could be an explosive scenario.

Last updated on 21 December 2009