Chris Harman

Thinking it through

Forever blowing bubbles

(February 1999)

From Socialist Review, No.227, February 1999.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive at
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

‘There is a very high probability that in the next few months we will see more sudden shocks to the system’

No matter how long you have been active in socialist politics, two things continue to amaze you. One is the zeal with which Labour governments pursue the same policies as their Tory predecessors. The other is the shortsightedness of mainstream economic commentators.

Look at their recent record. A year ago they were telling us the east Asian crisis could not possibly affect the western economies. Then suddenly in September and October they panicked. The Financial Times had headlines about an ‘economic meltdown’ and ‘a house of cards’. BBC2 ran a special Newsnight programme, asking, ‘Is capitalism collapsing?’ which included the spectacle of Milton Friedman denouncing International Monetary Fund policies as disastrous.

Then in late November and December they all decided, just as suddenly, that the crisis was over because the American Federal Reserve Bank had reduced interest rates by a minuscule amount and the stock exchanges were rising again. I took part before Xmas in debates with Margaret Thatcher’s former economic adviser Patrick Minford and with Gordon Brown’s former adviser, Meghnad Desai. Both insisted the crisis was not affecting the ‘core of the advanced capitalist world’ – as if Japan, the world’s second industrial power, was not part of that core. Since then I have heard the same message from Paul Anderson, who writes on economics for the left Labour paper Tribune, and, on BBC1’s Question Time, from Ken Livingstone. All of them are a bit like a group of people trying to make their way through a thick fog. When they don’t bump into something they are euphoric. When they do, they think the end of the world is at hand. In the autumn they panicked when they got a sharp bump from the spread of the Asian crisis to Russia and Latin America. Today they are euphoric because they have not yet been hit by a crisis in the US and are convincing themselves it can never happen.

The fog arises from the very character of a market capitalist economy. In the long run, the direction of that economy is dependent upon underlying profit rates, which in turn depend upon the relation between the total amount of surplus value squeezed out of workers compared with total investment. If this ratio is rising, there is an incentive to capitalists to invest and the economy expands. If the ratio falls, then investment lags, factories close, workers are unemployed, and the economy stagnates or slumps.

But in the short term the psychology of the capitalist class itself affects their perception of profit levels. When their shortsightedness leads them to think things can never go wrong, they live it up, embark on ambitious investment schemes and pour money into buying each other’s stocks and shares. As markets soar upwards, some of them make big profits, while others have every incentive to rig their books so as to make it look as if they are making big profits (otherwise they risk ‘hostile’ takeover bids). Such ‘bubbles’ have been a feature of capitalism, from the time of the Dutch ‘tulip’ bubble of the 17th century (when one bulb could be exchanged for ‘a new carriage, two grey horses and a complete harness’) and the English South Sea bubble of the 18th century, to the Florida land bubble of 1928-29 and the Japanese ‘bubble economy’ of the late 1980s. On each occasion, a wave of speculative frenzy led capitalists en masse to have expectations that couldn’t possibly be matched in the real world of production where profit ultimately originates.

This also creates problems for Marxists trying to analyse in detail what is happening to the system. We simply do not have access to the mass of empirical information (for instance, about real profit levels) which enables us to see clearly through the fog. So, for example, in the late 1980s a lot of us suspected that the widespread talk of Japan growing continually to overtake the US economy by the year 2000 was a lot of baloney, but we could not say for certain when the bubble would burst. Similarly today there is a great deal of evidence to suggest that the capitalist euphoria about the US economy is completely misplaced. Underlying profit rates did rise in the mid-1990s (partly as a result of long term cuts in real wages and a lengthening of working hours). But they do not seem to have risen much higher than that of the level of 1973 – a level that was too low to prevent the economy entering into a long period of crisis. And there is growing evidence that they have started to fall in the last 18 months. US workers have taken advantage of lower unemployment levels to put up increased resistance to wage cutting, while the slump in the east Asian countries has led their capitalists to slash the prices of goods they sell in competition with US capitalists, resulting in ‘overproduction’ in a whole range of industries, from steel and petrochemicals to jeans and tin cans.

Under such circumstances there is a very high probability that in the next few months we will see more sudden shocks to the system and more sudden outbursts of ruling class panic. As it is, the two economics which used to be regarded as ‘number two’ to the US (Japan and Russia) are both in a deep mess, western capitalists are beginning to get worried about their investments in China, Latin American governments are encouraging their economics to contract so as to avoid a clash with the IMF and the international banking system, the expected boom in Germany has not materialised, east Asia’s only hope is to export its slump elsewhere by dumping products on the world market – and some sort of recession is inevitable in Britain.

Nothing sums up the absurdity of the current optimism more than the reaction in recent weeks to events in Brazil. Before Xmas the orthodoxy was that the worse thing that could happen would be for the Cardoso government to allow the devaluation of the currency, the real. The IMF made the cuts aimed at avoiding a devaluation a precondition for a substantial loan. Millions of workers and the poor were forced to suffer the consequences.

Then in January speculators forced devaluation on the country anyway. What was the response of the US stock exchange? There was a one day fall in share prices, followed by a new upsurge. All sorts of commentators suddenly discovered that the ultimate evil, devaluation, was now a good thing!

If this scenario can make capitalist economists heave a sigh of relief, then it just shows what a mess their system is in and how close they thought it was to a 1930s type crash. It also suggests they have no real idea what is going to happen in the next 12 months.

Last updated on 21 December 2009