Chris Harman

Thinking it through

Don’t bank on the cure

(March 1999)

From Socialist Review, No.228, March 1999.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive at
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

‘Such is the insanity of capitalism that even when profits are very low some capitalists might decide to gamble on a new round of investment. But no one should put any faith in that happening’

‘Bury your head in the sand.’ That has remained the slogan of many mainstream economists and wide sections of the media as the global economic crisis has moved on to shake another continent, Latin America, with the Brazilian devaluation. People who said a 10 percent devaluation would be a disaster are now saying a 40 percent devaluation is okay.

They are also shrugging off the growing signs of recession in China and treating the problems of the Japanese economy as some freak sideshow, of no relevance to what they call the ‘heart of the system’ – as if Japan were not the world’s second largest national economy. Yet what is happening, especially in Japan, is a challenge to all the orthodoxies mouthed by supporters of capitalism. It undermines the fashionable free market ideology of the last quarter century – the rabidly free market Economist magazine was driven to argue late last year for nationalisation of the top 22 Japanese banks as the only approach which would work.

However, the Japanese crisis also shows the hollowness of the ‘Keynesian’ orthodoxy of the three decades after the Second World War, with its claim that easy measures of state intervention would be able to halt crises in their track. Keynesians William Keegan and Will Hutton of the Observer have been very good at picking holes in the free market orthodoxy. But they themselves were claiming in their early 1990s books The Spectre of Capitalism and The State We’re In that Japan showed how state intervention could make capitalism work.

Keynesians rightly recognise that recessions occur because capitalists are not confident enough about future profitability to invest the profits they have made in the past. The result is that there is not enough spending to buy all the goods which are produced – there is a ‘crisis of overproduction’.

The classic free market way of dealing with this, cutting wages, can only make the crisis worse. It reduces the demand for consumer goods as well as capital goods and spreads overproduction to an ever greater range of industries.

Where the Keynesians go wrong is in the answers they suggest to the crisis. Their first remedy is one they share with some breeds of monetarists – to try to stimulate capitalists to invest by cutting interest rates and playing around with the money supply. The Japanese have tried such a monetary approach, reducing interest rates to near zero.

The other Keynesian remedies are the ‘tax and spend’ measures denounced by free market economists (and their mouthpieces like Gordon Brown and Tony Blair). The Japanese have tried these too, increasing public expenditure and even handing out free vouchers for people to spend in the shops. Neither of these measures has worked. As an article in the Financial Times by Gillian Tett and Paul Abrahams reports:

‘Capital spending will fall this year (ending 31 March) by 6.3 percent. In December machine tool orders dropped 31 percent, the tenth month of year on year declines. With pre-tax profits of non-financial companies expected to fall by 41 percent this year, the chances of an uptick in investment next year are slight indeed.

‘Cuts in industrial production have led to a deep fall in the number of people employed, as well as to falls in salaries, bonuses and overtime. In December cash earnings dropped 4.2 percent year on year, the worst drop in modern times. For the next financial year, Salomon Smith Barney, a brokerage, predicts wage income will fall an annualised 2.4 percent.’ (12 February 1999)

The point has been reached where, if things are left as they are, they are likely to get much worse as the effects of past attempts to boost the economy wear off. Profits are too low to produce investment, despite the low level of interest rates.

But cuts in wages in a desperate attempt to boost profits are reducing the demand for goods still further, so that wholesale prices are falling by 4.3 percent a year, making it nearly impossible for firms to sell their goods profitably despite the fall in wages.

The Financial Times writers suggest that the only way out of the recession might be for the Bank of Japan to ‘print money, to finance a massive expansion of demand through government spending. But the bank is loath to follow this approach. When it was tried before in the 1940s it ‘triggered hyper-inflation’.

It would also contain political dangers for the country’s rulers: ‘A bout of inflation would be devastating for Japan’s ageing savers, much of whose savings are in fixed income securities or cash. And if it led to a sudden tumble in the yen, it could lead to a trade war’ – and, incidentally, deepen the crisis in other East Asian states like South Korea, Thailand, Malaysia and Indonesia. In other words, the crisis is now so intractable that only the most desperate and politically explosive measures offer any chance of solving it.

The Financial Times writers end their article by hoping the bank might be able to fix things without going to these extremes. But this seems very much like crossing their fingers and hoping for the best.

There is a faint chance that their hopes will be justified – but only a faint chance. Such is the insanity of capitalism that even when profits are very low some capitalists might decide to gamble on a new round of investment, so lifting the economy from the depths of recession. But no one should put any faith in that happening.

The grim prospects facing Japan have implications for the system as a whole. The fact that mainstream economists and capitalist politicians have no sure way of dealing with Japan’s crisis means they have no sure way, either, of preventing similar crises erupting elsewhere. Even if that does not happen in the next year or so, it will at some point in the future. The bubble character of the US boom suggests it is likely to do so there at some point.

However much our rulers try to reassure themselves and us, we all face a period of economic and political turbulence.

Last updated on 21 December 2009