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International Socialism, January 1977


Notes of the Month

Whatever Happened to the Boom?


From International Socialism (1st series), No.94, January 1977, pp.5-7.
Transcribed & marked up by Einde O’Callaghan for ETOL.


The Labour government is pressing ahead with a new round of public spending cuts in the face of growing opposition. NUPE and other public sector unions were able to turn out 80,000 people in protest against government policies on November 17.

Callaghan and Healey in justifying the new package hide behind the IMF. In fact, all sections of British big business are calling for cuts of around £1½-2 billion, through their various organs – the Tory Party, the CBI and the Financial Times.

Even without the cuts, unemployment will not fall in 1977. The latest survey by the National Institute for Economic and Social Research (NIESR) predicts a growth rate of 1.7. per cent and 1,300,000 unemployed in 1977. If public spending were cut by £2 billion early in 1977, then the NIESR estimates that by the end of 1978 national output will be 1% per cent lower and unemployment 400,000 higher than without these cuts.

A new recession?

The Labour government’s economic strategy is in ruins. It depended on ‘export-led growth’ based on the new world boom which everyone expected to gather pace during 1976. In fact, the boom has not materialised. The recovery of the world economy from the recession of 1973-75 is faltering. The major Western economies – the US, West Germany and Japan – grew very quickly early in 1976; by the end of the year their growth rates were tapering off fast.

The Organisation for Economic Co-operation and Development (OECD) predicts for the Western capitalist countries a growth rate of less than 4 per cent in the second half of 1977. World productive capacity grows about 4 per cent a year. If output grows at a slower rate, as the OECD predicts, then 1977 will see a new recession.

There are a number of signs that the world economy is slipping back into recession. For example, there is a world wide slump in demand for steel. American and European steelmakers are cutting back on production and laying off workers. The EEC has just set up a steel cartel, Eurofer. The cartel’s job is to protect the European industry from the competition of Japanese companies, which have been dumping cheap steel on European markets.

The steel slump is an important indicator of the general state of the world economy. The steelmakers’ main market is the capital goods sector – firms producing plant and equipment. Capitalists worldwide are not investing in new plant and equipment.

In the US, which led the economic upturn in early 1976, capital spending has not yet reached 1974 levels. Investment in new factories, office buildings and roads, bridges and other public works is at a very low rate.

‘It is clear that one of the largest clouds on the economic horizon is sluggish capital spending.’ (Business Week, 2 August 1976)

The picture is the same in European manufacturing industry. For example, in West Germany investment is estimated to have fallen in real terms in 1976 for the third year running. In Britain, investment has not risen above very depressed 1975 levels.

The failure of capitalists to invest in new plant and equipment means that the economic recovery is not self-sustaining. New investment would have led capitalists producing plant and equipment to expand production and take on more workers. These workers’ increased spending would have led capitalists in the consumer goods industry to expand production and invest in new plant and machinery and so on.

But the short-lived boom in early 1976 was the product of temporary factors. Companies had let their stock of finished goods fall to very low levels during the recession and stepped up production in order to rebuild stocks.

The depth of the recession in 1974 and 1975 also led the stronger Western states to take special steps to revive their economies. The West German government introduced four ‘anti-cyclical’ programmes of public works and investment grants in 1974 and 1975; the Japanese government rushed through four ‘anti-recessionary’ packages in 1975 alone. But demand for consumer goods is still very depressed because of the cuts in real wages workers have suffered. Once the effect of the government stimuli wore off, the world economy began to slide’ backwards again.

Changes in real Gross National Product at annual rates






First half
Second half





First quarter
Second quarter
Third quarter





Source: Financial Times


This is not the way the capitalists’ economic textbooks tell them things ought to work. The slump ought to be followed by a gradual economy recovery and then a boom which in its turn leads to another slump. Why has the world economy slid back so sharply in the last six months or so?

The fundamental reason is that the crisis of 1973-75 has not solved the capitalists’ problems for them. Although inflation has fallen from its peaks, it remains at historically high levels.

Indeed, the world economic recovery in the first half of 1976 caused the prices of raw materials to rise at least as fast as they did in 1972 during the upturn from the last recession (Bank of England Quarterly Bulletin, September 1976). The boom in commodity prices in 1972-3 was one of the main reasons why the world economy slumped in 1974.

The rise in world demand for oil, which was running 5 to 6 per cent above 1975 levels in 1976 because of the economic recovery, is encouraging the Opec countries to raise the oil price again in early 1977.

The big increases in the prices of oil and other raw materials do not arise from the greed of the Shah of Iran, let alone that of the rulers of the impoverished Third World countries that produce most of the West’s raw materials. They are the result of competition among the Western capitalists themselves.

The Last Crisis

What happened in the early 1970s was that competing capitalist firms in Western Europe, North America and Japan bid up the prices of the raw materials they needed to expand production. They also forced up the rate of interest on the money capital they borrowed to finance their investments. The resulting inflation encouraged workers to fight for higher money wages from employers whose order books were full.

Rising prices, interest rates and wages bit into profits. The final straw was the four-fold increase in the price of oil, which was possible only because of the very sharp rise in demand for oil by the booming Western economies in the early 1970s. The result was the biggest recession since the 1930s.

Capitalism and the State

The fundamental reason why the world recovery is faltering now is because this recession did not provide capitalists with new opportunities for profitable investment.

In the 19th century, when Marx developed the theory of crises, the average size of individual firms was quite small. The state, although it represented the interests of the capitalist class as a whole, did not see its interests tied up in the fate of individual firms.

This meant that in a time of crisis, when the banks called in their loans and the weaker firms went bankrupt, the state did not interfere to save the lame ducks. Workers were laid off on such a scale that they were ready to accept wage cuts. The demand for bank loans slackened and so interest rates fell. Plant and equipment went cheap. The stronger capitalists who survived the slump could take advantage of these conditions to absorb their weaker brethren and reorganise production on a larger and more efficient scale so as to come out top during the boom that gradually developed as the economy recovered.

Today each national economy is dominated by a small number of very big firms whose interests and operations interweave with those of the state. The state cannot permit the collapse of one of these enterprises because this would threaten the survival of the entire national capital. So the state does not let the banks call in their loans to a big firm that is in trouble, but instead steps in to shore up the lame duck. British Leyland is a good example. If the major British car producer were allowed to collapse, then British capitalism would have been written off as an independent entity.

Unemployment has followed the same pattern in Britain. The official statistics vastly underestimate the number of unemployed women, although hard times bring women into the job market to supplement the squeezed family income. Between November 1973 and May 1975 overall unemployment rose 65 per cent, while employment among blacks rose 156 per cent. Unemployment among those under 20 has been running at 1¼ to 1½ the national average since 1969
(CIS Special Report: Who’s Next for the Chop)

Unemployment and the cuts

As a result, the crisis of the mid-1970s did not lead to any major reorganisation of capital that opened up new opportunities for profitable investment. There was no major shake-out of labour during the recession. Unemployment did rise dramatically in all the advanced capitalist countries after 1973, but its impact has been very uneven. On the whole, it has been the less well paid, less highly organised, and less skilled sections of the working class that have been hit hardest. The stronger sections, for example in the car industry, have had their real wages squeezed because of inflation and short-time working, but suffered much less severely from actual unemployment.

In West Germany, where unemployment averaged just over 1 million in 1975, the Gastarbeiter (immigrant workers) from Turkey, Yugoslavia, Greece, Spain and Southern Italy bore the brunt. The immigrant labour force fell by 260,000 between September 1974 and September 1975 (OECD Economic Survey Germany, May 1976). In the US in September 1976 the black and the young have been hit hardest.

Employers have preferred to use natural wastage and short-time working to cut down on employment. These are inefficient weapons in any attempt to rationalise production. Natural wastage means that jobs are lost at random, while the search for greater profitability should dictate sackings in one section and taking on workers in another. Older workers, who are more difficult to retrain and switch to new jobs keep their jobs, while school-leavers, who are far more flexible and able to learn, rot on the dole queues.

Employers have used these inefficient methods because they have been reluctant to confront workers head on. This means that the recession has not broken shopfloor organisation, with the mass sacking of militants.

The fact that the employers have avoided head-on confrontation is a tribute to the strength of shopfloor organisation. It also means that this organisation remains, ready to take advantage of any economic upsurge in order to fight for higher wages. An example was the 1976 strike by Ford workers in the US, who took advantage of the upturn in the American car industry to press for and win wage increases and longer holidays. Unemployment has not cowed the working class.

The failure of the recession to solve capitalists’ problems explains why they are demanding, in every major Western country, cuts in public spending.

The recession has not made available to the capitalists resources – skilled labour power, money capital, means of production – on the scale needed to reorganise the capitalist economies so that they can resume rapid growth. The only other way that the industrial capitalists can get hold of these resources is to cut down on the public sector, which has taken on the burden of the necessary but unproductive or unprofitable investments which private firms were not prepared to make, and where the workers on the whole lack the economic muscle or traditions of struggle of industrial workers (although 17 November shows how the old traditions are being shaken off).

US profits as a percentage of employees’ compensation and adjusted profits (a measure that underestimates the rate of profit):



21    per cent


14.5 per cent


  9    per cent


14    per cent

Source: OECD Economic Survey United States, July 1976

Average rate of return on German capital:



14 per cent


  6 per cent

Source: OECD Economic Survey West Germany, May 1976

Real rate of return on British capital:



13.4 per cent


  7.5 per cent


  4    per cent

Source: Bank of England Quarterly Bulletin, March 1976

The profits squeeze

Capitalists are not investing for a very simple reason. The rate of profit has fallen throughout Western capitalism to levels that are so low that it is not worth their while to invest.

The standard explanation for the fall in profits found in papers running from the Economist to Marxism Today is that it is caused by wage ‘increases. The evidence of the German economy contradicts this explanation.

Especially after 1962 investment in German industry has been highly capital-intensive – ie, it has replaced workers with machines. The result is that the capital-labour ratio, the amount of money invested per worker, rose rapidly in the 1960s and even more rapidly after 1969, from 20 in 1958 to 60 in 1970. That means that for every worker the capitalist has to lay out three times

as much on machinery, raw materials, etc as he did in 1958. But it is the worker who creates the surplus-value that is the source of the capitalist’s profits.’ This surplus value is not growing at anything like the increase in the cost of invest-, ment. And so the rate of profit falls (see Annex 1 to OECD Economic Survey – Germany, May 1976).

Even strong capitalist economies like West Germany face a deep-seated crisis of profitability. Profits would rise if plant, equipment and raw materials became cheaper, if interest rates were lower and if workers were to accept wage cuts and work harder. But, as we have seen, the recession produced none of those results.

Waiting for Jimmy Carter

The final collapse of capitalism is not round the corner. However, the sort of steady and stable growth enjoyed by the Western economies during the long boom of the 1950s and 1960s will not return. Instead, the booms will be brief, fragile and inflationary, while the slumps will be long, deep and inflationary. Unemployment will reach levels much higher than we have seen since the 1930s. A confidential Labour Party study predicts 2½ million unemployed by 1980 (Observer, 21 November 1976).

In the short term, what happens to the world economy will depend on whether Jimmy Carter decides to reflate the American economy by cutting taxes and increasing public spending. The Financial Times reported after the last EEC summit,

‘Western European governments are pinning their hopes for finding solutions to the problems of faltering economic recovery, the threat of an oil price increase and general relations with the Third World, firmly on the incoming Carter Administration in the US.’ (30 November 1976)

Whether this touching faith is rewarded remains to be seen. In any case, reflation in the US is likely to mean, either the sort of boomlet we saw in the first half of 1976 or a runaway inflationary boom like that in 1972-3, which will be followed as night follows day, by another recession on the scale we have just climbed out of.

Political Prospects

How do we connect these general economic perspectives with our own activities as revolutionary socialists? Elsewhere in this journal Duncan Hallas discusses the political prospects for 1977 in some detail.

The signs of growing opposition to the Social Contract are there to be seen. The size of the turn-out on the 17 November demo was one such sign.

There are other signs. A mass meeting at Massey Ferguson’s Manchester plant voted for a four-month wage deal, running from April to July 1977, after which they intend to return to free collective bargaining. A motion opposing wage restraint was passed overwhelmingly by the 18,000 workers at British Leyland’s ‘Longbridge plant and will be discussed by stewards representing the whole combine in February. The rash of disputes over pay differentials in Leyland is another indication of the changing mood.

In July the Labour government will try to sell a third round of wage restraint. Everything that the pay policy was meant to prevent – mass unemployment, continued inflation, the fall of the pound – has happened all the same. There will be growing numbers of workers who will refuse to stomach more cuts in real wages as the price for such obvious economic failure on Labour’s part.

The test of the new Socialist Workers’ Party will be its ability to relate to the growing opposition to the government’s policies. The change of name reflects the International Socialists’ success in providing a focus for those who wanted to fight racialism and unemployment over the last year. We should face the tests to come with a real modesty. We are a very small party – the size of the 17 November demonstration shows how much greater the ability of even a section of the trade union bureaucracy to mobilise is than ours. But the opportunities to build and to grow provided by the crisis are there for us to grasp.

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