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International Socialism, May 1977


Notes of the Month

Economic Prospects:
No return to the Sixties


From International Socialism (1st series), No. 98, May 1977, pp. 3–4.
Transcribed by Christian Høgsbjerg, with thanks to Sally Kincaid.
Marked up by Einde O’Callaghan for ETOL.


THE leaders of the major Western capitalist states meet this month in London to discuss what to do about the world economy. The answer they will come up with is, almost certainly: very little.

Yet all the signs are that the short-lived economic recovery which developed in the US in mid-1975 and then spread to Europe and Japan has run out of steam. The Organisation for Economic Co-operation and Development (OECD) predicts that the annual growth rate of real gross national product in the Western capitalist bloc will fall from 6 per cent in the first half of 1976 to 3.5 to 4 percent in the 18 months to December 1977. (OECD Economic Outlook, December 1976) It also estimates that by the end of 1977 unemployment in these countries will be higher than the 15.25 million reached when the recession was at its deepest in October 1975.


THERE will be no swift and easy return to the book of the 1950’s and 1960’s.

During the 1974–75 recession the governments of the strongest Western capitalist states – the US, West Germany and Japan – all introduced programmes aimed at stimulating their economies. These measures were responsible, in part, for the brief recovery of 1975–76.

But the recovery was accompanied by a renewed acceleration of the inflation that had been one of the main causes of the crisis in the first place. As a result, the US, West German and Japanese governments tightened their economic policies lest inflation escape control again.

The most dramatic example is the new Carter administration in the United States. Carter was elected on a platform that committed him to reflating the economy and reducing unemployment. Once in office he campaigned for the West German and Japanese governments to reflate their economies as well lifting their weaker brethren like Britain and France along with them.

It took Carter less than three months to abandon the package measures he had promised to revive the American economy. The reason: fear of inflation. In the first three months of 1977 consumer prices in the US rose at an annual rate of nearly 10 per cent. The Administration has now abandoned its target of cutting unemployment below 7 per cent, while it expects real growth will be slower – 4.9 per cent rather than 5.4 per cent. (Financial Times, April 26 1977)

Weak and strong capitals

THE revival of inflation is a sign that the recession did not solve any of the problems facing the Western capitalist economies. The tools used by governments to manage their economies during the boom – tax cuts, public spending – are powerless to solve problems that are rooted in the structure of modern capitalism.

In the ‘classical’ business cycle of pre-war years prices fell during recessions. Today this is no longer true. At best, in countries like the US, West Germany and Japan the rate at which prices rise slowed down during the 1974–5 recession. But, at the first sign of recovery, inflation revived. The reason is that the mechanism that caused prices to fall during recessions no longer operates. Prices used to fall because firms would go bankrupt; their plant and equipment would be bought up cheap by their competitors and their workers would join the dole queues, helping to weaken resistance to wage-cuts. But today the size of firms is so great that their collapse would often threaten the survival of individual capitalist states as independent economic entities. So the state steps in to rescue firms threatened with bankruptcy, and while jobs and output fall, prices continue to rise.

So long as the permanent arms economy served to stabilise the system, inflation was a manageable problem. But as the proportion of arms spending in the gross national product fell, in the 1960s, the cycle of boom and slump revived. The effect of the arms economy’s decline was to synchronise the cycles of individual economies as international competition intensified, so that all the major Western capitalist states went into recession or boom at the same time. The result during the very sharp boom of the early 1970s was to increase inflationary pressure, as American, Japanese and European capitalists competed for money capital and raw materials, bidding up interest rates and commodity prices.

During the recession, the weaker economies have been forced to adopt the policies of the stronger ones. In 1974–5 the governments of Britain, France and Italy all pursued policies that were much more expansionary than those of the US, West Germany and Japanese governments. They did so out of weakness, which compelled them to step in and prop up lame ducks on a larger scale than was necessary in the stronger economies.

The above-average inflation rates, the balance of payment deficits and the falling exchange rates that resulted forced the French, Italian and British governments to cut back on public spending and control wages. The role of the IMF, in which the US Treasury plays a decisive role, in enforcing these policies on Britain and Italy is well known. France’s economic difficulties have meant the end of the old Gaullist dreams of national independence (one reason for the split in the French ruling bloc between Giscard and Chirac): Carter recently commented on Giscard’s new ‘co-operative’ attitude.


BUT if the crisis has strengthened the position of US imperialism within the Western bloc, the underlying problems affect weak and strong capitals alike. The major Western capitalist economies all suffer from a deep-seated crisis of profitability (see Notes of the Month, International Socialism 94). Milton Fisk elsewhere in this issue analyses the fall of the rate of profit in the US. In West Germany the average rate of return on capital fell from 14 per cent in 1960 to 6 per cent in 1975, well below the rate of interest paid owners of long-term government bonds (OECD Economic Survey: Germany, May 1976).

The crisis has not reversed the long-term decline in the rate of profit, even though OECD estimates that profits could have risen in the US, Japan, West Germany and Britain by as much as 20 to 30 per cent in 1976. Workers paid for this increase in profits with a fall in real wages as prices rose faster than wages and an above-average improvement in the productivity of labour. But, although the mass of profits has risen, the rate of profit remains depressed.

Japan is a good example of the problems facing Western capitalism as a whole. The recovery of the Japanese economy in 1976 was a product of massive export-led growth. Sales to the US went up 37 per cent and to Western Europe 39 per cent, while the import bill rose only by 16 per cent. The result was a record trade surplus in 1976 of 11.18 billion dollars. (Financial Times, April 19 1977) Yet the story will be different this year. This is partly because the world economy is slowing down again and partly because of a revival of protectionism as the US and the EEC try and keep out Japanese cars, television sets and steel.

The prospects for the Japanese economy are grim indeed. Industrial output is falling. Industrial investment will rise only 1.3 per cent in 1977, in other words, once inflation is taken into account, it will fall. (ibid., April 7 1977)

The picture is the same across the Western capitalist economies. Investment – the fuel of the capitalist economy – is drying up. The reason is that the profits capitalists expect from their investments are too low to be worth the risk. In Japan money profits are still 20 per cent below 1973 figures. (ibid., April 25 1977) The OECD estimates that the increase in private investment in the EEC countries will be lower in 1977 than in 1976. Even in the US, where the recovery appears stronger than elsewhere, orders for capital plant and equipment fell in March. (ibid., April 30 1977)


THIS analysis is not an invitation to sit down and wait the inevitable collapse of capitalism. If workers will pay the price – the massive increases in unemployment and in the rate of surplus value necessary to offset the decline in the rate of profit – then the system can recover temporarily.

In Britain the Labour government has little room for manoeuvre. Inflation has been running at an annual rate of nearly 20 per cent in recent months. The latest forecast by the London Business School predicts that price rises will not fall below 10 per cent before 1980 and that in the second half of 1977 output will fall while unemployment rises to an official figure of 1.5 million. The authors of the forecast argue that the remedy is ‘that the share of wages in the economy must fall if the return on capital is to be sufficient to encourage domestic and overseas investment’ (Sunday Times, April 10 1977)

In other words, British capital needs Phase Three. This is at a time when, as one economist put it: ‘The past 12 months have almost certainly seen the sharpest fall in the real living standards of Britain’s working population in any year for at least a century, including the wars. Indeed, to find any comparable fall, it would probably be necessary to go back to the eighteenth and early nineteenth century.’ (Observer, May 1 1977)

Can the Labour government and its allies in the trade union bureaucracy head off the rank-and-file rebellion against the fall in living standards? This is the subject of the next Note.

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