Tottering on the edge but never permitted to fall into the abyss

It has become fashionable again to speak of the contradictions of capitalism. Radical geographer David Harvey is writing a book about the 17 Contradictions of Capitalism (don’t ask why but critical economic thinkers like Harvey and Ha-Joon Chang with his 23 Things They don’t tell you about Capitalism seem to have this fascination with random numbers). For example, one of Harvey’s contradictions concerns market demand. One way to ensure demand is healthy in an economy is through high wages but if they rise too much they eat into profit. So, since the 1970s economies have definitively swung the other way, suppressing labour and trade unions and trying to restore profit. But that just creates the opposite problem, with employees whose wages are being squeezed unable to afford the products produced by firms and turning to borrowing as a consequence - creating the economic problems we are painfully aware of. That’s a contradiction – whichever way you turn under capitalism (a system in which employees and employers have conflicting interests), insoluble problems rear up.

But I want to talk about another contradiction of contemporary capitalism, albeit one which has attracted less attention, but is still a contradiction in the sense of attributes being in conflict with one another. That is modern-day capitalism’s instability, indeed worsening instability, countered by the determination of business representatives, politicians and the state to always stop it from collapsing completely. That is why, I would suggest, we inhabit this strange and conservative world.

Bubble Trouble

Capitalist instability is attributed by Keynesian and Marxian economists to the business cycle: competing firms produce more and more goods which eventually outgrow the ability of workers to consume them, glutting the market and causing bankruptcies and recession. Once this process of destruction has been played out, the process can start all over again. It is one of the features of the last thirty years that this instability has become chronic. Britain, for example, has suffered three major recessions and spikes in unemployment since 1980, in contrast to none between the end of World War Two and the mid-1970s.What has happened is that the instability of the business cycle has been supplemented by the greater volatility of a financialised economy. According to the Cambridge University economist Ha-Joon Chang, virtually no country in the world had a banking crisis between the end of the Second World War and the mid-70s. Between the mid-70s and late ‘80s, 5-10% of countries did. This grew to 20% in the 1990s and then to 35% with the onset of the 2008 global financial crisis.

Another way to look at this process is as a series of financial bubbles which went the way of all bubbles. “The thing you need to realize,” wrote Paul Krugman in August, “is that the whole era since 1985 has been one of successive bubbles. There was a huge commercial real estate bubble in the 80s, closely tied up with the S&L crisis; a bubble in capital flows to Asia in the mid 90s; the dotcom bubble; the housing bubble; and now, it seems, the BRIC bubble. There was nothing comparable in the 50s and 60s.”

The bursting of these bubbles caused major real world effects. The East Asian crisis of the 1990s, referred to by Krugman, precipitated mass unemployment in the region and more foreign ownership of companies in countries like South Korea. What he modestly calls the “housing bubble” became the 2007-8 global financial crisis whose effects are still being intensely felt now. But the point to keep in mind is that action by governments prevented these crises from following their natural free market course and becoming far more destructive than they actually were.

Don’t purge the rottenness out of the system

Marxian economist Andrew Kliman has pointed out that the 1930s Great Depression was the last time there was a genuinely free market response to one of capitalism’s periodic busts. Then US Treasury Secretary Andrew Mellon wanted to “purge the rottenness out of the system” by liquidating stocks, labour, real estate and farmers. “The amount of capital value that was destroyed during the Depression was far greater than advocates of laissez-faire policies had expected,” writes Kliman in The Failure of Capitalist Production: Underlying Causes of the Great Recession, “and the persistence of severely depressed conditions led to a significant radicalization of working people. Policymakers have not wanted this to happen again, so now they intervene with monetary and fiscal policies in order to prevent the full-scale destruction of capital value. This explains why subsequent downturns have not been nearly as severe as the Depression.”

If you want to see an example of “significant radicalization” that policy-makers are so desperate to avoid, look to Greece now, where both the socialist Syriza and Fascist Golden Dawn are on the rise, and in danger of eclipsing the conventional, capitalist parties. The suffering in Greece is politically created, as opposed to just being an outcome of economic slump, but it shows what the “full-scale destruction of capital value” could look like and bring in its train and why policy-makers are so terrified of universalising it.

The economist, Harry Shutt, has said the period since the 1970s has been characterised by a “progressive postponing of the evil day” on the part of ruling elites. The 1987 stock market crash was nipped in the bud by pumping money into the banks, the Latin American debt crisis resulted in public bail-outs, the response to Russian hedge fund crisis of the late ‘90s was a recapitalisation of financial institutions by the US government to the tune of $3.6 billion and when the dot.com share bubble burst in 2000, interest rates in the US were held below the rate of inflation for three years in order to encourage borrowing and avert a recession.

All these government interventions to stop capitalist busts following their natural course are dwarfed by what happened in 2007/8. A conservative estimate puts the cost to the public at arresting the crash at $7.7 trillion in the US and £1.5 trillion in Britain. There is a consensus that this intervention had to happen, governments had to stop this “sucker going down”, in the poetic words of George W Bush. Without action, companies would have been unable to pay their staff, ATMs would have not dispensed cash, trains and buses would not have run. The system would have collapsed, with untold and unpredictable human consequences and suffering.

There was political unanimity about the necessity of government intervention. For the Right and Centre and faux-Left, intervention meant “capital value” was saved. For the Left, intervention meant that the structures on which ordinary people depend for the livelihoods were stopped from going under. Allowing everything to be liquidated, as Andrew Mellon recommended in 1929, was not regarded as an option. Referring to Mellon, the famous left-wing economist, John Kenneth Galbraith wrote in 1954: “a developing depression would not now be met with a fixed determination to make it worse”. The contemporary mainstream Left, Right and Centre would all concur.

Groundhog Day

But, as a result of this consensus, little attention is paid to the consequences of the fact that complete collapse was not allowed to happen, that “full-scale destruction of capital value” was prevented: the huge insolvent institutions bailed out (which, if the market had had its way, would now be in the dustbin of history), simply said ‘thanks very much’ and went on acting in precisely the same way as they did prior to the crash occurring. That is why there is a Groundhog Day quality to the UK economic ‘recovery’ based, as it is, on rising house prices and household debt; factors which caused the crash in the first place. The only purging allowed is inflicted on those at the bottom of society – the unemployed, benefit claimants, the disabled. Those at the summit are the recipients of government intervention, not laissez-faire. Nothing was solved and nothing has changed, not least declining real wages which necessitate greater household debt for consumption to go on happening.

The processes that aim to re-balance the economy, which almost all politicians say they want, cannot happen because the dominant financial institutions, which in the years leading up to the crash made the economy so unbalanced, are still dominant - because they were artificially stopped from going bust. Instead of innovation and organic growth, you get stagnation, monopoly and the unalterered ascendancy of finance. Contemporary politics is characterised by a fervent desire for the benefits of capitalism, but an equally strong aversion to experiencing its negatives.

Looked at another way, it is possible to have the advantages of capitalism - healthy economic growth, innovation, new firms replacing old - but only if you accept periodic destructiveness and all that that entails. But, of course, the last time this destructiveness was allowed unbridled reign, in the Great Depression of the 1930s, the results were not only the immediate ones of mass unemployment, hunger and destitution but the later, though no less attributable ones, of Nazism, Stalinism and the physical annihilation of World War Two. Only after this orgy of destruction had played itself out could the so-called “Golden Age” of capitalism begin.

Thus there is a determination on the part of ruling elites to perpetually put a lid on the instability of capitalism for fear of what will ensue if they don't. But this inherent instability keeps bubbling up nonetheless. The question now is: are ruling elites merely (quite literally) buying time, in a futile attempt to avert a systemic meltdown that will inevitably happen eventually? Will the next one blow the lid off?

Note: I’m indebted to this article, Forever blowing bubbles, on the UK Independent Working Class Association site, which sparked the idea for this post.