Monday, November 11, 2013

Economics - Little Changes

Economics teaching at Britain's universities has come under fire from a leading academic who accused lecturers of presenting "things that are known to be untrue" to preserve theories that claim to show how the economy works. The Treasury is hosting a conference in London to discuss the crisis in economics teaching, which critics say has remained largely unchanged since the 2008 financial crash despite the failure of many in the profession to spot the looming credit crunch and worst recession for 100 years. Michael Joffe, professor of economics at Imperial College, London, said he was disturbed by the way economics textbooks continued to discuss concepts and models as facts when they were debunked decades ago. He said many reformers had called for economics courses to embrace the teachings of Marx and Keynes to undermine the dominance of neoclassical free-market theories, but the aim should be to provide students with analysis based on the way the world works, not the way theories argue it ought to work.

Even though we are the longest surviving socialist party in the UK, formed way back in 1904,  not too many have heard of the Socialist Party of Great Britain. It is rather a pity because across all those decades as the British and world economy ebbed and flowed with its periodic crises, the SPGB developed its analysis of recessions. For us worthwhile social change cannot come about blindly in knee-jerk reaction to events, nor in the role of passive bystanders as events unfold around us. What has become crystal clear is the extent to which the experts of capitalism, the self-styled "Masters of the Universe" possess little idea what they were actually buying and selling. Genuine social change will require more than just restricting executives' bonuses, or trying to improve regulation of the financial services sector, as many are calling for. Even when it is working right, even when it is booming, the market system fails miserably to do the one thing it claims as its unique selling point. Far from efficiently sending market signals between supply and demand, between producer and consumer, the market system sends confused, unreliable and skewed information. Capitalism won’t collapse of its own accord. But for many millions it has never functioned to start with. Instead the market system must be dismantled intellectually, ideologically and democratically. A genuine alternative society must be agreed before capitalism can start to be dismantled in reality, with alternative mechanisms emerging to replace both the market and the state.

Ahhh..We already hear some it comes, yet another out-of-date theory, compounded by the fact it is based upon the studies of 19th century thinkers - Karl Marx and Frederick Engels which is then even further confused by all the conflicting explanations, stemming from their writings, leaving the “socialists” squabbling and feuding over who possesses the correct party line. Over-Productionist, Under-Consumptionists, Declining Rate of Profitists, all claiming the authority of Marx and all vying for recognition since each theory means a political policy to be promoted in the hope of implementation. Therefore, the SPGB begs your patience and indulgence as we challenge your existing and widely held accepted views.

Not too long ago, we were all supposed to believe that the globalisation of capitalism and free markets was the route to freedom, peace and prosperity for all. Then, with scarcely an explanation, and somewhat out of the blue, the story changed.  The good times are over  and prosperity gave way to austerity.  Politicians rationalise it as "necessary pain". Just how should we understand the change? Why did the crisis appear as a bolt out of the blue? Why was it not expected or anticipated by any economist or mainstream commentator?

Capitalism is not primarily a system for producing wealth to meet consumer demand, but for making money. This is what business is all about: using money to make more money.  A capitalist institution  starts off with a sum of money, which they place into circulation in the expectation that it will return as a greater sum than started with. To this end, the capitalist enterprise buys means of production and labour power on the market, then puts these to work to produce goods, which it then takes to market in the expectation not just of sales, but of profits. If  successful in this aim, and if to remain solvent and successful and keep up with the competition, some must be  reinvested in yet more production, buying yet more labour power and means of production, to produce yet more wealth and, potentially, money profits. And then the cycle begins again, on an ever-expanding scale. The ABC of capitalist accumulation and capital circulation according to Marxian theory

The motive is not the satisfaction of consumer need – a relatively straightforward matter – but the production and appropriation of profits on an ever-expanding scale – a much more tricky thing to achieve. The health of the economy and our well-being now rests upon the ability of the capitalist class to make profits from the whole process. When they cannot make or do not expect to make a profit from production, or when they produce too much to sell profitably, they will not invest in production, but in speculation, or will not invest at all, and hoard money. This affects not just their own business, but the whole system of wealth production. Crisis, in this view, is not caused by any bogeyman such as the bankers, but is a necessary result of the process itself.

Mainstream economists and the consequences of some of the “Marxist” alternatives rather than question why our lives are held hostage by the needs of capitalist profits seek to find a way back to “business as usual” as Paul Mattick Jnr titled his book. The debate is between the needs of business, on the one hand, and the need to preserve social cohesion for the needs of business on the other. Businesses and policy-makers are damned if they do, and damned if they don’t. It’s no good  demanding jobs from a system that would happily give us the jobs if it could. But what are usually thought of as “socialist" policies from the Left are unlikely to work either. Many would say that Keynesian methods saved capitalism from a Great Depression  1970s and led to capitalism delivering generally and gradually improving prosperity for all and monetary policy moderating the ups and downs of the business cycle. Might the same tricks not work again and pull us out of our present crisis?  The cost was the rising level of government debt in all capitalist countries. In the 1980s and after this was joined by an unparalleled expansion of corporate and private consumer debt. What happened around 2007 was that this expansion of debt collided with the continuing failure of the capitalist economy proper to expand at a sufficient rate. The chickens of 1975 have come home to roost in the current depression. And since the Keynesian card has already been largely played, capitalist governments are now torn between fears of further unraveling of the private-property system and the dangers of further increasing sovereign debt.

The  DisproportionalityTheory

The Socialist Party’s view and part of its case for the need for socialism is that the mere existence of buying and selling always raises the possibility of crisis, but the drive to accumulate capital—the lifeblood of capitalism—ensures that periodically crises become very much a reality, and nothing the politicians do can prevent them. When capitalism is in boom, enterprises are in a position where their profits are rising, capital is accumulating and the market is hungry for more commodities. But this position does not last. Enterprises are in a perpetual struggle for profits—they need profits to be able to accumulate capital and therefore survive against their competitors. During a boom this inevitably leads some enterprises—typically those which have grown most rapidly—to over-extend their operations for the available market.

In capitalism, decisions about investment and production are made by thousands of competing enterprises operating without social control or regulation. The competitive drive to accumulate capital compels enterprises to expand their productive capabilities as if there was no limit to the available market for the commodities they are producing.

Growth is not planned but governed by the anarchy of the market. The growth of one industry is not linked to the growth of other industries but simply to the expectation of profit, and this gives rise to unbalanced accumulation and growth between the various branches of production. The over-accumulation of capital in some sectors of the economy soon appears as an overproduction of commodities. Goods pile up, unable to be sold, and the enterprises that have over-extended their operations have to cut back on production.

As commodities lie unsold revenue and profits fall, making further investment at the same time more difficult and less worthwhile. Accumulation stalls, saving and hoarding increase and the unstable forces of money and credit soon transmit the downturn to other sectors of the economy. The initially over-expanded enterprises cut back on investment and this leads to a fall in demand for their suppliers products, who in turn are forced to cut back, causing difficulty for their suppliers' suppliers and so on. Profits fall, debts mount up and the banks push interest rates up and contract their lending in a vicious downward spiral of economic contraction. In this way, what started as a partial overproduction for particular markets is turned into general overproduction with most sectors of industry affected.

Crises and slumps invariably follow this general pattern. Sometimes the initial overproduction takes place in consumer goods industries, as it did in 1929, and spreads from there. At other times, like in the mid-1970s the initial over-expansion is in the producer goods sector where enterprises produce new means of production like industrial steel or robotics equipment. In the slump of the early 1990s a major factor was the over-extension of the commercial property sector and some of the high-tech 'sunrise' industries. The current recession that began in 2007 sprung from asset prices becoming completely disengaged from what is happening in the real economy where wealth is produced and value created, and were only sustained by ever increasing amounts of indebtedness It couldn’t last – capitalism just doesn’t work that way.

Whatever the causes, the result is always the same—falling production, increased bankruptcies, wage cuts and rising unemployment, with an attendant growth in poverty.

In a slump there is simultaneously a problem of falling market demand alongside declining profits. Attempting to deal with one problem (say consumer demand) at the expense of the other (profits) as the Keynesians have, will not improve the situation.

A number of quite distinct and separate things need to happen before a slump can run its course. Firstly, capital has to be wiped out if excessive productive capacity is to be tackled with devalued capital being bought cheaply by those enterprises in the best position to survive the slump. Secondly, de-stocking needs to take place, with overproduced commodities bought up cheaply or written off entirely. Investment will not resume if overproduction still exists. Thirdly, after this has occured there needs to be an increase in the rate of industrial profit helped by both real wage cuts and falling interest rates (which tail off naturally as the demand for more money capital eases off in the slump.) This will help renew investment and increase accumulation. Also, if recovery is to be sustained, a large proportion of the debt built up during the boom years will need to be liquidated if it is not to act as a drag on future accumulation. Through these mechanisms a slump helps build the conditions for future growth, ridding capitalism of inefficient units of production.

When these processes have run their course, accumulation and growth can begin once more with capitalism again creating a boom situation which will be inevitably followed by a crisis and slump. This has been the history of capitalism ever since it first developed. No reform intervention by governments—however sincere—has prevented or can prevent this cycle from operating. The supporters of laissez faire and the free market have failed and so have the Keynesian interventionists. Today, when faced with the trade cycle, supporters of capitalism have nowhere to run.

Indeed, the trade cycle demonstrates the impotence of reformers and politicians, and is a further indictment of the capitalist system as a whole, bringing misery for millions of workers who lose their jobs, become bankrupt or have their wages reduced and have their working conditions worsened. And far from being an aberration, this cycle of misery is the natural cycle of capitalism.

The passage of a cyclical crisis described  by Rosa Luxemburg:
“Once a crisis is in full swing, then the argument starts about who is to blame for it. The businessmen blame the abrupt credit refusals by the banks, the speculative mania of the stockbrokers; the stockbrokers blame the industrialists; the industrialists blame the shortage of money, etc.”

She goes on with a portrait of the recovery:
“And when business finally picks up again, then the stock exchange and the newspapers note the first signs of improvement with relief, until, at last, hope, peace, and security stop over for a short stay once more. Modern society notes the approach of crisis with horror; it bows its head trembling under the blows coming down as thick as hail; it waits for the end of the ordeal, then lifts its head once more—at first timidly and skeptically; only much later is society almost reassured again.”

Recession is a natural part of the life-cycle of capitalism. Economists may be confused, and those who fashion financial models may be bamboozled, but capitalism is acting true to form.  Workers shouldn't waste their time trying to sort out this mess. The Socialist Party of Great Britain wants to get rid of capitalism, not reform or regulate it. That's why we exist.

Business As Usual: The Economic Crisis And The Failure Of Capitalism by Paul Mattick. Reacktion Books: 2011. 

What Is Economics by Rosa Luxemburg. See ‘Is The Economic Crisis Over?’ quoted at

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