The world economic crisis took a sharp turn for the worse in September 2008. Some of the Marxist economists who had discussed the crisis in our first series of interviews, March-July 2008, have commented again. In this interview: Simon Mohun.
You've argued that out of this crisis we may see capitalism move to a set-up more like 1945-73. However, though there is a lot of talk about regulation, it's all about regulation of the sort designed to stop banks taking unsustainable risks, rather than direction of investment, planning the development of a national industrial base, and so on. Governments are nationalising banks, but still privatising utilities and services.
I wanted to point to the idea that the neo-liberal model is clearly bust. People don't believe any more in leaving everything to the free reign of markets.
It is not at all clear how this will play out in terms of government policies. At present the policies seem to be focused on providing state guarantees to institutions which are insolvent. (In parenthesis: these interventions always appear to be too little and too late. And of course they will always appear as too little and too late until the economy turns around).
The government does have a view that more regulation is required; and is proceeding with such regulation as if the world has not really changed. Northern Rock appears to be being given a more dynamic loans policy which it has to pursue, and the government stake in other nationalised banks is being increased; but these banks are being governed by a "hands-off" structure in which personnel are drawn from the people who got us into this mess in the first place.
However, I cannot see how the neo-liberal world order will be re-established. That means that all sorts of questions and spaces for political action are opened up in a way that has not been the case for 30 years. Therefore, it is quite possible that we will see a move to a much more state-managed economy, with much more emphasis on consensus as to how the economy should be run. This could take an unpleasant corporatist form. It could take some sort of traditional social-democratic form. It could look like the German social market economy.
It does not look likely at present that it will take a Scandinavian-type social-democratic form, because neither this government, nor any likely future government, wants to do anything serious about the huge inequalities that have arisen in society in the last thirty years.
The future is unpredictable. It is all up for grabs. And it really all depends on the pressures the left is able to put on to… towards - well, at the moment, fairly minimal social-democratic goals, like greater equality and greater equality of opportunity.
Are you postulating as a likely outcome, also, the return of exchange controls, fixed exchange rates, and so on, as between 1945 and the 1970s?
Yes and no. No, in the sense that there appears to be little pressure at the moment for curbing international capital mobility.
At the same time, I think it is quite likely that Britain will be forced to join the euro, and there you have several economies with a fixed exchange rate between them. It's quite likely that there will be a move towards creating large blocs of countries with fixed exchange rates between them.
What will happen, then, to relations between the euro and the dollar, for example, is another question. I have no idea.
The Financial Times reports that you can deduce from market movements that financiers reckon on a 30% probability of one or another country currently in the euro being forced to abandon it. And currencies previously pegged to the dollar, like the Chinese renminbi, have drifted further away from it.
In trying to think about the future, we have to use the distinction popularised by Donald Rumsfeld, between known unknowables and unknown unknowables.
Economists tend to say that this is the distinction between risk and uncertainty. Risk we can try to quantify by using probabilistic methods, uncertainty we can't.
Will a country leave the euro? I have no idea whether that is a (quantifiable) risk or an (unquantifiable) uncertainty, and I don't believe anyone else does. But if a country should decide to leave the euro, then my guess is that there would be a unsustainable run on its currency. Because of that, I don't think that any country will leave the euro.
Will the dollar collapse at some point? Everyone thought that because of the structural weaknesses in the US economy, the dollar would be weak now. Rather surprisingly, it has proved to be strong, as wealth-holders have flooded into dollar assets, particularly US Treasury bonds, as safer assets in a period of turmoil.
There is a view that this cannot go on for ever, and at some point the dollar will weaken and even collapse. Weakening is not a significant problem; collapse certainly is. If that happens, it's impossible to know what the consequences will be, but they will be very nasty, because the US is still a quarter of world GDP.
Relatedly, another big unknown is the Sino-US relationship. Rebalancing the world economy requires much more Chinese domestic consumption (and in order that Chinese consumers save less, there will have to be better social security, medical insurance, pension provision, etc.) and much more domestic US saving. These are very big changes which will need time to be implemented. What all this means for the dollar-renimnbi relationship remains to be played out.
Do you see anyone in government circles beginning to propose the sort of reshaping of capitalism which you think likely?
No. But it may be that one lever to get changed policies in place will be the environment question. One of the things needed is, not an extension of the carbon trading which we have at present, but a big carbon tax. Apparently one of the issues which has paralysed the Government up until now is the feeling that it cannot afford politically to impose a tax increase.
One of the ways to tackle the growing inequalities would be big taxes, especially income taxes, on the rich, and tax cuts at the lower ends of the distribution. That appears to be politically impossible to propose, despite the popular venom against bankers' bonuses. It may be that a carbon tax is the way to get acceptance that serious tax changes are needed to promote a more equal society.
However, the Government has, quite incredibly, just approved a third runway for Heathrow.
When we talked last year, you were expecting the crisis to be relatively small. That made sense if you looked at the scale of the US subprime mortgage liabilities - large in absolute terms, tiny in relation to the financial system as a whole. With hindsight, what can we identify as the elements which led to a relatively small disturbance triggering this huge crisis?
That is a difficult question. I have to hold my hands up and say I was wrong. It is clearly a much deeper crisis than I thought a year ago, or even six months ago. The world economy fell off a cliff when Lehman Brothers was allowed to go bust; but I still haven't seen a good explanation of other than seizing up of credit markets, and I still don't really know why aggregate demand fell so quickly.
I've seen some work on the US economy, looking at the situation of the people who were lent the subprime mortgages. Why did they default?
There is story going round which says "it's the fault of all of us. We were all too greedy. We all borrowed too much". In the USA, a big proportion of earners had been very stretched for a long while. The political process of deregulation and liberalisation, together with stagnant real wages, has led to costs like education, child-care, and health-care taking larger proportions of essentially fixed household budgets.
It could just be that so many people were stretched that rather small changes in asset prices were sufficient to trigger major collapses in household budgets. There is no firm evidence for this, but it is an interesting line for research, especially for us on the left. There is a culture of "blame the victim", and maybe the victim wasn't to blame.
It is not clear to me that the crisis is anything other than an indication of how dependent the modern economy is on flows of credit. I always knew that theoretically, but to be confronted with it empirically is something of a shock.
When we talked earlier, you thought that the price rises for oil, wheat, and so on [the "Brent crude" oil price rose from $51 to early 2007 to $145 in late summer 2008] were rooted in fairly long-term supply-and-demand factors. Since then we have seen those prices fall sharply ["Brent crude" oil down to $38 in late December 2008, though it has risen since then].
I still think I'm right about that. It is clear that large speculative positions were taken in some of those commodities [i.e. people bought large advance contracts on them, expecting price rises; and that buying, in turn, pushed the prices up].
These commodities are fairly limited in supply. When demand drops, prices can fall precipitously [because supply cannot quickly be reduced to match]. But the world economy will in due course recover. The big oil companies have spent very little in the last 20 or 30 years on exploration and on adding new refining capacity. I would expect the oil price to rise very fast once recovery starts, and I would expect the same with other commodities too.
When the oil price was going up, many writers said that the rise was chiefly driven by speculation. I thought at the time that the price rise was too large and too well-established for that to be true. But maybe I was wrong.
I'm sure that there was a speculative bubble. Trying to pick exactly what of the price rises was due to speculative activity and what to more long-term trends is almost impossible.
A lot of oil-price speculators will have got hammered by the price falls. Attempts to corner the market in commodities with a limited supply are tempting, but almost invariably unsuccessful. The last one I know is the Hunt brothers' attempt to corner the silver market in 1980. It looked as if it was going to work, but then failed spectacularly. [The silver price went from $5 an ounce in early 1979 to a peak of $54 in early 1980, then collapsed back to $10.80 in March 1980. The Hunt brothers were bankrupted and convicted on charges of manipulating the market].
There are two prices why prices move: "economic fundamentals" and "market noise". There will always be market noise, and within that there is a short-term tendency that if prices are rising they are more likely to go on rising; if prices are falling, they are more likely to go on falling. In the long run the opposite is the case: long periods of price rises tend to be followed by long periods of price fall.
It is very difficult to predict the "market noise", so the only realistic approach is to step back and focus on the "economic fundamentals".
The oil market is an unstable market. There will be speculative swings, but they will be around a trend line built on "economic fundamentals", and that trend line is upwards.
You have said that financialisation involved a big change in the balance of power within capital, but also that it is wrong to see that as a struggle of finance capital versus industrial capital. So - a big change in the balance of power between whom and whom?
A change in the balance of power between those whose positions rested on liberalisation and the rule of free markets and minimal government intervention, and those who would prefer to operate in a more managed, "corporatist" world, like, say, steel companies.
Many, many industrial companies have substantial financial portfolios, so I still think it's wrong to see a simple split of interests between the financial world and the industrial world.
Would one sector be the more globally-oriented corporations, who might even prefer a more managed environment but know that there is no mechanism for getting it on a world scale, and the other firms focused on domestic markets?
Possibly. But I think the left has to be very careful about lining up with small business against big business. Politically, that would not be very astute.
Of course. Do you think that the balance of power is shifting back, towards sectors of capital more interested in economic management by governments?
It is too early to tell. There is a widespread recognition that free markets have been shown not to work well. What happens as a consequence of that recognition is still open. We don't know.
The world of laissez-faire and the Gold Standard was pretty much shot as soon as the First World War happened. Yet a big shift in government orientations [to Keynesian policies] did not come for a long time after that. Do you see a similar delay as likely now?
The problem with looking backwards like that is that it is difficult to disentangle the intertwining of economics and politics. In the British case, for example, the period between the two World Wars was one of a consistently rising rate of profit.
The way I see the pattern, moves to establish a new international order happens towards the top of a period of rising profit rates. The mechanisms used to establish the new order will probably be different in every case.
It is true that the Gold Standard was effectively destroyed by the First World War. It staggered on, limply, until 1931, when it completely disintegrated, but it was not replaced by anything until the late 1940s.
Why did it take so long? There was the Second World War. There were all sorts of particular historical conjunctures.
If we look at the period from 1980 to 2000 as a recovery of the rate of profit, then in terms of historical parallels it is time for some sort of major change in global capitalist arrangements. But it's clearly not going to happen in the same way.
In capitalist development over the long term, we tend to get free-market, neo-liberal periods which coincide with broad, long-run, rises in the rate of profit; and more "managed" periods which coincide with long-run falls in the rate of profit. That has happened in the past. Whether it is an immutable pattern of capitalist development is difficult to say.
The future is unknowable, and is partly down to us and our political activity.
• January 2009. Simon Mohun has done extensive research on the development of productive and unproductive labour (in the Marxist sense, i.e. labour which does not produce surplus value), especially in the USA. He is a professor of economics at Queen Mary University of London. He spoke to Martin Thomas.
