This is an odd sort of crisis for a Marxist. If you had read Marxist crisis theory at a fairly abstract level, I think you would be a bit puzzled by this crisis. It’s not about falling rates of profit. Profit rates have been rising.
It’s not about a profit squeeze. It’s not the case that wages have been squeezing profits. In terms of the classical parameters of Marxian discussion, we come back to disproportionality. That seems to fit what has been going on a bit better. More generally one would say from a Marxian point of view that this crisis is the anarchy of the market showing itself in a particularly dramatic form.
But that’s all. And I wouldn’t exaggerate it. There will be some pain, but capitalism will survive the pain, and there will be a much more interventionist approach by financial authorities in the USA and around the world to regulating finance and investment banks. Ben Bernanke at the Fed [US Federal Reserve] is going to do pretty much whatever it takes, together with Hank Paulson at the US Treasury, to make sure that the system does not run out of liquidity.
There are many accounts today drawing parallels between the present situation and the late 1920s. Some of those parallels are quite interesting, to do with consumer debt, buying on margin [borrowing to buy stocks and bonds and hoping to make money on rises or falls in price], and a credit crisis spreading into the rest of the economy. But there is a lot that is different, too.
Bernanke, as an academic economist, made his reputation in the study of the Great Depression. The general view is that the Great Depression was turned from an ordinary cyclical downturn into a Great Depression by the bank failures in the USA. Bernanke and the Fed and the US Treasury are not going to allow those bank failures to happen now, even if they have to (in effect) nationalise all the bad debt.
There will be a recession, but I wouldn’t exaggerate it. There will be a lot of pain in financial houses in the City and on Wall Street, but I think most people will say “serve them right”; and the interesting question for the future is the extent to which the financial institutions will be made to bear responsibility for the mayhem they have created. That’s an open question. The Bank of England, for instance, took a very tough line over Northern Rock shareholders. Bear Stearns shareholders in the USA did a bit better, but not brilliantly.
Is this a crisis of liquidity, or is it a crisis of solvency? [I.e. is it a crisis of people and firms not being able to get hard cash in time to cover the payments they have to make, or of them not having enough assets, liquid or illiquid, to cover their liabilities?] The central banks are determined to make sure a crisis of liquidity is resolved, by just pumping liquidity into the market, but will allow any institution that turns out to be insolvent to go bust. We’ll have to see if that works. There are clearly risks, but my guess is that the underlying economy is stronger than a lot of the doom-sayers in the press claim.
I could be wrong. It’s quite possible that the banks are hiding things, and there are nasty surprises still in store. Financial markets will be volatile for some time, until all the bad debt is out in the open. But the crisis does not look that dramatically severe to me.
The capitalist financial system of today can be more crisis-prone. It is not necessarily so. It depends on how it is regulated. The greater the pyramiding of financial assets, the greater the disruption if something goes wrong. But something has to go wrong for that to happen; so the real issue is, what will go wrong?
Lots of things can go wrong, but whether they will or not is another question.
What’s happening now is basically that the US housing market was in a bubble, and that bubble has been pricked. It is unclear now what the effect will be. It is clear that the way in which that housing debt was securitised [bundled into pieces of paper giving titles to income, and traded on financial markets] is going to be much more heavily regulated in future.
Closer regulation does not rule out some new fancy financial manipulation producing some new form of assets which can be sold on with similar problems. We don’t know. The problems that exist at the moment result from a mis-selling of mortgages which seems to me virtually to have amounted to fraud, but I imagine that won’t be allowed to happen again.
At present, because the banks are reluctant to lend to each other, the [high] interest rates that the banks are charging have become “decoupled” from [low] official interest rates. The British government is in two minds about this. It wants interest rates down to mitigate the risk of recession, and at the same time it wants interest rates to stay high so that house prices fall.
When markets correct, they generally overshoot. But it doesn’t seem likely to me that the pain in consumer credit markets is going to spread significantly into firms’ production and investment plans. Obviously it is spreading into retail trade. John Lewis, for example, is reporting figures that look very grim compared to last year. But John Lewis is saying that it will ride it out, and I think that is what will happen.
On a world scale, profits are quite high; growth rates in most parts of the world are quite high. It doesn’t look like a crisis with a capital C.
The early 1970s marked the end of what is called the Golden Age of capitalism, the era of post-World-War-2 expansion. Then we had a period of five to seven years in which things were open. Things were getting increasingly difficult for capital; labour was quite well organised, and was resisting moves by capital to resolve the crisis in a direction favourable to capital. The rate of profit was collapsing.
There was a major turn about 1979-80. It was symbolised by Paul Volcker’s raising US interest rates in 1979; the election of Reagan in 1980, and his attack on the air traffic controllers’ union; by the election of Thatcher in Britain in 1979; and by Mitterrand being forced to abandon his “socialist” experiments in France (or what were called his “socialist” experiments) in the early 1980s.
All round the metropolitan capitalist world, there was a major shift in the balance of forces towards capital and away from labour. Since about 1982, the rate of profit has recovered.
In the USA — I haven’t explored this for other countries, because the data is much harder to get hold of — the rise in the rate of profit [profits as a rate of return on assets] has been not reflected in an equivalent rise in the profit share [profits as a percentage of total income]. The rate of profit would have risen higher, with a rise in the profit share too, were it not that a lot of what might be called profit income was diverted into the pockets of the wealthy.
There were huge increases in pay at the top of the distribution, while for about 83% of employees real wages per hour were stagnant from about 1978 to 1997. These inequalities, and their corrosive effects on society, are slowly, slowly coming more to the forefront in political terms.
The rate of profit bottomed out in the early 1980s and, broadly speaking, on a long-term trend, has been rising since then. And the statistical measure fits with everything else we know. The working class has taken a hammering in almost all metropolitan countries in the last 20 or 25 years in terms of labour organisation, income, and so on.
The US statistics allow you to distinguish between workers who have no supervisory role, who are about 82% of the employed population, and the top 18%. Looking at IRS [US Inland Revenue Service] statistics, we find that the major changes have taken place right at the very top of that 18%, among the top one per cent or one-half per cent.
The share of productive labour [in the Marxist sense, i.e. of labour producing surplus value] in total labour in the USA remained roughly constant in the last two decades of the 20th century. The share of unproductive wages has dramatically increased, and that is largely driven by increased pay in legal service, finance insurance and real estate, and business services.
In terms of hours, the share of unproductive labour in the USA has not risen; but many unproductive workers are paid a lot more.
There’s been a huge change in the balance of power within capital, which is often summed up in terms like financialisation. Since the early 1980s the resurgence of capital has also been a rise of finance, and that is to do with globalisation and the new facilities to shift large amounts of money around electronically.
However, it would not be quite right to talk of this as a successive struggle of finance capital versus industrial capital. They are much more intertwined than that picture would suggest. Rather, the nature of capital has changed, with finance becoming much more preponderant.
Why then have interest rates often been low over the last decades? To ask that question, I think, is in effect to revert to the picture of two capitalist interest groups, finance and industry, in conflict. I don’t think that is accurate.
There’s been a celebration of markets, of money-making, of individualism, of greed, and so on, which is associated with a significant change in the way in which capital presents itself. Finance capital now mainly works through the extraction of very large fees for providing advice in mergers and acquisitions. The extraction of financial income works via interest rates less than it used to.
What about the theories of the relative decline of the USA? The US economy is the most powerful economy in the world, and one of the most resilient economies in the world; and it will remain that way for some time to come. Relatively speaking, the US economy is in decline. You cannot have a China growing at 10% a year for 20 years without effects on the balance of world economic power. The growth rates of China, India, and latterly Brazil — the so-called BRICs — are significant, and will have effects. You can see that in the way that China is operating in Africa at present, and securing resources in a way that was inconceivable 20 years ago.
I don’t think the dollar is as powerful as it was in international markets. The euro is looking like a much stronger currency. Increasingly, those who run the treasury departments of central banks, particularly in the Far East, are looking very hard at their dollar portfolios, and asking whether they are a sensible long-run home for their assets. The dollar is significantly weaker as a world currency than it used to be. But that has happened over a long period of time. It’s a slow process.
A catastrophic slide of the dollar does not seem likely to me. It is always possible, but it would be so disruptive and so much against every individual country’s short-term interest, that it is unlikely to happen.
A lot of the discussion around this issue is very ultimatist, as if we must either have one thing or the other. But maybe not. There will be some disinvestment from dollar assets, but assuming that the USA does recover from the turmoil, then funds will flow back into dollars again. I don’t think it’s the final catastrophe. I’m very much opposed to that way of looking at things.
But a crisis can be a catastrophe without being “the final” catastrophe...?
I think the dollar will fall. I think people don’t recognise, however, how much the dollar has already fallen, and how much the US balance of payments has already improved. It is still pretty terrible, but it has improved massively over the last five years.
In fact, the dollar could rise in the medium term against the pound. Of course, these things are not certain. If they were certain, we’d make a fortune on the money markets.
I think the difference in policies between the US Federal Reserve and the European Central Bank is in large part down to different circumstances. There isn’t a housing bubble in most of Europe. In the USA, more inflation might not be such a bad thing; it could bring down real house prices with a smaller fall in nominal prices. That’s one reason why the Fed is more relaxed about inflation: it sees it as a way of easing some of the price adjustments that would otherwise be more painful.
In Britain, of course, there is a housing bubble, and it looks as if it will be punctured. It is still early days, as yet. Nationwide is predicting a year-on-year fall in nominal house prices. How far will that go? It remains to be seen.
• 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.