December 1998

On the roots of today's global economic crisis

by Andrew Kliman

To understand the current crisis, we need to return to the world economic crisis that erupted in 1973. Since then, there has really been no recovery worldwide. Rather, the growth rate of per capita GDP (gross domestic product) has consistently fallen, never rebounding. The major exception had been in Asia, with its tigers like South Korea and upcoming tigers-to-be, like Thailand, growing at a phenomenal rate. But with the crisis they are reeling back.

Indeed, economies that together produce 40% of world output are already in recession or stagnant. But capital flight from Third World countries outside of Asia is still in process, so the crisis is still spreading to the rest of the world. An indication of how much capital is fleeing can be seen from the interest rates to obtain capital. A year ago, Third World governments needed to pay only three percentage points more than the U.S. Treasury paid. By October, the spread had become 15 percentage points!

In addition, commodity prices have fallen by 30% in real terms since mid-1997. In real terms, they're at their lowest level in 25 years, and industrial commodities' prices are at their lowest level since the 1930s! We could be heading for a world deflation, which could trigger bankruptcies and a financial collapse. Retail prices in Belgium, France, Germany, Switzerland, and Japan are falling, and wholesale prices in 13 of the 15 advanced industrialized countries are now declining.

AS JAPAN GOES...

The Japan situation is really the key one. Japan's is the second largest economy in the world, producing 7.7% of world GDP, and the hub of East Asia. Much of the present crisis has its origins in the collapse of the bubble of the 1980s in Japan. For the first time since statistics have been kept (the mid-1950s), Japan's GDP has now fallen for thee consecutive quarters.

As for the U.S., the major trouble signs-besides the widening foreign trade deficit from the crisis abroad-are the declines in corporate profits and the saving rate. Corporate profits, which are a key "leading indicator" (their movements tend to precede movements of the whole economy), peaked in mid-1997 and have fallen by 2% in the past year. Because of this, as GDP figures for the third quarter show, business investment has started to drop. As for the saving rate, it has fallen to all-time lows, and is now actually negative-U.S. consumers are spending more than their entire incomes on goods and services. This situation is completely unsustainable.

As the system undergoes its convulsions, capitalists are abandoning free-market ideology. Controls on capital flows and foreign exchange markets, which had been all but abandoned, are back in vogue and are winning some acceptance even among supporters of free markets. It is not an exaggeration to say that capitalists and their press are veritably pleading to be saved through government intervention. That seems to be why there's been such jubilation in the financial markets now that Alan Greenspan and the Federal Reserve have stepped in three times in two months to lower short-term interest rates. But as capitalists such as George Soros and financial economists such as Allen Sinai themselves concede, the policy-makers have no solution.

RETURN TO UNDERGROUND

This situation has led many on the Left to return to theories of underconsumptionism. They weren't very prominent during the economic crisis of the 1970s, but they are now undergoing a revival. Underconsumptionist works, such as William Greider's ONE WORLD, READY OR NOT and Robert Brenner's "The Economics of Global Turbulence" (published as a special issue of NEW LEFT REVIEW), are getting a lot of discussion.

According to these writers, capitalism is supposedly experiencing a "crisis of overproduction." The term "overproduction" is more or less a euphemism for "underconsumption." As Marx pointed out, however, "overproduction" is a tautology, not an explanation of crisis: if one says that more has been produced thanis demanded, one is merely restating the bare fact that there's a crisis, not explaining what has caused it.

But those who invoke the concept of overproduction usually want to imply more. They want to imply that overproduction occurs due to endemic underconsumption in capitalism, because production tends to grow faster than consumption. The latter is limited by the low incomes of the workers. So those who make this argument usually conclude that a better distribution of income, in favor of workers, will do away with the problem. They also imply that overproduction has occurred because of the anarchy of the market, the unplanned nature of private capitalism, so that state control over investment would solve the problem.

Yet to say that the anarchy of the market causes overproduction is to imply that capitalists are pretty stupid. They never learn from their mistakes, never learn that they shouldn't produce so much. It is true that they can't know in advance how much to sell. But why, when they guess wrong, do they always overproduce instead of sometimes overproducing and sometimes underproducing? It must be that they never learn.

It is true that under capitalism, production tends to grow faster than consumption. The underconsumptionists want to argue that this leads to crisis: if production grows faster than consumption, it must snap back; production must fall to the limit set by consumption. But why? Capitalists don't produce in order to meet consumption needs, but to make profit. And profit can be gotten just as well by selling to other capitalists (who buy machines and factories and materials) as it can by selling consumer goods. So the fact that consumption tends to lag behind production does not constitute a barrier to capitalism.

Consumption in fact sets no limit to production. Marx's schemes of reproduction, in Vol. II of CAPITAL, demonstrate that there is no such limit. Capitalist production isn't "ultimately" or "eventually" production for the sake of consumption, but increasingly production for the sake of production-as consumption lags behind production, more and more of the total production is production of goods that go back into production, like machines and materials. So if demand for these investment goods is sufficiently strong, the fact of underconsumption just can't cause crisis. And, thus, if there is crisis-demand for investment goods isn't strong enough-one just can't attribute this to underconsumption, since, again, the capitalists can and do sell to each other. It is important to recognize that underconsumptionism rests on a very severe logical fallacy.

But then why is there insufficient demand, if the reason isn't underconsumptionism? Marx, as well as Raya Dunayevskaya and others, argue that the tendential fall in the profit rate makes investment demand decline. It isn't a problem of demand in the market that is tending to depress the profit rate, but the reverse.

This also implies that the tendency of the profit rate to decline cannot be due to what's taking place in the market, which is its consequence. It must be due to what's taking place in production.

As Dunayevskaya wrote concerning Marx's theory, "The organic composition of capital produces, on the one hand, the decline in the rate of profit, and, on the other hand, the reserve army of labor. The inability of capitalism to reproduce its only value-creating substance sounds the death knell of capitalism." It is otherwise in Luxemburg's underconsumptionist theory, as Dunayevskaya wrote: "The socialist proletarian revolution, which, for Marx, is rooted in the MATERIAL development of the conflicting forces of capital and labor, here becomes a wish disconnected from the increasing subordination of the laborer to, and his growing revolt from, the capitalist labor process." (ROSA LUXEMBURG, WOMEN'S LIBERATION, AND MARX'S PHILOSOPHY OF REVOLUTION, p. 45, emphasis in original). In light of the resurgence of underconsumptionism, it is important to return to and restudy this chapter.

By exposing both the bankruptcy of free market ideology and the impotence of state action, the current economic crisis has brought new life to this perspective. For more than a half-century, Marxist-Humanism has argued that private-ownership capitalism and state-ownership capitalism are opposite sides of the same coin, and that neither variant of the system can overcome its crises. Capitalism's system of value production-which both variants have in common-must be abolished so that freely associated individuals can put production under their conscious and planned control.

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