For the first time in its history, capitalism does not have any means of deliberately getting out of a crisis.
THE present crisis of the advanced capitalist world differs from any preceding crisis; it represents a climacteric for capitalism, a major turning point in its entire history. For the first time in its history not only does capitalism not have any means of deliberately getting out of the crisis and initiating a new boom, but no such possible means are even visible on the horizon.
Laissez-faire capitalism in any case does not have any internal mechanism that would automatically end a crisis and start a new boom. The level of output and employment in such an economy depends upon the state of confidence of the capitalists. When their state of confidence is low, they refrain from undertaking investment expenditure, which keeps employment and output in investment goods production low; this, in turn, keeps down the demand for consumption goods, and hence the employment and output in the consumption goods sector. Thus the total employment and output in the economy is governed by the state of confidence of the capitalists, and a crisis is characterised by a particularly low state of confidence. In a laissez- faire capitalist economy caught in such a crisis, no internal mechanism exists for suddenly turning around the state of confidence, and hence for ending the crisis and starting a new boom.
Some would argue, against this, that new innovations are forever forthcoming, crisis or no crisis; and as new innovations become available, the prospects of profit-making, by introducing such new innovations before one's rivals have done so, improve. This leads to a revival of investment, and hence of employment and output, even in a laissez-faire capitalist economy caught in a crisis. This argument, however, is untenable: the sheer availability of innovations does not lead to their introduction into the production process, and hence to larger investment, if the capitalists' state of confidence is low, which it is in a crisis. Several innovations, for instance, appeared in the inter-War years, but far from overcoming the Great Depression, they did not get introduced because of it. Hence the proposition that a laissez-faire capitalist economy lacks any internal mechanism for overcoming crises remains valid.
Historically, the fact that capitalism has overcome crises, and that too fairly quickly, is because it has not been laissez-faire capitalism of the textbook kind. It has had access to external props which it has used to overcome crises. In the entire period before the First World War, the colonial system provided such an external prop. Colonial markets such as India were available on tap; British goods could be sold in the Indian market at the expense of local products (while Britain's own market was open to European goods) and the surplus extracted from India, that is, the excess of what was taken from India over what it absorbed, went to the temperate regions to which Europeans were migrating, to constitute Britain's overseas investment. By the First World War, however, the capacity of the colonial system to provide such an external prop had got substantially exhausted.
In the post-Second World War period, state intervention in demand management, which had been suggested by John Maynard Keynes, constituted the new external prop which quickly overcame incipient crises. In fact, the reason why the Great Depression of the inter-War period was so protracted and painful is that capitalism in that period was between external props and, for that very reason, without an external prop.
What is true of the present crisis that makes it comparable to the Great Depression is that capitalism now is once again without any external prop; where it differs from the Great Depression is that there are no obvious external props on the horizon. State intervention in demand management, which had been undermined outside the United States earlier, has now been finally buried in the U.S. itself, with Barack Obama's agreement with the Republicans to cut the fiscal deficit, and the downgrading of U.S. public debt by the credit-rating agency Standard & Poor's (S&P) because even this agreement is considered insufficient. While state intervention is being buried, there is nothing to take its place.
The introduction of state intervention in demand management itself had not been easy. In 1929, Keynes had advocated, through Lloyd George, the leader of the Liberal Party to which he belonged, a system of public works financed by fiscal deficit to take care of the unemployed, whose numbers then were just about half of what they were to become in the trough of the Depression. But the British Treasury, under the influence of the City, the seat of British finance capital, turned down the proposal on the grounds that any violation of the doctrine of sound finance, which held that governments should balance their budgets (these days the doctrine, enshrined usually in fiscal responsibility legislation, allows a small fiscal deficit relative to gross domestic product, or GDP), was unproductive. Keynes himself saw the doctrine of sound finance as just bad economics; but underlying this bad economics was class interest.
The humbug of finance'Any system that would require state intervention to rectify its functioning admits ipso facto to being internally flawed. A recognition of the need for such intervention undermines the social legitimacy of the capitalists: if the state can ensure full employment which cannot be reached otherwise (contrary to what orthodox economic theory taught), then the state can run enterprises as well; the necessity of a class of capitalists then disappears, and their state of confidence ceases to matter. Among capitalists, the segment that deals with finance and hence is substantially engaged in speculative activities feels particularly vulnerable to any undermining of the social legitimacy of the capitalists since it constitutes what Keynes called the class of functionless investors. Finance capital, therefore, is particularly opposed to state intervention even when no additional taxes on capitalists are involved, that is, even when such intervention, in the forms of larger state expenditure to stimulate demand, is financed by a fiscal deficit. The doctrine of sound finance which expresses this opposition has been aptly called by Joan Robinson the humbug of finance.
Finance capital's opposition to larger state expenditure disappears, however, if the threat to its hegemony arising from loss of social legitimacy becomes irrelevant. This happens under fascism, where it has direct control over the state and no possibility exists, as Kalecki put it, of a next government. This explains why the first countries where larger state expenditure occurred for building up the military apparatus and which therefore climbed out of the Great Depression were military-fascist Japan and Nazi Germany.
Among the liberal capitalist countries, the U.S. under Roosevelt did introduce the New Deal for stimulating the economy through state expenditure, but the moment there was some recovery, pressure from finance capital made Roosevelt cut back on the fiscal deficit, plunging the economy into a second recession in 1937 from which it recovered, like other liberal capitalist economies, only when war preparations began against the fascist threat. It was only after the War, from which the working class had emerged politically stronger (an indicator of this in the advanced countries was the rise of Social Democracy) that state intervention in demand management became established; and even then, taking these countries together, the most significant component of aggregate state expenditure was military expenditure in the U.S., to which corporate and financial interests are much less opposed.
The process of centralisation of capital, leading to the present situation of synchronous global movements of finance, and the formation on this basis of what has been called international finance capital undermined even this regime of state intervention. Since the states in question were nation-states, while the finance capital in question was international, the former lacked the capacity to withstand pressures from the latter. Policies pursued by the nation-state, which went against the caprices of finance, ran the risk of financial outflows from the economy, precipitating liquidity crises. States therefore took pains to appease finance, and one manifestation of this was the return to sound finance, which negated the ability of the state to stimulate demand in the face of incipient crises.
U.S.' stimulus packageThere was one exception to this, the U.S. Its currency being considered as good as gold by the world's wealth-holders (despite its de jure delinking from gold with the collapse of the Bretton Woods system), and also being the medium in which much of the world's wealth is actually held, any significant and sustained capital flight from the U.S. was unthinkable, which therefore gave its state a degree of freedom in running fiscal deficits not enjoyed by any other capitalist state. Whether it exercised that freedom or not, it had it: finance might politically influence U.S. policymaking to keep the deficit restricted, but it could not browbeat the U.S. state into doing so. Not surprisingly, after the 2008 crisis, the U.S. provided a stimulus package, which, though exceedingly modest relative to requirements, was nonetheless the most significant among advanced capitalist countries.
Even this stimulus, however, is now being withdrawn, which brings to a final conclusion the era of state intervention in demand management, by ending it even in the one economy that enjoyed some leeway in this regard. The pressure of finance capital, operating through both the major parties in the U.S., has produced an agreement between Obama and the Republicans which seeks to cut down this deficit by $1 trillion through the government's own measures and by a further $1.2 trillion on the basis of the recommendations of a bipartisan committee of Congress. Much of these cuts are likely to be effected at the expense of the poor, since Obama has promised to continue with the Bush-era tax cuts for the rich (which together with the big bail-out packages for finance after the 2008 crisis are responsible for the build-up in government debt that finance, ironically, is so vociferously objecting to). Notwithstanding this agreement, however, S&P has downgraded U.S. government debt, since it considers the agreement, and U.S. fiscal policy in general, to be inadequate.
S&P's being dissatisfied with U.S. government policy would be a laughable matter of little consequence, were it not the case that S&P is a watchdog body for finance capital. Its incompetence is legendary (since it gave high ratings to the toxic assets, inflating the housing bubble and hence causing the subsequent massive collapse); but it is the eyes and ears of finance. Its downgrading of U.S. public debt, therefore, will entail willy-nilly a further curtailment of the fiscal deficit.
The fact that this is going to worsen the U.S., and hence the world, recession is obvious, especially since several eurozone countries are also caught in a similar predicament. They, too, are reducing fiscal deficits through draconian austerity measures which are engendering massive social strife. What is important is that even while state expenditures are being reduced, and private expenditures show no signs of revival (if anything the poor prospects of the world economy are leading to further cuts in them), there are no other external props available that could take the place of state expenditure. In the 1930s state expenditure had emerged as an external prop, and its potential role was clearly visible on the horizon. No such external prop is visible on the horizon today.
Innovations as we have seen, instead of causing a new boom, will themselves get introduced only in the event of a boom. State intervention in the advanced capitalist countries is pass. A large-scale expansion of China's domestic market through state expenditure that raises the purchasing power of its domestic population could provide a stimulus for the world economy as a whole.
Indeed, Oskar Lange, the renowned economist, was reportedly of the view that the demand from the Soviet Union and centrally planned economies, with which the capitalist world traded, contributed to the stability of post-War capitalism by providing it with a steady and growing market uninfluenced by the vicissitudes of the capitalist world. Such an effect in principle is undeniable, no matter how minor it might have been in practice. But China's capacity to stimulate the capitalist world, even assuming that considerations of nationalist neo-mercantilism which undoubtedly animate China today can be overcome, still remains somewhat limited.
The only possibility of a revival therefore is the formation of some new bubble in the prices of some reproducible assets, or of claims on such assets. But the timing of the formation of such a bubble, if at all it does get formed, remains uncertain; and even when it gets formed and initiates a recovery, its subsequent collapse will push the system back into crisis. What is in store for the capitalist world economy therefore is an occasional bubble-stimulated revival, followed by collapse, around an average state of substantial mass unemployment. Keynes had wanted to rescue the system, through state intervention, from precisely such a state because he thought the world will not much longer tolerate the unemployment which is associated with present day capitalistic individualism and that this system might not therefore face up to the socialist challenge.
With Keynes' project coming to naught, a revival of this challenge comes on to the agenda.
