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SAO PAULO 21-23 NOV 2008

The root of the crisis - exploitation of the working class

The capitalist system has experienced about 30 serious crashes since the mid-19th century. The magnitude of the present crisis is traceable to an unprecedented expansion of credit and financial services, which are obviously closely interrelated. But the crisis itself, like all the others, is rooted in one of the basis contradictions of capitalism – the disparity between the buying power of the working class and the value of the goods and services that are offered for sale.

This disparity in turn results from the accumulation of capital by the owners of the system, as they appropriate the lion’s share of the social surplus by exploiting the working class. Some of this capital is consumed, some is invested, and some is used for speculation together with the fictitious capital generated in the financial-services sector. Karl Marx described fictitious capital as “money that is thrown into circulation as capital without any material basis in commodities or productive activity”. Speculation is thus a house of cards based only partly on the operation of the real economy, i.e. the production of goods and non-financial services.

The disproportionate accumulation of capital in the hands of the owners has been an integral element of every capitalist crisis. It is a prime factor in the waves of speculation that precede and sometimes accompany large-scale declines in mass purchasing power.

Karl Marx pointed out that maximizing capital accumulation requires continuous expansion of production, which tends to increase as if there were enough mass purchasing power to absorb it. When the gap between production output and purchasing power becomes great enough, the system crashes. Production has to be reduced, workers lose their jobs, purchasing power declines even more, and real capital is destroyed. The financial-services sector is rocked by an earthquake. Fictitious capital goes up in smoke. The self-destructive cycle continues until output and purchasing power are roughly in balance, the cycle is reversed, and the system starts to grow again, enabling a restart of speculation.

During the second half of the 19th century purchasing power was augmented repeatedly as new jobs were generated in new industries, and wage increases were achieved by trade-unions. But the crashes recurred nevertheless. After a long depression triggered by a major crash in 1873, new jobs were generated at the turn of the century in Western Europe by armament programs in the run-up to World War 1. The war itself absorbed large numbers of workers and generated large orders for industry.

Shortly after the war ended, the British economist John Maynard Keynes said that unless the contradiction between purchasing power and production could be resolved, capitalism would be subject to even bigger and more persistent crashes. He was right. The crash at the end of the 1920s lasted throughout the 1930s, except in Germany, where rearmament and militarization closed the gap.

The Great Depression did not come to an end until the outbreak of World War 2. For example, unemployment in the US in January 1940 was about 20%, officially. By April 1942, four months after the US entered the war, it was down to 1%.

Post-war – growth followed by stagnation

After 1945, a number of factors contributed to creating jobs, augmenting purchasing power, and stimulating growth in the West. These factors included a vigorous expansion of the public sector, with social insurance systems that among other things ensured that unemployed workers retained part of their purchasing power, wage increases achieved by trade unions, the strong expansion of the automotive industry, based on extension of credit to both the working class and the middle class, and the wars in Korea and Vietnam. In Western Europe, public-sector growth, social insurance systems and wage increases resulted from class struggle, with the Soviet Union serving as a benchmark.

But competition between firms requires continuous reductions in production costs. The relentless drive to increase production efficiency through automation, mechanization and new technologies had a continuous negative effect on formation of jobs and extension of purchasing power. Investment in new technologies contributed to reducing profit margins.

Throughout the 1950s and -60s, GDP in the OECD countries grew by 5-6% annually. But in the early 1970s these rates dropped by about 50%, and have remained low ever since. This is a trend. Figures for specific years may vary. In other words, the capitalist system has been in a state of stagnation for almost 40 years.

The solution - credit

As production continued to outstrip purchasing power throughout the 1970s, the bourgeoisie offered a solution in the form of credit - on a scale never seen before. Credit to individuals, both working- and middle-class, to manufacturing firms, to service industries, and to so-called developing countries.

Imperialist expansion and the development of an international network of slave labor also contributed to augmenting purchasing power within the OECD countries, by providing cheaper goods.

Another word for credit is debt. By the end of the 1970s, the capitalist world, including the neo-colonies, was floating on a sea of debt. It was apparent to anyone with a rudimentary knowledge of Marxist economic theory that the situation was unsustainable.

Unsatisfactory profitability and over-capacity

The bourgeoisie faced another worrisome problem in the early 1980s. There was an evident contradiction between the mass of accumulated surplus value and profitable opportunities for investment in production. The return on capital employed was too low, and the rate of profit in many sectors was falling.

It should be noted that although profit rates in industry were in decline, in absolute terms the amount of social surplus accumulated by the bourgeoisie continued to grow. Since the rate of return on industrial investment was not as attractive as it once had been, where could the bourgeoisie find profitable alternatives?

The answer was provided by the rapidly expanding sector for financial services, including the credit market, both domestic and international. Capital began pouring into this sector, which expanded as never before. By the end of the 1980s financial services accounted for roughly 55% of GDP in the OECD countries. This means that less than half of the reported growth rates refers to the real economy, where goods and non-financial services are produced.

Simultaneously, the stagnation in the real economy was reflected in persistent over-capacity. It is not easy to collect accurate figures for all the OECD countries, but indications are that utilization of production capacity has fluctuated between 70-80% since the early 1980s. So that 20-30% of capacity has been unutilized virtually year-round. At the end of the 1990s, Jack Welch, then head of GE in the US, said “We have over-capacity in every sector”.

Economic and ideological crash

The symptoms of the crisis in the real economy have thus been evident since the early 1970s. Stagnation, over-capacity, declining real wages for the working class and large sections of the middle class, growing inequality of incomes and wealth throughout the world, continuously increasing unemployment, rapidly increasing poverty world-wide, exponential expansion of credit and speculation. In Western Europe, dismantling of the public sector since the early 1990s has also reduced purchasing power.

The insatiable thirst for accumulating capital requires the working class to earn less money but to buy more goods and services, while the owners of the system accumulate more and more capital. The only way to bridge the gap between declining purchasing power and the need to increase production has been to drive wage-earners deeper and deeper into debt. For a number of years, the debt burden of the working- and middle-class in the West has exceeded 100% of personal income.

During four decades, persistent tremors have indicated the earthquake to come. These have included a deep recession in the early 1980s, repeated crashes in stock- and real-estate markets, repeated crises throughout Latin America, bank crises in Western Europe in the early 1990s, the crisis in Japan that began in the early 1990s and continues today, repeated crises in currency markets, the crash in Mexico in 1994, when the Clinton regime organized a bailout of 53 billion dollars to save US investors, the downfall of the so-called tiger economies in 1997, the bursting of the dot-com bubble at the end of the 1990s, and subsequent crashes too numerous to mention.

During all these years, while the real economy was inexorably sliding downhill, the sea of debt was rising and the tremors were becoming more intensive, the high priests of capital chanted the mantra of the mythical self-adjusting self-balancing market, where an invisible hand ensures the prosperity of all.

We are now witnessing a crash of planetary dimensions, as the real economy collapses and the vast speculative bubble bursts. While demand drops precipitously and unemployment rates accelerate almost daily, the hedge funds that have managed huge amounts of accumulated capital are going through the floor. The waves of bank failures continue. The gigantic derivatives market will implode within the next six months, as will the market for so-called structured financial instruments. No country within the capitalist system is immune. There can be no so-called de-coupling.

We are also witnessing an ideological crash that has come as a complete surprise for the high priests of capital. The market mantra is dead. Whatever the high priests may say, the empirical evidence is revealing what Marxists have always known - the disastrous problems of capitalism cannot be solved within the framework of the capitalist system.

There is of course a relatively simple solution for the crisis in the real economy. The capitalists could return to the working class the surplus value that they have appropriated through exploitation. However, the historical record indicates that they are not likely to do so voluntarily.

It appears that in Latin America the brutal realities of capitalism have already driven large numbers of people to start developing the only solution available, which is socialism and the end of exploitation. It remains to be seen whether a strong socialist movement led by Communist parties will emerge in other regions, especially Europe and the US. If it does not, we can expect a continued development of the new and higher form of Fascism that has been emerging simultaneously with the crisis of capitalism over the past forty years.