Why do Social Democrats do what they do?

September 16, 2009


Like fish stranded by a fast retreating tide, most mainstream economists, commentators and governments tend to be flapping around frantically and aimlessly, unaware of the real cause of their distress. The more cautious among them hope for a slow return of the tide; most merely hope against hope that somehow, sometime, all will return to what it was. It almost certainly will not.

Nobody saw it coming. This is an oft repeated mantra about the global economic crisis, which is also — and equally erroneously — referred to frequently as a financial crisis. But it is certainly true that most mainstream economists and commentators continued to talk up the economy even as the first serious signs of collapse became evident. And most also tended to refer to it — at least initially — as a purely financial affair.

They did so out of an almost religious belief in the market and, in most cases, an obvious absence of knowledge about economic history. Clearly blinded by the chimera of Stock Exchanges and the smoke and mirrors of booming futures and derivatives trading, they lost sight — if ever they had it — of the real productive economy. Their god was profit and their church, the market.

So when the economic bubble began to deflate, punctured by what was an effective pyramid scheme based on sub-prime mortgages in the United States, they did not question church or deity; the search was for individual sinners, those who had abused the rites and rituals that they believe guarantee profits ever after. So instead of rational appraisals, there were frequent outpourings of dogmatic incantations and calls for regulatory patches to repair the sub-prime hole that had begun deflating the economic bubble.

And there is the continued insistence by any number of economists and commentators that the crisis could not have been foreseen; that its precise cause and probable consequences still remain a mystery. But this is simply untrue. For 20 years and more, the warning signs have existed — and have been pointed out, although usually from the more radical margins of economic debate.

However, even that standard bearer of free market capitalism, The Economist magazine, warned in 1999 that the spectres of over-capacity and over-production were haunting the world economy. A survey by the magazine of international demand, supply and capacity resulted in the conclusion that a time of glut leading to stagnation, was on the cards.

This was something that had been pointed out even earlier by the likes of economic historian Robert Brenner in the United States. He was not alone. Economic commentator T. N. Vance in the US was raising warnings in the 1950s and the so-called oil price crisis of 1973 led to a veritable flurry of analysis on the margins of economic debate, illustrating what probably lay in store.

However, these commentators and economists not only looked to productive capacity and the related sources of supply and demand in the world economy, they based their analysis on the much earlier work of Karl Marx and his collaborator, Frederick Engels. In 1848 Marx and Engels wrote that the then relatively new capitalist economic system needed to expand its market globally; it needed to “nestle everywhere, settle everywhere, establish connections everywhere”.

It was a system, they wrote, that has “conjured up such gigantic means of production [that it] is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells”. This, they maintained, would lead to crises and to “an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production”.

But the mass of free market praise singers grew as the world recovered from the barbarity and destruction of the second world war and a lengthy economic boom began. The collective attitude of the praise singers was well summed up by economics Nobel laureate Paul Samuelson. In 1970 he told a conference of his peers that the days of crises — of boom and bust — were over. “The National Bureau of Economic Research has worked itself out of one of its first jobs, namely business cycles,” he claimed.

Three years later came the first crisis. But it failed to dent the psuedo-religious belief in the market and the system as it existed. Sinners were found: the oil producers and their “artificial” lifting of the oil price. What was needed was merely some adjustment; there had apparently been too much tinkering with the market.

This attitude was summed by British Labour Party prime minister James Callaghan in 1976 when he said:

“We used to think you could just spend your way out of recession by cutting taxes and boosting government borrowing...that option no longer exists...it worked by injecting inflation into the economy. Each time that has happened...unemployment has risen.”

Callaghan’s statement announced the turn away from what was known broadly as the Keynsian approach to that advocated by Milton Friedman and the Chicago School, an approach now labelled neo-liberal. Thirty years later, neo-liberalism has been found wanting and, without apparent irony, history is now repeating itself: the present British prime minister, Gordon Brown, has increased government borrowing and embarked on a policy of spending as a solution to recession.

But this begs the main question: is this merely another recession/depression, one of the cyclical slumps inherent in the system, or is it something different? The answer is probably both yes and no: yes, it is one of the slumps inherent in the system and no, it’s underlying cause is no different from those preceding it. However, it is by far the greatest crisis the system has suffered, the cumulative result of decades spent ignoring a growing and fundamental fault.

The economic history of the modern, capitalist, world is peppered with examples of booms and slumps, of struggles for economic supremacy by individuals and exploiting minorities in regions, countries and blocs. All the while, productive capacity and the ability to manufacture more with less grew as mechanisation and the bloody history of colonial plunder replaced plantation slavery and the dehumanising horror of the workhouse.

Peasants and self-sufficient communities, driven off their lands by force or taxes, swelled the ranks of the sellers of labour who, at one and the same time, became the purchasers of the very products they helped to make, distribute or provide the raw materials for. Their wages and conditions improved only after desperate and often bloody struggles.

However, there were always some employers who realised the link between the worker as producer and as consumer. None more so than Henry Ford. He had little regard for workers, but understood that the survival of the system demanded the ability to sell, at a profit, the products that the sellers of labour create — and buy. In his 1922 autobiography he noted:

“...Our own sales depend in a measure upon the wages we pay. If we can distribute high wages then that money...will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales”.

But he too did not foresee the looming absurdity of over capacity and over production that now afflicts almost every manufactured item, but is especially obvious in the textile, garment and motor vehicle industries. Take vehicle maker Toyota, for example. This year the company estimates that production will be more than 30 per cent below its current, 10 million units a year capacity. It now contemplates reducing output by another 1 million vehicles.

Such reductions in capacity mean more and more unemployment and less and less purchasing power. It also means tumbling prices as competition intensifies and this, in turn, leads, on a global basis, to a race to the bottom in terms of wages and conditions.

South Africa — and especially the garment centres of Cape Town and Durban — have already borne the loss of tens of thousands of rag trade jobs. Vehicle makers and component suppliers in the Eastern Cape have also been badly hit and are gearing up for even more job losses.

So far, government and its “social partners”, business and labour, have responded with a policy framework that amounts to financial bailouts and short-term retraining at half wages for retrenched workers. This is based on the almost certainly forlorn hope that there will be an economic revival in the short to medium term.

The hope is forlorn because the mircrochip revolution is continuing apace. These slivers of silicon lie at the heart of vehicle assembly lines, televisions, cell phones, the national power grid and the automated machines in factory and home. They make work faster, easier and cheaper, using less and less labour.

This technological advance could herald a world of plenty for all. It could liberate humanity from drudgery and poverty and repair the destruction already wrought on the physical environment. But it could only do so on the basis of collective action for the benefit of the majority.

Our present anarchic system of minority ownership, based competition and the need to accumulate increasing levels of profit in order to compete even more successfully, works against such a development. There is already evidence of where this may lead: to fortified islands — whether suburbs, cities, or regions — of affluence in a global sea of desperate poverty and increasing savagery.

So we are faced with a stark choice, not just nationally, but internationally: start to transform radically the economic system to one based on co-operation, under collective, democratic control — or persist with the existing system of competitive, minority control, whether by individuals, companies or states. It may amount to a choice between planetary survival or annihilation.

Terry Bell

writing, editing, broadcasting

specialising in:

political/economic analysis and labour

P.O Box 373, Muizenberg 7950

South Africa

Tel: +27 +(0)21 788 9699 • Fax: +27 +(0)21 788 9711 • Skype: belnews

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