Financial crisis is capitalism's legacy

How big a mess is capitalism in? In February when New York economist Nouriel Roubini suggested $1,000-2,000 billion in losses in the financial sector alone, mainstream commentators thought he was mad. Today these commentators are running to catch up with Roubini, and he, in turn, has revised his estimates upwards. So Martin Wolf of the Financial Times, reports: “Prof Roubini talks of a $5,600 billion (£2,773 billion) decline in the value of stocks and the possibility of additional trillions of dollars in losses on commercial property. Total losses might even equal annual GDP.” That is a loss of £6.4 trillion – enough for a 300-fold increase in the entire world aid budget. Such predictions reflect the panic in the ruling class. Why is capitalism facing a potentially very serious crisis? Capitalism is built on profit. The capitalist who makes a profit can invest and compete effectively. The capitalist who fails to make a profit goes to the wall. This is the ultimate law of competition.

But it is not simply the amount of profit that matters, the crucial figure for the capitalist is the “rate of profit” – how many pence do they get back for each pound invested. As Karl Marx pointed out, a fall in the rate of profit calls into question the viability of the whole system. In the 1950s and 1960s capitalism enjoyed a sustained boom based on high profit rates. But in the 1970s and 1980s the profit rate fell by about half in most major economies. In recent years it has recovered some of this fall in some countries, notably the US. This “recovery” came through a massive increase in the exploitation of workers. Our rulers have clawed back some of their losses by making us work longer and harder for less pay. Such is the legacy of 30 years of neoliberalism. But the system has not been fundamentally restructured, and profit rates have not recovered to levels seen in the 1950s. A number of factors have helped to mask the problems – until now. Because rates of profit are relatively low there is less scope for investment in production. Instead, pools of cash wash around the globe looking for a profitable outlet.

The cash comes from the substantial savings held by corporations in the US, from China where the system has boomed in recent years, and from exporters of oil and other basic commodities whose prices are soaring. This cash fuels “bubbles” that disguise the underlying problems. These include the dotcom boom in the US stockmarket in the 1990s, property bubbles seen in many countries in the past 20 years and the subprime mortgage boom since 2002. The cash also finances unprecedented levels of consumer debt in Britain, the US and elsewhere. This debt plays a vital role. For the capitalist system to function its output must be consumed. If the rate of profit was as high as in the 1950s companies could use their profits to purchase new machinery and expand production. Because profit rates have fallen, consumers have ­provided a crucial part of the demand required to keep the system moving forward. But because their wages were being held down this was paid for by debt. They lived beyond their means, and were encouraged to do so by the banks.

Governments have also helped absorb some of the output of the system, with the US and British governments taking on vast debts. Debt and bubbles in the economy can postpone the day of reckoning. It is possible that the defenders of the system will find another way to postpone this crisis. But it cannot be avoided indefinitely. The consequences of the unravelling of the economic system could be grave. It is not just the established economies, such as the US and Britain, that face trouble ahead. China, seen by some as the “saviour” of the system, depends on US consumers. If the US is removed from the equation China is a net importer of goods, many of them parts produced elsewhere in the region, which are assembled in China and re-exported to the US. Recession in the US will impact across this region. A global slowdown will make all the tensions in the system worse. Stronger states will be tempted to use their muscle to make weaker ones pay the price. Wars like those in Iraq and Afghanistan could become more common as states try to grab what profit remains, and prevent their rivals from doing so. It will also increase the tension that exists within every economy – between workers and capitalists. Socialists will be in the forefront of the struggles that result. But as well as fighting our rulers’ attempts to make us pay for their crisis, we also have to point to the insanity of capitalism, and the need for a socialist alternative.