Crisis in Global Economy

Crisis of global capitalism and OWS

October 23, 2011, 6:43 pm 

While we gather here to discuss the crisis of global capitalism, the workers, students, unemployed youth and other marginalized and excluded people in Western capitalist countries have begun a massive protest against banks, finance and insurance companies and stockbrokers. The Occupy Wall Street (OWS) has gathered momentum as many big cities have organized their own OWS campaign. It has been reported that in Italy, protesters fought with the police. The fragile economies of almost all Western capitalist countries are yet to come out of the economic crisis that surfaced in September 2008 with the collapse of mega banking and financial companies. Growth rates were below one percent; inflation and unemployment rising. As one woman protester informed us angrily, "I have a degree, but I make coffee". People have expressed their anger over the system, the system that has failed to ensure a reasonable living standard and jobs in spite of the fact that world productive capacity has reached the point that it is in a position to do so. It is interesting to note that a third world has been created within the first world itself. What we are witnessing is not only a systemic crisis but a generalized crisis. Wolfgang Streeck in a recent article in New Left Review (71) characterizes this crisis in following words: "Rather than construe our present affliction as a one-off disturbance to a fundamental condition of stability, I will consider the ‘Great Recession’ and the subsequent near-collapse of public finances as a manifestation of a basic underlying tension in the political-economic configuration of advanced-capitalist societies; a tension which makes disequilibrium and instability the rule rather than the exception, and which has found expression in a historical succession of disturbances within the socio-economic order." I would add that this crisis signifies the bankruptcy of neo-liberal model that has been in vogue worldwide particularly since the Reagan-Thatcher experiment in the 1980s. Neo-liberalism has replaced the democratic capitalism or social welfarism that was practiced as the dominant model in the first three decades after World War 2. Neo-liberalist motto is that if markets are allowed to operate freely without state interference the economy achieves equilibrium. In other words, political allocation should be ended and the resources including reproducible and non-reproducible goods should be solely guided by market logic, the principle of marginal product.

It was somewhat hilarious how big banks and finance companies that were considered too big to fail collapsed in a short span of time as sand castles. The process began in March 2008 with the Bear Stearns, a classic ‘white shoe bank, debacle. The week began on September 15 witnessed the collapse or bankruptcy of big banks, investment and insurance companies that include the world largest insurance conglomerate, AIG. Bernanke, the chairman of the Federal Reserve System declared that ‘we are heading for the worst financial crisis in the nation’s history.’ His doctoral dissertation was on the Great Depression that began in 1929 with the collapse of the stock market in the US. The similar events took place in the UK and many European countries. Stock markets all over the world recorded unprecedented decline. The value of savings, and pension funds plummeted. Bail-out of them by the state was the only way to save big banks and financial institutions.

To understand the crisis of global capitalism, I would focus briefly on some of the changes that took place in the global economy. First, the capitalist world system was able to recapture the area that it lost since the Russian Revolution in 1917 making once again the entire world open to the logic of capital accumulation –so-called globalization. Neo-liberalist project worked reasonably well for some time partly because of this favourable situation. Secondly, the process of globalization has made the movement capital easier and as a result productive capital moves out of capitalist centre to the periphery where it could reap higher rate of profit. This has changed significantly the pattern of international division of labour as substantial amount of industrial production has moved to capitalist periphery including China.Thirdly, as a result, partial de-industrialization of the centre countries, especially the USA and UK, has reduced the number of available high productive employment with adverse effect on the proportion of wages and salaries in the national income. For example, in the USA, the proportion fell from 53.5 per cent in 1970 to 45.5 percent in 2005. In 1960, there were 114,000 auto workers in Detroit, about 50 per cent were Afro-American. Today the number has reduced to only 36,000. High-wage manufacturing jobs were replaced by lower-paying service jobs. The most popular job in Michigan now is to work in a restaurant or fast-food joint. Finally, in the new international division of labour, the imperialist countries continue to appropriate surplus value produced in other parts of the world through financial capital backed by political hegemony in a uni-polar system.

How do we explain the crisis in the context of those changes? Some observers have argued that the crisis is a result of the relaxation of regulations that govern the financial markets. Glass-Seagull Act enacted in the 1930s was repealed. It had also been argued that free operation of financial market was the best guarantee for equilibrium. Since the dotcom crisis, we witnessed that London and New York compete in liberalizing financial markets giving free hand for commercial banks and investment banks to operate at their will. Many new financial instruments were invented and old instruments were redefined. Banks offered loans liberally to anyone who was seeking a loan. The so-called NINJA (No Income, No Jobs and Assets) have become a common feature of the system.

It was true that the excessive liberalization of financial markets led to financial crisis. However, it begs the question? Why do banks and financial organizations act in that manner? I would argue that they the system had forced them to increase liquidity in the system as there was what Marx called a realization crisis. What is meant by realization crisis? I will make the definition as simple as possible. The value that has been produced within the capitalist system has to be realized post factum when those goods and services are sold in the market. In other words, value produced should be realized in the market. If produced value exceeds value realized, system would face an over-production crisis. It could happen for two reasons that are inter-linked. First, the consumption demand would fall if the income of general masses decline as a result of low wages and salaries. As I argued above the real income of wage and salary earners in Western capitalist countries, especially in the USA and UK declined in the last 20 years or so. Secondly, over-accumulation of capital has led to fall in general rate of profit in advanced capitalist countries and as a result new investments happened only in limited sectors. The data on the USA has revealed that the rate of profit in non-financial sector showed a tendency of general decline in the last two decades. Capitalist response to this realization crisis is to create fictitious capital and buying power in the form of NINJA loans and credit cards and many other new financial instruments. So NINJA loan is a symptom not the cause of the crisis. This is how the USA and UK responded to realization crisis.

What we are witnessing is not just a periodical crisis in the system. The present crisis demonstrates that the capitalist system has become archaic and moribund. The human freedom cannot be enhanced further within the capitalistic system. The economic system has degenerated to an extent that human and nature can no longer co-exist. Fredrich Engels, Marx’s friend and co-thinker once said if capitalist control and exploitation of nature went like this and at this rate, nature will definitely hit us back. The current ecological crisis is not something that is exogenous but a crisis that is due to the dynamics of capitalist valorization exploitation. Of course, I do not claim that this would be the final crisis of capitalism. IMF has declared that the future of the system depends very much on the capitalist development in China and India. This may be partly true in the short term. What is important for us to keep in mind is that moribund system refuses to go away voluntarily, it has to be overthrown and a better system has to be built. This function is not a function of history. As Engels informed us history is nothing without human agency. We may reiterate what both Hegel and Marx loved to say: Hic Rhodus, hic salta. [("Here is Rhodes, jump here!") Prove what you can do, here and now.]

This is the text of the talk given at the meeting organized by the Commercial and Industrial Workers Union at the ISD Tea Museum on October 15, 2011.

The writer teaches political economy at the University of Peradeniya.

E-mail: sumane_l@yahoo.com