Economic analysts and the media are frantically debating whether a recession in the US economy is inevitable or has already started.
Major Wall Street finance houses are announcing huge losses. House building is down 30 percent, retail sales are plunging and unemployment has climbed to 5 percent.
The picture in Britain is not as stark, but it isn’t far behind. Retail sales fell 0.4 percent in December compared with November according to the Office for National Statistics.
News commentators say this is an example of “shaky consumer confidence”. Of course people are wary of getting even further into debt to buy the things they need or want.
The argument presented by the government is that if workers earn too much that will keep prices high and do more damage to the economy.
But we are also told that it is because we aren’t spending enough the economy is in trouble. Either way it is apparently our fault.
The idea that we don’t have enough money to buy our way out of the crisis can be tempting. This can lead people to demand capitalists or politicians restrain the race to the bottom.
While this would be no bad thing it gives the impression that the crisis can be resolved by better management. But economic turmoil is inherent in capitalism and comes not from how much we consume but from the way the system overproduces.
The pursuit of profit is the key driving force under capitalism. The direction of the economy is dependent upon underlying profit rates.
If profit rates are rising, there is an incentive for capitalists to invest and the economy expands. If they fall, then investment lags, factories close, workers are laid off, and the economy stagnates or slumps.
Capitalists are locked into competition with each other. There are endless battles for market share as they race to invest in profitable areas and produce goods for them.
This can lead to a crisis of “overproduction” as unsold goods pile up. This process is encouraged by the way that capitalists reinvest some of their profit in an attempt to get ahead of their rivals. In particular, investment tends to take the form of buying up bigger, better and faster machinery.
The first capitalist to invest in the new technology might be able to undercut their competitors and corner the market.
But as other capitalists rush to introduce the new technology, the price of the end product will eventually fall to its new, lower, value. This is because the more the bosses invest in better technology, the more they cut the amount they spend on workers – the source of value in the first place.
The very pursuit of profits by individual capitalists, can end up reducing the rate of profit for capitalism as a whole.
Look at how this works is the car industry. Car production is 30 percent under capacity already – cars are overproduced. Car manufacturers look for innovations, real and imagined, to find new ways of making more cars just to try to make a profit.
To help capitalists raise the investment and to find other ways to make money the system needs finance, banks and the stock markets.
Not all the money is reinvested in the productive sector and some of that credit is used for speculation in what Karl Marx described as the “most colossal system of gambling and swindling”.
In the short term the psychology of the capitalist class itself affects their perception of profit levels. When their short sightedness leads them to think things can never go wrong, they embark on ambitious investment schemes and pour money into buying each other’s stocks and shares.
As markets soar upwards, some make big profits, while others rig their books so as to make it look as if they are making big profits, just as the US Enron company did before its collapse.
These activities do not generate new wealth or expand production. They represent the gambling of profits already created by workers – and ultimately they depend on the health of the real economy.
The price of shares is related to the level of dividends, which is related to profits. If profits are falling the firm will not be able to pay out dividends and share prices will fall.
Sometimes this happens gradually, sometimes there is a sudden fall. Crisis in the financial sector feeds back into the real economy. The dangers of the current crisis in the economic system and its underlying causes was shown last week.
A report for the Philadelphia Federal Reserve Bank showed factory production is contracting far more sharply than analysts predicted. The study’s manufacturing index fell by 20.9 percent – compared to a 1.6 percent fall-off the previous month.
The US stock market dropped fast. The real economy is being pushed further into trouble by the chaos on the markets.
The current crisis flows from the US reaction over the last two decades to lowering profit rates. This meant a massive increase in the rate of exploitation of US workers, who work a week longer each year than in the 1970s and earn less in real terms.
The potential of increased profit rates enabled the US to attract funds from across the globe, allowing both individuals and corporations to accumulate debts.
This fuelled the stock market bubble. When a previous bubble collapsed from 2000 to 2001, the US central bank responded by slashing interest rates. This cheap credit fuelled a new bubble in housing – which has now burst.
It was an attempt to get round the underlying problem of the rate of profit in the system – which is far lower than the 1960s and 1970s – and it didn’t work.
This isn’t the fault of ordinary people – but the most likely outcome of the crisis is that rich will try to make them pay for their mistakes.