Liz Truss proved to be disastrous for British capitalism (Picture: Flickr/No 10 Downing Street)
The shortest-ever term of office for a prime minister saw Liz Truss exit Downing Street after only seven weeks. Her policies helped crash the British economy and alienated large sections of international capitalism, exposing major fault lines in ruling class ideology.
Just before Truss was forced out, newly appointed chancellor Kwasi Kwarteng was sacked. He was the fifth chancellor in 12 months and is now the shortest serving chancellor in history, with the exception of Iain Macleod in 1970 who died 30 days after taking office.
Kwarteng was of course sacked by the prime minister for the crime of carrying out her very own policies—Truss’s own premiership ended 11 days later.
Truss created a crisis within neoliberalism, but she also helped to highlight the fracture that has always existed between the rhetoric of free market economics and the reality of capitalist accumulation. Her economics represent a logic dominated by the concept of a free market in which price signals determine the success or failure of capitalist firms.
Other forms of co-ordination within markets such as regulation, government provision of goods and services or laws, excluding property rights, were understood as impediments to these market signals.
In contrast however, capitalist accumulation sees governments not only act to frame competition by defining property rights but they also manage competition to favour their own capitals, ultimately acting as a backstop when the inevitable crises occur within markets.
Whether it was the 2008 financial crash and the bailing out of the financial sector through a massive increase in public sector debt or the Covid pandemic requiring governments to fund private capital, along with its wage bill through furlough schemes, the state is inextricably embedded in the framework for capitalist accumulation.
Unfunded tax cuts, rising debt and inflation triggered a backlash by financial markets. These three factors weakened the potential of the state to act as a backstop, which was further undermined by Truss and Kwarteng’s mini-budget. Capitalists articulated their complaints about Truss and Kwarteng’s proposals as “business needs stability”.
From the liberal and neoliberal perspective, changes in capitalist development and its weaknesses in relation to British capitalism proved so disastrous for the Tory government led by Truss.
Markets are driven by the need to accumulate wealth, while competition drives out weaker firms, in turn concentrating the wealth in ever-larger firms. To remain the dominant firm in a market requires further investment in both technological ability and scale of production. In this sense, capitalist markets are dynamic.
This investment, combined with competition from rival firms, inevitably leads to a reduction in profitability for all firms in an industry. So, markets have crisis built into them.
Marxists explain this contradiction by recognising that these pressures inevitably lead to a tendency for the rate of profit to fall. Neoliberal thought attempts to resolve the question of why economic crises develop by focusing less upon their origins—the inability to continue to accumulate profit—and more on how crises can be managed.
Truss and Kwarteng exposed a contradiction. This is between the free-market ideologues who insist markets can simply operate unhindered and those who recognise the necessity of the state to construct a favourable framework for managing crises and facilitating the accumulation of future profits.
Truss articulated her economic thoughts by challenging what she identified as the “Treasury view”, as well as the orthodox economic neoliberal view of “sound money”, in favour of a growth agenda which is fostered via tax cuts both for rich individuals—by abolishing the highest income tax rate—and reductions in corporation tax for businesses.
When combined with additional restrictions on the rights of workers to strike, the entrepreneurial spirit of market capitalism could be unleashed from an anti-growth coalition, a spirit which Truss and Kwarteng maintain had been missing from British capitalist development throughout the 20th century.
Truss and Kwarteng thus focus on impediments to market signals as the cause of crises, not the rate of profit itself.
The criticism of British capitalism’s productivity failure, to grow at rates achieved by its competitors—articulated in the concept of the Treasury view—originates in the 1920s when, following the collapse of international trade during the First World War the British government returned to the Gold Standard. The standard was a fixed arrangement for currency valuation which ensured international trade could be paid for at predetermined stable exchange rates.
The return to gold in 1925 precipitated the 1926 General Strike and the mass unemployment of the 1930s. British exports were unprofitable in relation to international competition and employers pushed through attacks on wages along with swingeing cuts to living standards in what were known as the Hungry Thirties.
The British government was again forced to abandon the Gold Standard in 1931. Its collapse as a mechanism for regulating international trade was one of the economic drivers for the outbreak of the Second World War.
Post-war attempts to revive stable exchange rates through the Bretton Woods Agreement—now using the dollar as the global currency—continued until its own collapse in 1971. Then emerged the floating exchange rate system known today.
The interwar decades thus saw a transition from a more liberal market economy to a more state-managed economy, dominated by Keynesian ideas of demand management from the 1940s until the 1970s.
A lack of investment and rationalisation in private industry in the 1920s saw a relative economic decline in British manufacturing. Government action to bridge this investment shortfall failed to materialise due to hostility from its own Treasury department to sanction such intervention in private markets.
The Treasury view suggested that City interests were given precedence over manufacturing, as British financial institutions grew in global importance.
These criticisms of the City of London, and the divide between financial and manufacturing capitalism, have been a mainstay of a critique of British capitalism in the 20th century, from both the political left and right. A critique of the Treasury view is associated with Keynesian approaches in which a dynamic state can substitute for the failures of private capital.
However, a market-focused critique of the Treasury view is also associated with the political right, of which Truss articulates and can be found in the critique of government expenditure. Government action is then responsible for “crowding out” opportunities for more efficient private investment.
Since the 1920s economic historians have debated the origins of Britain’s relative economic decline and the mechanisms through which this decline continues. Differing interpretations have placed the blame on, to name a few, a failure of entrepreneurial spirit, “gentlemanly capitalism”, British manufacturing support for cartelisation and monopoly over modernisation, failures of investment in research and development, and government weakness in providing the necessary investment for newer technologies.
An example of the right-wing critique is found in Corelli Barnet’s Audit of War. It rabidly blamed the construction of the post-war consensus for creating a state-funded “dependency culture” in which “the dank reality of a segregated, sub-literate, unskilled, unhealthy and institutionalised proletariat hanging on the nipple of state maternalism” prevented anything other than relative economic decline from occurring.
The Treasury view is itself rooted in the concept of sound money: the ability to manage exchange rates and facilitate international trade in goods and services. It was championed by Margaret Thatcher and monetarist economists in the 1980s as a means to weaken labour and restrict inflation.
Here the argument was made that, if the quantity of money circulating in the economy could be controlled, prices would have to adjust to the limits of this supply. Money would be “sound” because investors could have certainty that profits from investment would not be undermined by inflation and increased money supply.
The history of inflation under Thatcher’s governments was, however, that it exceeded what was expected from her monetary policies. Monetary targets set for the Bank of England were continually adjusted to address the inability to control the target used for measuring the money supply.
One reason for the failure was that the ideology of controlling the supply of money diverged from the reality as financial institutions found new forms of money to use to facilitate exchange and circumvent monetary policy.
By the 1970s the eurodollar market had already emerged and, under Thatcher, new forms of debt developed around consumer expenditure, such as with increased credit card use, while in the area of corporate capitalism deregulation of the financial sector saw newer forms of credit, such as derivatives as contracts for future trade and leveraged buy-outs, while other forms of money expanded.
This process has continued into the 21st century, most notably with still new alternative forms of money such as cryptocurrencies.
Importantly this rise in financial capitalism, while too often portrayed as parasitical on “real” manufacturing capitalism, was symbiotic with manufacturing. Private manufacturing capital moved profits into wider financial markets to avoid reinvestment in new technologies for fear of undermining their own basis for profitability.
Thus, the fossil fuel industry has the capital and technology to abandon fossil fuel production overnight, but cannot do so because of the path dependency which has created the wealth in the industry itself. Oil corporations risk undermining the very basis of their profitability based on an old technology and as a result move their profits into financial services. Oil companies can then gain greater profits from their financial services than the actual production of oil.
A deeper explanation for the monetarist failure lies in the fact that money is not simply a mechanism to facilitate exchange but is also a mechanism for holding wealth. Money can be used both as payment for trade and to amass wealth.
For hoarding wealth, money has a different function. Here it can be used to speculate on short-term changes in the economy, through what is referred to as arbitrage. Rather than invest in productive assets—with the risk that the future profits from this investment will fail to accrue to the investor—speculation on future price changes can provide higher returns to investors.
Additionally, where these price changes can be determined in advance by large-scale financial institutions, the profits can be substantial and, as a result, asymmetric information permits large firms to maximise profits in these markets. Thus, to use currency trade as an example, the foreign exchange market grew from $1.6 trillion per day to $6.6 trillion per day between 2001 and 2019.
The growth in returns on financial assets exceeding those of output from firms since the crisis of the 1970s is the centrepiece of the critique of capitalism developed by Thomas Piketty, Capital in the Twentieth Century. While Piketty is not a Marxist his work nevertheless documented the growing concentration of wealth in the 1% compared with the global 99%.
Piketty’s evidence challenges a mainstay of mainstream economics: that equilibrium in competitive markets ensures the equalisation of returns to production, capital and labour across time. In popular language, “trickle down” economics ought to see more equal real incomes for whole populations over time.
But the reality of global growth since the 1970s, as Piketty charted, has been the opposite, with rising income inequality and divergence rather than convergence of incomes within populations.
An explanation for the evident failure of trickle-down economics has been the focus of the second target of Truss and Kwarteng’s argument, namely an anti-growth coalition. This perspective lends itself heavily to the work of Chicago economist Deirdre McCloskey and the earlier work of US political scientist Mancur Olson.
McCloskey’s critique of the work of Piketty, and others who identify the stark levels of inequality in contemporary capitalism, is to dismiss these concerns in favour of what she claims has been “the great enrichment” over the past 200 years.
Her perspective is that where markets operate free from restriction, inequality will reduce over time as returns to investment in both physical and human capital equalise.
Growth then rather than the distribution of wealth is the fundamental driver of capitalist development. McCloskey maintains that it is the size of the cake not its distribution that is of utmost importance, while of course ignoring the transition costs for those baring this adjustment, namely through poverty, war and destitution.
More recently we can add the environmental costs of traditional, carbon-based forms of industrialisation. For McCloskey what is required is more time for Piketty’s evidence to demonstrate this inevitable equalisation.
The Truss/Kwarteng mini-budget attempted to apply shock therapy to Britain. The treatment administered both in Chile after the overthrow of the Allende government in 1973 and in Russia after 1989 was now to be introduced to the British economy to try to wipe out rigid distributional coalitions, instill an entrepreneurial spirit and let market signals operate unhindered.
British and international capitalist firms and institutions rejected the proposals decisively. Truss maintained that this was due to the poor signalling of their intentions, “they went too fast”.
British capitalism was not prepared to follow the route of the Russian economy after 1989, not because it opposes growth but rather the post-Brexit free(er) market for British capitalism currently guarantees the redistribution of profits into the hands of capitalist firms operating within Britain’s economy.
Brexit removed regulation from financial markets and allowed the financial sector to act as an offshore tax haven for Europe. The development of tax-free enterprise zones and “freeports” for the manufacturing and distribution sectors respectively is creating deregulated freer markets for large-scale capitalist firms.
This architecture is being constructed without removing the government safety net, in the form of the ability of the British government to borrow. Truss and Kwarteng believed accelerating this agenda would promote new growth opportunities, but it was one in which uncertainty about which firms would survive in this freer market which led international capital to abandon the Truss government and move swiftly to prevent its implementation.
The short-lived Truss experiment in free market economics placed neoliberal ideology over and above the reality of capital accumulation. While maintaining an ideology of free markets, British capitalism is completely dependent upon the integration of the state with private firms in constructing a framework for accumulation which guarantees profitable outcomes for British capitalism.
Post-Brexit, this newly emerging architecture of deregulation and low taxes for business was already facing threats to its fulfilment, as the dethroning of Boris Johnson testifies. The failure to deliver on the advantages of Brexit and the emergent social conflicts and industrial unrest together led to the collapse of support for Johnson.
With the appointment of Rishi Sunak as prime minister the attacks on the public sector and trade unions will continue, but the role of the state as a stabilising institution within capitalist markets can be assured. A step towards freer markets proved a step too far for one of the weakest capitalist classes in the world. A return to the integration of state and private capital will be re-established.
As a result, the problem of managing the tendency towards low growth rates in the British economy with higher levels of state intervention will remain unresolved.
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