[Marxism] Sixty Years of Global Economic Expansion Ending? By Nat Weinstein

[Bonnie Weinstein <giobon@xxxxxxxxxxx>]

Sixty Years of Global Economic Expansion Ending?
By Nat Weinstein
Socialistviewpoint.org

You load sixteen tons, and what do you get?

Another day older and deeper in debt.

Saint Peter, don¹t you call me, ?cause I can¹t go;

I owe my soul to the company store.[1] <#_ftn1>

I was struck by the number of unusually pessimistic reports on the
deplorable state of the American and world capitalist economy in the July 20
New York Times. But in the days following, the bad news only got worse.

The first of these reports was a front-page story bearing the title, ³Given
a Shove, Digging Deeper into Debt,² by Gretchen Morgenson. Her story focused
on the human side of the housing crisis as personified by Diane McLeod, a
typical victim of the mortgage mess who is now awaiting eviction from her
small, two bedroom ranch house in suburban Philadelphia.

The author describes her as having been ³a dream customer for lenders; until
she hit the wall financially, she juggled not one but two mortgages, both
with interest rates that rose over time, and a car loan and high-cost credit
cards debt.² 

This story gets down to the nitty-gritty tale of woe suffered by a growing
numbers of working people faced with a major assault on their dream of
finally getting a home of their own.

Later Morgenson also takes up the larger economic picture underlying her
report on the life-wrecking impact of the mortgage fiasco on ordinary
working people. In a piece titled, ³Work Out Problems with Lenders? Try to
Find Them,² she explains why they can¹t:

³In times past, when a borrower fell behind on a mortgage, the lender was
likely to try to help work out the delinquency.

³But as many troubled borrowers are discovering, today¹s lenders often sell
the loans they make to investors, making it nearly impossible for homeowners
to discover whom they should contact for a workout.

³And the companies to which borrowers send their mortgage payments?known as
loan servicers?are often hard to reach or unwilling to modify a loan that is
delinquent.

³As a result, one missed mortgage payment can quickly generate so many extra
fees and charges that within a few months, a borrower can fall far behind
and ultimately lose his home.²

Another report by Morgenson titled, ³Borrowers and Bankers: A Great Divide,²
appeared on the front page of the National section of the same edition of
the Times. This one went a lot further than most toward putting the lion¹s
share of the blame where it belongs?on the bankers who make sub-prime and
other risky loans that they would not make if they could not package them
and sell them to other, larger banks to worry about the likelihood of
borrowers defaulting.

This situation began when it first became legal and acceptable for
governments to systematically print enough purely paper dollars to balance
their budgets and keep the wheels of the global capitalist economy turning.
Thus, every worthless dollar, pound or euro, put into circulation, dilutes
the value of the given currency. And, of course, it results in the mass of
public and private debt growing at a much higher rate?generating new loans
and multiplying total indebtedness.

Making bad matters worse, the American superpower, with the largest and
richest economy in the world, is able to sell its growing mountain of debt
to the rest of the world, seemingly to an endless extent.

But there¹s a limit to everything: Thus, presently, when a debtor is forced
to take out new loans to pay interest on his debts, the debtor is in big
trouble. 
Fannie Mae, Freddy Mac and the credit crunch
Even with the printing presses running fast enough to provide enough new
money to be added to both public and private debt for seemingly limitless
investment opportunities, there inevitably comes a time when most available
capital gets tied up in an ever-growing number of mortgages. Thus,
³collateralized mortgages² are piled on top of millions of existing
mortgages. But there is not nearly enough real new wealth to keep the cycles
of investment, production, profits and sales going. Thus, the economy, which
has been expanding for more than 60 years, is longer growing.

That¹s why Congress created the government-backed, trillion-dollar
for-private-profit lending institutions to keep the profit-driven capitalist
economy running at top speed. This was for the benefit of Fannie Mae¹s and
Freddy Mac¹s stockholders and the managers with their multi-million-dollar
salaries, bonuses and other benefits.

But for it to work for maximum effect, the government was forced to leave
unchallenged the implication that the profitability and solvency of the two
government-sponsored enterprises were guaranteed by the U.S. Treasury and
its taxpayers?leading inexorably to today¹s credit crunch!

However, it did the job for which it was created. It enabled Fannie Mae and
Freddy Mac to create more trillions of dollars of credit, adding more than
$5 trillion to the now, 12 trillion-dollar total U.S. mortgage debt. But
this debt was accrued without sufficient capital reserves to finance the
possibility of hundreds of billions of dollars in losses which will also
inevitably result in a staggeringly larger bailout?perhaps in the trillions.

Thus, ³the two financial giants who now own or underwrite nearly 80 percent
of all new mortgages in the U.S.² were, for all practical purposes, created
out of thin air. 

 Therefore, the CEOs of these two giant lenders began making exceedingly
risky investments, raking in fabulous profits without, necessarily,
personally suffering the consequences when borrowers began defaulting on a
massive scale. 

Morgenson again points the finger of blame for the whole sorry business
where it belongs. She writes:

³?[W]e are in dangerous territory today where bailouts are concerned, and
not only because they feed Americans¹ suspicions that only the rich and
powerful get help in our country.? So asking Main Street to bail out Wall
Street leads to this inevitable question: Weren¹t the financial folks the
ones who helped create the mess we are in??

³Which returns us to the dispiriting divide between those who receive help
and those who don¹t.?

³?The banks are too big to fail and the man in the street is too small to
bail,¹ said John C. Bogle, the founder of the Vanguard Group, the mutual
funds giant who is a philosopher of finance.²

Neither do the powers-that-be need worry too much about its impact on the
richest taxpayers?supposedly taxed at a higher rate than most, but in
reality, at lower rates than wage earners on all levels of the economic
ladder. 

For instance, ³Warren Buffett, the third-richest man in the world, has
criticized the U.S. tax system for allowing him to pay a lower rate than his
secretary and his cleaner. (From The Times, of London, June 28, 2008.)

Meanwhile, the justification for everything from bailouts to government
subsidies to troubled giant corporations is the bipartisan capitalist
government¹s rationalization, ³they¹re too big to fail²!

The most obvious refutation of this absurdity is the Great Depression. After
all, everyone knows that the entire global capitalist economy collapsed and
remained stagnant until World War II, proving that nothing is too big to
fail.

Let¹s take a closer look at the reasons why enterprises ³too big to fail²
are now no less likely to fail?but with a bigger bang than ever-before.

Wikipedia, the online encyclopedia, provides us with the damning arithmetic
underlying the process:

³For every dollar of equity capital, a well-financed regional bank holds
perhaps $10 in loans or securities. Wall Street¹s biggest broker-dealers
could hardly bear to look themselves in the mirror if they didn¹t extend
themselves three times further. At the end of 2007, Goldman Sachs had $26 of
assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34,
Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in
equity capital per $100 of assets.

³Leverage,² as the laying-on of debt is known in the trade, is the Hamburger
Helper of finance. It makes a little capital go a long way, often much
farther than it safely should. Managing balance sheets, as highly leveraged
as Wall Street¹s, requires a keen eye and superb judgment. The rub is that
human beings err.²
More bad news
This takes us to the next of these unusually pessimistic reports for a
mainstream publication. This one was featured on the front page of its
Business section of the same July 20 edition of the Times. The story,
written bv Peter S. Goodman was revealingly titled, ³Too Big to Fail.² He
writes:

³In the narrative that has governed American commercial life for the last
quarter-century, saving companies from their own mistakes was not supposed
to be part of the government¹s job description. Economic policy makers in
the United States took swaggering pride in the cutthroat but lucrative form
of capitalism that was supposedly indigenous to their frontier nation.

³Through this uniquely American lens, saving businesses from collapse was
the sort of thing that happened on other shores, where sentimental
commitments to social welfare trumped sharp-edged competition. Week-kneed
European and Asian leaders were too frightened to endure the animal
instincts of a real market, the story went. So they intervened time and
again using government largess to lift inefficient firms to safety, sparing
jobs and limiting pain but keeping their economies from reaching full
potential. [Emphasis added.]²

His point about European and Asian capitalists saving companies from their
own mistakes, and their American counterparts taking pride in their own
³cutthroat but lucrative form of capitalism,² is certainly true?but only so
far. 

The very same can be said about all capitalist governments. They all
consider their job description to include saving their ³too-big-to-fail
capitalists² from their own mistakes when the system goes out of whack. But
they also consider their job description to include cutthroat and lucrative
capitalist tactics whenever the opportunity arises to rake in bigger than
normal profits. 

However, it¹s not easy to understand why capitalists do what they do without
keeping in mind what Adam Smith, one of capitalism¹s most insightful
political scientists taught about the laws of capitalist economy.
Adam Smith¹s contribution to capitalist economic theory
Adam Smith, the Godfather of capitalist economics was the first to explain
the basic laws governing capitalist economic relations in great detail and
how the self-regulating mechanism of the profit-driven economic system
works. 

It¹s virtually impossible to live and function in the capitalist world
without having gained some familiarity with the A-B-Cs of every-day
capitalist economic relations?the law of supply and demand. On the other
hand, it¹s one thing to understand the basic ³arithmetic,² as it were, of
everyday economic relationships, but it¹s something else again to understand
the ³higher mathematics² of its interaction with human social and economic
relations. This, of course, is because of the huge number of factors
involved in any manageable algebraic economic formula involving, literally,
millions and billions of variables?producers and consumers in the national
and global capitalist economy.

We must rely, rather, on the ³higher mathematics² of the vastly complicated
human mind and brain when dealing with the business of billions of people
engaged day-in and day-out in producing, buying and selling commodities in
order to live and work in the capitalist world.

It will prove useful to take a closer look at the laws of supply and demand.
In order to better see its limits, and thus be better prepared for the
higher laws of capitalist economy.

First, let¹s look at the reference to lower and higher mathematics.
The laws of gravity as metaphor
Everyone on this planet believed they knew the basic laws of gravity?what
goes up must come down. Then Galileo came along in the early 17th century
and proved that all things, from feathers to cannon balls? irrespective of
weight and shape?fell at the same rate of acceleration?in a vacuum, greatly
refining the understanding of gravity.

>From the early 17th century on, it became possible for people to know how
gravity really works.

Even so, later in the 17th century, after Isaac Newton discovered the
dynamic between Galileo¹s three laws of motion and their interaction with
the force of gravity (that is, an iron ball fired from a cannon falls at the
same rate of acceleration as an iron ball dropped from the Tower of
Pisa)?thus, people¹s understanding got even deeper.

Then, with the help of the even higher mathematics of Isaac Newton¹s insight
and his invention of the calculus, he proved that the same laws governed the
orbits of all bodies in the universe?at least as far as science and
technology had advanced in the late 17th century.
Adam Smith¹s laws of supply and demand
It will prove helpful to lay out the fundamentals of the laws of supply and
demand, which together with our metaphoric reference to the laws of gravity
will serve as preparation for the ³higher mathematics² of capitalist
economic relations as discovered by Karl Marx.

Adam Smith¹s arithmetical ABCs go like this:

? When demand is greater than supply, a cycle of economic expansion begins.
It ends when the market is saturated with unsold goods.

? Saturation becomes problematic after supply matches demand, because like
all other things in motion, the momentum of economic expansion carries it
far beyond its intended goal of balancing supply with the given level of
demand?resulting in a mass of unsold goods and the beginning of another
cycle of creative destruction.

? But this cycle also forces the least productive capitalists into
bankruptcy. Thus, with a smaller relative proportion of more productive and
profitable surviving capitalists?each gains the possibility of grabbing a
larger proportion of the growing marketplace vacated by their bankrupted
competitors. 

? Supply and demand also forces ever-larger sections of the middle classes
into the ranks of the working class. But at the same time, it also forces a
higher proportion of the expanding work force who have been replaced by ever
more sophisticated machines, into the ranks of the ³reserve army of the
unemployed.² 

? That, in turn, serves to intensify the competition for jobs, which tends
to force wages down?also in accord with the laws of supply and demand.

? Consequently, when demand again exceeds supply, another cycle of creative
expansion of the productive forces begins, with each succeeding cycle
reaching new heights of efficiency, productivity and, therefore, higher
absolute profits. This is followed, by another excessive expansion of the
productive forces; after which, the cycle of creative destruction begins
all over again.

Smith, and the economic experts who consistently followed in his footsteps,
had argued that any attempt to interfere with the ³invisible hand² guiding
the self-regulating mechanism of capitalist economy, would do more harm than
good?resulting in a more profound crisis of creative destruction!

 While the logic of Smith¹s argumentation was scientifically correct as far
as he and those following in his footsteps went, they never fully explained
why. 

Marx, however, in his three volumes of Capital having benefited from what
Smith and his most sophisticated followers had previously discovered, was
able to confirm those generalizations he found in accord with the facts, and
reject those that were not. But he also explained what they couldn¹t
explain. This takes us to one of Marx¹s most important discoveries?why the
average rate of profit tends to fall over time. Marx¹s discovery is closely
related to Smith¹s, but it¹s the only one that fully explains why the
³invisible hand² of capitalism cannot be forced to do what it cannot do.

But if anyone does find a way to fool wise old Adam¹s invisible hand for a
time, the destructive force of the cycle of ³creative destruction² will be
proportionally greater.
The Keynesian revolution ³refutes² both Smith and Marx
The 60-plus years of uninterrupted global economic expansion (something that
has never before occurred in the over 500 year history of capitalism) has
led most bourgeois economic experts to the conclusion that both Smith and
Marx were wrong about the counterproductive efforts to interfere with the
self-correcting workings of capitalism¹s ³invisible hand²!

Economists like John Maynard Keynes, however, after witnessing the Great
Depression and doing their best to extricate the system from its biggest,
longest and deepest of all previous cycles of creative destruction, began
having second thoughts. That is, they came to understand that the only
solution for their dilemma was the mass destruction of surplus goods. This
mass destruction can be done profitably only by war on a global scale,
preparations for war, and the production of the tools, materials and weapons
of mass destruction that comes with the horrendous cost in human life, limb
and property.

 Moreover, Keynes was able to convince those attending a meeting between the
soon-to-be victors of the Second World War at Bretton Woods, New Hampshire,
in 1944. They decided that the Keynesian ³solution² was the only way to
prevent an even more destructive economic collapse at the end of the next
big boom-bust cycle. This Keynesian ³solution² would require a radical
separation of the global capitalist economy from the dictatorship of the
gold-based monetary and trading system, a system thousands of years old.

That is, by creating a faith-based monetary system?termed ³fiat money,²
based on purely paper currencies, they allowed the exponential expansion of
credit and opened the door to unprecedented levels of credit. This new
system would theoretically allow an expansion of the world capitalist
economy for decades (instead of years) and avoid the kind of destructive
crisis of overproduction detonated by the stock-market crash of October
1929. 

Keynes and most others searching for a way out of another Great Depression
had come to the conclusion that the capitalist world could not survive
another one of those catastrophic episodes of not-so-creative
destruction?unless a way could be found permitting the laws of capitalism to
be radically stretched to a previously unattainable level of public and
private debt. 

Thus, the Keynesians, had come to the conclusion that without such a
fundamental change in the global monetary system, (as Keynes had been the
first to propose), a solution could not be found within the framework of the
system. It would have been impossible to postpone the inevitable downward
cycle for decades rather than years?but not indefinitely.

Or as Keynes famously answered a critical student who pointed to the
consequent growth of public and private debt to unsustainable proportions:
³By that time we¹ll all be dead!²  History has already confirmed the first
part of Keynes¹s conclusion, and society is now poised on the edge of the
confirmation of its second side.

The Keynesian system has already given birth to permanent war, permanent
preparations for war, an ever-expanding debt burden, and an accelerating
rate of global inflation in most of the capitalist world.
Tweaking Adam Smith¹s invisible hand
There are a number of indirect ways that Keynesianism allows the Federal
Reserve Bank chairman, in conjunction with the U.S. Treasury secretary, to
intervene to keep the U.S. economy on an even keel. They can tinker with,
and otherwise manipulate, the Keynesian monetary system, albeit to a very
limited extent. And each postponement, as both Smith and Marx warned, makes
the inevitable economic collapse that much worse.

Those assigned by Congress to help Smith¹s ³invisible hand² maintain
economic equilibrium, have already gone a long way toward loosening the grip
over its monetary system, a system which, for thousands of years, had
rigidly and ruthlessly enforced capitalism¹s laws of supply and demand.

This little miracle, when viewed from the standpoint of history, was made
possible by Keynes¹s invention of fiat money; that is money whose value
relative to other currencies and the world of commodities, has no
objectively-determined economic foundation.

Rather, fiat money¹s purely relative value is now determined not by the
traditional universal equivalent?gold or some other precious metal?which
undergoes continual changes in the exchange value of every commodity in the
world marketplace. Thus, the totality of changing relative and absolute
exchange values tests and readjusts them in accord with the varied and
changing value of all commodities based on the changing proportion of
socially necessary labor power incorporated in each commodity. And, because
gold, acting as universal equivalent, is exchanged billions of times more
frequently than any other commodity, its value was tested and proven
billions of times more frequently than all the others.

That¹s something that cannot possibly be done with fiat money; simply
because it is what it is. In the final analysis, its real value is equal
only to the value of the paper it¹s printed on!

That¹s why the tinkering with interest rates and otherwise deflating the
real value of fiat money results in the printing of many more paper dollars,
euros, pounds and yen than the value of most of these nations¹ Gross
Domestic Product. And it especially holds true for the U.S. dollar!

But the short and happy life of the global capitalist order has been
extended by 60-plus years of expansion. The paper currency substitution for
gold has done what it was designed to do. It has accomplished this little
miracle by ending each cycle of rapid expansion with a slowdown of the rate
of expansion, rather than in a destructive contraction. Until now.

Now, however, the mass news media has been scaring the daylights out of the
world¹s capitalists, as well as their most vulnerable victims who will
suffer most from any recession. Even more frightening are the increasing
number of economic commentators who have, one after another, been
characterizing pieces of unusually bad news?and there have been plenty of
those lately, as ³something we haven¹t seen since the Great Depression.²

Whether it turns out that way or not, it has become evident that the U.S.
and the global capitalist economy, is now poised on the brink of another,
even more destructive economic, financial and monetary crisis than we have
seen since the terrible years of the 1930s.

This is the end result of the unending technological process that constantly
replaces less efficient factories with state-of-the-art plants and machines.
Thus, those capitalists that modernize, tend to realize a higher rate of
profit than their competitors who are unable to match their higher level of
productivity at lower cost in human labor power.

But this long-term environment in which there is the tendency toward
ever-lower profit rates, is, in the final analysis, responsible for the
boom-bust cycles of the capitalist mode of production. A growing portion of
the least productive enterprises must either catch up and surpass those who
were the first to introduce the most productive labor-saving machines, or
die. 

Because labor-saving machines keep getting more sophisticated, and therefore
more productive and profitable, the greater proportion of workers who are
replaced by machines, shrinks the world market. This explains why
capitalism, as a social and economic system, is doomed by its own internal
contradictions.

In other words, in direct relation with this overall, long-term process, as
each capitalist earns a higher profit rate than the rest, the average rate
of profit is proportionately reduced.
Behind the falling rate of profit
We come now to the fatal contradiction between the two components of
invested capital, which Marx calls constant and variable capital. The
tendency of the rate of profit to fall is the fundamental contradiction that
will bring the entire structure of world capitalism tumbling down. Here is
how the contradiction is manifested.

Constant capital; that is, the portion of capital invested in factory
buildings, machines, and raw materials, is merely reproduced in commodities,
but does not create any new?that is, added value?or what Marx calls,
³surplus value.²

On the other hand, variable capital?the portion spent on labor power
(wages), both reproduces itself and adds new value to the commodities
produced ? surplus value.

In other words, even fully ³automatic² machines cannot produce commodities
without the human labor that may be required to maintain, repair, adjust,
and turn them on and off. This is the hidden reason why the rate of profit
is doomed to fall at the same pace as the rate at which new labor-saving
machines replaces human labor power!

Thus, when completely or almost completely automatic factories are
eventually created?as they must, logically, do?the rate of profit falls
close to zero. In other words, if machines do away entirely with the need
for human labor power, then zero workers, equals zero surplus value and zero
profit!

After all, if surplus value is zero, it means that there are close to no
workers receiving paychecks. This leaves nearly no one with money enough to
pay for the product of automatic factories?no one, that is, except
capitalists themselves. But that, of course is an absurdity. Or, more
practically speaking, it means that close to no money is in circulation to
pay for the great mass of goods produced ³for sale.² And that, in turn, will
end capitalist production along with society divided by class. That too
proves that capitalist economy must die either naturally or unnaturally.

But long before such a contradiction becomes a reality, something far more
important must be set into motion. And that, as German Marxist Rosa
Luxemburg predicted, capitalism must be forcibly overthrown by an
increasingly rebellious working class, followed by either successful
socialist revolution or the end of civilization as we know it.

In other words, as Rosa sloganized it, it must end either in ³Socialism or
Barbarism!²

 



[1] <#_ftnref1>  ³Sixteen Tons,² hit song made famous by country singer,
Tennessee Ernie Ford, was written by Merle Travis.

 


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