The Crisis of the Capitalist Economy

Oct 25, 2017

The following article, which appeared in issue #188, December 2017, of Lutte de Classe, the political journal of the French Trotskyist organization, Lutte Ouvrière, is a text from LO’s annual congress.

Declarations by governments and the media have recently become more optimistic about the global capitalist economy. The word “recovery” is used frequently, tempered by adjectives such as “prudent” and “fragile.” But even this guarded optimism is interspersed with alarmist declarations about the threat of a financial crash.

The European Central Bank (ECB) declares itself optimistic about recovery, although its president Mario Draghi adds the following touch: “unless a risk materializes.” Well yes, of course....

In its most recent report on economic perspectives, the French Economic Observatory (OFCE) wrote: “There is recovery in all geographic zones,” but it then added: “the marks of the crisis have not yet faded and although unemployment is decreasing, it remains high in the Eurozone.”

Recovery for Whom? Not the Laboring Classes

Bourgeois economists found their optimism on only two parallel domains: company profits and the amount of dividends paid out to shareholders, which are both doing well.

Under the headline “A Good Semester for the CAC40 Companies,” Les Échos (France’s major national financial and economics daily) wrote on September 1st and 2nd, 2017: “In a single semester, the CAC40 companies accumulated as much profit as they did for the whole of 2013 and almost as much as in 2015: 50.241 billion euros, an increase of 23.6% in one year.... It looks like the 2007 record profits of 96 billion euros [just before the start of the current crisis. Ed.], might be attainable in the not too distant future.... Another good piece of news is the acceleration of growth in revenue (+ 6.9%): ‘ There’s a green light on all the indicators for the first time in a long while,’ admits the firm of Ricol Lasteyrie Corporate Finance.”

The Global Head of Equities at Amundi Asset Management affirms that “a return to pre-crisis profitability levels is possible.”

These record profits are reflected in the dividends handed out to shareholders: 1.154 trillion dollars were paid out by the 1,200 biggest companies in the world. And that is just the tip of the iceberg, because these numbers do not include speculative funds and banking subsidiaries based in tax havens.

These numbers are so big that they seem unreal, but the fortunes accumulated regain their meaning when they are set against the cents saved by cutting wages, eliminating breaks for workers on production lines, or supermarket cashiers having to wear adult diapers because they are not allowed to take a toilet break!

Behind the economic numbers, there is a class reality: the big bourgeoisie continues to get ever richer. It would take too long to list all the billionaires named in the specialist magazine Forbes. Their number is growing and their fortunes even more so.

Meanwhile, the same banks, which were bailed out from the 2008-2009 collapse by injections of public money, have been massively supported ever since by the Federal Reserve and the ECB, and they have made record profits: 23 billion euros in 2016 for the top six French banking groups, 27.8 billion dollars for JP Morgan alone, the top U.S. bank.

Some commentators believe they can see signs of possible recovery in other areas: this year in France, the number of new companies is greater than the number that have closed; there is a supposed drop in unemployment in Germany, Great Britain and the U.S.; industrial metal prices are rising on a global scale, indicating a growth in demand.

Best case scenario, these assertions show mindless optimism. But more often, they are crude distortions of the truth or out-and-out lies.

The triumphant headline in Le Monde (France’s “establishment” newspaper) on September 29th, read: “France Is at Last Opening New Plants,” with a sub-heading: “In the first semester, more companies opened than closed for the first time since 2009.” But the main body of the article qualified this greatly: “This positive change is far from wiping out the years of deindustrialization: there are still around 570 fewer plants today than in 2009.” And, more importantly, it explains that the new plants are much smaller companies than those that closed—doubtless start-ups with an uncertain future—and that “the new sites generally have less personnel than the ones that closed.”

According to the economic database Trendeo, industrial production in France remains 10% lower than in 2007.

Commenting on the statistics of INSEE (France’s national institute for statistics and economic studies) on unemployment, the headline of Le Monde on October 7th asserted: “Economic Recovery Seems Here to Stay, but Unemployment Is Decreasing Too Slowly.” So no grand conclusions can be drawn—even from the official figures about economic recovery.

Never mind: things are so much better elsewhere! Economic spokespeople for the bourgeoisie present France as a special case compared to its neighbors, Germany and Great Britain, where unemployment is said to be dropping. The U.S. is supposed to be moving towards full employment.

This is a campaign of bare-faced lies. Even where “unemployment in the strict sense of the term is stable…, insecure jobs are on the rise” (according to Alternatives Économiques, a French monthly magazine on economic and social issues). By “unemployment in the strict sense of the term,” French statistical jargon means only people who are unemployed and have not worked at all in the preceding months. Their number has risen to 3.5 million in mainland France. But this figure does not include those who did work but for less than 78 hours in a month, those who are in training, and those who are in subsidized jobs. These workers are lumped together with the gentle expression of “reduced activity,” but this means reduced wages, so reduced in fact that they cannot live on just one job.

Unemployment in Germany is indeed low. In the twenty years between 1992 and 2013, the number of people working has grown by almost four million. At the same time, even if a lot more people are working, the total number of hours worked has decreased from 69 billion to 66 billion per year!

A lot more people working, but a lot fewer hours worked. The truth is, there is a major increase in people being forced into part-time work, so there are part-time wages or mini-jobs of less than 20 hours per month, meaning that people cannot live without having two jobs or more.

Since the economic crisis of 2008, part-time work in France has increased by 80%.

Someone in Great Britain who has worked just one hour in a week is no longer considered to be unemployed for that week.

And as for the U.S. being close to “full employment,” the official statistics place the level of unemployment at 4.4%. This is a gross manipulation of reality. The website Shadow Statistics estimates that, if all the people who are “discouraged” are counted, which they have not been since 1994, the true level of unemployment is 23%.

Even those numbers that are used to pretend unemployment is decreasing tell a completely different story. They show the extent to which the capitalists and their shareholders have managed to profit from the relation of forces ensured by mass unemployment in order to generalize job insecurity and flexibility, intensify exploitation, and increase the number of workers who may well be working but are crushed by poverty.

Another figure used to show signs of recovery is the sharp rise in base metal prices on the London Metal Exchange (the principal market for these products): iron, copper, and zinc. This is indeed new compared with last year because industrial raw material prices had pretty much collapsed since mid-2014.

The price of copper, for example, has risen by more than 15%. As a result, the two largest producers in the world of this raw material essential to industry, Chile and Peru, have attracted investors, including those who intend to invest in production by opening new mines and hiring workers. The increase in the price of copper has sparked fierce competition between major trusts and the banks behind them. In Les Échos on September 28th, S&P Global Market Intelligence was reported announcing that “in Latin America, which accounts for 40% of the world’s copper reserves, the number of holes drilled in copper exploration programs was the highest since 2013.”

The earlier stagnation in production led to lower demand for raw materials, causing their prices to collapse. This collapse brought about the closure of a number of mines, a withdrawal of capital, and layoffs.

The collapse itself was probably an over-reaction. Speculators now clearly foresee a reverse swing of the pendulum. The prediction that the price of iron ore, for example, after having dropped sharply, will probably now start to rise, is attracting not only capital invested in iron ore extraction but also speculative capital. These speculators place their money in iron ore in the hope that they can sell off their shares before the pendulum swings back again. But this does not translate into any kind of investment.

Purely financial anticipation—which is to say speculation—amplifies the ups and downs of production.

Capital that flows towards industrial companies also does so through mergers and acquisitions, i.e., companies being bought out by more powerful companies. This kind of operation, which has increased markedly over the past year, increases the concentration of capital without increasing productive investment or creating jobs. On the contrary, job losses are often a direct result of the restructuring that takes places after mergers.

Money put out for mergers of productive facilities does not create new productive forces. For the most part, it just involves buying the market share of a competitor. Beyond the implication of different governments in the de facto buy-out of the French transportation company Alstom by the German conglomerate Siemens, or of the shipbuilding company STX France by the Italian shipbuilder Fincantieri, economic crises have always been periods for concentrating capital. The giants that dominate an economic sector are replaced by more powerful behemoths. Imperialism is the rule of monopolies. Financialization simply gives them more ways to suck the lifeblood out of all economic activity.

Major companies buying up their own shares obviously does not create more productive forces. It is nevertheless one of the methods favored by the boards of directors of those companies to spend their profits. The U.S. publication Foreign Affairs asserts that between 2003 and 2012, the S&P 500 companies—the 500 largest companies listed on the U.S. stock markets—spent 54% of their profits in buying back shares. What’s worse, they borrowed the money to do so! The financial snake is eating its own tail. But the major shareholders do not see this as an aberration. The buying up and elimination of part of a company’s shares automatically increases the value of the remaining shares and is therefore profitable to those who own the most shares. It is one of the most efficient ways for the rich to get richer and for inequality to become more pronounced even within the ranks of the bourgeoisie.

Debt and Financialization

Le Monde writes: “Capital investment funds are overflowing with money; banks are fighting over who can offer abundant and inexpensive financing. And the temptation to inject even more debt is strong.” In plain language, there is a strong temptation to put capital into government bonds, treasury bills, etc., i.e., in shares that represent state, or sovereign, debt. Marx had already written, in Capital, about the role of public debt that, “as with the stroke of a magic wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry.”

Financialization has led to abnormal growth of the financial sphere and has given this magic wand a power that is infinitely stronger than it was in Marx’s time.

The world of finance is overheating again. Debt has reached new heights in the U.S. and in China. This includes not only state debt, but also household debt. That is why Le Monde (July 9th-10th), under the headline “The Seeds of the Next Financial Storm,” was moved to write: “The level of household debt in the U.S. has never been so high.... It is 50 billion higher than the record amount registered in the third trimester of 2008, when Lehman Brothers collapsed.”

The threat is so tangible that the U.S. Secretary of the Treasury was able to use it to put pressure on Congress to vote for Trump’s proposed tax reform as quickly as possible. On October 19th, Les Échos commented: “The Secretary of the Treasury’s words struck a chord on the eve of the anniversary of Black Monday, the Monday in October 1987 when the decline of the Dow Jones Index was the biggest in its history (-22.6% in one day).”

French president Emmanuel Macron is remarkably cynical when he takes stock market shares out of the tax base on the grounds that this will encourage productive investment. But the policy that subordinates the state’s resources to the possibilities of finance—i.e., to the financiers and the big capital for which they work—goes way beyond Macron’s own little personality. All imperialist countries have this policy in one form or another. It is demanded by big capital.

One of the most despicable aspects of a growing number of social matters being subordinated to finance is what is happening in terms of healthcare, treatment for dependent people (in retirement homes) and the handicapped, etc. Financialization has invaded these sectors, directly in private clinics and retirement homes and indirectly in the public sector itself. Despite considerable progress being achieved on technical and medical levels, there is a serious decline at the human level. What capitalism has brought to industrial production, financialization has brought to the realm of human relations: sick people, old people, and handicapped people become nothing more than merchandise!

But what purpose do these billions accumulated in finance serve?

Les Échos is surprised that tiny little Ireland is third on the list of U.S. creditors, below China and Japan but above the United Kingdom and Saudi Arabia, while Ireland is owed nearly four times as much as France. The newspaper talks of the phenomenon as “an oddity that is highly indicative of the weight of investment of the big multinationals.”

The debt security amassed in Ireland is made up of U.S. Treasury bonds. Even if they are considered, in country-by-country statistics, to be debt owed to Ireland by the U.S., these bonds do not belong to the Irish government but to the big multinationals that chose Ireland as a place to hoard their reserves due to its very attractive fiscal regime. And just to name the major, mainly U.S., companies: Google holds 37 billion dollars of U.S. loans, Facebook holds 11 billion, Apple 52 billion, Microsoft no less than 111 billion.

What do these big companies do with their reserves? When they possess these gigantic sums of money, which they do not invest in production, they devote them to financial operations, i.e., speculation, just like major hedge funds do.

Thirty U.S. companies, including Ford, Coca-Cola and Boeing, have apparently accumulated more than 800 billion dollars in various bonds as investments.

To the bonds issued by the U.S. government are added company bonds, i.e., debt instruments issued by corporations. In other words, these large companies are competing with speculative funds.

Les Échos adds, in the kind of understatement that characterizes bourgeois economists: “This impressive growth in the power of companies in the bond market may one day become a concern for financial stability.”

We have already explained in the past the reasons for the financialization of the economy and the parasitism that this represents for the capitalist economy. We will not go into that again here.

This financialization weighs more heavily on the economy with every passing year, even for the capitalist companies themselves. The headline of Les Échos on October 2nd, 2017 was: “Activists Upset Relations with Shareholders,” with the added sub-heading of: “Almost 66% of companies say that they are vulnerable to the risks represented by activists on the stock market.”

These “activists” are the financial companies, known not so long ago as raiders. They are speculators who prey on the weakness of a company, the errors or failings of its directors. They buy it up and sell off its profitable activities piece by piece, then sell the rest at a discount or close it down.

Les Échos goes on to say: “Activists are at the center of their worries. And for good reason: a Morgan Stanley study shows that, over the last five years, activist campaigns have doubled in Europe (119 between July 2016 and June 2017) with prestigious targets such as Safran, Casino or Nestlé. Even if this is less widespread than the phenomenon in the U.S. (327 in one year), the sudden appearance of activists whose methods are sometimes unorthodox poses a real challenge for Investor Relations Managers.”

Financialization weakens industrial production, and yet the whole jackpot of surplus-value that makes finance prosper comes from industrial production, i.e., exploitation.

But it is the same capitalist bourgeoisie, even the same individuals, that own both the large companies that are attacked and the speculative funds that attack them! The finance that devours industry is nothing more than capitalism devouring itself.

Ever more colossal amounts of capital are placed and moved from one region of the planet to another. Less predictable than cyclones and tsunamis, their consequences are more devastating for the lives of millions of human beings. At the heart of their movement around the world is profit, even very short-term profit. We can see this in the ultra-sophisticated software that can earn money for its owners in micro-seconds from infinitesimal differences in exchange rates or share prices. And it is not necessarily reality that guides them but their idea of reality and the advantage they can draw from it.

A declaration by Janet Yellen, the Chairwoman of the U.S. Federal Reserve, or by Mario Draghi, president of the ECB—or more precisely the interpretation given to it by financial markets—can create a financial storm. In an international situation marked by instability, all it takes to create unpredictable movements of capital is for Trump to raise his voice against North Korea or Venezuela, a terrorist attack in London or Barcelona, or the threat of a government collapsing.

The powder keg is so full that the tiniest spark could set off a huge explosion. Economics and politics are tightly entwined, and the capitalist system has gone mad.

The most recent madness of the system is that of speculation on virtual currencies—Bitcoin, Ether, and many others. These are becoming speculative bubbles, and, while they remain virtual for now, they can lead to very real financial crises.

Bitcoin is a currency exchanged through computers and is virtual in that there is no control over it, not even by the central banks. There are around two hundred virtual currencies that go under the generic term of cryptocurrency. They are bought and sold by financiers. On October 6th, 2017, Le Monde asserted: “The market exists. 70 hedge funds (speculative funds) now invest in these virtual currencies, of which 750 billion dollars are exchanged on a daily basis.”

On October 9th, Le Figaro posted the headline: “Virtual Currency to Finance Start-ups.” But even if information technology start-ups had a hand in the invention of cryptocurrencies—some IT companies even thought that this would be a way to avoid the need for bank loans and finance—a monster has been created, and it escaped some time ago. Speculative funds are attracted by the smell of new financial markets, and the market in question is expanding. It is not a market made up just of innocent “geeks” creating start-ups, but more so of those who are involved in what economists delicately call “the shadow economy”: drug revenue, illegal arms sales, slave trading, money-laundering, to name but a few.

Cryptocurrency generates exponential profits. While the head of Goldman Sachs, attracted by profit, may hope to add the emission of Bitcoins to the bank’s activities, his counterpart but nonetheless competitor at the head of JP Morgan says, “Bitcoin is a fraud that will blow up.”

And he should know! At the core of the matter, these virtual currencies are only pushing the virtual nature of the billions of dollars or euros moving around the world in electronic circuits to its full conclusion.

This dispute between two hotshots of the capitalist economy might be funny if cryptocurrency did not pose a threat—a very real threat!—to millions of people who have never heard of Bitcoin or Ether, and if the real profits that these virtual currencies generate did not also rely on very real exploitation.

The increasing financialization continually pushes the parasitism of big capital and its aberration ever farther. Shareholders in the major companies, i.e., the big bourgeoisie, get richer by making workers’ living conditions worse, even in the richest industrial countries.

Finance Devouring Social and Economic Life

Financialization does not just make the small number of ultra-rich in the big bourgeoisie richer at the expense of the working class; it also damages and rots away the whole of social and economic life.

From time to time, some of the strategists of the big bourgeoisie rejoice in having up until now avoided, particularly in 2008, a repetition of the 1929 stock market crash.

In fact, they are not even sure of this, judging by the anxiety with which they follow the formation of financial bubbles now here, now there. But whether a financial crash that is more catastrophic than that of 1929 occurs or not, the damage that financialization has inflicted on social and economic life is already here. The collapse is not just in the future, but started years ago and it affects all aspects of economic life and, in turn, all social life.

All aspects of social life, from the healthcare system to public education and infrastructure, are already deteriorating due to the growing influence of finance, whether directly or indirectly through funds taken from them by the state.

In Germany, probably the most industrially developed country in Europe, road networks are falling into disrepair. Bridges on essential roadways can no longer support trucks over a certain weight. High schools, even in upper-class areas, have to rely on the generosity of the students’ parents to guarantee a minimal upkeep.

In Rome, the poor state of the water-distribution network, added to by the drought, is making the existing problems worse because there are no funds for maintenance. Last summer, the city avoided cutting off water only by pumping from a lake, leaving other communities in difficulty. Interviewed by the Corriere della serra (Italy’s most well-known daily newspaper), the president of the public waterworks federation estimates that it would cost two billion euros to renovate the system. But the city cannot afford to pay: it is already 15 billion euros in debt. In a major city in one of the most developed countries on the planet, paying debt interest and paying for water distribution at the same time is just not possible. A clear sign of regression in a city that had a state-of-the-art water supply system … two thousand years ago!

These are situations that a majority of people on the planet, living in underdeveloped countries, have always experienced. Imperialism has never allowed poor countries to develop a healthcare system or any of the infrastructure that is possible in this day and age. But now, capitalism is even demolishing what exists in the developed and privileged part of the world.

An essayist who calls himself Marxist, Anselm Jappe, titled a recent work The Self-Devouring Society—Capitalism, Excess and Self-Destruction to explain his view that capitalism is reaching the end of its tether because of its regressive dynamic. Among a small fringe of the intelligentsia, he is not the only one to observe or even demonstrate this. But, like many of his peers, he takes his reasoning no further than the observation.

The problem is to know if this “self-devouring capitalism” which is currently devouring itself right before our eyes will not devour all of human society, or if the latter will find within itself the strength necessary to overthrow the existing social order and to establish a new social organization free of the dictatorship of the big bourgeoisie, of private ownership of the means of production, of exploitation, and of competition.

And therein lies the main difference between those who, to paraphrase Marx, are happy to use Marxism to understand the world and those who take Marxist ideas for what they are: the revolutionary instrument needed to change it.

Commentators who are taken seriously or are considered to be “distinguished economists” are currently asking themselves very solemnly about “the mystery of vanished inflation.” This was actually the title of a recent article in Le Monde. With a mixture of naivety and lies, they express surprise at the fact that “U.S. salaries have risen very little or at least not at the same rate that they did before the financial crisis,” and go on to say: “The strange aspect of all this is that there is almost full employment. This should mean higher pay checks, which is supposed to mean higher prices for goods and services.” They make the same observation for Europe, where “a return to more robust growth and the big drop in unemployment have not brought about the hoped-for spurt.”

Well of course not! Economic life is not based on abstract economical mechanisms but on social relations, the relations between social classes! Behind the mechanisms that are the livelihood of the bourgeoisie’s economists and for which some of them receive Nobel prizes, lies the reality of class struggle. Since the start of the crisis, the big bourgeoisie has been waging a fierce war to siphon money off from society to maintain its profits.

In his time, Marx denounced commodity fetishism, particularly that of money. He explained that these are inventions of human society at a certain stage of its development and that they hide the true social relations between human beings and the domination of one social class over another; in this specific case, the domination of the capitalist class over the exploited classes.

Humanity will be able to truly solve its most fundamental problems only by destroying such fetishes and, above all, the social relations that they hide. This means that it must put an end to the domination of the big bourgeoisie and to the capitalist order that it upholds and of which it is the principal beneficiary. The only social class that has the power and interest to do so is the worldwide proletariat.