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Capitalism and Its Crisis Proclivity
by Elmar Altvater and Conrad Schuhler
Email: marc1seed (nospam) yahoo.com
02 Dec 2014
The liberal economists of the 19th century claimed no crises could occur in capitalism since every supply creates its demand. On the other hand, Marx and Engels recognized early on the causes for crises in capitalism. The contradictions of the accumulation process lead to crises.
CAPITALISM AND ITS CRISIS PROCLIVITY
By Elmar Altvater
[At the end of October 2014, isw (Institute for Social-Ecological Economic Research) had its fall seminar with answers of Marxism to burning questions. For two days over 40 participants discussed three addresses by Elmar Altvater. Ursula Dersch summarized the main statements by Elmar Altvater. This article published on October 25, 2014 is translated from the German on the Internet, www.isw-muenchen.de.]
1. THE CRISES – THE CONSTANTLY RECURRING `WORLD MARKET THUNDERSTORM’ AND THE PECULIARITIES OF FINANCIAL CRISIS
The liberal economists of the 19th century claimed no crises could occur in capitalism since every supply creates its demand (Say’s theorem). On the other hand, Marx and Engels recognized early on the causes of crises in capitalism. The contradictions of the accumulation process lead to crises. Capitalists want to minimize wages as much as possible which tears open the discrepancy between the economy’s production capacity and the market’s consumption capacity. Crises are “ambivalent.” Workers lose their jobs and fall into distress. On the other hand, crises remedy malformations and stimulate technical, economic and social innovations.
Marx assumed crises will always occur in capitalism. He distinguished between small and great crises. The massive crises can involve the form of money, market and politics. On account of the anarchy of the market, there will always be disproportions. For example, crises arise through under-consumption because of very low wages. The opposite situation also leads to crises: successful wage disputes lower the profit rates.
No crisis repeats itself. The present crisis is a system crisis, possibly the most severe in the last 500 years. The whole world is affected by this crisis. Repercussions result for nature and politics and not only for the economy. European integration is endangered: anti-foreign breakdowns increase along with the tensions in the Euro zone. Limits, perhaps even the end of growth, are reached. The crisis seizes both the real economy and public finance.
The 2007 sub-prime crisis was the trigger for the current crisis. In capitalism, a little shock can have great effects. At the beginning of the crisis, there was private speculation that led to private debt overload whose solution raised the public indebtedness. The rating agencies played a fatal role. Limitations of incomes and living conditions, decay of public institutions (schools, hospitals), loss of budget sovereignty and de-democratization are manifest as consequences of the austerity policy in the impacted states.
2. THE CAPITALIST WORLD MARKET AND IMPERIALIST CONFLICTS
The capitalist world system developed between 1492 (America’s discovery) and 1648. With the Westphalian Peace, a system of nation-states arose that arranged a mechanism for their mutual relations. The capitalist world system was always colonialist and expansive. To the European states, the plundering of raw materials (plantation economy) and the plundering of people (slave system) were central in the “long 16th century.”
In his imperialism theory, Lenin described the competition of imperialist states for colonies that ultimately led to the First World War.
In the present, the discussion about free trade is provoked again. Although free trade promises to improve the wealth of nations, many people live in misery and distress. The ideology of free trade dominates in the universities, media and in political decisions. Liberalization, deregulation and privatization are urged. Free trade is a means for enforcing the capitalist production method and the profit principle globally.
TTIP is the continuance of free trade ideology in finance-driven capitalism. It begins a new stage in global class conflicts. The negotiations on TTIP are conducted in secret and democratic control is excluded. If TTIP takes effect, businesses could sue states when industrial safety acts or pollution control laws possibly reduce the expected profits of firms. The lawsuits take place before courts of arbitration filled with lawyers from large economic law offices, not before regular courts of the states. Social standards and ecological standards can be suspended by big corporations.
While economic crises have a cyclical character, crises of nature have a cumulative character. The development of a capitalist economy is not compatible with the natural courses. That the powerful capitalist states may force other countries to renunciation with violence and even wars and not renounce themselves is conceivable as a possible reaction to finite raw materials. Oil states still accept the bond of the oil price to the dollar and thus strengthen the hegemony of the US. It is foreseeable that capitalist development could end in an ecological cul-de-sac.
3. HOW GREAT IS THE TRANSFORMATIVE POWER OF CAPITALISM TO A GREEN CAPITALISM?
3a) GREEN CAPITALISM
Wise capitalists on principle are not enemies of transformism. They believe everything must change if we want everything to remain as it is. In the past, there were two Promethean revolutions: the first consisted in the settling down of people and the second in industrialization.
The Greens assume fewer raw materials and energy will be used in green capitalism and more recycling will occur. They hope for lower costs which will affect profits positively.
Professor Altvater is convinced green capitalism develops completely unsatisfactory strategies and ultimately prevents the development of alternatives. The certificate trade with CO2 emissions is one example of counter-productive reforms. Too many certificates were awarded in Germany and the toxic CO2 emissions were not reduced. Corporations use the certificates like securities that can bring profits. The certificates have become legitimate speculation markets in rivalry to the financial markets. The climate cannot be improved through certificates. In Altvater’s opinion, green capitalism is impossible. A growth pressure exists in capitalism that leads to more and more resource consumption. The crisis proclivity of capitalism is not overcome in green capitalism.
3b) GREEN SOCIALISM
We find ourselves in an age formed by people that could be called “capital ozone” because the capitalist economic system is dominant. “Solar” and “solidarity” are important terms for green socialism. Energy production should forego on fossil energy and hearken back to solar energy, wind and geo-thermal. All over the world there are already cooperatives today. This lets us hope socialism is possible in regions before capitalism arrives. A “moral economy” often exists in countries under great distress as temporarily in Argentina.
The socialism of the 21st century must be ecological and not cling to centralized forms of property, centralized planning, dependence on fossil energy, ecological destruction as a result of contempt of nature, growth fetishism and the precedence of investment goods over consumer goods.
The following aspects are important for the way to ecological socialism:
• People respect nature.
• People support social and economic equality.
• Acceptance of the commons and common interests grows among people.
• Foreign-controlled work is abolished and self-determined work introduced.
Professor Altvater ended with a quotation from Rosa Luxemburg: “Freedom without equality is exploitation. Equality without freedom is oppression.”
ECONOMICS IS MAINLY ONESIDED AND REACTIONARY
By Conrad Schuhler
[This article published on November 5, 2014 is translated from the German on the Internet, www.isw-muenchen.de.]
1. THE FAILURE AND CULPABILITY OF ECONOMICS
Doubts about the explanatory power of economics have arisen since the 2007/2008 world financial crisis. That is really the understatement of the year. Economics (the mainstream around neoliberalism/ neoclassicism) cannot explain the crisis. Its advice and prescriptions were and are an important cause for the genesis and persistence of the crisis.
International capitalism changed its course from the beginning of the 1970s. Until then it based its development on so-called Fordism since the end of the Second World War. Mass production increased on the foundation of higher domestic demand. The change of policy consisted in producing for the world market and no longer for the domestic market. Wages and salaries, previously the pillars of domestic demand, were now mainly and often exclusively considered cost-factors minimized for reasons of global competition. The era of neoliberalism began that aggravated the crisis with its reduction of purchasing power demand and led to a shocking financial crisis. Credits on one side and heavy debts on the other side replaced income generated in production more and more. The bubble formation over assets began and its eventual bursting starting with the mortgage credits in the US.
The neoliberal economic theory from Vienna to Chicago could not explain this crisis. This theory was jointly responsible for this crisis. Significantly the international spokespersons of neoliberal theory, Milton Friedman and Friedrich August von Hayek, were awarded Nobel Prizes for economics in the 1970s. They were the driving forces of the Mont-Pelerin Society that successfully urged market fundamentalism for more than 60 years as a model for politics and the economy… Eugene Fama received the 2013 prize for his “efficient market hypothesis” according to which the rational actors on the financial markets always achieve market efficiency and balanced prices. That is why a regulation of the financial sector should be absolutely rejected. For that, the Nobel Gold for economics was awarded despite the continuing financial-, debt- and investment crises.
This failure of economic theory is manifest on the national German plane and no only on the global plane. In November 2008, four weeks after the collapse of the Lehman Brothers investment bank that explosively triggered the financial crisis, the “council of the five wise men” that advises the German government on economic questions predicted a slight economic dent for the coming year. In truth, the 2009 production fell 5%. The dominant economic theory is blind for the crisis and therefore has no solutions.
2. WHY ECONOMICS IS MAINLY ONESIDED AND REACTIONARY
In the study of the history of thought and the classical authors of the economy, critical students demand the whole range of economic thinking and not predominantly statistics and econometrics. As a first reaction, their identification of this deficiency seems surprising. Normally sciences enjoy spreading their intellectual origin and development. Subjects like history of law, philosophy of law and sociology of law officially belong to the canon of “jurisprudence.” The thoughts of Aristotle, Galileo and Newton are present along with Einstein and Weizsaecker in physics where the teamwork of experimental methods and theoretical models are valued far more than in statistical-econometric economic theory. Why is this different in economics? Why is economics so blind and dumb regarding its own history of ideas?
Economics emphasizes the origin and distribution of social wealth. As the textbooks have said for generations, economics is based on the assumption of scarcity of resources to satisfy the needs of “economic subjects.” The legitimation of those who profit most from this economic system basically dictates the hard work and pay of the production factors and political power depends on the results and recommendations of this discipline. Economics has an ideological rule-securing or rule-challenging function. Therefore it acts more resolutely than anti-ideologically and appears as a “neutral” authority of scientific reason by withdrawing to statistics and econometrics.
However the exact opposite is true. The problem is not in the application of mathematical procedures but in not questioning the axiomatic of these procedures, their presuppositions and basic assumptions. Three points illustrate this.
2.1 THE FALSE DOGMA OF ECONOMIC BALANCE
In economics, the principle of economic balance as expressed in the theorem of Jean Baptista Say is in effect. Incomes arising in production cover the supply. In the modern macro-economy, the aggregate supply is said to correspond to the aggregate demand so market clearing is attained. No crises would occur if the market were free from interventions. The system by itself tends to balance.
This is logically impossible. That the arising incomes do not need to refer to either the place or time of the produced supply is ignored. Income can be saved and not spent so a gap opens up immediately between supply and demand. This was a central point of the criticism of Keynes in the neoclassical balance theory.
Spending need not occur where the incomes arose. The purchasing power demand is directed at goods… while the losers are eliminated from the market. IN a ridiculous way, Say’s theorem and the underlying assumptions of balance theories of all kinds – from Walras and Pareto to Marshall – deny the possibility of a crisis originating from the system. Therefore they only repeat the meaningless phrase exogenous factors responsible for the crisis to explain the manifestly constant crisis.
2.2 THE FALSE AND INHUMANE PICTURE OF HOMO OECONOMICUS
The model of the person in economics is the so-called homo oeconomicus who perfectly surveys the market, clearly foresees the future development and then rationally decides upon an action, optimally adjusted to all relevant data, that creates the greatest economic advantages for him. This homo oeconomicus is also the basic figure of all marginal theories like the marginal benefit- and marginal cost schools. However the marginal figure is a chimera. Neither this know-it-all or this predict-it-all person exists nor a person who makes purely rational economic decisions. Think only of the influence of advertising focused on the affective approval of the recommended product, the opposite of rational-economic enlightenment about the range of items for sale. The motivation strategy is used for insurances, banks, textiles, medicines and building materials; rational considerations are eliminated.
Thus the homo oeconomicus cannot be our hope and is not desirable or future-friendly. For example, there is an increasingly sharp conflict today between protection of the atmosphere and nature conservation on one side and unscrupulous profit-mongering on the other side. The more business can shift ecological costs to the general public – the so-called externalization of ecological costs – the better the balance sheet looks. The economic benefits for the capitalist entrepreneur are in sheer contradiction to nature and to the person. Therefore we do not need a homo oeconomicus but an economic actor for whom the human factor and not economic advantage is most important in his economic actions.
2.3 MONOPOLISTIC COMPETITION DOMINATES MARKET ECONOMY TODAY
In many ways, economics starts from atomistic competition to which market participants have to submit. In truth, monopolistic competition has long dominated. Enforcing monopoly power strategically on the market is central, not adjusting to the free price formation on the market. This conversion of monopoly power also takes place on the political plane. If a US-EU free trade agreement should be accepted today with the TTIP with which corporations gain the right to sue for compensation against profit-reducing laws, this would demonstrate the primacy of the economy over politics and democracy.
3. WHICH THEORETICAL POSITIONS MUST ECONOMICS RE-APPROPRIATE TODAY?
3.1 THE MARXIST POSITION
Marx initiated a revolution of economic theory with a precise analysis of the crises of the economy for the first time. Marx applied the labor value theory starting from Adam Smith and David Ricardo to the commodity labor itself.
Marx stated: “The value of the commodity labor like every other commodity is determined by the production time needed for the reproduction of this specific article.” The so-determined value of labor can be surpassed by the goods produced by labor. Only a part of the produced goods is necessary for the reproduction of labor. The excess part is the surplus… The capitalist on one hand wants to maximize the surplus value and on the other hand minimize wages. This enormous divergence of consumer power on one side and productive power on the other side represents the endogenous crisis in capitalism. According to Marx, the endogenous crisis can only be remedied by socializing control over capital and over the hard work and compensation of production factors.
3.2 THE POSITION OF KEYNES
For Keynes, the level of production and employment is determined by the effective demand for goods. The consumption of private households is its greater factor. According to Keynes’ consumption function, the savings rate increases with the increase of income. The marginal consumption inclination decreases. Therefore more equality in income distribution has a positive effect on consumption, investment and growth. A lower general wage level would not have a positive employment effect but would result in a demand shortfall and job losses. Thus Keynes pleads for greater equality in income distribution and for a “comprehensive social control of investments.”
3.3 THEORIES ON FINANCE-MARKET DRIVEN CAPITALISM, PAUL KRUGMAN AND RUDOLF HICKEL
We face completely over-sized financial markets today that have uncoupled from the real economy creating value. In 2010 the volume of financial transactions amounted to 75-times world production. When financial businesses offer profits of 10 to 30% while the economy only grows 1 to 3% per year, an ever larger part of wealth is sucked up in the largely unproductive financial sector. This economy liquidates itself. Therefore Hickel and others urge the rigorous regulation of the financial sector and many support the conversion in to public, democratically-managed property. Only a democratic financial management can ensure more democratic control of the economy.