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Proletarian issue 20 (October 2007)
Theory: Capitalism and crisis
The current ‘credit crunch’ is the latest manifestation of overproduction crisis.
The so-called ‘credit crunch’ that is convulsing the financial world expresses in a very sharp and dangerous form the most fundamental contradiction upon which capitalism is founded, and upon which it must in the end founder. That contradiction is the conflict between (a) the social, public character of the productive forces that capitalism brings into play and helps to develop, and (b) the private character of capitalist appropriation. It is that contradiction which again and again plunges capitalism into the crisis that is central to this system of production relations: the crisis of overproduction.


Capitalism expands the manufacture of commodities as if the universe were populated exclusively by consumers with bottomless pockets. This is because in order to stay competitive and keep ahead of their rivals, individual enterprises must constantly be expanding, taking advantage of economies of scale and selling greater numbers of products. Under capitalism, a business can either expand and grow, get taken over by a bigger business or go bust.

We say that the self-expansion of capital is the mainspring of production. This means that capitalists produce in order to make profits – to increase their capital; satisfying the wants (or not) of the people is, as far as the capitalist is concerned, an accidental by-product of expanding his capital.

Meanwhile, however, that self-expansion is necessarily accompanied by the impoverishment of the mass of workers, since, to make profits from economies of scale, capitalist enterprises increase mechanisation and discharge as many workers as possible. Those that are left work harder, faster, and usually for diminishing wages.

The fruits of public labour are appropriated into private hands; the work of many people creates wealth that goes into the pockets of the few people who happen to own the means of production (factories, etc), despite the fact that these owners have not done the work that created their wealth.

But this appropriation hits a major problem. How can the capitalists continue to expand their capital if the surplus value1 that it sweats from living labour (the workers) cannot be realised through the sale of commodities at their full exchange value on the market? What happens when the mass of impoverished workers are unable to buy the huge numbers of products that have been produced?

On the one hand, we have the impoverished masses with restricted or non-existent purchasing power; on the other we have a system of commodity production that can brook no restriction. Put the two together and you have the recipe for a crisis of overproduction. It’s not that there are more articles of use in the shops than are required for consumption; it’s that the same system that brings this profusion of goods onto the supermarket shelf – the system of capitalist commodity production – is also the system that systematically ‘restricts’ consumption by the working class (by making them poorer and poorer). The end result: lots of goods but no money to pay for them.

This phenomenon, visible at its starkest amongst the impoverished masses of much of Asia, Africa and Latin America, is to a degree camouflaged in the West. The superprofits drained from the exploited labour and looted resources of the rest of the world help to keep absolute poverty and starvation within the imperialist homelands to a minimum, leaving the sharpest consequences of exploitation to be borne by our unacknowledged proletarian brothers and sisters on distant shores.

Welfare capitalism, applied in varying degrees of dilution by most imperialist powers after the war, was a necessary concession that had to be made to the proletariat of the imperialist countries, which might otherwise have become overly impressed with Soviet successes in raising the material and cultural conditions of life of the masses. Unlike the Soviet achievement which it aped, of course, this domestic concession was paid for by the continued oppression of the rest of world’s masses.

Even during the most prosperous years and in the wealthiest countries, poverty has always kept a grip on a substantial minority. And now, as the general crisis imposes itself with ever greater insistence, the polarisation between rich and poor is becoming increasingly sharp, not only between ‘have’ and ‘have not’ nations, but between the superrich and the proletariat within the homelands of imperialism itself.

And with the retreat from welfare capitalism and the decline in real-terms wages in Britain and elsewhere, it is clear that it is the proletariat in general whose living standards are under attack, revealing the class identity between more privileged skilled industrial workers, for example, and the poorest sections of the proletariat.

What took it so long?

A glance back at the last ten years should convince us that the real question is not so much ‘Why crisis now?’ as ‘What took it so long?’ After all, the only way that the markets were set back upon their feet after the debacle of 2001 was by slashing interest rates, thereby giving a kick start to demand. Had it not been for the investment of Asian banks in western currencies, combined with the ready availability of cheap commodities made in China, this creation of a borrowers’ paradise would have long ago collapsed into an inflationary mess.

That is because if extra money is made available to consumers through a massive programme of lending at low rates of interest, this increases demand for commodities in relation to supply and thus tends to cause prices to rise higher than they would otherwise have been – ie, inflation. Inflation, however, eats into the purchasing power of the capitalists' profits so it is not something that they welcome. However, the inflationary effect of cheap borrowing over the last few years has tended to be countered by the cheapness of Chinese imports, and investment of the massive profits being made by Asia in dollars, euros and pounds has helped to maintain the exchange value of those currencies, when normally one would have expected them to decline because of rampant inflation.

But judging from the way the Bank of England and its counterparts have over the last two years been nosing the interest rates upwards, it’s no secret in bourgeois circles that the inflationary demons are closing in. The temporary reprieve secured by capitalism after the 2001 crash nearly tipped the entire world economy into all-out recession (as it also nearly did after the 1997 Southeast Asia ‘Tiger’ economy crashes) was just that: temporary. It was a reprieve bought by piling up ever higher mountains of debt. This could never be a lasting ‘solution’ to the world’s problems, though, and the international economy is heading for an even bigger crash than those that were temporarily averted (averted in the West, that is; the world recession has been hitting hard in the oppressed world for some time already).

For the last five years, the western consumer-led boom has been stoked up by the device of encouraging folk with middling or low incomes to bridge the gap between what they need and what they can afford by borrowing, notably by taking out mortgages and incurring credit card debt. Consumers in the US and Britain in particular have been spending more than they earn for years, taking advantage of easy credit terms and low interest rates. By this seeming largesse, capitalism has created a kind of phantom army of consumers, workers who have been helping the bourgeoisie out of its overproduction hole by digging themselves into a hole of personal indebtedness.

What has been helping prop up capitalism in the high street has also been helping to shunt surplus value around between the capitalist players, assisting imperialism in its task of concentrating ever denser masses of capital into ever fewer hands. The mergers and acquisitions (M&A) whereby this concentration is achieved also rely on the ready provision by the big institutional lenders of cheap loan capital to the would-be buyers.

Whether on the dizzy peaks of high finance or on the supermarket shelves and estate agent windows of the high street, what has kept the show running since 2001 has been a vast web of indebtedness. It was only a matter of time before a thread got pulled in this web. That thread turned out to be the ‘subprime’ mortgage debt market in the USA.

‘Subprime’ con-trick backfires

‘Subprime’ mortgages are offered to the low waged or those with poor credit ratings. By targeting the poorest to transform into temporary ‘consumers’, capitalism reaches the most desperate limit in its quest to squeeze demand out of stones.

Using a tactic known as ‘bait and switch’, the economically vulnerable are lured into taking on what looks like a low-interest mortgage. After a year or two, the interest rate is ‘reset’ to a punishingly high level. The borrower must either submit to being bled dry, or default and lose his home. This cynical practice, now inveighed against in high moral tones in the capitalist press, would never have raised an eyebrow had the subprime scam not become enmeshed in the world of ‘securitised debt’, burning the fingers of people who ‘count’ – ie, capitalists.

In recent years, with too much capital chasing after too few profitable investment opportunities, there has been something of a boom in the buying and selling of debt itself. The banks that lent money to the subprime victims followed suit, selling the debt on to investment banks, which then were given the right to recover the loan plus interest. These high-risk loans were then packaged up along with some (supposedly) less risky loans into something called ‘collaterised debt obligations’ (CDOs) and sold on to all manner of investors, not least pension fund managers.

The subprime loans offered easy money – after all, even if the debtor defaulted, you still got his house. However, when the speculative investment in property development resulted in a glut and resultant collapse in house prices, aggravated by the number of repossessions choking the market, these ‘high risk’ loans began to be described as ‘toxic waste’. And because this bad debt passed between so many hands, at each stage further camouflaged as a different form of ‘financial instrument’ and ever more hopelessly entangled with what was supposed to be ‘good’ debt, it crept unannounced into the asset holdings of major investors, banks and pension funds all over the world.

The exchange value of any commodity derives from the labour time it embodies and reveals itself as an average of price fluctuations on the market. Debt as commodity is no exception, however mysterious seems the process by which that labour time finds itself thus expressed. But in the case of complex financial instruments like CDOs, there is no open market to put a price on them. When the market was booming, nobody bothered to challenge the high valuations attributed to these CDOs by their vendors. However, once the market faltered, the valuations went through the floor. In the USA, Sowood Capital Management lost half its value in July and has since gone bust. Goldman Sachs only hung onto its hedge funds by an injection of $3bn, and Bear Stearns closed two hedge funds. The best and brightest at Harvard University’s investment team have lost $350m so far on a duff hedge fund investment.

Such is the slippery nature of this shape-shifting debt that the damage does not stay solely with the investment agencies directly exposed to subprime debt. Since nobody knows for sure who is holding the ‘toxic waste’, there develops a general paranoia about lending to anyone. Every banker is sitting on an unacknowledged and unquantifiable heap of the stuff, and knows that each of his rivals is doing exactly the same. The result is a general freeze on lending. Despite the vast amounts of capital transfused into the patient by all the central banks, M&A activity remains close to paralysis at the time of writing, and nobody wants to buy debt any more.

In short, the astronomic indebtedness made possible by years of low interest rates looks like coming back down to earth with an almighty bang.

Writing on the wall for capitalism

Claims that, beneath the speculative froth, the ‘real’ economy plods uneventfully onward are without foundation.

The crises of 1997 and 2001 brought untold misery to millions of people who suffer in the ‘real’ capitalist economy – the economy of factory closures, foreclosed mortgages and pension fund losses. There is no doubt that the present debt crisis will bring no less misery.

One need but consider the fate of young working-class couples who have just scrambled onto the bottom rung of the housing ladder, only to have their feet kicked out from under them by negative equity. Or consider those workers who have seen their final salary pensions melt before their eyes, after the two previous outbreaks of market turmoil convinced the bourgeoisie that this was yet another aspect of ‘welfare capitalism’ that needed ditching in the battle to protect their profits.

Now the level of their pensions depends entirely on what particular somersaults the market happens to be turning upon retirement. With no second chances, the fragile pot of savings that has taken a lifetime’s work to accrue must be splurged out in a moment in the purchase of whatever annuity the insurance companies choose to offer. And if the FTSE happens to be in free fall on the day in question, the outlook will be bleak indeed.

If capitalism cannot resurrect demand through building the debt mountain higher, it must instead try to tackle the other end of the overproduction crisis: it must trash the very productive forces it has brought into being in the first place, thus revealing itself as the real enemy of all social progress.

However, making people homeless, stealing their jobs, robbing their pensions and imposing below-inflation wage deals, whilst perhaps saving the bourgeois hide for a while, can in the long run only stoke up yet worse crises of overproduction, as effective demand is further undermined by the further impoverishment of the masses.

Whether the lords of high finance can postpone for a few more years the decisive crash of the world financial system is beyond scientific prediction. What is clear however is that every ‘smart’ move capitalism makes to save itself from its own insoluble contradictions only succeeds in further tightening the noose of history around its throat.

Even in the midst of the miseries such crises inflict, let the proletariat rejoice in this knowledge and organise to overthrow this decadent, parasitic system once and for all.

1 The only source of capitalist profit is the surplus value extracted from workers, ie, the difference between what workers are paid as wages and the net sale price of the commodities they produce (after deducting other costs of production). Profits made from takeovers and mergers, buying and selling land, buying and selling shares, etc, are essentially speculative, involving merely the passing of surplus profit appropriated by one capitalist (which he may be forced to share with landowners, financiers, and others) from one person to another.
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