Thursday, January 15, 2009
Harry Shutt: a Crisis of Overaccumulation
There are some really good articles in the Economics section in Red Pepper right now including one (about which I might blog another time) by Stuart Holland, the architect of Labour's left-wing 'Alternative Economic Strategy' in the 1970s and 1980s . As far as I can tell this is the first time Holland has surfaced in the UK since about 1985 which is interesting. Might there be some return of the AES (or some neo-AES) in the offing? Suddenly the idea of total nationalisation of the financial sector (which is still very much on the cards) and the nationalisation and socialisation of the 'commanding heights of the economy' under a left-Keynesian, dirigiste programme doesn't seem quite so dated or quite so far beyond the bounds of 'realism' anymore. Strange times. For me, however, the most interesting article is the interview with Harry Shutt . In the course of this interview one of the best and clearest accounts of the crisis in terms of overaccumulation of capital (although this particular description isn't used) is put forward. I'm slightly puzzled by the solutions and alternatives that Shutt puts forward at the end of the article which seem, to me, to be in awkward tension with his emphasis on capitalism's inherent and systemic tendency towards periodic chronic crises. Nevertheless here's the explanation of the crisis:
"In order to understand Shutt’s explanation for the crisis, it is necessary to take a brief detour through Marx. According to Marx, capitalism is a system of accumulation. Profits are made but can’t all be consumed by owners. Extra profits need to be recycled through the market. ‘The only way you can successfully recycle them is to either expand your existing business or diversify into another business,’ says Shutt. ‘It all depends on the ultimate consumer, consuming more and more. It has to grow, growth is built in.’ The problem is that as profits are invested into the market, generating more profits that in turn have to be reinvested, production expands until it reaches a level that can no longer be absorbed by consumers. The market is glutted, and recession results. But the destruction of capital and jobs creates pent up demand for the whole process to begin again in time.
That, in brief, is the business cycle. But Shutt’s argument is that western political leaders have, for years, based their economic strategy on avoiding or limiting the downside of the cycle, a doctrine encapsulated in Gordon Brown’s famous boast of an ‘end to boom and bust’. Credit expansion has been fuelled, household debt recklessly encouraged, state services privatised, financial institutions subsidised and regulations banished all in order to find profitable outlets for a burgeoning ‘wall of money’ generated by the system. A high rate of growth is needed to maintain this process, but can’t be sustained because of the weakness of demand in the economy.
The consequence is that money, frustrated in its search for productive activities to invest in, has turned to speculation. ‘When you get to the point that you can’t actually make profits by producing more stuff – organic growth – profits get recycled into speculation,’ says Shutt. ‘In other words, you start placing bets that certain assets will increase in value.’ And once speculation takes hold, it becomes advantageous to bring even more money into the market, because that pushes up the value of assets. Hence, the ‘leveraging’ by speculators – the borrowing of more and more money to speculate on financial assets.
‘Over the last 30 years you’ve had a progressive postponing of the evil day,’ he says. ‘1974/5 was the first financial crisis since the second world war, then you had the 1987 crash, which was inflated away by pumping lots of money into the banks. Then it was shifted offshore. We’ve had the Mexican crisis, the East Asian crisis and the Russian crisis. The big one was the dotcom bubble eight years ago. And since then, we’ve been building up to this one.’
What the prolonged amassing of this huge surplus of capital cum fraud-driven credit bubble, means, according to Shutt, is the inevitable crash – the inexorable end of the business cycle – is going to be far more severe that it would otherwise have been. ‘I think we are looking at negative growth, for an absolute minimum of two or three years and I wouldn’t be surprised if it’s five or ten. That would be a depression,’ he says.
It’s not a cheering prognosis – a protracted downturn of several years with the likely side effects of military conflict and scapegoating of minorities. But Shutt hasn’t finished yet. There is no light at the end of the tunnel, or if there is, it’s very dim. He believes that that this slump will be much more difficult to emerge from than in previous downturns because traditional engines of growth are no longer available to drag us out. Remove debt-fuelled consumption and property speculation from the equation, and you are left with anaemic subsititues such as the internet, the service sector and green technology. The arguments of centre-left Keynesian commentators that the answer lies in re-regulating the financial sector and encouraging consumer spending, ignore the fact, says Shutt, that the demand for capital – the availability of new profitable productive activities to invest in – is in long-term decline, and consumer spending power has been exhausted.
‘It is easy to say that we’ll emerge from the slump eventually, but to quote Keynes, “in the long run we are all dead”,’ he says. ‘In other words there has to be a huge contraction in the meantime and the impact on livelihoods and lives is likely to be intolerable. The fundamental misconception of mainstream commentators is that people can and should be induced to consume more when they’re already ‘maxed out’ on credit. In practice it is right and necessary that they should now be forced to rebuild their personal balance sheets, which means saving rather than spending. Only once they’ve done this, probably after several years will they be able to start spending again. This pinpoints a fundamental weakness of capitalism. In order to function it requires the perpetuation of unsustainable levels of consumption in order to absorb the endlessly expanding stock of capital.’"
"In order to understand Shutt’s explanation for the crisis, it is necessary to take a brief detour through Marx. According to Marx, capitalism is a system of accumulation. Profits are made but can’t all be consumed by owners. Extra profits need to be recycled through the market. ‘The only way you can successfully recycle them is to either expand your existing business or diversify into another business,’ says Shutt. ‘It all depends on the ultimate consumer, consuming more and more. It has to grow, growth is built in.’ The problem is that as profits are invested into the market, generating more profits that in turn have to be reinvested, production expands until it reaches a level that can no longer be absorbed by consumers. The market is glutted, and recession results. But the destruction of capital and jobs creates pent up demand for the whole process to begin again in time.
That, in brief, is the business cycle. But Shutt’s argument is that western political leaders have, for years, based their economic strategy on avoiding or limiting the downside of the cycle, a doctrine encapsulated in Gordon Brown’s famous boast of an ‘end to boom and bust’. Credit expansion has been fuelled, household debt recklessly encouraged, state services privatised, financial institutions subsidised and regulations banished all in order to find profitable outlets for a burgeoning ‘wall of money’ generated by the system. A high rate of growth is needed to maintain this process, but can’t be sustained because of the weakness of demand in the economy.
The consequence is that money, frustrated in its search for productive activities to invest in, has turned to speculation. ‘When you get to the point that you can’t actually make profits by producing more stuff – organic growth – profits get recycled into speculation,’ says Shutt. ‘In other words, you start placing bets that certain assets will increase in value.’ And once speculation takes hold, it becomes advantageous to bring even more money into the market, because that pushes up the value of assets. Hence, the ‘leveraging’ by speculators – the borrowing of more and more money to speculate on financial assets.
‘Over the last 30 years you’ve had a progressive postponing of the evil day,’ he says. ‘1974/5 was the first financial crisis since the second world war, then you had the 1987 crash, which was inflated away by pumping lots of money into the banks. Then it was shifted offshore. We’ve had the Mexican crisis, the East Asian crisis and the Russian crisis. The big one was the dotcom bubble eight years ago. And since then, we’ve been building up to this one.’
What the prolonged amassing of this huge surplus of capital cum fraud-driven credit bubble, means, according to Shutt, is the inevitable crash – the inexorable end of the business cycle – is going to be far more severe that it would otherwise have been. ‘I think we are looking at negative growth, for an absolute minimum of two or three years and I wouldn’t be surprised if it’s five or ten. That would be a depression,’ he says.
It’s not a cheering prognosis – a protracted downturn of several years with the likely side effects of military conflict and scapegoating of minorities. But Shutt hasn’t finished yet. There is no light at the end of the tunnel, or if there is, it’s very dim. He believes that that this slump will be much more difficult to emerge from than in previous downturns because traditional engines of growth are no longer available to drag us out. Remove debt-fuelled consumption and property speculation from the equation, and you are left with anaemic subsititues such as the internet, the service sector and green technology. The arguments of centre-left Keynesian commentators that the answer lies in re-regulating the financial sector and encouraging consumer spending, ignore the fact, says Shutt, that the demand for capital – the availability of new profitable productive activities to invest in – is in long-term decline, and consumer spending power has been exhausted.
‘It is easy to say that we’ll emerge from the slump eventually, but to quote Keynes, “in the long run we are all dead”,’ he says. ‘In other words there has to be a huge contraction in the meantime and the impact on livelihoods and lives is likely to be intolerable. The fundamental misconception of mainstream commentators is that people can and should be induced to consume more when they’re already ‘maxed out’ on credit. In practice it is right and necessary that they should now be forced to rebuild their personal balance sheets, which means saving rather than spending. Only once they’ve done this, probably after several years will they be able to start spending again. This pinpoints a fundamental weakness of capitalism. In order to function it requires the perpetuation of unsustainable levels of consumption in order to absorb the endlessly expanding stock of capital.’"
Labels: Economics
