A global pandemic has exposed just how fragile the world economy already was. Tomáš Tengely-Evans examines why capitalism constantly creates economic crises
A major slump is coming. Whether bosses or workers pay the price is up for grabs.
The credit crunch of 2008 was followed by brutal austerity assaults on public services and working class living standards. Globally it left millions of people living in poverty and hunger.
But mainstream economists say that the crisis now could be far worse. They say it might be more like the great depression of the 1930s.
This was an era of mass unemployment and the rise of fascism—as well as titanic workers’ struggles.
This year global GDP is expected to fall for the first time since the Second World War.
The scale of the economic contraction in the developed economies is estimated to be greater than that of the 2008 crisis and the recession in 1974-5 combined.
The coronavirus crisis has exposed the inability of the free market to meet human need. And many ordinary people won’t want a return to the “normal” of austerity and inequality afterwards.
But that will mean breaking from a system that has crisis built into it. Commentators talk of economic crises as external upsets to a free market system that would otherwise work properly.
But global capitalism was already weak before coronavirus and the lockdowns. It never recovered properly from the global crash of 2007-8.
And while that crisis ripped through the banking sector and the housing markets, it was only a symptom of a much deeper crisis of profitability.
Economic crisis flows from how capitalism—based on production for profit not human need—is organised.
The revolutionary Karl Marx argued that capitalism has “anarchy” in the marketplace and “despotism” in the workplace.
While there is planning inside businesses, there is no planning between firms, sectors or across the economy as a whole.
This leads to overproduction of commodities that aren’t bought and to scarcity of others.
The bizarre news of oil prices turning “negative” for the first time in history in April is one example of this anarchy.
There’s a flood of oil that no one wants to buy on the market—and, in the US, nowhere to store it.
Oil prices began falling when the Chinese government was forced to impose a lockdown in Wuhan and other provinces in January. Within weeks China, the world’s largest importer of oil, saw its consumption fall by 20 per cent.
But at the same time Saudi Arabia launched a price war against Russia to grab a bigger slice of the market.
This meant that just as demand was collapsing, production increased because the Saudis wanted to damage a rival.
Competition doesn’t just create overproduction. It can lead to a crisis of low profitability, which is the root cause of economic slump.
What’s becoming more evident under the lockdowns is that it’s not billionaires who make wealth. It is workers’ labour that creates value.
As Karl Marx wrote in 1868, “Every child knows a nation which ceased to work, I will not say for a year, but even for a few weeks, would perish.”
Workers are forced to sell their labour power—their ability to work—for a wage in order to make a living.
But they don’t get paid back the full value of what they create. This gap is what Marx called “surplus value” and it is the source of capitalists’ profits.
How much of this surplus value bosses grab for themselves depends on how efficient their firm is. Corporations and states are locked into competition with one another and to outdo each other they plough profits back into investment, not just into bosses’ personal wealth.
Competition forces capitalists to invest in more efficient methods of production—whether that’s the latest IT technology or new factory equipment—to get ahead of or match their rivals.
While investing in new technology can help a firm gain big profits, it has bad consequences for capitalism as a whole.
Marx said that it is workers’ labour that creates new value. But most of the new investment goes into technology and machinery, not labour.
Over time the proportion invested in technology and machinery as opposed to labour increases.
You can see this trend in manufacturing. While manufacturing is still an important part of the economy, the number of workers employed in the sector has massively declined.
Individual bosses still make billions. But, because workers’ labour is the source of value, the amount of profit compared to the amount of investment falls.
How can bosses respond to low profitability? They can try to ramp up the rate of exploitation—longer hours, less pay, worse terms and conditions—to squeeze more surplus value out of workers.
Often this is accompanied by austerity and attacks on public services from governments.
There’s another option—to clear out inefficient chunks of capital through bankruptcies and set the system up for the next boom—and the next bust.
As capitalism grew, Marx argued there was a “concentration and centralisation” of capital. A few large firms dominate the market.
If they went bust, it would leave gaping holes in the economy and could trigger a depression.
That’s why banks and other large corporations are deemed “too big to fail” and receive huge bailouts.
The underlying cause of the 2008 crash was a crisis of profitability. In response governments pushed through punishing austerity to squeeze workers and pay for the bailouts of banks and corporations.
Central banks slashed interest rates and pumped cheap credit into the economy.
Rather than clearing out unprofitable bits of capital, it fuelled the growth of “Zombie firms”.
These are companies on life support that wouldn’t survive without credit.
In North America and Europe, between 10 and 20 per cent of companies were zombies.
Global debt has grown to over 300 per cent of GDP.
This meant recovery was weak and global capitalism was already vulnerable before the pandemic.
Once again states have responded to the coronavirus crisis with more bailouts for businesses.
But they have less room for simply pursuing the same policies of cheap credit that they did in 2007-8. Interest rates are already at historic lows.
While there will be bankruptcies, these are likely to be mainly among smaller rather than big business. So this will not do not very much to deal with the underlying crisis of profitability.
There will need to be a battle about what comes afterwards and who pays for this almighty slump.
Some sections of the ruling class can see ordinary people’s anger at how society is run. The bosses’ Financial Times newspaper argues its “time for a reset” for capitalism.
“Radical reforms—reversing the prevailing policy direction of the last four decades—will need to be put on the table,” says one editorial.
“The leaders who won the Second World War did not wait for victory to plan for what would follow. The UK published the Beveridge Report, its commitment to a universal welfare state, in 1942.
“That same kind of foresight is needed today.”
In Australia too the federal government introduced welfare payments for families, widows and the unemployed.
But capitalism’s capacity to give reforms within the confines of the system is diminished.
Huge chunks of capital had been destroyed in the war and this unleashed an unprecedented period of economic boom.
Today is a time of slump, and bosses are trying to squeeze workers more.
While bosses can argue for state intervention on the side of business now, they will demand workers pay the price later.
Finance Minister Mathias Cormann said the government had “no alternative” but to spend billions on programs like JobKeeper to prevent economic collapse.
But the Treasurer Josh Frydenberg has also warned that after the crisis there would be a reckoning, with government “paying for years to come” to reduce the debt.
Many people talked about the “death of neo-liberalism” after the 2008 crisis because free market policies were exposed. Yet austerity followed to protect profits.
There were impressive struggles—for example the Arab Spring and the revolts against austerity in Europe. But in general the radical movements were eventually blunted and thrown back.
Again many working class people are angry. And the coronavirus crisis has raised fundamental questions about how society is run.
But class struggle to win big changes is not inevitable.
Ensuring bosses don’t make workers pay means encouraging struggle to shape the outcome of the crisis—now.
We have to reject the appeals for sacrifice and the idea that unions and bosses have any common interest in how the crisis is solved.
Struggle will be crucial to resisting the bosses and to impose a socialist solution onto the crisis.
Unless we break from the logic of the profit system, there will be further crises that bosses try to make our class pay for.