Nick Beams addresses 70th anniversary meeting

Capitalist breakdown and the revolutionary perspective of the Fourth International—Part 3

By Nick Beams
7 October 2008


Published below is the third part of a report delivered on September 28 by Nick Beams to a public meeting in Sydney on the 70th anniversary of the founding of the Fourth International. Beams is a member of the WSWS International Editorial Board and National Secretary of the Socialist Equality Party (Australia). Part 1 was posted on October 4 and Part 2 on October 6.

The measures adopted by the Nixon administration in 1971-73 were intended to bolster the position of the US at the expense of its rivals. But, throughout the 1970s, the economic situation of American capitalism continued to worsen. Attempts by the Carter administration to initiate a coordinated global upturn failed, and by the end of the decade the US and world economies were experiencing stagflation--a combination of rising inflation and growing unemployment.

In 1979, in the midst of a growing crisis, reflected in the plunge of the US dollar, a further major turn was undertaken with the appointment of Paul Volcker as head of the US Federal Reserve.

The Volcker measures, based on record interest rates and the creation of the deepest recession since the Depression, were aimed at a restructuring of American capitalism to maintain its global dominance.

America's rise to power, from the period after the conclusion of the Civil War in 1865, had been based on the development of its industrial and manufacturing capacity. The Volcker measures, which destroyed whole sections of industrial capital, heralded the start of a new mode of accumulation--one based on finance capital. The beginning of this new era can be dated to 1982, when the American stock market began to climb.

The Dow Jones index was still below 1,000 in 1982, a level it had attained a decade earlier. It doubled in the next five years to reach 2,000 in January 1987. Meanwhile, in the first five years of the 1980s, American industry underwent the deepest recession in the post-war period.

Nevertheless, the position of American capitalism was by no means secure. In October 1987, the stock market experienced its largest-ever one-day fall, requiring a major intervention by the US Federal Reserve and other central banks to prevent a global collapse. This was followed by the savings and loans debacle, which necessitated a major government bailout, followed by a recession in 1990-92.

The turning point in the fortunes of US capitalism came with the liquidation of the Soviet Union in 1991, followed by the opening up of China and other regions of the world to global capital. It has been estimated that from the time of the collapse of the Berlin Wall in November 1989 to the present day, around one billion workers have been added to the labor market available to capital. World capitalism has never experienced such an influx of cheap labour in history. It was this process that made possible American capitalism's new mode of wealth accumulation, based on financialisation.

The following figures for Apple give an idea of the amounts involved. It has been estimated that, of an iPod selling for $299 in the US, some $4 goes to the companies in China that manufactured it, while around $160 goes to the US companies involved in its design, transport and retailing.

The opening up of China and other cheap labour regions had a two-fold impact. On the one hand, it increased the accumulation of surplus value--the source of all wealth accumulation in the capitalist mode of production. On the other hand, the cheapening of commodities made possible the lowering of interest rates in the US and other major capitalist countries throughout the 1990s, thereby providing cheap credit. This fueled the successive US booms--the stock market bubble, the Internet and tech bubble of the 1990s and the housing boom, which took off after 2002.

World capitalism experienced something of an upswing from the early 1990s, although one rocked by growing financial storms and turbulence: the crisis of sterling and the Scandinavian banking system in 1992; the $50 billion bailout of American banks caught in the Mexican peso crisis in 1994; the Asian economic crisis of 1997; the Russian default in 1998; and the collapse of the US hedge fund, Long Term Capital Management, in 1998.

In the US, the road to wealth accumulation was no longer manufacturing industry or the provision of financial services associated with manufacturing industry, but the buying and selling of assets using borrowed funds for profit.

A simple calculation will indicate how much there was to be made. If an asset is purchased for $100 million, with $10 million of equity and $90 million of borrowed funds, at an interest of, say, 8 percent, and the asset appreciates at only 10 percent over a year, then at the end of one year it will be worth $110 million. Of this, $7.2 million must be paid in interest, leaving $2.8 million of profit. That is a rate of return of 28 percent. With a more rapid appreciation in asset values, the rate of return will be even higher. For example, if the asset value goes up by 15 percent, then the profit on $10 million will be $7.8 million or 78 percent.

[This simple example also provides an insight into the devastating impact, on a highly indebted system, of a fall in asset prices. Suppose that, instead of rising by 10 percent, the value of the asset falls by 2 percent, so that it is worth $98 million at the end of the year. The bank will still have to be paid $7.2 million, leaving only $0.8 million of equity capital. That is, $9.2 million or 92 percent of the initial capital will have been wiped out.]

The crucial question is: what keeps the value of assets rising? It depends on a continuous inflow of credit.

The significance of this form of wealth accumulation was set out in a paper published in Foreign Policy in 1996 entitled "Securities: The New Wealth Machine". The paper pointed out that these new financial instruments were the leading component of global wealth and its fastest growing generator, and that securitisation was "fundamentally altering the international economic system."

The article noted that the new approach to wealth creation "requires that a state find ways to increase the market value of its stock of productive assets" and that such a strategy must be implemented by "an economic policy that aims to achieve growth by wealth creation [and] therefore does not attempt to increase the production of goods and services, except as a secondary objective." The road to the increased value of assets was the pumping of more credit into the financial system.

The buying and selling of securities based on assets became the new road to wealth accumulation. In 1995, the dollar value of asset-backed securities stood at $108 billion. By the year 2000, at the height of the share market bubble, it was $1.07 trillion. The dollar value reached $1.1 trillion in 2005 and $1.23 trillion in 2006. In other words, in the space of a decade, the value of these securities had increased ten-fold. Now the entire house of cards has come crashing down.

The size of this house of cards is indicated by the following figures. In 1980 the ratio of US debt to gross domestic product (GDP) was 163 percent. By 1987 it had risen to 346 per cent. Even more spectacular has been the rise of financial sector indebtedness. It jumped from just 21 percent of GDP in 1980, to 83 percent in 2000 and 116 percent in 2007.

Even this brief review makes clear why the faith of Mr Kaletsky and others in the continued pre-eminence and stability of American capitalism is so misplaced.

The crisis now engulfing the US economy has not come out of the blue. It is the outcome of processes stretching back more than three decades, of the measures initiated within the US to overcome the crisis of the 1970s and maintain its position of global dominance. And, notwithstanding talk of "decoupling" and the China boom, it is a crisis of the world capitalist system as a whole. The central pillar on which global capitalism has rested for the greater part of the twentieth century, and especially in the past 60 years, is disintegrating before our eyes.

There is deep significance to the fact that this crisis has struck at the very heart of the global capitalist economy, and its circulatory mechanism, the credit system, which has played such a central role in the accumulation of profit in the past 25 years.

In Volume Three of Capital, Marx pointed to the crucial importance of the credit system, both in extending the scope of the capitalist economy and in laying the foundations for the transition to a higher form of society, socialism.

In the first place, credit facilitates a tremendous expansion of the productive forces, because production is no longer organised on the basis of individual capital, but social capital. At the same time, it destroys all the ideological justifications of the capitalist order based on the notion that private appropriation is justified by the risk taken by the individual, or that accumulation of capital results from individual saving. The individual does not risk his own resources or savings, but, through the credit system, the savings of others--the vast accumulation of social wealth.

Credit brings to a new peak of intensity the contradiction between the social character of production and the private appropriation of wealth, in precisely the forms we are witnessing in the current crisis. The credit system, Marx wrote, "reproduces a new financial aristocracy, a new kind of parasite in the guise of company promoters, speculators and merely nominal directors; an entire system of swindling and cheating with respect to the promotion of companies, issues of shares and share dealings."

Marx only lived to see the very beginnings of this process, but he drew out its historical significance in words that sum up the present situation.

"The credit system," he wrote, " ... accelerates the material development of the productive forces and the creation of the world market, which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production.

"The credit system has a dual character immanent in it: on the one hand it develops the motive of capitalist production, enrichment by the exploitation of others' labour, into the purest and most colossal form of gambling and swindling, and restricts ever more the already small number of exploiters of social wealth; on the other hand however it constitutes the form of transition towards a new mode of production."

To be continued