Friday, 7 January 2011

Capitalism's spiral of self-destruction

Already, 2011 is shaping up to be a decisive year for capitalism. The neo-liberal mantra of reducing public spending to cut the deficit will be tested not only by heightened class antagonism but also by the very economic framework it operates in. We are witnessing capitalism collapse in on itself.

BBC News reports that the British government is "resigned" to bankers continuing to award themselves huge bonuses. Commitments by banks are likely to be "more spin than substance," and "even if bonuses are cut, salaries have risen significantly to compensate, by up to 40% in some cases." The banks themselves continue to argue that "they cannot dramatically reduce bonuses without the risk of losing top staff to banks based overseas, which are under less pressure to cut the payments."

The government "wants the banks to commit to lending more to small businesses, which is seen as key to boosting the economic recovery," as a concession for maintaining high bonuses. This remains a problem, because these financial institutions are central to an economy built largely upon credit.

It is not only small businesses, but also people seeking mortgages. In the wake of the recession, banks tightened their rules, making it harder for people to borrow money and exacerbating the housing slump. This continued until last year, when lending picked up in the wake of the bank "stress tests" undertaken by the Committee of European Banking Supervisors. However, by this point the damage was done. It is now harder than ever for people to get on the housing ladder, and lending is set to slump again this year through lack of demand.

In the broader economy, consumption has also faced a decline. Stores like Mothercare and Clinton Cards are blaming December's fall in profits on the weather, but HMV - which is having  to close 60 stores in the next 12 months - has admitted that "challenging trading conditions" also have to be taken into account.

For the first time in 20 months, the service sector contracted last month, whilst the economy as a whole "stagnated." According to Chris Williamson, chief economist at Markit, "domestic demand has weakened as households and business continued to rein in spending" and it now looks as though "economic growth is completely reliant upon export sales while domestic demand has wilted."

The reasons for this aren't hard to see. Cuts in public sector spending are undoubtedly taking their toll, but the private sector is being hit by the double whammy of the bosses' own austerity measures and the knock-on from government cuts. Research by the Incomes Data Services suggests that, yet again, private sector pay rises are to trail inflation. In the past three years, workers have faced pay freezes and below-inflation pay rises which amount to pay cuts in real terms. So, their income is declining whilst costs continue to rise, and this of course affects consumption.

With classical economics, there is a natural limit to this. Adam Smith wrote in The Wealth of Nations that there was "a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour."

The era of cheap credit destroyed the idea that "wages must at least be sufficient to maintain" the workforce. It allowed for the bosses to siphon off the production of their employees as profit far beyond this basic limit, and to grow ever richer as more people were forced into debt and to living hand-to-mouth. But, even within the existing economic framework, it is nothing short of madness to think that this trend can continue after the spectacular crash of this system which wrought the recession and the subsequent "need" for austerity in the first place.

But madness is fine as long as it produces gain in the short-term. Capitalism is eating itself, and economists have been predicting such a downward spiral for some time. But, as a CEO, to heed and act upon these warnings would be to defy the gods of profit margins and put your own job at risk. So the economic implosion continues.

I don't believe in historical determisim, and so I would say that this by no means renders the end of capitalism inevitable. The Keynesians may yet win the argument over the neo-liberals and reverse austerity. There may be a crisis point at which the bosses decide to favourlonger-term self-preservation over greed.Some other factor may intervene. We simply don't know. But even if it were inevitable, what rises out of the ashes certainly isn't. Economic devestation in Germany gave us fascism, not a stateless communist utopia.

That is another reason why a convincing fightback is neccesary. As I've argued before, the point is not simply to preserve the concessions to the working class which exist within the present system - it is to offer an alternative to that system and build a movement that can bring it about.