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Capitalism and Crises: An Introduction

Humankind has passed through various forms of societies during its evolution. From primitive communes, slave societies, the Asiatic society, feudalism and through to the capitalist system we live under today.

In all the previous societies or systems, humankind had access to the use of tools, by the use of which we could extract from nature the things needed to survive, such as food and material to build shelters as protection from the elements etc.

Capitalism is the first system in history which separated humans from these tools (means of production) and concentrated them in the hands of a minority, namely the ruling class, through the private ownership of the means of production.

Thus, under capitalism, society was divided into two main classes; the ruling class and the working class, a development which resulted in definite social relations whereby a worker had to enter into these relations, regardless of choice, to sell his labour in order to ‘get at’ the ‘tools’ to work and consequently earn a wage in order to be able to live. These ‘tools’ or ‘means of production’ today include factories, power stations, computer technology etc. Furthermore, all previous systems only made or produced what was immediately required. Under capitalism however, came commodity production, which was production for the ‘market’ rather than for immediate needs, and hence production for profit.

All changes from one society to another have been revolutionary changes. For instance the narrow confines of feudalism restricted the growth of the merchants within that system and the further development of production and trade was only achievable by a complete overthrow of the existing order, an overthrow that would smash the fetters of feudalism for ever. The English revolution of the 1640s was the result. This revolution, led by Oliver Cromwell’s New Model Army, resulted in the creation of the first capitalist nation in the world.

Along with the birth of capitalism and the concentration of the means of production into the hands of the ruling class, ie private ownership, came the birth of the working class. Moreover a working class which knew only one way to live, that was by selling its labour.

Under capitalism what the worker is paid in wages and what value their labour power produces are entirely different; the difference being known as surplus value, or more commonly, profit.

However, and this the bourgeois economists will deny until they are blue in the face, the most important law of political economy is ‘the law of the tendency of the rate of profit to fall’. Furthermore, consciously or not, the capitalist’s search for new markets abroad and the attacks on the standard of living of workers at home, speed-ups, longer working hours, wage cuts, are all actions which attempt to stop the fall in the rate of profit.

How does the rate of profit fall? The capitalist owns machinery which we call ‘constant capital’. This machinery can add its value to the production process, but can add no more than its value. He also has a workforce which he pays, this payment we call ‘variable capital’. But, as we have noted, what he pays the worker and what the worker can produce with their labour power are entirely different, thus the worker can add more to the production process than what they are actually being paid. So it is only through the workers labour power that surplus value, profit, can be realised.

Therefore, as the capitalist tries to expand production, bringing in more machinery and bringing in new technology and consequently less workers in comparison, so the ratio of ‘constant capital’ as against ‘variable capital’ grows. They are trying to expand by using more machinery and less workers but consequently their surplus value, or the rate of their profit, decreases because they are using less and less of the source of the creation of surplus value, the workers and their labour power.

Therefore under the conditions of the private ownership of the means of production we have reached a stage in history whereby we cannot go forward and develop and improve the standard of life for all, despite the massive advances of technology. On the contrary, in order to maintain and increase profits the ruling class will look for new markets abroad, in competition to the rival capitalists of other nations and engage in trade wars and eventually shooting wars. Two world wars are testimony of this fact.

After the Second World War came the so-called ‘boom period’ which was based on the Bretton Woods agreement of 1944, whereby paper currency, dollars, were convertible into gold at the rate of 35 dollars per one ounce of gold. Therefore all paper money appeared to have real value because it was backed by gold. This was a licence for the capitalists to print money, to expand credit and for American dollars to be pumped into Europe to rebuild capitalism. But this entire movement was based on fictitious capital. It was not capital taken out of workers in the form of surplus value, but by borrowing and printing money. Therefore enormous burdens of debt were built up via interest payments and far from covering up the fall in the rate of profit it in fact made it worse.

Now this fictitious capital, which was used to build factories, hospitals, even entire towns and indeed the Welfare State itself, is being destroyed. Hence we see today the attacks on welfare and benefits, the NHS, education etc which are now viewed by the capitalist as a drain on profits.

Historically speaking, capitalism has developed production, the productive forces, to the extent that it has reached a point whereby it is impossible for it to continue expanding on the narrow basis of production for profit.

What this means is that in the same way as capitalism broke down the fetters of feudalism, so the confines of capitalism must now be broken through and replaced with a system which will be able to continue to develop these productive forces. Socialism, production for use and human need, is the only other system known to humankind. 

Part Two

The Current Financial & Political Crisis.

First let us examine the so-called sub-prime mortgage crisis, apparently the crisis from which the current worldwide recession started.

Let us pretend that we have a friend, let’s call him Billy. Let’s say for example that Billy owed £10,000 on his mortgage, but Billy has lost his job and is unable to pay the bank. Thousands of people are in the same position as Billy. Hence the sub-prime mortgage crisis.

So, along comes the government to help out. It hands over millions of pounds to the bank to compensate them for what they have been unable to collect from the thousands of defaulters, such as our friend Billy.

However, once this bail-out of the banks has been accomplished what situation are we left with?

Billy is still left owing the bank £10,000, since his debt is not written-off, and he still has no job.

In other words the supposed root cause of the sub-prime crisis is still there and remains unresolved.  

Moreover, the government’s bailout has been designed to rescue only the banks, not our friend Billy, nor the thousands more in the same situation as him.

However, to compound this situation further, the money the government has given to the banks is in part freshly printed money, part of its quantative easing programme, and consequently is basically merely pieces of paper since it represents no value whatsoever.

If the answer to the crisis was simply to print more paper money then capitalism would never have a crisis since it would print as much money as it wanted at any given time.

So why doesn’t it do this? Because paper money has to represent value, that is why printed on the paper notes is the ‘promise to pay the bearer on demand the sum of’, in other words, in and of itself paper money is worthless; try eating it when you are hungry, or wearing it to protect you against the cold, and the government has printed billions of it!

In order for it to have worth it has to represent real value and the only source of real value is labour, labour as embodied in the production process.

As an example of the problems printing money causes one can look at the recent US/China ‘discussions’. China holds millions of US dollars in investments yet the more the US government prints dollars the more all dollars that are already in circulation are devalued. China is saying for goodness sake stop printing the damn things or our dollar holdings will be worthless! Consequently China has threatened to off load all their US dollars and change their investment holdings into gold. Such a move would bankrupt the United States overnight.

Background

In the 1960s and 70s, Britain’s manufacturing base represented 80% of the economy, with 20% of the economy finance and service industry. Hence an 80% production base, producing real value, could support the remaining 20%, a health service, an education system, state pensions etc.

Today, with the deliberate destruction of manufacturing carried out by both Tory and Labour governments, manufacturing now represents only 20% of the economy and therefore is now insufficient to support the rest of the economy.

Manufacturing, the creation of real value, is the pool from which all the economy drinks. If an investment banker pays himself a million pound bonus, in order for it to have value, it is drawn from the value created by manufacturing, and consequently, if 100% of the economy is drinking from the small 20% pool of manufacturing then there is going to be a drought for a lot of people. And the financiers and bankers, backed by the government, are making sure that it will not be them going thirsty.

Given the above, it seems sensible to ask why would any logical person destroy manufacturing in the first place? The answer is that capitalism is not logical. It is driven by the profit motive first and last. The rise of the financial sector was promoted partly as it seemed to offer a speedier way to make profits and off-set the falling rate of profit. Rather than having to invest in the building of factories and tie-up capital over ten or twenty years before a profit could be realised, the capitalists decided that the creation of financial instruments and speculation offered a much quicker way to realise profit rather than the long and drawn out production process. However, all real wealth is created by the extraction of raw materials and their transformation into socially useful and ultimately saleable goods.

But the capitalist believes that a product is worth whatever you can get for it, that it possesses no intrinsic value and is merely subject to the whims of supply and demand.

That is why Gordon Brown sold off half of Britain’s gold reserves; he saw gold as merely a thing to sell, not the product of a labour process that invested in it real value.

Today, with the flight of investment out of paper money and into gold poor Gordon is left scratching his head in wonder.

Given then that labour is the only source of value, capitalism sees the answer to its crisis as outsourcing production to the cheap labour areas of the world and in the UK extracting more and more labour from workers but without a larger investment. What then follows is the destruction of whole layers of the economy, (the destruction of fictitious capital) lower wages for those remaining in work, no waste paid on benefits and a maximising of the rate of profit.

Moreover, over the last period wages have lagged behind the rising cost of living, and this situation should be seen in conjunction with developments in the 1980s which saw the unregulated introduction of credit into the system and the proliferation of credit cards and relative easy credit access.

The reality was that the worker could no longer pay for even basic goods with his static and falling wage level and therefore was driven to use various forms of credit such as credit cards, bank loans, remortgaging of homes etc. This allowed the capitalist to still have consumers for his goods and covered up to a degree, the pauperisation of workers and the debt bubble that this policy engendered.

However the debt bubble, like all bubbles, would eventually burst. Credit cards became maxed-out, loans became no longer easily accessible and there are only a certain number of times that a worker can remortgage his home!

As a result of the vast amount of debt that has inevitably built up, as workers struggled to compensate for inadequate wages and had to use the newly available credit facilities, we find that in both the United States and the UK the number one growth industry is debt collection. The banks sell their customer debt on to various agencies, some more vicious and notorious than others, and these scavengers on the backs of society use all and every means to ‘recover’ impossible levels of debt, their tactics often bordering on the wrong side of legality. But the mantra behind all these actions is that the worker ‘must be made to pay’ because, as we have stated previously, the only source of value in society comes from the working class, and if this class cannot be exploited, used and controlled then capitalism is in trouble, and will, as it has done historically, drag up the spectre of fascism to do by brute force what it couldn’t manage to do in ‘democratic’ form.

The current system likes to inform us that it will carry no lame ducks, that the market decides all. That you stand or fall by your own efforts and that it rewards success. Such, we are led to believe, is the philosophy of capitalism.

However when their own banking system faced total collapse this philosophy went right out of the window. The financial elite, after gorging themselves for years on bonuses resulting from their speculative activities, demanded, and got, when these activities blew up in their faces, billions of pounds of taxpayers money to bail them out of the crisis of their own making. Perhaps the philosophy should be, we reward the financial elite whether they are a success or a complete and abject failure!

Apparently the philosophy that the market decides all, only applies when it involves the working class.

Of course, what we have witnessed before our very eyes over these last 18 months is the class nature of the system.

Now we are given the message from prime minister Brown, and echoed by all the mainstream politicians and media, that ‘immoral’ bankers were to blame for the crisis and what we now need is a return to ‘moral markets’

It is difficult to know where to begin with this utter nonsense. One is tempted to put it down to the ravings of complete idiots or second rate conmen. Which of these they are I will leave you to decide.

Obviously Brown could not point out a single example of a ‘moral banker’ because when we are discussing capitalism, production for profit, the terms moral and immoral, ethical and unethical, good and evil, are irrelevant. Profit, and the accumulation of wealth by the ruling elite, as we continually stress, is the be all and end all of the system. If the finance sector had not moved into ever more absurd levels of speculation, and if the capitalist system itself had not tried to drive down workers wages and conditions, then it would not have been capitalism!

Furthermore, with his comments on morality do you think Brown was making a serious attempt to address the banking crisis? If you look at the obscene bonuses paid out within the financial sector, with the tacit approval of government, even after they were all bailed out directly or indirectly by taxpayers’ money, then you will have your answer.

Summary

Periodically we have a crisis of capitalism; every generation has faced a crisis of over production. In the 1930’s it was a crisis of over production of manufactured goods, now we also have a crisis of over production of speculative finance capital.

When we say ‘over production’ this does not mean that capitalism has produced an abundance of goods for the entire world to enjoy. Capitalism is production for profit, and if there is no profit then logically under capitalism there is no production. That Asia and South America are in great need of steel for instance, means nothing if they cannot pay the asking price, they will have to go without, because if there is not enough profit in the production of steel then it will not be produced.

Perhaps we can best see the inherent cruelty of capitalism if we don’t use the example of steel but instead use food as an example; food for Africa for instance. But alas, the African workers and peasants are so poor they cannot pay the price demanded. What a shame that so many people are starving the capitalist will say, as he throws his hands up in mock horror, but the system of production for profit insists that capitalism will not and cannot feed the starving masses. Indeed farmers in Europe are regularly paid not to produce and grow food! The best government can do is urge workers to support ‘Live Aid’ or ‘Feed the World’ or encourage support for whatever charitable event is the vogue of the day.

Up until the crisis of over production manifests itself, capitalism expands production as if there is no limit to the ability of millions of Billy’s to consume their goods, or to pay financial indebtedness (mortgages), whilst at the same time in order to maintain profit margins over their rival capitalists it reduces to the lowest possible level Billy’s ability to consume, ie by attacking his wages or benefits or other means of existence.

This is the basic contradiction at the heart of periodic capitalist crises. Crises which can only be ended forever by adopting a planned socialist economy.

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