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Issue # 1412      27 May 2009

The cyclical crisis of capitalism

Who is to pay for the “recovery”?

There is little agreement amongst politicians, economists, business leaders and media commentators on the likely speed of economic recovery. The government predicts the economy will continue to shrink for another year, before growing by 2.25 percent in 2010-2011. Treasury secretary Ken Henry expresses confidence that Gross Domestic Product (GDP) will rise to 4.5 percent the following year. Opposition leader Malcolm Turnbull described the government’s predictions as “completely unbelievable” and “crazily optimistic”. Others suggest it might take as long as 5-10 years. Regardless of the economic forecasts and political brawling over whether Labor governments are poor economic managers, Treasury, Labor, Liberal, big business and their capitalist economic commentators all agree on three things.

The first is what constitutes economic recovery. According to that circle the main indicators of economic recovery, for them, are growth in the GDP (a measure of national income), stock market indexes, corporate profits and the level of private investment.

The second area of agreement is what the government should do during the recovery: it must return to budget surpluses and clear its debts – more than $220 billion of accumulated deficits – as quickly as possible. To do this the government must place caps on and make huge cuts in its spending in the years to come.

The third area relates to wages. In their view, wages must be restrained and where wage cuts were imposed during the recession these should be maintained during the recovery period.

Anyone who thought the scorched earth policies of economic rationalism (neo-liberalism) were dead and buried should think again. The stimulatory measures contained in the government’s recent packages and the May budget are intended to be a short-term bail-out of capitalism. When the recession shows signs of bottoming, then cost-cutting and “tough” decisions will be to the fore.

As for recovery for ordinary Australians and their families relying on wages, pensions, unemployment and other welfare benefits, the forecasts are not so rosy. Treasurer Wayne Swan told Lyndal Curtis on the ABC PM program (13-5-09) that it would be years before Australians are as well off as they were two years ago. Unemployment, according to the government is set to remain high for some years to come.

A recovery without recovery for the people? How can they talk about recovery when there is no recovery for ordinary working people and their families? To answer these questions, it is necessary to look at the cyclical nature of capitalist production and where the present economic crisis fits into this.


Capitalist production cycle

During production value is added to the various inputs through the labour of workers. Workers are not paid the full value of that labour. The difference between the value of their labour and what they are paid is what Karl Marx called “surplus value” – which becomes profit when the commodity or service produced is sold. The process of extracting surplus value, of not paying workers for the full value of their work, is how workers are exploited under capitalism.

The capitalist’s pursuit of maximum profit is the objective and principle motive of capitalist production. When the cost of production, including labour costs, is less than the selling price of what is produced, then the capitalist makes a profit.

This process of exploitation creates a gap between the value of what is produced and the means people have to purchase the products and services. Over a period of time that gap builds up and fuels what Marx called an economic crisis of over production. This is not over production in the sense that people do not need or want what is produced, but because they do not have the means to buy everything. It is overproduction in relation to the objective of capitalist production – maximum profit.

Just months before the crisis hit, the Australian economy was suffering from what capitalist economists were describing as “too much boom”. Corporate profits had reached new heady heights, the stock market seemed to have no limits, there were skilled labour shortages. The Reserve Bank of Australia was trying to cool the economy down with a rapid succession of interest rate rises.

Then almost overnight, what seemed an endless boom was turned on its head. Thousands of workers were being sacked, profit forecasts were being adjusted downwards, the credit squeeze was sending businesses to the wall, retail sales were hit and the talk was crisis. The Reserve Bank did an about-turn, lowering interest rates. The government stepped in with a host of measures to bail out the corporate sector and stabilise the banking system. It followed these with two stimulatory packages putting money into the hands of ordinary people, with the message “spend, spend, spend”. While these handouts were of great benefit to many people struggling to make ends meet, their main aim was to keep business afloat.

The crisis phase of the boom – crisis – recession – recovery cycle that Marx so clearly analysed more than 150 years ago had set in. Since then, the economies of the capitalist world – individual countries and the entire system as a whole – have been plunged into crises of over production at intervals of approximately 8-10 years.

The specific details of each cycle vary; some recessions are deeper than others, some have a longer recovery or boom period, and so on. Government actions can affect the timing and severity of a particular crisis, but they cannot prevent them occurring. The extension of easy credit, increase in government spending, including on war or war preparations, for example, can delay the onset of crises, but not eliminate them.

Workers hit on all fronts

This most recent crisis is typical with its bankruptcies, plant closures, takeovers, asset sales, shops and other businesses slashing their prices, and falling profits. Workers always feel the full brunt of a crisis, as they are sacked, their entitlements go up in smoke, wages are reduced and working conditions come under attack.

The crisis of over production leads to the actual destruction of capital as plants are shut, surplus stock destroyed and investments on stock markets and in managed funds shrink. Historically, the collapse of stock markets and other investments were of little concern to workers – it was the rich who lost their money. Today it is a very different situation. Millions of workers directly own shares in their employer’s company or in other corporations and banks such as Telstra and the Commonwealth Bank. The stock market fell by over 50 percent. Workers’ retirement savings in superannuation funds were likewise hit to varying degrees.

Bankruptcies and plant closures continue to increase. Some companies have sacked workers because demand has shrunk and the work is just not there to do. Other bosses have negotiated arrangements for their workforces to have “non-work” days, shorter hours, cut shifts, accept wage reductions and other arrangements to avoid or reduce sackings. In many sectors – on the waterfront, car manufacturing, in the hospitality sector, mining, etc – there is not enough work for existing workforces.

There is a great deal of insecurity in the workforce; casuals are the most vulnerable, but thousands of “permanent” employees are being sacked every week. Some employers see the crisis as an opportunity to sack workers, impose longer hours of work, unpaid overtime and cut conditions, even when their businesses are still thriving. They are simply taking advantage of the precarious situation facing workers with unemployment rising and job opportunities all but vanished.

Capitalists never let up in their struggle to reduce the cost of labour. Every dollar less paid in wages, every dollar saved through unpaid overtime, means a corresponding rise in profits.

Ironically, these measures reduce the income in workers pockets, leaving them with even less to spend and so adding to the crisis of over production. A downward spiral is set in motion, more businesses go bust, more workers are laid off, etc.

This downward spiral of destruction of capital continues until a balance is achieved, where the rate of profit is largely restored as the reduced levels of production correspond to the demand for goods and services. At this point production becomes relatively stable, laying the basis for the recovery phase of the cycle.

The government’s most recent $900 and other cash handouts had the aim of countering that spiral by giving people more money to spend as did a number of the one-off spending measures in the May Budget.

The military industry in Australia also saw the huge increase in the defence spending of close to $6 billion on new submarines and other equipment as stimulating the economy. It is true that it will increase demand for products and create jobs, but the same amount of money spent on public services such as housing, transport, education, health and community services would create many tens of thousands more jobs, and be of considerable benefit for the people of Australia. The massive increase in military spending is nothing short of preparing for war – an exercise that will bring death and destruction – and of course super profits for the war industry.


When the corporate sector begins to rebuild, it will be doing so in a way to maximise profits – by maximisation of the exploitation of workers and restoring and increasing the rate of profit (profit as a percentage of capitalist investment).

Employers will be hell bent on holding onto all the cuts in wages and working conditions and other sacrifices that workers made during the crisis. Their aim will be to consolidate their gains. The trade union movement will have a big battle ahead of it to restore these lost wages and conditions, let alone gaining new wage rises.

In some workplaces, where there was strong union involvement, agreements were made to revert back to previous pre-crisis wages and conditions when the volume of work picked up. This was done, for example, on the waterfront.

Regardless of any agreements, government and employer pressure will be on not to “harm the recovery” with wage rises. The old “trickle down” myth, telling workers to restrain wages to boost profits so as to create jobs, will be trotted out yet again. But very little trickles down to workers. Any new investment is more likely to be spent on takeovers and chasing cheaper labour overseas. Wage restraint and wage freezes boost profits. That is their aim and they do it well.

There will also be calls to raise productivity – meaning output per worker without a corresponding increase in wages. This results in a larger volume of production relative to the income received by workers. In other words, it creates a bigger gap between the value of the work done (labour), what is to be sold and the amount of money workers have to spend.

Hence the capitalist process of recovery based on restoring and increasing the rate of exploitation, begins the process of building the gap, the inability of people to buy what is purchased, that eventually results in another economic crisis of overproduction. The foundations for the next economic crisis of overproduction are being laid during the recovery period of the economic cycle.

The various measures the Rudd Labor government has taken are focused on restoring the rate of profit of the corporate sector (albeit from a smaller asset base). The calls on the government to move as quickly as possible to restore a budget surplus, wind back public debt and make the “tough” decisions to slash spending are also directed at recovery for the private sector. They do so at the expense of people’s personal incomes and social expenditure on welfare, public hospitals, education, housing etc.

That is why capitalism can never eliminate the “boom-bust” economic cycle. The cycle arises out of the basic contradiction of capitalism – the private ownership of the means of production and the social nature of production. As long as workers are not paid the full value of their work, as long as the means of production and what is produced by the labour of workers are privately owned that contradiction, and along with it the economic cycle, will remain.

When capitalist economists, government and big business representatives use the GDP as a measure of recovery they have in mind only one component of the GDP. Recovery to them means growth in corporate profits. Growth at the expense of the other two key components – wages and the taxation of both those profits and the incomes of the rich.

Next Week: The People’s Budget – an alternative path to recovery for the people.

Next article But is that enough

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