Zombie Capitalism Global Crisis and the Relevance of Marx

Part Two

CAPITALISM IN THE 20th CENTURY

The Great Slump

An unprecedented crisis

The deepest slump capitalism had ever known followed by the most sustained boom, interspersed with the bloodiest war in human history. Such was the course of capitalism in the middle 50 years of the twentieth century.

The epicentre of the slump was the United States, which had emerged from the First World War as the greatest economic power, with 50 percent of global industrial production, overtaking both victorious Britain and defeated Germany. The onset is often identified with the Wall Street Crash of 29 October 1 929, when the New York stock exchange fell by almost a third. But " business was already in trouble before the crash", with auto output down by a third in September compared with March 1929.1 Over the next three years US industrial production fell by about half, and the slump spread across the Atlantic to Europe, where there were already incipient signs of crisis. German industrial production also fell about half and, with a slight delay, French fell by nearly 30 percent. Only Britain saw a smaller fallof about 20 percent-but that was because its heavy industries were already in a depressed condition.

By 1932 a third of the workforce in the US and Germany were unemployed and a fifth in Britain. Those hit were not only manual workers as in previous crises, but white collar employees who thought of themselves as belonging to the middle class. Hundreds of local banks went bust in the US and some giant banks in Europe collapsed spectacularly, destroying people's savings and aggravating the general sense of disaster. Hitting all industrial countries at once, the crisis destroyed the demand for the output of agricultural countries, driving down the prices farmers received and creating vast pools of misery. No region of the globe avoided at least some decline in output,2 and world trade fell to a third of its 1 929 level.3 By comparison, both world output and world trade had grown during the previous "Great Depression" of the 1870s and 1 880s.4

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The 1920s boom

The ideological shock of the crisis was increased by the way capitalism had seemed to have recovered in the preceding years from the destruction of the First World War. Industrial output in the US had doubled from 1914 to 1929, with the emergence of a host of new industries that began to revolutionise patterns of consumption-radio, rayon, chemicals, aviation, refrigeration, and the replacement of horse-borne by motorised transport. The boom in the US had a beneficial impact in Europe. Germany, racked by civil war in 1919-20 and then unparalleled inflation in 1923, had then seen industrial output grow 40 percent above its 1914 level. In France industrial production had doubled. The press had displayed an unbounded optimism about capitalism, proclaiming a "new era" of endless prosperity. Mainstream economists had been just as confident. Alvin Hansen wrote that the "childhood diseases" of capitalism's youth were "being mitigated", while America's most eminent neoclassical economist, Irving Fisher, had stated on the eve of the Wall Street Crash that "stock prices have reached what looks like a permanently high plateau", and continued to exude optimism for some months after, while in Britain John Maynard Keynes had assured his students, "There will be no further crash in our lifetime" .5 Social democrat Marxists joined in the chorus, with Hilferding's theory of "organised capitalism", as a system in which the anarchy of the market and the trend towards crisis had disappeared.6 Suddenly they were all proved wrong.

The initial reaction of mainstream politicians and their fellow travellers in the economics profession was to assume that they only had to wait a short time and the slump would begin to correct itself. "Recovery is just around the corner," as US president Herbert Hoover assured people. But recovery did not come in 1930, 1931 or 1932. And the economic orthodoxy which had been so confident in its praise of the wonders of capitalism so recently could not explain why-and it still cannot explain why today.

There have been attempts at explanation. The most common among the most orthodox at the time was that articulated by the

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English economist Arthur Cecil Pigou. Workers, according to his argument, had priced themselves out of their jobs by not accepting cuts in their money wages. Had they done so, the magic of supply and demand would have solved all the problems. Irving Fisher belatedly put forward a monetarist interpretation, arguing that the money supply was too low, leading to falling prices and so cumulatively increasing debt levels. More recent monetarist theorists put the blame on the behaviour of the central bankers. If only, the argument went, the US Federal Reserve Bank had acted to stop the money supply contracting in 1930 and 1931, then everything would have been all right-the arch monetarist of the post-war decades, Milton Friedman, traced its mistakes and the depth of the slump back to the death of New York Reserve Bank president Benjamin Strong in October 1928.7 By contrast Friedrich von Hayek and the "Austrian" school argued that excessive credit in the 1920s had led to "an imbalance in the structure of production" ,8 which would be made worse by increasing the money supply. Still other economists blamed the dislocation of the world economy in the aftermath of the First World War, while John Maynard Keynes stressed an excess of saving over investment that led to a lack of "effective demand" for the economy's output. Finally, there was the claim, still perpetuated in much media commentary today, that the raising of US tariffs by the Smoot-Hawley Act in the summer of 1930 unleashed a wave of protectionism preventing a recovery that would otherwise have occurred if free trade had been allowed untrammelled sway.

Ever since then the proponents of each view have found it easy to tear holes in the arguments of those holding the other views, with none being able to survive serious criticism. That is why the current Federal Reserve head, Ben Bernanke, sees explaining the slump as the ever illusive Holy Grail of his profession. Yet if the slump of the 1930s cannot be understood, neither can the chances of it recurring in the 21st century be seriously assessed.

Disentangling the real causes of the slump from this mishmash of contradictory argument involves, first of all, looking at what really happened during the 1920s.

Rapid economic growth and the proliferation of new consumer goods had encouraged people to see this as a decade of continual rises in living standards and enormous productive investment-a story that is still frequently accepted today. But in fact wages rose by a total of only 6.1 percent between 1922 and 19299 (with no increase after 1925) and the manufacturing workforce remained static while industrial production expanded by about a third. Michael Bernstein notes that "the lower 93 percent of the nonfarm population saw their per capita disposable income fall during the boom of the late 1 920s".10 The fall in labour's share of total income meant that the proportion of national output that could be bought with wages fell. The economy could only keep expanding because something else filled the resulting gap in demand.

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Many analyses have argued that investment fulfilled this role. Gordon Brown tells how much recent literature sees "that the most notable aspect of the 1920s was overinvestment" .11 A chastened Hansen noted in his analysis of the slump that, although a "vast sum of \$138,000,000,000" of "investment" had "led consumption" during the 1 920s, only half of that was business investment, and of that only a third was new investment, ie a mere \$3 billion a year. 12 In other words, beneath the appearance of rapidly expanding investment, the reality was a relatively low level of productive accumulation despite the impetus provided by the new industries. Other analyses, by Simon Kusznets,13 Steindl,14 and Gillman, 15 bear this out.

Only one, stark, conclusion can be drawn from such figures. The boom could not have taken place if it had only depended on the demand for goods created by productive investment and wages. A third element had to be present to prevent the piling up of unsold goods and recession in the mid-1920s. As Hansen recognised, "Stimulating and sustaining forces outside business investment and consumption were present . . . with these stimuli removed, business expenditures would have been made on a more restrictive scale, leaving the economy stagnant if not depressed" ^.16

Hansen, as a mainstream economist, even if by now a critical one, saw these forces as being "non-business capital expenditures (residential building and public construction)" and " the growing importance of durable consumer goods financed in large part by a billion dollar per year growth of instalment credit" and "rather feckless foreign lending" .17

A classic Marxist analysis of the slump by Lewis Corey puts the stress on the growth of luxury consumption, unproductive expenditures and credit. The 1920s were a decade in which incomes from dividends and managerial salaries rose several times faster than real wages,18 until "the bourgeoisie" (including the non-farm petty bourgeoisie) were responsible for over 40 percent of consumption, according to him. 19 Then there was growing expenditure on advertising and sales drives as firms sought markets for the growing number of goods they were turning out-this expenditure, in the form of incomes for sales personnel in these same industries, could then create a market for some of the goods businesses were trying to sell. A doubling of consumer credit20 enabled the middle class and some layers of workers to buy "on the never never" some of the new range of consumer goods, with car sales at a level in 1929 they were not to reach again until 19 5 3. And finally there were upsurges of non-productive speculative investment in real estate and the stock market. Such things could not create fresh new surplus value to solve the problem of profitability (they merely involved funds passing from one capitalist pocket to another). But their byproduct was unproductive expenditure in new building, new managerial salaries and conspicuous consumption, all of which absorbed some of the goods being poured out by industry, encouraging further speculation:

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Superabundant capital became more and more aggressive and adventurous in its search for investment and profit, overflowing into risky enterprises and speculation. Speculation seized upon technical changes and new industries which were introduced regardless of the requirements of industry as a whole . . . 21

Spending on new non-residential construction rose by more than half over the decade, and was "most intense in the central business districts of cities". This was most notable in New York, where work on the world's tallest building, the Empire State Building, began in 1929-only for it to be known by 1931 as "the Empty State Building" .22

While the US boomed, there was also a boost to economic expansion in Europe with an inflow of American funds that could make up for some of the destruction caused by the war-the impact of the US Dawes plan of 1924 was particularly important in encouraging loans to Germany.

These factors were already losing their capacity to sustain the boom in industry before the Wall Street Crash. There was the beginning of a recession in 1927, but a brief upsurge of investment in heavy industry and autos in 1928-9 pulled the rest of the economy forward.23 Then, in the late spring and early summer of 1 929, this came to a sudden end, with a sharp fall in fixed investment24 and auto production.25 The expansion of credit and the scale of speculation that sustained unproductive expenditures had hidden the underlying problems right up to the last minute. But once there was a single tiny break in the chain of borrowing and lending that held it up, the whole edifice was bound to come tumbling down. Marx's comment on crises could not have been more apposite:

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The semblance of a very solvent business with a smooth flow of returns can easily persist even long after returns actually come in only at the expense partly of swindled money-lenders and partly of swindled producers. Thus business always appears almost excessively sound right on the eve of a crash. Business is always thoroughly sound until suddenly the debacle takes place.26

The recession precipitated a sudden contraction of speculative ventures and unproductive expenditures, so reducing still further the market for industrial output. Faced with declining sales, industrialists were already beginning to borrow from the banks, rather than lend to them. Those who had engaged in the speculative boom (including both industrialists and banks) now tried to borrow more in order to cover their losses after the crash, but borrowing was now very difficult. Those who could not borrow went bust, creating further losses for those who had lent to them. The slump spread from one sector of the economy to another.

Once the decline started there seemed no end to it. Industrial decline led to pressure on the banks, which in turn deepened industrial decline and put more pressure on the banks. But that only further exacerbated the disproportion between productive capacity and consumer demand, further worsening the crisis in industry. As firms tried to sustain sales by competitive price cutting, profits everywhere fell and with them the willingness even of firms that survived to invest. The non-productive expenditures that helped to fuel the boom were cut right back as companies tried to conserve their funds and the slump grew deeper.

The position in Europe was no better, with recession also already under way when Wall Street crashed. Conditions were worst in Germany, the world's second biggest industrial economy, which began experiencing an economic downturn in 1928:27 "By the summer of 1929 the existence of depression was unmistakable" ,28 as unemployment reached 1.9 million and the spectacular failure of the Frankfurt Insurance Company began a series of bankruptcies.

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Problems in each country impacted on those in others. There had already been an outflow from Germany of some of the American funds associated with the Dawes plan before the Crash. It now became a torrent as hard-hit American institutions recalled their short-term loans from Germany, creating difficulties for German industrialists who had been relying on them to finance their own industrial overcapacity. Austria's biggest bank, the Creditanstalt, went bust in May 1931. Britain was hit by the withdrawal of foreign funds from its banks, and broke with the world financial system based on the gold standard. This in turn created vastly exaggerated fears in the US where the Federal Reserve Bank raised interest rates, and there was "a spectacular increase in bank failures"29 and industrial production slumped even more.

The proliferating impact of the crisis made it easy for people to confuse effects with causes. Hence the contradictory interpretations from mainstream economists, with some blaming too much money, some too little; some central bank interventions, some lack of intervention; some excessive consumption, some too little consumption; some the gold standard, some the turn of states to protectionism and competitive currency devaluation; some the rapidity of the growth of investment, some its tardiness; some the forcing down of wages, some their "stickiness" in falling; some the scale of indebtedness, some the refusal of the banks to lend.30

Yet amidst the contradictory interpretations there was an occasional partial glimpse that something fundamental was causing havoc to the system to which all the mainstream economists and politicians were committed. The two economists usually thought as representing polar opposite attitudes, Keynes and Hayek, both stumbled on the same factor but in such a way that neither they nor their apostles took it seriously.

The main theme running through Keynes's General Theory of Employment, Interest and Money was that saving can exceed investment, opening up a gap that reduced the effective demand for goods, and therefore output, until the reduced level of economic activity had cut saving down to the level of investment. This could be overcome, he argued, by cutting the rate of interest ("monetary measures") and putting more money in people's pockets by tax cuts and increased government spending ("fiscal measures"). But he recognised that these measures might not work, since people and firms might still decide to save rather than spend. In particular he was "somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest" .31 He is best known for explaining the weakness of investment on the crowd psychology of speculators-"when the capital development of a country becomes a by-product of the activities of a casino, the j ob is likely to be ill done " 32-and the flagging "animal spirits" of entrepreneurs.33 But at points in the text he threw in another factor. He argued that the very process of expanding capital investment led to a decline in the return on it-in "the marginal efficiency"-and therefore to a blunting of the spur to further investment. 34

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