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February 2002 • Vol 2, No. 2 •

A Product of the Global Economic Crisis

By Nat Weinstein

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The collapse of Enron, which had been described as the country’s seventh largest and most powerful energy trading company is much more than just the biggest corporate bankruptcy in the nation’s history. It may also be one of history’s big swindles, costing its mostly small-time shareholders billions of dollars as its stocks fell from a high of 90 dollars to less than 1 dollar a share. But most of all, as we shall see, it is symptomatic of the deepening global economic crisis.

Enron’s collapse will also contribute to the crisis. It added tens of thousands of jobless to the growing army of unemployed and reduced their retirement plans—stuffed with Enron stock—to a fraction of their former value. Meanwhile the handful of Enron’s corporate insiders and big-time stockholders systematically sold off the bulk of their stocks in small blocks while assuring all that the corporation’s economic future was bright and its stock would resume its rise.

The mass media has been reporting new evidence almost daily of the complicity of public and private agencies with Enron’s criminal activity. The following are just a couple of the many instances of complicity by the government guardians of the “rule of law” over corporate America.

The Jan. 17 New York Times reported that Harvey L. Pitt, the chairman of the Securities and Exchange Commission, who is responsible for policing companies like Enron, was reported to have paid a visit on Jan. 14 to senior executives in charge of the Financial Accounting Standards Board, the accounting industry’s private-sector oversight body.

According to one official present, Mr. Pitt reportedly “read them the riot act” for moving too slowly in adopting new standards particularly involving bookkeeping treatment of “special purpose entities”—the murky partnerships at the center of the unraveling of the Enron corporation. The Times gave this account of Pitt’s hypocritical “scolding” of his underlings:

Such a lecture from the head of the commission would be unremarkable but for one fact: For months leading up to the Enron debacle, Mr. Pitt, a former lawyer who has had most of the accounting industry’s top players as clients, has been preaching the message that the commission under his predecessor was too adversarial toward the industry and needed to work more cooperatively with accounting firms.

The Jan. 19 edition of the same newspaper reported that when a former chairman of the S.E.C., Arthur Levitt, attempted to regulate conflicts of interest in the accounting industry, his efforts were scuttled by “10 or 11 senators” and other influential persons who rained a torrent of threats down on his head. It was also reported that no fewer than “71 senators and 188 congressmen have been on the Enron gravy train. All but 5 of the 56 members of another investigative committee, House Energy and Commerce, got Enron or Arthur Andersen dough. The country’s chief law enforcement officer, John Ashcroft, has recused himself from the case because he too received Enron Cash….”

The criminal character of the capitalist profit system

The collapse of Enron is, among other things, an indictment of the criminal character of the profit motive and the capitalist economic system. The corporate-owned and controlled mass media of communication—otherwise known as the “free press”—now blames this latest high-rolling rip-off on “greedy corporate executives.” But it’s hard to take this denunciation of Enron seriously, since the entire capitalist economic system is motivated by unmitigated greed.

Goods and services are produced, not in order to satisfy human needs and wants, but in order to make as large a profit as possible. And so long as there’s a profit to be made, all sorts of anti-social products, including such things as poison gas, atomic bombs and other weapons of mass destruction, are cheerfully and profitably produced.

Make no mistake; the current exposé of the scandalous activities of Enron by the powers-that-be, is not motivated by their outrage at the terrible damage done to its workers or even to the large number of its small stockholders. Rather, it’s because by going through the motions of a criminal investigation, the reality of their complicity might be somewhat easier to deny.

Neither is the reference to ethics anything but pure hogwash. The fact is that the laws governing big business are written and interpreted in such a way as to make “legal” what would be criminal if committed by private citizens without powerful friends beholden to them in high places.

After all, it’s an open secret that laws regulating corporations are so riddled with loopholes that capitalists easily slip through without a scratch. And if past practice is any guide, it is highly unlikely that any of the real perpetrators responsible for these “unethical” activities will serve any time in prison. And even if the cabal of regulators and regulated are compelled to throw one or more of their own to the wolves, those convicted of grand larceny—it’s safe to say—will not be made to serve as much time as would a poor ghetto-dweller convicted of shoplifting.

The significance of Enron’s bankruptcy, however, is far surpassed by what it reveals about the nature of capitalist democracy on the one hand and, on the other, what it tells us about the currently deepening economic crisis in the capitalist world.

First, we will take a look at the political significance of the Enron bankruptcy and the general malfeasance of public and private authorities assigned to regulate corporate America.

Dollar democracy or ‘what’s good for big business is good for America’

The truth of the matter is that while the capitalist electoral and political system is democratic, it is like the democracy in ancient Greece and Rome, which was democracy for slave owners, not for the slaves. The American system, thus, would be better characterized as dollar democracy.

Last year’s New York City mayoralty election campaign, during which the winner and his runner-up each spent thousands of dollars for each vote each received, is a graphic example of dollar democracy. And like the scores and hundreds of thousands of dollars it takes to elect most congressional candidates, the millions to elect most U.S. senators and the scores of millions of dollars to elect a U.S. president, it is a gross violation of genuine democracy.

It also means, more concretely, that a rich individual or corporation, able to contribute big bucks to candidates for public office, has far more influence over those elected than do thousands, hundreds of thousands and millions of ordinary voters. And capitalist democracy puts no obstacle in the way for billionaires like Ross Perot to single-handedly put up tens of millions of dollars to finance their own campaigns for mayor, governor or president of the United States!

Two more factors contributing to the fraudulent character of capitalist electoral democracy need to be taken into account. 1. There are no real limits on how much can be donated by individuals to a candidate. And 2. There is no real limit on how much of these contributions, beyond actual campaign expenses, can be permanently pocketed by these candidates. (That’s one of the ways that those with modest means who manage to serve several terms or more in congress are able to retire from public office as millionaires.)

In other words, the right to bribe public officials and the latter’s right to be bribed is one of the “freedoms” enjoyed by the very rich in America, which we are repeatedly told is the “most democratic” of all capitalist countries. In fact, the United States loves democracy so much that it has been fighting wars all over the world to impose capitalist democracy everywhere—whether the people there like it or not.

President George W. Bush, of course, is no stranger to the art and science of dollar democracy. Thus, the mass media could not ignore the president’s long-standing political and financial relationship with the oil and gas industry and especially with Enron Corporation and its chairman/chief executive, Kenneth L. Lay. Chairman Lay was one of the leading contributors and fund-raisers for both George W. and his father, George H. W. Bush, who had preceded him as U.S. president.

Faced with headlines featuring his long-standing relationship with a big-time crook, President Bush brazenly (and foolishly) sought to divert attention from himself by announcing that Mr. Lay had contributed heavily to his opponent, Ann Richards, the incumbent Texas governor when George W. ran for that post. But the president failed to mention that Mr. Lay had also made a much larger contribution—half a million dollars—to Bush’s own gubernatorial campaign.

It was also in the public record that Mr. Lay was one of the 214 so-called “Pioneers” he recruited to contribute at least $100,000 each to elect George W. Bush president of the United States.

Enron’s rise and fall reflects the boom-bust cycles of capitalist economy

The economic boom of the 1990s was a decisive factor in Enron’s rapid growth. And when the period of rapid economic expansion began petering out at the end of that decade, it contributed heavily to the Enron Corporation’s collapse. Enron’s bankruptcy is not the first and will not be the last casualty of what promises to be one of history’s most severe crises of overproduction.

(Already, the Kmart Corporation, the nation’s third largest discount retailer has filed for bankruptcy. And the U.S. steel industry is using its paid agents in the capitalist government and state institutions to bail it out with welfare for capitalists and further restrictions on foreign steel imports. And Random House, the largest consumer publisher has begun downsizing in anticipation of big troubles in the book-publishing industry. Those are only some of the latest symptoms of the brewing economic storm.)

A complex corporate economic entity like Enron is a living social organism whose human constituents are like the cells in a biological organism. Corporations and other business enterprises serve as the “multi-cellular” organisms, as it were, that populate the global economy. And like their biological counterparts, these socio-economic entities also malfunction from time to time for reasons that flow from their way of life in the global economic ecology.

And like any other living entity, a corporation’s ability to benefit from life’s everyday opportunities or recover from its adversities depends in great part on the ever-changing environmental conditions in which it lives—that is, the general state of health of the economic system as a whole.

The financial and political wheeling and dealing of big corporate entities are not in any sense abnormal; it is their way of life in the global capitalist “ecological” system. In short, Enron did what all business enterprises do in the normal course of their existence. Its demise, however, is no less, and perhaps more, a result of the current sickness of the world economy than it is a result of its so-called “unethical” and reckless wheeling and dealing.

In the first place, the economic function of Enron, although it includes investments in gas and oil pipelines and powerhouses, is not mainly as an industrial capitalist enterprise like the auto, steel, transport and other industrial enterprises. Its main function appears to have been that of a “middleman.” That is, its main activity had been or has become buying energy and other commodities cheap, and selling them dear—rather than in the production of these goods.

All capitalists like to use other people’s money to do business on a larger scale than their normal sources of capital would otherwise allow. But it’s one thing to borrow heavily to build new forces of production, its quite another to borrow on the same scale to finance the buying and selling of commodities. By the time commodity traders take possession of the goods they trade, the profit that goes to its capitalist producers has already been deducted from the value of its goods.

Middlemen, and the commercial sector of capitalist economy in general, provide a necessary function for the industrial capitalists. Their main function is to speed up the circulation of the working capital of the industrialists that would otherwise be tied up in unsold commodities. The industrialists can then more quickly put their working capital to use to finance the next cycle of commodity production.

(Middlemen take over the part of the industrial capitalist’s function of distributing his products to wholesalers and retailers. Since the main function of the commercial sector of the economy is to speed up the process, they receive a share of the surplus value deducted by the capitalists in the industrial sector. Thus, the middlemen’s main function is not in the production of surplus value but in the acceleration of its realization—that is, its transformation from idle goods sitting in warehouses into cash. As we shall see in a moment, the growth of the commercial relative to the industrial sector of the global economy is one of the hidden factors signaling the severity of the developing crisis of overproduction.)

It becomes purely speculative, however, when borrowed capital constitutes an unsustainable portion of an enterprise’s total working capital. All businesses involve risk, and enterprises engaged in large-scale trading of commodities must expect to win some and lose some. But when borrowed money outweighs the capitalist’s existing capital, the margin of profit—the middleman’s difference between the purchase and selling prices—is very narrow.

However, during the expansion phase of the capitalist economy, when markets are growing and competition is less intense, the margin of error is wider. And, of course, the margin of error is narrower in a shrinking global marketplace such as has been the case starting at the end of the last decade.

A careful reading of the reports and commentary in the mass media on the evolution of Enron’s rise and fall will show that when some of its riskier investments went bad in the more favorable economic environment—such as was the case during Enron’s rise—other investments were lucrative enough to balance the books. In such a favorable business environment good investments tend to outweigh the bad—at least if abnormal risks are prudently avoided.

And since all investments involve one or another degree of risk, it follows that in an unfavorable economic environment, such as that which began with the collapse of the “new economy,” Enron was one of those enterprises that began piling risk upon risk in a desperate struggle to survive the developing global economic storm. One must also take into account that no one really knows when the cycle of capitalist production will change from boom to bust.

One of The New York Times’ more sober Wall Street columnists, Floyd Norris, put it like this in his Jan. 18 column:

There is a historical pattern in such things, one that was recognized by the economist Charles P. Kindleberger in his classic 1978 book “Manias, Panics and Crashes.” “The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom,” he wrote. After the revelation of the fraud, and the collapse of the boom, he added, “the curtain rises on revulsion.” There is no proof of fraud at Enron, but the revulsion is clear.

It was also reported in the Jan. 17 Times in an article headlined, “Enron Avoided Income Taxes In 4 of 5 years,” that the company “used strategies common among businesses to avoid taxes. It also used some unusual methods, among them the creation of 881 subsidiaries abroad, including 692 in the Cayman Islands, 119 in the Turks and Caicos, 43 in Mauritius and 8 in Bermuda.” The author, however, also notes: “Enron is by no means alone in not paying taxes.”

That last sentence is telling. It should be obvious that openly stating that the laws were consciously designed to allow capitalists to avoid paying taxes, or to hide corporate profits from stockholders, would have aroused a storm of protests. Consequently, the authors of such legislation always give “good reasons” for doing so. But all who vote for what really amounts to the shifting of the tax burden from the rich to the poor know exactly what and why they do it. The rationalizations are obviously designed to hide as well as they can the pro-capitalist, anti-working class policies of the capitalist governmental and state apparatus.

The only thing unusual in the Enron Corporation’s crooked path is that it excelled in the arcane arts of hiding income from the tax collector and from their own stockholders. And no small part was played by the unparalleled political influence bought and paid for by Enron. And, by most people’s standards if not by capitalist law, Enron’s “unethical” practices amounted to pure, unadulterated larceny.

Significance of decades of growth of the commercial and decline of the industrial sector

There are many partially or entirely hidden factors that are symptomatic of the severity of the unfolding crisis of overproduction. One of these is being made manifest by the collapse of Enron Corporation whose main function has been largely restricted to commerce—the buying and selling of merchandise.

As has been briefly indicated earlier, the growth of the commercial sector relative to the industrial sector means that the total surplus value being produced, and thus the total profits realized by the world’s capitalists, is much less than it may appear. In other words, a much larger sector of the global capitalist economy is engaged in the transformation of potential surplus value incorporated in goods sitting in warehouses into cash, than is being engaged in the production of surplus value—from whence profits are deducted.

That means that the general, global, average rate of profit has been deeply undermined and that a proverbial “straw”—a minor incident—can break the economic “camel’s” back and bring the currently inflated average rate of profit crashing down to a fraction what it is today. This is because of the unconscious objective laws governing capitalist economy, one of its most important being the law that determines the average rate of profit. And since, the collapse of Enron affects the workings of this economic law, a very brief description of its basic elements may help shed light on the depth of the unfolding crisis of overproduction.

The falling rate of profit

The rate of profit is determined by two organically connected factors: First is the proportion of capital invested in “constant capital”—i.e., machines, plant, equipment, technology and in the commercial institutions created to assist in the realization of surplus value, which also counts as the “dead labor” incorporated in these means of production.

And on the other, is the proportion of capital invested in “variable capital”—i.e., the wages paid to workers in exchange for their power to labor for a given quantity of hours, days or weeks. The ratio between these two portions of invested capital determines the rate of profit. Thus, as the dead labor grows in proportion to living labor—all other factors being unchanged—the rate of profit falls.

One of the early signs of a booming economy is the relative and absolute growth of the “organic composition” of capital—that is, the growth of machines and other elements of constant capital relative to the decline in the proportion invested in variable capital—wages. Thus, when the boom begins subsiding, the rate of growth of the industrial sector begins slowly contracting. Only later does the commercial sector also begin contracting, since capitalists need to at least try to speed up the transformation of commodities into cash to keep the economy going for as long as it seems to work. This is the immediate result of slowing sales, declining production, increasing layoffs, and with new cycles of economic decline feeding on the preceding ones.

As can readily be seen, this process can lead to a crisis of overproduction that can be mild, medium or severe depending to a great extent on the length of the preceding period of economic expansion.

And when you take into account the revival of the global economy during World War II, that period has so far lasted for some 60 years. That’s probably the longest period of sustained economic expansion—allowing for very brief slowdowns every 6 to 8 years or so—in the history of capitalism!

Then we must also take into account how it came to pass that the developed industrial countries of the world have been expanding on such a scale and for so long a period of time? The answer to that question lies, at bottom, in the vast expansion of credit that has been set into motion by Keynesian economics. Leaving aside all of the many other mysterious forms of movement of capitalist economy, it is the unprecedented expansion of credit that is largely responsible for having kept the capitalism alive and growing for so long.

But paradoxically, this global capitalist organism has been steadily getting sicker as the mountain of debt owed by every nation to the world’s bankers and money lenders steadily grows. Keynes himself, the British economist that contributed most to the scheme leading to growing indebtedness, conceded that the debt would grow to the point of being unsustainable. But, he famously said, by that time we’ll all be dead.

Debt crises now erupt ever more swiftly and pervasively, hitting one country after another. In these crises, the world’s poorest peoples are forced to suffer austerity—in plain English, a massive reduction in already miserable living standards imposed on them by bankers and institutions like the International Monetary Fund, established for that purpose by world capitalism.

Meanwhile the symptoms of the underlying sicknesses increasingly erupt like boils and ulcers on the surface of the living organism called world capitalism. It’s most dreadful consequences so far have been a century of predatory wars on a global scale between imperialist camps for a larger share of a shrinking world market and/or in wars of oppression such as are now being waged here, there and everywhere in the poorest of the world’s enslaved nations.

Today, the mounting debt crisis affects all of the world’s currencies with the weakest being hit first with monetary crises that end in the devaluation of their currencies. And while they are all losing absolute value, the relative value of the strongest currencies rises because their values are measured, not in gold or another more reliable measure of value, but in each other. Nonetheless, the debt crisis also affects the most powerful of the world’s industrial countries, not excluding the American superpower, which is for the time being affected in other ways.

Meanwhile, curiously enough, at the same time that the value of the high and mighty American dollar mounts relative to the currencies of all other countries, inflation is eating away at the dollar’s value. That’s the proof that all the world’s debt is unsustainable and chaos will be the result when the world’s strongest currencies collapse—as is already happening to Japan.

Now, it must be said that the picture painted above has already made a huge impact on the consciousness of the peoples of the world, including right here in the United States. The description above will not sound far-fetched to most, including Americans. Even those more privileged layers of the working class have begun to feel the effects of the deepening crisis even before it has crystallized. However, what they already know and feel is moderated by their still tolerable economic position. That, to be sure, will change when the crisis crystallizes, as it must—and then everything will change.

That’s why we can say without fear of being repudiated by historical events to come, that the global crisis of overproduction, now well under way, will challenge the very existence of the human race on the planet earth. And there is absolutely no way out for the victims of world capitalism but by world socialist revolution. And it’s also safe to say that a socialist future is not as capitalists want to believe, a ghost of the past, but on the contrary, the specter that quite rightly haunts the most well informed among the rulers of the capitalist world.





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