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Summer 2002 • Vol 2, No. 7 •

The Boom-Bust Economy and the Class Struggle

By Nat Weinstein

There is a growing awareness by working people everywhere that their quality of life has been getting progressively worse during what has been the longest period of capitalist “prosperity” in history. The period I refer to is not just the most recent phase of economic expansion that came to an end when the “new economy” bubble deflated in the spring of 2000, but the one that began shortly after the end of the Second World War.

Some serious bourgeois economists think that the last half-century of good times are near an end. While very few of them have warned of an imminent descent into a major crisis of overproduction, neither is it an accident that there are almost daily comparisons made between the current trends in the economy and the 1920s—the decade preceding the stock market crash of 1929.

A recent reference appeared in the July 7 New York Times in an article on what to call the “recovery” from the recession alleged to have ended early this year. The author, Louis Uchitelle, is one of that newspaper’s economic commentators who specialize in explaining the latest view of economic trends to his readers. He writes:

Historians will undoubtedly liken the early years of the 21st century to the aftermath of the booming 1920s, when inflated stock prices, excessive expansion and corporate and financial dishonesty also had to be reversed. Then bank failures led to a rapid unraveling of the economy. “If there is a financial smash now, all bets are off,” said Peter L. Bernstein, an economic consultant and forecaster.
Almost no one anticipates an aftermath to the 90s as disastrous as the Great Depression, certainly not Mr. Bernstein. Despite the multiplying troubles, nearly every forecaster is betting on a recovery.

There are, of course, a handful of economists, as implied above, that have expressed the view that the long boom seems headed toward a bust that might be as severe as the one that was triggered by the stock market crash of 1929. But while none offers anything new in the way of a solution they treat the prolonged period of relative economic equilibrium as if more than a half-century without a major crisis of overproduction were the norm. Rarely if ever is it noted that there is no precedent in the last 150 years of capitalism since the steam engine sparked the beginning of the industrial revolution.

Let’s take a look at how this extraordinary period of prolonged prosperity has come about.

Keynes rescues capitalism

A scheme for transforming the world capitalist economy was put together toward the end of World War II by the representatives of the Anglo-American-led imperialist bloc when it became clear, by 1944, that they would emerge the victors. It was a radical new economic policy designed to prevent what they had every reason to believe would result in an even greater threat to capitalism than the Great Depression.

John Maynard Keynes, the main architect of the plan made no claim that it would be a permanent solution to capitalism’s internal contradictions, but that it was the best option available and that it was likely to last for at least as long as he would be around to worry about it.

The first requirement, and the linchpin of the new economic policy, was to gradually separate the global monetary system from its base in gold in order to loosen—if not abolish—what Marxist economist, Ernest Mandel, called the “dictatorship of gold.” This provided capitalist “regulators” with a means for permitting at least a small measure of human intervention into the blind forces driving capitalist economy toward ultimate self-destruction.

A major obstacle standing in the way had been the capitalist state’s inability to print currency in sufficient amounts to adequately stimulate a stagnating economy without the disastrous inflationary consequences dictated by gold. This is because when more paper dollars are printed than are covered by the supply of gold, it is noticed very quickly by moneychangers and speculators who then rush to change their dollars into gold. Unlike in post-Keynes capitalism, ordinary tellers, noticing an increase in the demand for gold spread the word far and wide, causing hordes of panicked holders of cash to change dollars into gold before banks run out of gold coins—and shut their doors!

The same principle applies to an over-extension of credit in a gold-based monetary system, since it results in a far larger increase in the money supply relative to the value of fixed and circulating capital. Thus, because there is no longer a way to change dollars into gold as money, the underlying foundation for an accelerated rate of inflation is hidden for far longer periods than is possible when paper money is as good as gold and silver.

Thus, by separating money from gold—beginning modestly, but widening as time went on—it became possible for a given quantity of operating capital to support a far greater proportion of credit than was possible in a traditional monetary system based on the gold standard.

This allows governments to more freely pump new currency into the economy in order to absorb unsold commodities when the economy begins to slow dangerously. Then, when the economy shows signs of having responded adequately to the stimulus, much of the paper is sucked back out to slow down, if not stop, the inevitable devaluation of currency. In that way, a runaway contraction or expansion of the forces of production can be moderated, if not eliminated, by pumping paper dollars in or out, as needed, to “regulate” the boom-bust cycles of capitalist production.

In this fashion, a relatively uninterrupted expansion of global capitalism without a major crisis of overproduction has been extended for a far longer period than at any time in the 500 year history of capitalism.

To be sure, Keynes’s scheme was not plucked out of the blue; it had to first go through a pragmatic series of attempts to extricate world capitalism from the Great Depression, which had, however, failed dismally. In fact, it was only the vast government expenditures spent on weapons of mass destruction in preparation for and during the Second World War that succeeded in reviving the world capitalist economy and ending the first Great Depression.

There are other implicit consequences of Keynesian economics that help explain the economic developments now taking place. Among other things, the loosening of the dictatorship of gold on credit means lots of valueless paper dollars that have the effect of reducing the value of each of the total dollars in circulation. It has resulted in permanent inflation because the quantity of dollars pumped into the economy tends to be greater than those siphoned back out. Thus, the relentless expansion of credit has now begun sinking over-extended powerful corporations and threatens to sink the ship of global capitalism as well.

One of the problems resulting from the elimination of gold as the only reliable measure of the values of everything from consumer goods to the real capitalized wealth of giant corporations is that the value of corporations is not known. Thus, the quantity of debt they can reliably sustain is also not known.

For instance, before even astute creditors could become aware that the debts of companies like Enron and WorldCom had grown to a point infringing on their ability to repay the capital advanced and/or the interest on the unpaid balance, the bottom dropped out of these seemingly all-powerful industrial and financial behemoths, and their real worth was suddenly and shockingly revealed.

But were these disasters merely the result of the shenanigans of a few, or even many, “bad apples”? It is becoming increasingly clear that there is no clearly defined line separating “honest” capitalists from their crooked counterparts, since most, if not all, break the so-called “rule of law” whenever and wherever necessary. It only becomes apparent that this line has been crossed when the economy sours and the more adventurous CEOs are among the first to get caught with their pants down. Such happenings are an inevitable consequence of the unpredictable workings of anarchic capitalism. And history shows that such scandals as we are witnessing today, tend to proliferate whenever the economy descends into a serious downturn. That’s why they so closely resemble those that led up to the Great Depression.

How capitalists get away with murder

No one should really be surprised when these big-time crooks get away with big-time larceny. It’s because they are rich enough to have put all the lawmakers and law-enforcers on their payrolls. Why else would Congress write laws with so many loopholes, some made to order, making it almost impossible to get a criminal indictment against big-time crooks like Kenneth Lay? In fact not a single Enron executive is yet to be indicted.

And why else, in those rare cases when the executors of “law and order” indict a corporate crook and in the rarer instances they are convicted and incarcerated, do these stand-ins for the entire array of high-class felons called corporate America, serve very brief sentences in “country-club”-style confinement. That is, in “prisons” with tennis courts and many other amenities intended to make their stay not too uncomfortable?

Why is all this possible? It’s because the capitalist mode of production is itself based on legalized robbery of the wealth produced by working people. And if there were any lingering doubts concerning the class nature of justice in capitalist America, revelation of President George W. Bush’s own financial skullduggery should remove them. The following selections from the Progressive Review briefly summarize the case against insider trading by the governor of Texas who became president of the United States:


In 1986: George W. Bush and partners receive more than $2 million of Harken Energy stock in exchange for a failing oil well operation, which has lost $400,000 in the prior six months. After Bush joins Harken, the largest stock position and a seat on its board is acquired by Harvard Management Company. The Harken board gives Bush $600,000 worth of the company’s publicly traded stock, plus a seat on the board plus a consultancy that pays him up to $120,000 a year. When Harken runs short of cash it hooks up with Jackson Stephens, who arranges a $25 million stock purchase by Union Bank of Switzerland. Sheik Abdullah Bakhsh, who joins the board as a part of the deal, is connected to BCCI.
In January,1990: Bahrain awards exclusive offshore drilling rights to Harken Oil. This is a surprise as Harken is in very shaky financial condition, has never drilled outside of Texas, Louisiana and Oklahoma and had never drilled undersea at all. The Bass brothers are brought in by Harken for sufficient equity to proceed with the effort. Harken’s stock price increases from $4.50 to $5.50.
George W. Bush sells two-thirds of his Harken Energy stock at the top of the market for $850,000, a 200 percent profit, but makes no report to the SEC until March 1991. Bush Jr. says later the SEC misplaced the report. An SEC representative responds: “nobody ever found the ‘lost’ filing.” One week after Bush’s sale, Harken reports an earnings plunge. Harken stock falls more than 60 percent. Bush uses most of the proceeds to pay off the bank loan he had taken a year earlier to finance his portion of the Texas Rangers deal.
August: Saddam Hussein invades Kuwait. Harken’s stock price drops substantially. Two months after Bush sells his stock, Harken posts losses for the 2nd quarter of well over $20 million and its shares fall another 24 percent, by year-end Harken is trading at $1.25. Bush has insisted that he did not know about the firm’s mounting losses and that his stock sell-off was approved by Harken’s general counsel.


But if you think that Democratic presidents are any better, forget it. Just recall Bill and Hillary Clinton’s him-and-her rip-off in the Whitewater caper.


What happens when the Keynesian bubble bursts

We saw a preview of coming events on a global scale when the so-called “tiger economies” of Southeast Asia were tipped over like a row of falling dominoes in 1997 by speculators who are in the business of testing the currencies of all nations to discover their real worth. When they discover those that are overvalued they can make oodles of dollars overnight by bursting the bubble of inflated currencies—bringing their victims’ over-indebted economies crashing down at the same time.

That episode was only a symptom of the cancer eating away at the debt-ridden global economy. But by showing how the collapse of the currencies of the tiger economies nearly destabilized the world’s richest countries, it provided a preview of coming events when the debt-ridden global capitalist economic bubble built on the foundation of the Keynesian monetary innovations also bursts, as all bubbles must.

World imperialism managed to survive that crisis because their wealth was great enough to meet that relatively modest challenge. But it won’t be so easy when one of the major industrialized countries is faced by a similar run on its currency like the one that brought down the Southeast Asian tigers. In any event, that phase of the unfolding global crisis of overproduction was only a pale reflection of bigger and more destructive economic earthquakes to come.

Keynesian economics has undergone numerous changes since it was first put in place but it has so far succeeded in restraining Adam Smith’s “invisible hand” of uncontrollable market forces from taking its revenge. That’s exactly what we have been seeing unfold since the Enron disaster.

Besides the mountains of debt that keep growing everywhere, no one really knows the real worth of each of the world’s currencies. The only thing that is known is their value relative to each other, not their absolute value (relative to the world of commodities). It appears that the difference between the two modes of measuring the exchange values of everything, from bread to factories to global indebtedness, is a difference that makes no difference.


A preview of things to come

To better appreciate its significance, imagine what would happen if the dollar, which has long been considered “overvalued” (i.e., overpriced) relative to all other currencies, begins falling more rapidly than it has recently. It could set off one of the world’s maddest scrambles by speculators to find the safest place to transfer their wealth in dollars. (Professional speculators are not the only ones that will be compelled to also rid themselves of dollars and scramble along with all others to find the safest place to park their wealth.)

It is by now well known that all big capitalist enterprises—not only the so-called multinationals—have investments throughout the global economy, which means that a significant portion of their total wealth is at least temporarily deposited in the banks of these countries and thus in marks, francs, pesos or pounds. When confronted by a run on a major currency like the dollar, all multi-national investors will be hard put to decide where to transfer their holdings.

That explains why gold has been steadily rising in price—reflecting a rising demand for gold. It foretells the worst of all outcomes for capitalism: the release of gold from its entombment to wreak its revenge on the Keynesian system. The resurrection of gold as a safe haven can easily lead to an exceedingly unwelcome return of the dictatorship of gold, the collapse of the world monetary system, the strangling of commodity production and exchange, and even runaway inflation, the likes of which has not been seen since post-World War I Germany.

It is impossible to predict the severity of such a crisis—except in the long run—since it depends on such a vast array of variables, many of which are hidden deep inside the complex interacting global coordinate system called capitalist economy. When the Keynesian mother of all monetary and economic bubbles bursts, the wretched of the earth along with their more privileged counterparts among the world’s advanced capitalist countries will be pushed down toward impoverishment—impelling the world working class toward revolutionary class struggle.

As can be seen, the next Great Depression will uncover all the festering contradictions suppressed by the false sense of security in the advanced industrial countries of the world. The entire working class, including its most privileged sectors, has long been lulled into passivity by the modern equivalent of bread and circuses. While their real living standards have slowly declined throughout the half-century of Keynesian economics, it has been concealed by the proliferation of new kinds of products some of which slowly but steadily have become accessible by different degrees to almost every sector of the working class from the most privileged to the most deprived.

The contradiction between value and use value hides declining living standards

One of the most important things determining what workers believe is an acceptable living standard flows from what Marx called the contradiction between the exchange value of commodities and their use value.

This contradiction makes it possible for workers to enjoy a greater number of things satisfying their needs and wants than before. But rather than these goods representing an increase in living standards, it can paradoxically serve to dull their perception of how their inability to satisfy all their new needs and wants lowers their living standards.

This is how it works: Because the long-term tendency toward more sophisticated technology increases the productivity of human labor, it results in an increase in the quantity and variety of commodities available. This has resulted in a long-term tendency toward a fall in prices that is hidden by the declining purchasing power of money.

But reducing the cost of production also reduces the value (and the price, in the long term) of the goods produced. And because labor power is also a commodity, like all such things, its value is also determined by its cost of production. And since wages is the price of labor power, it too fluctuates somewhere above or below its cost of production. Therefore, when the price of commodities necessary to maintain the prevailing standard of living of average workers falls, so will wages also be depressed by the lower cost of the goods needed to maintain the living standard they previously considered acceptable.

As we have seen, workers’ perception of the living standard to which they believe they are entitled rises as their labor gets more productive. But if their share of the greater quantity and variety of their labor product does not also rise, their perceived standard of living declines. Whether it rises or falls, however, it never stays the same, it either goes up or down. And which way it goes depends on the unending struggle between capital and labor.

This is a genuine, unambiguous fall in the living standards of the average worker. All workers can feel it but most are unable to articulate it. And that is because it is an extremely abstract but largely hidden variable called perception.

(The perception of what constitutes an acceptable living standard is analogous to the way things were before the 17th century Italian scientist Galileo came on the scene of. Before his discoveries, the wisest and brightest scientifically minded people believed that heavy objects fell faster than lighter ones. This was because they were unable to factor into their perception, the hidden variable of the shape of the falling object and its varying resistance to air. Galileo’s experiments at the Leaning Tower of Pisa, however, proved that all objects in a vacuum, whatever their weight, fall to the ground at the same time.)

Of course, there is much more to this contradiction between commodities as useful things and as things possessing exchange value. (Obviously, some of the most useful things, like air and water, are not necessarily things that possess exchange value, that is, are not commodities. And other things ranging from love to landed property act like commodities, but are not.)

The hidden truth about real living standards, moreover, tends to be glaringly revealed when economic booms go bust. Recessions and depressions change the given relation of forces between capital and labor to the disadvantage of the laborers. The supply of unemployed rises and the demand for labor power falls. This leads inexorably to a sharp downward pressure on the price of the commodity called labor power.

But even after the economy recovers it does so on a higher level of generalized productivity since the most inefficient producers are driven out of business and only the most efficient remain. And the larger the army of unemployed relative to employed, the lower the demand for labor power and thus, the lower its price tends to become—all other things unchanged.

But that, too, has a hidden and highly contradictory side: On the one hand, the exchanges of labor power for wages may, indeed, reflect an exchange of things of equal value. But, on the other hand, it is not an equal exchange between the value of so many hours of labor power at the moment it has been sold to the capitalist, and its greater value after it has become the property of the capitalists and consumed by them in the process of capitalist production. This is the result of the irreconcilable difference between labor and capital over how many hours of labor constitute a “fair day’s pay for a fair day’s work.”

Thus, the process of the capitalist mode of production leads inexorably to the absolute impoverishment of the working class.

Profound changes in mass consciousness, and why

Never before in history has there been such a generalized feeling that capitalism, to use the popular expression, “is bad for your health.” Never before, in fact, has capitalism been so unpopular at a time when the advanced industrial countries of the world were still in a state of relative prosperity.

The amazing increase in this expression of rising class-consciousness, although it is muted, is unlike that prevailing in the decade leading up to the Great Depression. Today, U.S. capitalism in particular, unlike in the 1920s, has earned a reputation everywhere, including here at home, of having engaged in numerous wars to advance the interests of the American capitalist class. And while the declared aims of these wars are always in defense of freedom, democracy, human rights and other highly noble purposes, they are never anything of the kind.

Large sections of the American people and an even larger proportion of the peoples of the world are unconvinced by these purported aims.

The main exception to the rule was the American people’s perception of World War II at the time and, unfortunately, to this day. The main reason this was and is still the case, is the nature of the regimes heading the imperialist adversaries of the United States and its allies. German and Italian imperialism were headed by extremely reactionary anti-working class fascist dictatorships. That appeared to give credence to the claims of the U.S. capitalist government and its imperialist allies of their democratic and humanitarian pretensions.

The significance of all this should not be underestimated; even though this unusual radicalization of mass consciousness remains largely beneath the surface at present. I think the careful reader will see the main point of this essay. The coming world crisis of overproduction will start off with the great majority of the peoples of the world at a higher level of anti-capitalist consciousness than was the case in 1929. The next Great Depression will more swiftly result in a mass radicalization of the working class. And that promises to result in the most extensive and the most class-conscious period of global pre-revolutionary struggle in world history.





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