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Global Financial Crisis II: Why capitalism is doomed

Euro_Economic-CrisisEconomic crises are inevitable under capitalism. The fundamental and fatal flaw of capitalism is the mechanism for profits to rise at the expense of wages and consumption. Global capitalism is now in a bottomless mire, and the final nail in the coffin will be the failure of politicians and mainstream economists to understand the modus operandi of the capitalist economic system, writes Bill Waters.

23 October 2011

Global Financial Crisis I was no aberration, and GFC II is also predestined.

The ultimate, underlying cause of all economic downturns (recessions-cum-depressions) in free market capitalist economies is “overproduction” (whose obverse is “underconsumption”): meaning insufficient consumer spending power to purchase the total output of goods and services on the market.

In turn, lurking behind that manifestation of economic crisis, lies growing inequality in the distribution of income and wealth within most contemporary “free enterprise” systems.

Statistics reveal that the 1930s Depression and GFC I were both heralded by an era of rampant inequality.

If, for example, low and middle income earners are stripped of purchasing power by wage and welfare cuts plus tax rises, while corporations and upper income earners are pampered by a “soft” tax and deregulatory regime; then, inevitably, the profit share of national income will rise temporarily, while the wage share declines.

The mechanism is as follows: obviously, a high-income person has a greater savings ratio than a low-income person who spends perhaps every cent of income. Thus a redistribution of income from the latter group to the former group will raise the propensity to save, while reducing society’s propensity to consume.

This increase in savings, however, requires new, offsetting investment outlets if the system is to avert an economic downturn.

But, paradoxically (a “contradiction of capitalism”) the very slump in consumer spending will forestall the possibility of new, profitable business investment outlets. Thus, with the leakage from the spending stream (savings) now outstripping the injection into that stream (investment), national income and gross domestic product must fall (i.e. negative economic growth). Even modern, mainstream economic theory begrudgingly acknowledges the credibility of this scenario.

“Macro-economics” involves model-building to explain the performance of the economy “as a whole” (viewed in broad national aggregates). But the orthodox theories, which are preached as though gospel to students, are often more ideological than scientific; and the theoretical causal connections posited are sometimes questionable, and unverified by hard data.

The textbooks may sometimes place the cart before the horse.

In the post-World War II years, they have universally postulated that it is fluctuations in business investment (and not in consumption spending) that are the ultimate, proximate cause of subsequent fluctuations in economic output and employment. “Business investment” is spending on capital goods (instruments of production) such as factories, machines, tools and equipment used in the production process.

The texts often mistake consequence for cause: they assert that business investment is an “autonomous” (independent) component of total expenditure in the economic system; while consumption (outlays by the consumer masses on the goods and services turned out by the capital goods) is allegedly a dependent variable, and thus not the initiating cause of any drops in both aggregate demand (total spending) and then national income (and GDP).

Consumption spending is considered a “dependent” variable because increases/decreases in consumer outlays allegedly depend on prior increases/decreases in national income.

If income governs consumption, then some other factor must trigger any changes in national income (and GDP), whether up or down. That factor, by a process of elimination, becomes business investment: which mainstream textbooks, ever since World War II, have considered to be capricious, volatile, and hostage to the dynamic and unpredictable elements of economic growth (including population change and new technology).

Thus, booms and slumps are supposedly caused by relatively unpredictable ups and downs of business investment, with changes in consumption then being a follower (of national income) rather than a leader. Consumption is portrayed as relatively stable and predictable.

In short, conventional economists have been bewildered by the booms and busts so characteristic of the post-war advanced capitalist countries, and some are refreshingly honest about their quandary. Consciously or unconsciously, their “innocence” serves an ideological and mystifying function.

Karl Marx saw economic crises as endemic, with booms inevitably dissolving into slump.

The initial rise in profits (relative to wages) was caused by machines replacing workers, and by the shredding of labour employment to the minimum possible, by squeezing maximum output from each unit. Note that these forces are being replicated right now in Western economies, especially the USA.

Conservative financial journalist, Terry McCrann, reports that while corporate profits fly high in the USA, the wages bill shrinks. He rightly questions the sustainability of this situation: a Freudian slip into neo-Marxism, Terry?

The post-2008 bailouts have put contemporary governments in a fiscal straitjacket, with little room to manoeuvre - especially given political and ideological constraints.

Pending GFC II, another bailout is not feasible. The scandalous world-wide transfer of private debt from failed banks and corporations to the public sector also debars future stimulus spending (a la Kevin Rudd’s Australian Government in GFC I), and not just on ideological grounds.

Global capitalism is now in a bottomless mire; and I am leaving totally aside the need for urgent action on climate change. The focus on that issue will slide from centre-stage as economic crisis II soon engulfs the global financial system.

It is impossible to predict dates, but the continuing erratic behaviour on stock markets presages hard times. The share market is a separate entity from the “real” economy. But the two areas do intersect and interrelate.

When the stock exchange booms, the bulls are ascendant; and the increased “paper wealth” of shareholders encourages higher levels of both borrowing and consumption spending, which fuels the boom; while, when the bears rule and despondency prevails, shareholders facing a cut in “paper wealth” will reduce both their debts and consumption, which will aggravate the “real” economy (where output and employment are determined).

The final nail in the coffin of capitalism will be the failure of politicians and mainstream economists in the USA, Europe, Japan (and Australia?!) to understand the modus operandi of the capitalist economic system.

All of the incumbent governments (bar Australia?) propose “horror” budgets, embracing “the new austerity”.

There is a consensus that corporations and the rich must not face new tax and regulatory imposts that might discourage “the incentive to work, save, and invest”. The preposterous and discredited “trickle-down” theory is resurrected: unless business profits and prerogatives are undisturbed by the State, corporations will refuse to invest and employ, and the entire community will suffer dire consequences.

The truth is that the only rational economic strategy today is the humane and egalitarian one, not a policy that redistributes income from low and middle income groups to the corporate sector: via massive cuts in government spending on public services, welfare benefits and infrastructure, allied with further deregulation both of industry and (especially) the labour market – all in a vain search for the holy grail of limitless profit-making.

Advocates of such pre-1930s, stone-age economic thought, fail to understand that it is not business investment that triggers and sustains economic growth – it is consumption spending by the broad mass of middle and low income earners.

Only when there is an upsurge in the latter, will investment (a dependent variable, not an independent variable) be stimulated, thus promoting economic growth and employment.

Consumption calls the shots, investment dances to the tune!

But this latter scenario is ill-fated. Capitalism is doomed, because dogma will always triumph over economic rationality. Governments are trapped in financial and ideological quicksand.  The fundamental and fatal flaw (or “contradiction”) of capitalism is the mechanism (both inherent and ideologically-encouraged) for profits to rise at the expense of wages and consumption: a situation that is unsustainable.

Economic crises are inevitable under capitalism.

Karl Marx once stated the alternatives for humanity: socialism or barbarism; and global capitalism may well have begun the long, slow slide into barbarism.

Bill Waters holds a Master’s degree in Economics and an Honours degree in Government, both from the University of Sydney. He taught Economics and Government at the University of Sydney, and Politics at the University of New South Wales.

Image: graur razvan ionut.




0 #6 Jon Brewer 2012-03-26 18:06
I think the biggest problem is that capitalism has become an article of faith. No matter how insane the capitalist notion, it was accepted as dogma. Milton Friedman argued capitalism would bring freedom to the world; when China, now "communist" in name only, cracked down on leftist protestors in 1989, he said China was more free than the United States. While Reaganomics fails both ways (There was a recession combined with spiraling debt and unemployment during the Reagan years, and Reagan flip-flopped as a result.), the idea that Reaganomics was a smashing success is pretty much taken for granted these days. (Never mind that administration officials also committed treason by selling weapons to Iran in order to buy weapons for terrorists in Central America.) Capitalism has become the new religion. The Bank of America building, where one can place one's money and tithe for just the right to see your own money again, is actually built around a church, dwarfing the church.

Meanwhile, the only "liberals" who get seen in the press are the strawman types. So Ward Churchill gets face time and Winona Laduke doesn't.
+1 #5 Josie 2011-11-13 22:09
Jakob - try telling that to the almost 10% of Americans currently out of work, and the more than 15% living in poverty.
0 #4 Jakob 2011-11-10 02:30
Go capitalism ! Capitalist nations are the best on earth to live in ! 8)
0 #3 Chris Connor 2011-10-24 02:59
Brilliant Bill - it's good to see your still thinking about The Economy.
Why not contact us sometime?
+1 #2 Jo 2011-10-23 21:32
Very good article. With world markets crashing all around us, more and more people being plunged into poverty, and strict austerity measures being imposed on citizens throughout the world, capitalism has certainly shown itself up. I don't agree with the previous comment - capitalism can't survive. It is a system based on inequality, and this is completely aside from any interference by governments. At its core, it is a system that takes relies on the exploitation of the majority of the population, and only a few thrive. A system this unjust can't continue indefinitely. We have already seen its large cracks, and there are no doubt bigger ones to come.
0 #1 John Zwiers 2011-10-23 16:44
While I have no doubt, as to the consumption is the main mover for a prosperous global economy to be true.It is the inequitable labor markets that works against the stronger currencies,and not to mention fix currency manipulations. There is most certainly a wave of fear in the air, Yes I agree capitalism in its current form has succumbed to failure, But capitalism will rise again as there is no practical solution"s that can replace it . Capitalism in its very nature a part of the human physic. even in communism, capitalism was rife albeit underground. Hence the recent revolts around the world against autocratic governments, and there is more to come. In short it is not capitalism that failed it is the interference of politics ions and the power of company lobe-lists with self serving a genders. I look forward to the re ignition of capitalism, at what cost,and when who know's? But it will survive.

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