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Tuesday, September 18, 2001

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The emperor without clothes

By Achin Vanaik

FOLLOWING 1973-75, `80-82 and `89- 92, we are on the verge of a fourth global recession. But overshadowing these conjunctures has been the Long Downturn after the Golden Age (1948- 73). Whatever the geographical variations such as the impressive performances of the Chinese (from 1978) and the other East Asian countries (till 1997), the basic facts concerning the global economy (dominated by the triad of the U.S., Germany and Japan) are undeniable. By all major indicators, there is a dramatic decline in global performance between the Golden Age and the Long Downturn. Average rates of growth, of productivity, wages, investment and profit drop by roughly half. Economic orthodoxy concedes the existence of (7-12 year) ``business cycle'' ups and downs, claiming they are as natural as breathing. But far more damaging would be any confession that there have not only been longer (25-40 year) periods of serious downturn but that these have been recurrent over the last two centuries - `long wave' theories of capitalism's upswings and downswings which locate this within capitalism's internal workings have always been anathema to the neo-classical school.

Even to acknowledge the importance of the unflattering contrast between the two eras immediately undermines the claims of neo- liberalism (the most `purist', rightwing form of neo-classical economics) to being the `emperor' of social engineering today, the guide and key to economic prosperity for all. World capitalism would then be seen to be failing its own highest past standards. Which would raise questions about why this decline? Why should we accept anti-Keynesian, neo-liberal justifications of a clearly inferior present? Why cannot those virtues of full employment-strong welfare be restored? What is it about capitalism that made Keynesianism only a temporary palliative?

Rather than confronting such uncomfortable questions, acolytes of orthodoxy, especially of neo-liberalism, prefer to divert attention through non-sequiturs and unproven assertions. One technique is to incessantly cite the failure of the socialist/communist alternative, as if the former's inadequacies somehow justify the inadequacies of contemporary capitalism! Another is to repeatedly proclaim the current neo-liberal form of economic globalisation as not just the only viable form of capitalist development, but as the best. In short, orthodox economics has no theory of capitalist crisis as its most honest defenders admit. Insofar as crises periods are acknowledged as they often have to be, they are explained away as the result of factors essentially external to the `proper' functioning of a capitalist economy, such as bad Government policies, trade unions, leftist intellectual influence, oil shocks, cultural variations, technical change, etc.

It is important to understand what this failure means and why it takes place. An intellectual discipline (orthodox economics) whose dominant theory is unable to explain important facts is seriously flawed, especially when those facts are not inconsequential but point to rather profound weaknesses in the subject matter - the world economy - that is being investigated. But when this discipline cannot carry out adequate self- correction nor move towards better theoretical alternatives, then whatever its limited value in explaining other facts, or as a policy-guide of sorts, its preservation as the `hallowed' dominant paradigm means the triumph not of social science but of ideology. This is what neo-classical economics is.

This orthodoxy is governed by an assumption - equilibrium - that makes it into a dogma whose god is market perfection. The institutions that teach and promote it are a church. Its practitioners and propagators are effectively a priesthood. Like all true believers, it is not the sincerity of its acolytes that is in dispute or doubt. The absence of an adequate theory of crisis is a dagger at the very heart of this belief system but it is not the `bad faith' of orthodox economists that is to blame for failing to recognise this. Neo-classical economics by definition makes it impossible to understand or accept that severe crises are intrinsic to capitalism. It is the strangest of social science disciplines. Elsewhere, conceptual abstractions or `ideal types' (Weberian, Marxian, or whatever) are meant to serve as first approximations. This is an entirely legitimate and indeed, necessary, approach to understanding reality. This model is then used to interrogate reality and understanding deepens through a process of systematic modification and transformation of the original model so that it becomes, like reality, more complex. The end point of theoretical construction is necessarily very different from its start.

But the starting and end point of neo-classical economics is essentially the same! It is not the model that has to be changed in order to grasp an ever-more complex reality but the other way around. The problem with equilibrium analysis is not that it refuses to discuss change but the very manner in which it conceives of change. The `normal' model is of stasis and crisis is a `disturbance' from the equilibriating market and must therefore be seen as exceptional and external. In truth, it is the other way around and stasis is the deviation from the normality of an economy in motion.

Crises are rooted in the very nature of capitalism's fundamental dynamic principle - accumulation through competition. Competition is not simply the great virtue of capitalism (lauded by orthodox economics) but also its biggest vice. Today, the most serious effort to understand global capitalism comes from within the tradition of marxist economics and economic history. However discredited marxism may be as a political force and ideology, its capacity to analyse and explain the workings of world capitalism remain unsurpassed. The evidence supporting this claim is now available.

It has been centred on the work of Robert Brenner and his path- breaking ``The Economics of Global Turbulence: 1950-98'' (New Left Review, May/June 1998) updated by his ``The Boom and the Bubble'' (NLR, November/December 2000). This has been both defended and critiqued by marxists of different hues who nonetheless all share the fundamental assumption that capitalism cannot escape the periodic dilemma of over-accumulation and over- capacity and (despite sectoral variations) a declining average rate of profit across the world economy as a whole, caused by the actual unplanned nature of private competition. This contrasts with the idealised version of what competition, according to the scriptures, is supposed to do, namely equalise profit rates in different sectors through exit and entry of capital. It is the great merit of Brenner's analysis (backed by a wealth of statistics) that he shows how in the competition between the manufacturing sectors of Japan, Germany and the U.S. in the world market, the entry of higher productivity, lower cost innovators did not result in rapid exit of `older' capital rendered less profitable, because already sunk fixed capital would have to be paid for anyway. Therefore, as long as an adequate rate of return could be earned on circulating capital, and given the importance of the `intangible assets' built up by already existing producers in a product line, the overall result predicted by his theory (and confirmed empirically) was too little exit and too much entry by the competing capitals of Germany, Japan and the U.S. This resulted in an overall decline in the manufacturing rate of profit which could not be compensated for by developments (themselves uneven) in the services sector. Currency changes between the yen, the mark and the dollar distributed these losses and gains unevenly among these three locomotives of the world economy but could not alter the overall situation.

Despite what `cleansing out' of older capital that has taken place through recessions, lower wages, higher unemployment, bankruptcies, etc., there is still no convincing evidence that any of these economies (not even the U.S. which enjoyed something of a bubble during 1995-99) has been able to restore the profitability conditions of old that could promote a massive wave of new high productivity investment that in turn can pull the world economy on a new long-term upswing.

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