Okay, it’s time to get all scholarly. I know, I know, yawn? right? But sometimes it’s important to see the bigger picture – even when that picture is inflated to the point of conjecture – in order to get your bearings. So, let’s begin. Why are we… Hey! You! Yeah, at the back – put away that laptop and stop looking up your Facebook page – no one’s forcing you to be here! Now, where were we…
There’s two very broad trends that interest me more than any other in the world today. First of all, there is the tendency toward financial instability – both in the advanced and the developing countries. The second, is the decline of the US – I mean that quite broadly: financially, militarily, economically and politically. Let’s be clear – the US is not going to collapse overnight, like the USSR, but everything that it once valued – from hard industry to a powerful currency (not floated by another country) – seems to have gone into irreparable decay.
The big question is: are these trends linked? I believe they are – indeed, how could they not be? So, let’s start with financialisation of the US economy – that is, the turn from industry to finance by American businessmen in order to create profit. It’s readily discernible that this shift has taken place – just look at this graph:
Hoo-boy – as the Yankees say! Finance has sure grown a lot in the States over the past few decades. But is it really replacing manufacturing? Well…
Well, yeah – it looks like it has. Why is this? Well, this is something of a mystery. When speculating on economic trends at this level of abstraction, data can quite literally be read in the most contradictory of ways – there’s so much shade at this level of abstraction one often feels that there is nothing but shade. So, let’s do it this way: I’ll put forward the narrative I find most convincing, while indicating where disagreements (that I know of) are put forward. Then I will give my reasoning as to why these disagreements are wrong. It’s a Socratic dialogue – but be warned, like all Socratic dialogues, Socrates gets the last word…
Strangely enough, in order to find a coherent convincing arguments, one has to go to the left, and then a bit more to the left – until you find yourself in Marxist-Leninist territory. Generally the economic theorising in these territories is quite weak – but when it comes to general surveys of the world economic system, you simply can’t beat certain figures on the far-left. Personally, I think it’s due to their inherent fatalism – but that’s another days discussion.
Let’s start with the economic historian Robert Brenner – author of ‘The Boom and the Bubble‘ and more recently ‘The Economics of Global Turbulence‘. Brenner’s a Marxist – nay, a Marxist-Leninist – but for all that he’s one of the least dogmatic writers I’ve ever come across. He draws on Schumpeter as much as on Marx for his historical account of global capitalism since 1945 – what’s more he’s a good strong writer who doesn’t try to mystify the reader with econo-speak hocus-pocus. Brenner’s argument is simple – indeed deceptively so, because Brenner painstakingly reconstructs his assertions with minute historical analyses.
Basically, he claims that competition between various national economic blocks is causing profit-rates to fall in the manufacturing sector. This, he argues, hits the more advanced industrial countries – such as the US and the UK – harder than the recently industrialised countries – such as South Korea and Germany. This leads investors in the US and the UK – seeing profit margins shrink in the ‘real economy’ – to pump their money into finance. This leads to bubbles and… well, we know the rest of the story.
Okay, here’s the fundamentals of Brenner’s argument. Deep breath – you ready? Say, I’m a capitalist in the US. Say, I’m old-skool and I want to invest in a factory – the factory makes, I don’t know, rubber chickens. So, I pump in – that is, invest – $5m into the factory’s equipment (rubber chicken-making machines presumably – you know, the very latest in rubber chicken-making technology). Now, say that I figure this equipment will last me, I don’t know, 15 years. So, I’m making money for a few years and everything is hunky-dory. But then, 5 years later another capitalist opens up a rubber chicken factory in South Korea – but he has access to technology that makes ten times more rubber chickens per hour than I can make. I can’t compete with that, so I close down my rubber chicken factory – but I’ve lost a shitload of money, because of the original $5m I invested I made $4m, so I lost $1m and all I’ve got is an attic full of rubber chickens. I’m broke; my spouse thinks I’m bizarre – in short, life is bad.
Now say another slapstick-loving capitalist opens another rubber chicken factory in, say, China. And he has technology even better than the last guy. So the last guy has to shut down his factory too – thus making a loss. Now, say this process keeps happening over and over again. How the hell is rubber chicken manufacture ever going to turn a significant profit with all these loses being incurred? Well, according to Brenner, it doesn’t. This is why the profit rates in manufacture sink – and the more places that set up rubber chicken factories, the more the profit rate dives. So, what do I do? – well, I stop making rubber chickens (it was a dumb idea, anyway) and start speculating in the financial markets…
The argument against this is that, well, profit-rates aren’t so bad (for manufacturing profit-rates in the US, scroll up there a bit and look at the second graph with all the blue and red deelies). Brenner assumes that profit-rates after WW2 should be the norm for the rest of the century, but this was an exceptional time and should not be made the standard. There critics point out that the fall in profit that Brenner points to is not a great depression of profit-rates – but a ‘great moderation‘.
Personally, I don’t find this argument convincing. First of all, the economic landscape attests to Brenner’s assertions. Critics claim that profit-rates in the ‘real economy’ are moderated by the entry of new technology markets – so, like, computerized 3d rubber chicken models that render the real deal obsolete. But we’ve seen how volatile and fragile this New Economy-model can be. Remember the dot-com bubble? Didn’t that conclusively show that new technologies are a sort of ephemeral phantom, chased by investors whose minds are filled with hooey and whose pockets are stuffed with disposable money? I’m not saying that new technology hasn’t led – as Nicholas Crafts points out – to increased productivity, but I think that he exaggerates just how much this productivity growth was the true unmoved mover behind economic growth in the past two decades (for an extremely succinct overview by another chronically underrated far-leftist commentator, see Doug Henwood’s ‘After the New Economy‘).
Secondly, this argument can’t provide an over-arching historical narrative for why the present crash happened. Indeed, note the publication date for Craft’s article: November-December 2008. So it was written when? Would he write the same thing today – or even four months later? I doubt it. Brenner’s argument – like it or not – provides an explanation. What’s more Brenner was probably the first economist in the world to see the current financial crisis coming – and I say that without any exaggeration.
That’s it for now. In the next segment we’ll look in a little more detail at the financialisation of the US economy… Stay tuned!