The `third slump' and its consequences

By Phil Hearse

November 30, 2008 -- Ernest Mandel called the market crash and global recession of 1974-5 the ``second slump'' (1) – the first one being of course that of the 1930s, initiated by the stockmarket crash of 1929. We now know that the crash of 2008-9 is more severe, and will have more devastating consequences than that in the 1970s; whether it will be as bad as the 1930s slump we have yet to see. But it is now clear that this is a fundamental crisis of the neoliberal ``mode of regulation'' which now is under severe pressure and probably cannot survive in its present form.

Theorists who in this period stress the relative stability and continuity of modern capitalism are, as we shall see, way off the mark. This article aims to give a brief explanation of why the crash has happened; to situate it in the history of development of capitalism; to discuss possible consequences, especially those for the working class in Britain and internationally; and to suggest political implications for the radical left.

A brief word about the notion of the ``mode of regulation'' (and the related ``regime of accumulation'') borrowed from the Regulation School. In our usage this is merely a convenient way of saying that capitalism exists only in concrete forms, particular ways of organising and expanding production, circulation, consumption and distribution; and on the basis of these arises particular institutional forms of law and the state that give expression to it. It is just another way of saying that capitalism goes through different phases which emphasise different economic and political structures within the same mode of production.

The third slump in the history of capitalism

The 1930s recession, despite the ``New Deal'' in the United States, was only overcome by a world war during which huge sections of the economy in Britain and the US were nationalised. By 1938 there were 10 million unemployed in the US. It was only rearmament in the war that overcame the slump.The post-war settlement, Keynesianism, combined a mixed economy with a significant state sector, together with new social security arrangements, the ``welfare state''. These arrangements led to the so-called ``Golden Age'', the post-war boom based on the mass production of consumer goods which entered into crisis at the end of the 1960s and was plunged into full-scale crisis in 1974-5.

Like all capitalist crises, that of the 1970s was a result of a decline in the rate of profit. Keynesianism was based on the idea that state spending and corresponding state budget deficits could be used to overcome the secular trend in capitalism towards declining profit levels. But state spending generated unsustainable inflation and mounting budget deficits caused big tax rises that impacted on the spending power of the working class. In the end, Keynesianism could not prevent profit levels declining.

After the collapse of the Keynesian consensus, the capitalist class internationally attempted to push back workers' living standards through austerity and tight money – so-called ``monetarism''. Only gradually into the mid-1980s did a new mode of regulation – neoliberalism – emerge. This was characterised by the de-regulation of money markets, the dominance of finance capital, privatisation and the ``financialisation'' of all services and utilities, and a strict tying of the fortunes of companies to the value of their shares (stock) on the stock markets. It is this mode of regulation that has now literally gone into massive crisis: it is an open question whether the dominance of finance capital can be rescued. It would take at least a generation for lenders and borrowers to behave again as they did in the 1990s and first part of this century.

The current financial losses, and those still to come, make a neoliberal, debt-led, reflation highly unlikely. The problem is that the bourgeoisie internationally has already tried a more regulated form of capitalism, Keynesianism. Both Keynesianism and neoliberalism have failed to sustain growing profit without going into periodic crisis.

The crisis of neoliberalism

So why did this mode of regulation go into a tail spin? In fact the tendency towards financial crisis inherent in neoliberalism was already announced by the stock market crash of 1987, the Asian crash of 1997 and the bursting of the ``'' boom in 2000. Indeed, it is worth remembering that when the present plunge of world markets began in late 2007, they had nothing like recovered their losses in 2000.

The mechanisms of the crash have been widely discussed. The transition from the Keynesian mixed economy welfare state to neoliberalism entailed a new dominance of finance capital. The normal working of finance capital is basically money lending for interest, what in the Middle Ages was called ``usury''. In the furious competition between money lenders more and more obscure financial instruments are exchanged and some of these turn out to be worthless bits of paper – fictitious capital, like some of the US sub-prime mortgages. When however worthless lending is bundled into packages with performing lending, debts that are really being paid back, the integrity of all debt is called into question.

Moreover the frenzy to lend, make huge profits and thus big bonuses for bankers, leads banks and other financial institution to lend way above what they have by way of a capital base. They do this by borrowing money and then lending it for a profit and then paying it back, still retaining part of the interest for themselves. But if the debt turns out to be insecure, they are unable to pay it back. So they become bankrupt and are taken over or bailed out by a government. Britain's Northern Rock is a dramatic example of this process.

So what effect does this have on the ``real'' economy? Most big companies and many small companies finance their expansion and even day-to-day operations by borrowing. They are kept going by their promise to the banks to make profits in the future. But when the banks refuse to lend to them, they have to either cut back or maybe even go bankrupt. All economic activity slows and lower economic activity means less profit and thus much less tax revenue for the government.

This is essentially what has happened in the present cycle of capitalist expansion from the collapse of the ``bubble'' in 2000. It has been a classic ``bubble'' – an expansion of accumulation based on ``fictitious capital'', itself largely based on the inflation of real estate values. With the exception of some sectors of high-tech it did not correspond to the development of profits in the real economy. In fact the amount of speculative money sloshing around the markets way exceeds all production in real-economy.

According to a Japanese commentator:

How much speculative money is moving around the world? According to a Mitsubishi UFJ Securities analysis, the size of the global ``real economy'', in which goods and services are produced and traded, is estimated at $48.1 trillion… On the other hand, the size of the global ``financial economy'', the total amount of stocks, securities and deposits, adds up to $151.8 trillion. The financial economy thus has swollen to more than three times the size of the real economy, growing especially rapidly during the past two decades. The gap is as large as $100 trillion. An analyst involved in this estimation said that about half the amount, $50 trillion, is scarcely necessary for the real economy. Fifty trillion dollars [is] too big a number for me to actually comprehend.(1)

This is the essence of the matter. All lending and borrowing is ultimately based on the assumption of future profits. If however those profits are in doubt or are so obscure as to be indecipherable, confidence in the whole system collapses, banks start to refuse to lend to the public or one another and the ``normal'' workings of modern capitalism seize up. Although the credit crunch and the crash are symptoms of a lending frenzy out of control, they are also symptoms of a profit level across the world economy insufficient to justify any hope of major returns of capital lending. Economic downturn is both a cause and a consequence of the crash.

Consequences of the slump

How will the financial crash spill over into the ``real'' economy? At the time of writing (early November 2008) the signs are ominous. In the UK real unemployment is probably already at 2 million and heading upward to 3 million within six months. In October 2008 unemployment in the US rose by 240,000; in September it rose 287,000 and in August by 123,000 – giving an official figure of 10.5 million unemployed, 6.5% of the workforce (and as we know these figures are always underestimates). In the third quarter of 2008 General Motors and Ford between them lost $14.6 billion, a clearly unsustainable rate of loss. Both these companies and the third car giant Chrysler are tottering on the brink of collapse. There are numerous other indicators; what do they mean for the medium term?

As Trotsky said, all perspectives are provisional; much depends on the issue of whether there is a global collapse of the financial system. In that case all bets, literally, are off and the consequences will be unprecedented (see below).

First, let us assume to that this does not happen. Even in this case we can foresee a number of crucial impacts in the advanced capitalist countries:

1) A wave of bankruptcies and job cuts, with huge rises in unemployment;

2) A major reduction in tax revenues, leading to huge cuts in services, benefits and public sector employment – as is already happening in Italian schools;

3) A fall in all revenues based on share and stock prices, in particular the income of pension funds, potentially leading to a major decline in the income of pensioners – but also the loss of a major part of people’s savings in stock market funds;

4) A continued decline in house prices, itself destroying a major part of the savings of millions of workers, especially in the UK and US;

5) Newly unemployed workers or small enterprise owners recently gone bankrupt will be unable to meet their credit repayments (mainly credit cards) and will thus lose the property – mainly houses – upon which their credit is secured. This in turn will push up the numbers of the homeless;

6) A refusal by the banks to lend money except on ultra-secure conditions. This will inhibit credit for companies, plunging many small enterprises into bankruptcy and undermining any attempt to refloat the economy on the basis of credit and massive levels of domestic debt. Those days have gone.

There is a seventh factor that is more speculative – whether current price inflation will continue. Much of the inflation of commodity prices has been speculative and a major decline of the world economy is likely to hold prices in check. If prices continued to rise on top of all the effects described above, this would amount to a truly shattering decline of real incomes for workers in the advanced capitalist countries. In any case, mass unemployment and austerity is now inevitable. It is an open question whether the state will have sufficient means to provide some level of unemployment benefit to those affected.

Who pays?

Lenin said there was no crisis from which the bourgeoisie could not escape provided the working class was prepared to pay the price. That price in the current slump is going to be huge and there is no obvious way out of the slump for the ruling class, other than allowing the inevitable destruction of huge swathes of capital and hoping this creates the basis for profitable investment some time in the future.

All this is based on the most likely scenario that the lenders of last resort – governments – do not go bankrupt and have the resources to prevent a collapse of the financial system.

The worst-case scenario would be a “global Argentina”: in 2000-1 the Argentinean banking system and currency collapsed, destroying the jobs and saving of millions of workers and much of the middle class. If this happened on a world scale it is almost impossible to imagine the consequences; the ensuing social dislocation would probably put bourgeois democracy under threat with the danger of either right-wing authoritarian governments or revolution. While this does not appear to be the most likely scenario, the fact we even discuss it shows the extent of the coming slump.

Severe repercussions in the Third World

If the slump will hit the workers in the advanced countries hard, in the Third World it will be even harder. In an important article(3), Eric Toussaint explains that the poor in the Third World are likely to be hit by a combination of slower economic growth, the possible decline of commodity prices as the world economy slows down, the reluctance of major banks and governments to lend to the Third World or meet the minimal commitments to Third World aid agreed at the 2005 G8 Gleneagles summit, and reduced remittances from immigrant workers in advanced countries, an important source of revenue for millions of Third World families.

In addition there will be enormous pressure in the US and Britain in particular, but also in other advanced capitalist countries, to cut or severely restrict overseas aid budgets. NGOs are likely to find their income under pressure as charity spending by companies and individuals declines.

If all these things come to pass, as Toussaint explains, this is likely to result in many people in the Third World “paying the highest price”.

The social and political consequences

Nobody, not even the most optimistic right-wing observers, think the recession will end soon – all agree it will take years to overcome. Now a huge debate will open up amongst the ruling class and policy-making elites about how to run capitalism. While this will include some ideas about more ``transparency'' in financial deals, more oversight by central banks and more regulation overall, so far no one in influential government or financial circles is coming forward with radical new ideas for a new settlement of the Keynesian type.

For example Barack Obama’s economic advisory team includes people like Paul Volker and Larry Summers – architects and high priests of neoliberalism.

The problem is precisely this. If attempting to hang on to the sinking driftwood of neoliberalism will not work, what have the ideologues of modern capitalism got in their arsenal as a new engine of economic growth? Has capitalism, as John Bellamy Foster argues, reached its historical limits?

Foster argues:

Our experience of the last half-century has shown that capitalism at its core was able to avoid stagnation only by vast military expenditures and, when that proved insufficient, by an enormous inflation of asset values and speculation, i.e. `financialisation'.This growth, multiplied by the boom psychology on the way up (the “wealth effect”), turned out to also have a contracting multiplier effect on the way down.

These factors help to explain why the economic crisis in the real economy is so severe at present, and why there is no chance of an immediate restarting of the growth process ... Capitalism has reached its limits as a progressive force and its famous “creative destruction” has turned into a destructive creativity in which both the world’s people and the planet are now in jeopardy.

In any case, as neoliberalism disintegrates a new model capitalism will not suddenly emerge.

Ideologically this crisis is a massive blow for world capitalism. Not in a generation has the reputation of bankers and the ultra-rich been at such a low level. Class hatred and social disorder is now bound to deepen and intensify. Not for a long time has there been so much discussion of the relevance of Marx. Major opportunities for the left to explain the socialist alternative will now emerge. In the working class there is likely to be a new layer of impoverished workers pushed out of employment, losing their savings and/or pensions, and maybe losing their houses. Those relying on benefits and pensions will experience severe economic difficulties.

In the class struggle the situation will now get extremely harsh. We are likely to see the emergence of major battles over pay and employment. Despite the decline in union membership, the trade union bureaucracy will be forced to act at a minimal level of struggle to retain their base. Despite the ups and down of opinion polls overall there is likely to be a further erosion of confidence in mainstream politicians, although this will be ameliorated a little in the US as a result of the Obama honeymoon.

This of course presents opportunities for the left, but also severe dangers. There are likely to be major opportunities in some countries for the radical or fascist right. In Britain this of course takes the form of the British National Party who already have more than 100 councillors.

In the end, fighting the radical right depends on building a political force on the left with the potential to be a credible electoral as well as social alternative, although this in Britain is more difficult because of the penalisation of minority parties by the electoral system.

Because of the negative experiences of the Socialist Alliance and Respect Mark 1, the building of a coherent national left alternative in England and Wales is going to be extremely difficult. The Socialist Workers Party and the Socialist Party have both retreated into petty factionalism and are unable to sustain a wider vision of how a broad militant left might be created. Only Respect and the Scottish Socialist Party, both weakened by splits, sustain a serious alternative.

In any case, for the left the fundamental basis for a fightback is the ability or otherwise of the labour movement to sustain harsh defensive struggles over pay and jobs, and to be able to mount a political campaign to defend social benefits as well.

In Britain and internationally the left needs to elaborate a program of demands to meet the crisis, key objectives to mobilise around. These have to include:

1) Defence of social services and public sector employment.

2) A punitive tax on all incomes over £100,000.

3) A program of public works with workers on a liveable wage to mop up unemployment.

4) A substantial increase in the national minimum wage.

5) A major increase in state pensions and unemployment and social security benefits.

6) An end to evictions, take houses with mortgage defaults into the public sector.

7) Expand house building and create a nationally owned rented sector.

8) Stop factory and company closures, nationalise bankrupt companies under workers' control.

9) Nationalise all the banks.

10) Major controls on capital movements and a tax on international capital movements.

This is a huge agenda given the attrition the labour movement has suffered. But we have no alternative but to start from where we are, however difficult that may be.

[This article first appeared on the website of the British socialist newspaper Socialist Resistance.]


1) E.Mandel, The Second Slump, Verso 1975

2) Shii Kazuo in Japan Press Weekly, Special Issue, October 2008, p20

3) Éric Toussaint, ``Third World: Is Another Debt Crisis in the Offing?''