How is the economy doing

In one of their more lyrical moments, Marx and Engels wrote that capitalism “has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals”. Were it not for the fact that they went on to say that the modern bourgeoisie, in creating “a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells,” you might think they were rather in awe of capitalism.

These words were written in 1844 as Europe appeared to be in the midst of a revolutionary movement which was about to sweep capitalism away and replace it with a different system: “In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all.”

Capitalism has done some amazing things, but, as Marx analysed at length, all of those things have been done for very narrow purposes. Mainly to make profit. Marx describes the wealth of capitalism as “an immense accumulation of commodities”. He goes on to describe how the value in these commodities is connected to the labour power expended in creating them, and that this is expressed not in the commodity itself. One of his misunderstood phrases concerns alienation. In essence it means that, if you work making cars, you do not get given a car at the end of the week, you get a wage, a monetary value. The object of your labour – the car – appears as something alien to you. Very often as something you come to loathe.

The Stock Market

So, in reviewing where we are at economically, we have to start from a place rather different to that used by economists and politicians. I typed “how is the economy doing?” into Google and top hit was an article from Forbes magazine with precisely that title. What does it tell me?

The stock market performed very well in 2020 and 2021.
Nobody knows whether there is going to be a recession.
Some investments will do well, some won’t.

It’s interesting that these ‘take-aways’ focus on something most people have very little engagement with. This is highly surprising given that most people do not own stocks and shares. According to the Office for National Statistics in 2020 (the latest figures) just 12% of UK residents owned shares. It is somewhat confusing therefore to find the top hit on Google, from finder.com claiming that 33% of the public own shares.

As an aside, it is easy to be misled if you just type a question into a search engine and accept whatever is top of the list as the correct answer. Search engines simply do not work on the basis of what’s truthful. Note to self: time to write a guide to searching the internet for Critical Mass.

Dig down into the Forbes article and you find that 80% of Americans, according to a recent poll from the Wall Street Journal, feel that the economy is performing badly. Why this mismatch?

Ordinary people don’t judge the economy on the basis of whether investments, which most of them don’t have, will perform. They judge the economy on whether or not their standard of living is improving, whether they feel confident they will have a job in a year’s time (or even next week), whether their children are looking at a future better or worse than theirs.

Confidence

Let’s see if we can find any clues. I was struck by this headline in FE News “One-in-five young Brits not confident about their future”. This was from March and was the result of a survey of… well, sadly they don’t tell you how many people they surveyed or how they were chosen. Not that technical details like this prevent Labour MP Rushanara Ali using the figure: “With as many as one in five young people saying they don’t feel confident about their future, and lacking access to the kind of support needed to help ensure they make a smooth transition into the world of work, it is clear we all need to do more to help young people on their career journeys.”

The language is rather revealing; “with as many as” is politician speak for “don’t blame me if it was a survey of 15 teenagers carried out in the local youth club”. But that is less worrying than the vacuous statement “we all need to do more to help”. Do we? And what exactly should ‘we’ be doing. The point here is, faced with systemic problems of capitalism, politicians resort to meaningless platitudes rather than concrete policies.

Ipsos-MORI, who I count as a proper research company, recently conducted research amongst 17,000 adults in 23 countries. They found that, more or less universally, people were less confident about the future than they were 12 months ago. This means that, far from seeing their situation in life improving, most people perceive it to be getting worse. Nine countries, according to Ipsos-MORI, show a “significant drop” in their expectations for the future. Those countries include Germany, Belgium, Sweden, Turkey, Spain and Italy. Were any Brexiteers reading this I can almost hear them puffing out their chests and believing we were right to leave the sinking ship of Europe. Sorry chest swellers, the other countries are China, South Africa and Great Britain. What do all these countries have in common?

Apart from populations who perceive things as getting worse for them, they are all (and I am including China in this) part of a global capitalist economy.

Gains and losses

People’s perceptions may be important but do they determine the economy? I may well feel gloomy about the future, but it is hardly convincing evidence that the economy is about to tank. But, what if I am an investor?

The Financial Times ran a story on June 7th in which it reported that Scott Wheway, the chair of gas monopoly Centrica, told shareholders that the windfall tax imposed by the UK government to pay for the assistance with increasing gas and electricity prices would hit investor confidence. It is unlikely you will ever see a story from the FT saying a housewife in Hartlepool has warned that if prices keep rising consumer confidence will be hit. The reason is that, for one thing, the chair of Centrica is considered newsworthy in a way an ordinary person isn’t. But, it is also the case that ordinary people’s confidence has no real impact on the economy. Obviously, if lots of people don’t feel confident enough to buy things, that could affect the economy, but, if investors (unnamed, faceless investors) lack confidence, the shares that they would otherwise have invested in will start to lose value. As a result, workers, real workers with real jobs and families and mortgages to pay, will lose their jobs. Hidden away at the bottom of that FT report is this line: “Centrica has been involved in a bitter dispute with its unions after it threatened to fire people and rehire on lesser pay.”

In Wages of Labour, written in 1844, Marx notes: “The worker need not necessarily gain when the capitalist does, but he necessarily loses when the latter loses.” Marx, as ever, was way ahead of his time. We have been living through a period of austerity for, probably, 20 years now. In that time the very richest have gotten even richer, whilst the wages of those fortunate enough to have work have either stagnated or been reduced in real terms. Marx cites no less an authority than Adam Smith, who, in The Wealth of Nations, explains that the richer the society becomes, the more impoverished the worker becomes. Marx sums up the situation:

“thus in a declining state of society – increasing misery of the worker; in an advancing state – misery with complications; and in a fully developed state of society – static misery.”

Marx, following Smith, is absolutely clear on this. Capitalism cannot be made to work for the working class. Its very existence is inimical to such an idea. Yet, still we engage in the parliamentary charade that somehow we can vote away capitalism and replace it with socialism.

You won’t have to look too far for evidence that capitalism itself is in crisis. You know when you look at your wage slip that your wages cannot buy as much as they did even a week ago, let alone a year ago as your pay increases in the ‘annual’ round. In fact, for your wages to keep pace with inflation would mean at the very least that you would need a pay rise every week. For those not on a wage, for those who exist on pensions or benefits, the same tendency exists. Each week everything you have to pay for goes up. But your wage only increases every year if you are lucky. Doesn’t this strike you as decidedly unfair.

Do high wages cause inflation?

But, of course, the impact of wage increases is inflation. Let’s go back to our old friend Google. “Do wages cause inflation?” First hit is from investopedia.com who tell us, presumably with a straight face: Wages cause businesses to “increase the prices they charge for the goods and services they provide.”

The only reason they need to do that is that it is bad news for any business to make less profit than they made the year before. This profit is often paid in bonuses and dividends to those investors, whose confidence we must maintain. Remember? But, if they have profits, which are after all, as Marx explained, simply the accumulated surplus value provided by the workers, why not use some of that profit to help workers keep pace with the cost of living?

It is a neat trick to blame the victims of inflation for causing it, when the only reason workers are asking for a pay rise in the first place is to counter the inflation. In other words, whether wages cause inflation is immaterial. Inflation is occurring regardless of whether you have a wage rise or not. I want to make this absolutely clear, workers wages are not the cause of inflation they are a reaction to it.

So, what does cause inflation? First it is important to note that inflation varies greatly in different countries. Whilst the UK has an inflation rate currently of 9% and the USA has just hit 8.5%, France has a rate of 4.5%, Belgium 8.5%, Italy 6.5%, Spain 9.8%. So, what at first seemed good news for the Europhiles is a rather more tricky picture. But what is driving these rates is not wages, it is actually something far closer to home for capitalism and that is that the rate of profit has a tendency to decline.

Rate of profit

The rate of profit is related to profits only in as much as investors are always looking for a return on their investments. You might see why their confidence plays such a role in whether you get to keep your job, or in some cases even eat, next week, month or year. Over a long period of time, the Marxist analysis that the rate of profit tends to decline, has been shown to be empirically correct.

Michael Roberts, a Marxist economist, has shown how the rate of profit has been in decline since 1945 with some brief interludes: those famous peaks and slumps, where the peaks get lower and shorter and the slumps get deeper and longer. Quoting figures from a far reaching analysis of the world economy Roberts says: “There has been a secular decline in the world rate of profit over the last 80 years of -25%”.

These are technical questions, and I am pretty sure I’ve lost both my readers by now. But what does this all mean? In short, the capitalist world economy is no longer going through peaks and slumps; it is in pretty much permanent slump. Yes, there are still profits to be made by canny investors, but the reality is that investors are gloomy because they have every right to be. A decent rate of return is a thing of the past. This means they are not investing and this means shares are going down. This is all empirically founded.

The thing is that we still think we can solve these problems at the national level. Of course, national governments do have some levers and those in richer states more than those in poorer states. But, in much the same way that no one government could solve the Covid pandemic, which had the annoying feature of ignoring national boundaries, so no one government can solve a world economic decline which is caused by the internal contradictions of capitalism.

Of course, in a review of our economic situation I might have told you how many people were unemployed, how many homeless, how jobs in particular industries are in decline, or how the government (or governments) should invest in infrastructure. These things are not unimportant: unemployment, homelessness, industries moving from country to country, worsening conditions and prospects are the human cost of a global capitalist system which pits capitalist against capitalist, country against country and worker against worker. But, I am not one of the snake oil salespeople who are going to attempt to tell you that you can vote away a recession, or that with proper management capitalism can be made to work. The truth is we need a different type of economy and in next month’s Critical Mass I will discuss what that economy might look like.

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