Monday, 22 September 2008

Letter to The Guardian


Your columnists in the past week have concentrated on the financial markets.This is a profound mistake for the root of the crisis lies not in the sphere of finance but in the sphere of production or what we like to call the real economy.

The origin of the crisis is in the rate of profit in manufacturing and industry which has over the past decade or more stagnated. Undoubtedly, the mass of profit has increased but this has to be spread over larger and larger amounts of capital invested in these areas leading to a fall in the rate of profit overall.

The vast expansion of production since the end of the Second World War with all its benefits to consumers, at least in the developed world, leads to this problem. Paradoxically it is the very success of capitalism which leads to crisis

For in these circumstances capital looks for larger profits elsewhere - in our present case in housing, land, consumer credit and financial speculation in stocks, shares, oil, metals and agricultural commodities. This creates a financial bubble (see Vol 111 Capital) which eventually bursts.

Capital is happy to take risks for the larger profits although it does seek to spread that risk through derivatives and other financial instruments. But,of course,when the bubble bursts this spread of the risk brings down many.

The mortgage lenders gambled on employment continuing to grow,wages to rise and property prices to go on increasing. Employment did grow but much more slowly than they had assumed,wages stagnated and when the mortgage defaults began property prices fell rapidly. In other words their gamble failed and the bubble burst.

Contrary to your columnist, John Eatwell (19th September), better regulation of the financial market would not have prevented this crisis occurring. Given the long 15 year boom, which we had experienced, their gamble could be said to be based on reasonable assumptions, was certainly not irrational and was not that risky.

What of the future? It may seem odd but the solution to the problem of the rate of profit is a recession or, indeed, a depression.

Capital invested in production needs to be reduced by forcing the least efficent firms to go bust, wages need to be reduced and living standards to fall so that more of the value of production goes to capital and workers should be persuaded to be more productive - that is to produce more value.

This process has already begun and will accelerate in the coming months. This, I am afraid, is the price we have to pay for the capitalist economic system which, at its best, is the most productive the world has ever seen with massive benefits to consumers in boom peroids but which is inherently prone to crisis with brutal consequences for all.

Your columnists, maybe, should be persuaded to take a crash (sic.) course in Marx.

Ian Grigg-Spall

No comments: