Recent data show that the rate of economic growth has turned negative in many advanced capitalist countries, while it is slowing down in all the others. Serious concern is being expressed by multilateral institutions like the World Bank and International Monetary Fund that the global recession may sink into a double-dip depression.
Capitalist governments keep saying that they are taking steps to solve the problem, but the result is that the global economy is moving from one crisis to another. What is the cause of these recurring crises? What is the solution?
For an economic system to reproduce itself on an extended basis year after year, without interruption, it must ensure that the social surplus is reinvested to enhance the productive forces on a continuous basis. The capitalist system, which has reached an extremely high degree of monopoly and parasitism today, is incapable of fulfilling this condition.
Driven by the unlimited greed of monopoly finance capital to extract maximum returns all the time, the system is sucking too much out of the toiling people whose labour produces the material wealth of society. Multi-party elections produce governments that are committed to facilitate expansion of the sphere of domination and plunder by monopoly capital. Instead of steadily enhancing the productive forces, the system is regularly and periodically destroying them, throwing people out of work and rendering machines idle, besides destroying entire cities and nations through wars of aggression and occupation.
The seeds of the present crisis were sown two decades ago, when the capitalist class unleashed a heightened offensive on the world scale, following the disintegration of the Soviet Union. The space for monopoly profits was expanded by accelerated penetration of the markets of the former Soviet republics, of other east European countries and of China. It was expanded within each capitalist country by implementing privatisation and liberalisation programs. This heightened anti-social offensive has squeezed the purchasing power in the hands of the working population throughout the world. As a result, the toiling majority do not have the capacity to purchase what the capitalists want to sell. At the same time, the capitalists are not investing enough to increase production of essential mass consumer goods that the toiling masses need, thereby fueling rapid rise in their prices.
One of the methods of finance capital to get around the limit imposed by the lagging real wage incomes of the working class has been to expand consumer credit. However, the expansion of consumer credit has suffered a reversal following the 2008 crisis. Working families are no longer spending as much on credit as they did before, not even in the United States. This has accentuated the lack of consumer demand in the market.
Promoting industrial growth in Germany and a few other countries by converting the majority of member states of the Euro zone into net importers and heavy borrowers has also reached its limit. The majority of governments in Europe are unable to service their public debt. The entire capitalist banking system is facing the threat of another meltdown, more severe than in 2008-09.
Various economic critics are spreading various erroneous notions about the cause of the crisis and hence its solution. Some claim that the recession, or lack of market demand for the goods the capitalists want to sell, can be overcome if only a “fiscal stimulus” is designed properly. Some others claim that stricter regulation of banks can prevent speculative bubbles in the future. These notions serve to hide the reality that the capitalist system is incapable of overcoming its own contradictions; and hence the solution lies in changing the system itself.
“Fiscal stimulus” refers to a temporary policy of governments trying to compensate with additional spending when there is shortage of market demand. Such a policy can at best produce a temporary respite but cannot compensate for the permanent and massive amounts that are drained out of the labour force in the form of profits, interest, rent, taxes and inflation, thereby squeezing their purchasing power on a daily basis. The massive amounts spent by capitalist governments in 2009 and 2010 in the name of fiscal stimulus have failed to stimulate the global economy, which is sinking deeper into crisis in 2011.
Rise in the degree of speculative profiteering is a symptom of the disease afflicting the economic system. It cannot be curbed by capitalist governments which are themselves dominated by the very same monopoly capitalists. The problem of unlimited greed and speculative bubbles will remain as long as social production and state policy are driven by the greed of monopoly finance capital for maximum profits at all times. Speculation and intensification of exploitation are the inevitable response of the monopoly capitalists to counteract the tendency for the average rate of profit to fall (see Box on the Rate of Profit)
The solution to the crisis lies in reorienting the economy, from being geared to ensuring maximum profits for monopoly capital, to being geared to constantly enhance the standard of living and productive capacity of the working population. It is not a matter of regulating but of eliminating greed as the driving force of the economy.
The first step towards the solution is the establishment of social ownership and control of banking and insurance, and of trade. The concentrated financial resources of the country and the major share of physical stocks of essential commodities must not be left in the hands of private profiteers.
The working class and toiling majority, whose labour produces the wealth of society, are the ones who have the interest to bring about this systemic change. They need to establish themselves as the masters of society. They need to build for themselves new institutions of political power based on the modern definition of rights and of democracy. They need to use this power to reorganise the relations of production, to bring them into harmony with the productive forces, thereby opening the path to extended reproduction of society without any crisis of any kind. This is the kind of revolution that the situation demands – a second round of proletarian revolution, suited to the conditions of the 21st century, based on contemporary Marxist-Leninist thought.
Rate of Profits
The profit appropriated by the owners of capital, expressed as a proportion of the total capital advanced, is called the rate of profit. Suppose a capitalist firm enters business by advancing a capital of Rupees 100 crore, with which it rents some space and machinery, purchases raw materials and intermediate inputs, and hires a group of workers. At the end of one year of operation, suppose the firm has earned a profit of Rupees 20 crore, thereby expanding its capital to Rupees 120 crore. The profit of 20 expressed as a proportion of the initial capital of 100 works out to a rate of profit of 20% in this case.
One of the important discoveries of Karl Marx is the Law of the tendency for the rate of profit to fall. This law may be understood by further developing the example outlined above.
Let us suppose that of the 100 of total capital advanced, 60 was spent on the means of production and 40 on wages and salaries of the workers employed. The source of the profit of 20 lies in the exploitation of labour; that is, it lies in the fact that the labour power, when set in motion, creates more value than the 40 it cost for the capitalist. The degree of this excess, called the rate of surplus value or the degree of exploitation, is measured as the ratio of the profit (20) to the capital advanced to purchase labour power (40), which in this example works out to 50%.
Marx observed that with the development of the productive forces through the application of modern industrial technology, the composition of the capital advanced changes. Every 100 advanced no longer consists of 60% spent on means of production and 40% on labour power. With rising productivity of labour, the ratio of the former to the latter rises. It rises both due to increasing use of machinery and increasing rate of consumption of raw materials and intermediate inputs per human-hour of labour. From 60:40, it rises, say to 70:30. Out of a capital of 100 now 70 is spent on the means of production and 30 on labour power. If we assume the degree of exploitation to remain the same, at 50% as before, then the profit will be 15 on every 100 advanced. From 20% it would have fallen to 15%.
Marx called this the tendency for the rate of profit to decline, recognising that there are various countervailing factors that operate, including measures taken by the capitalists to increase the degree of exploitation. As a result, the average rate of profit does not decline all the time, while the tendency for it to fall operates independent of anyone’s will.
“The technical-scientific revolution of the last decades of the 20th century led to a rapid rise in the productivity of labour and in the organic composition of capital, that is, the portion of capital advanced to purchase material inputs in relation to the portion paid as wages of labour. This caused the average rate of capitalist profit to decline, in conformity with the objective law discovered by Marx. The response of finance capital, which is satisfied with nothing less than the maximum rate of profit, has been to raise the degree of speculative profiteering and to intensify the degree of exploitation of labour, through various means.”