Lessons of a minicrash THE mini-stock market crisis of April 2000 was forgotten within a few days. It remains nonetheless the symptom of more fundamental disequilibria which raise serious doubts on the capacity of the 'new economy" to form the basis of a new expansionary long wave. MAXIME DURAND*
WO elements were the detonators of the crisis. The first was the verdict delivered in the Microsoft affair which has been interpreted as the end of the super-profits linked to information technologies. On April 24th Microsoft shares lost 15.7% in one day and were down by 44% in relation to the end of 1999. The second factor was the announcement of the index of inflation which, at 0.7% for a single month, seemed to mark a sharp leap forward and confirm a light movement of resurgence of inflation.
As is very often the case, the factors which unleash a crisis are not the deep causes of it, and stock market instability is often the result of a tendency to exaggeration, to over-reaction. But these two elements have thrown a worrying doubt or two on the main underpinnings of the dominant mood of euphoria.
The Microsoft affair underlined that the endless accumulation of considerable profits is not guaranteed. Recall that Bill Gates is the one of three men whose combined fortunes exceed the GDP of the 48 poorest countries. That the giant of the "net-economy" can thus stumble has been perceived as a worrying message.
The inflationary resurgence, if it should be confirmed, puts an end to one of the
New Economy * DOSSIER: THE "NEW ECONOMY" AFTER the odes to the glory of the "new economy", presented as a new form of regulation, the fall in stock market prices during the second week of April has reopened the debate on the economic conjuncture and, beyond that, on the eventuality of a reversal of the depressive phase of the long wave, generally dated from the beginning of the crisis of 1974. Marxist economists, following Ernest Mandel, considered in general that if the beginning of a depressive phase of the long wave is due to the accumulation of contradictions which undermine the mode of regulation during an expansive phase, the reversal of the wave (and thus a new expansionary phase) involves factors exogenous to the economy: a modification of the relation of forces between the classes, the political will of a strengthened bourgeois leadership, a "technological revolution" allowing"
productivity gains, and so on. The revival of the rate of profit in the course of the two preceding decades, the (still uneven) opening up to trade of new markets (Eastern Europe, the ex-USSR, China) and finally the length of the favorable conjuncture in the United States (the ninth year of growth) are among the factors feeding the debate on the eventuality of a new expansionary long wave. The history of capitalist economy shows us moreover that the factors allowing an expansionary long wave differ each time and that it would be wrong to imagine today a return to the mode of regulation of the capitalist economy which predominated in the thirty years following the end of World War 2.
Without having the pretension of settling this debate, we publish here two articles which highlight different aspect of the contradictions of the current economy: the stock market mini-crash of Friday April 14th 2000 analyzed by Maxime Durand; the "new economy" and the possibility of a new expansionary long wave analyzed by Marc Bonhomme. We intend to return to this subject with other articles in our coming issues. Capitalism being also a society in which the commodity marks social development in an overall fashion, we complete this dossier with an analysis of cultural flux in the history of capitalism by Francisco Louça. * most striking traits of the "new economy", namely the possibility of the US economy experiencing a relatively high cycle of growth, with a return to quasi-full-employment (for US averages) without inflation picking up and leading to the reversal of the cycle.
### Concern about inflation
Wall Street's great concern about inflation certainly cannot be analyzed as the fear of a loss of competitivity - it relates rather to the division of incomes, which inflation affects in two ways. For the holders of financial assets, every price increase reduces the real value of the wealth as well as the income they possess. Inflation is moreover an indicator of tension on the labour market and reflects the resistance of employers to an improvement in the situation of wages.
From this point of view, the US economy has always been marked by this cyclical spiral: the upturn brings unemployment down and, thanks to this improved rela-
M.] tionship of forces, employees gain more rapid increases in their purchasing power. The employers respond by increasing their prices to maintain their margins, then the Federal Reserve Bank (the Central Bank) increases interest rates, so as to rein in activity. All this confers on the US economy a fairly repetitive cyclical profile.
But, precisely, the last cycle has given the impression that these mechanisms were neutralized and this forms one of the components (with the new technologies) of the vaunted "new economy". This also explains why the current cycle is presented as especially vigorous and exceptionally long. It had indeed seemed that the lowering of the rate of unemployment no longer pushed wages or prices upwards.
Things are a little more complicated and it is worth going back a little to consider the last cycle in its entirety, distinguishing two phases. After the recession at the beginning of the 1990s the cycle restarted normally and growth was in the order of 2.7% between 1991 and 1995. Then, from 1996 onwards, growth found a International Viewpoint #322 June 2000 17
* New Economy
MERETECOOMY second breath and reached an annual average of 3.7%, more regular moreover. It is then on the basis of a fairly brief period that this "new economy" has been constructed.
The main characteristics of this atypical conjunctural phase are the following: investment continues to grow very much more quickly than GDP and hence constitutes a dynamic element; this allows higher productivity gains than in the past; these productivity gains allow real wages to begin to grow again (all the more so in that working time increases) without excessively disturbing the share of profits; inflation is contained because productivity gains compensate for a good part of the wage increases and the US benefits from a fall in import costs, thanks to the rise of the dollar and the fall in the price of raw materials; consumption also picks up, growing very much more quickly than GDP on the basis of a fall in the rate of saving - it 18 International Viewpoint #322 June 2000 increases much more quickly than household incomes, and the indebtedness of households progresses very quickly.
Indebtedness
This indebtedness corresponds, to the tune of $200-300 billion, to the fact that some households have borrowed dollars to buy shares; public expenditure falls as a proportion of GDP
(notably military expenditure in the first half of the 1990s), and exports mark time; economic equilibrium between supply and demand is achieved through an acceleration of imports which boosts the trade deficit. It is necessary here to bring together two figures: in the final quarter of 1999, growth reached 7% in annual terms, but the external trade deficit worsened again to reach the equivalent of $400 billion in annual terms.
Thus the new US economy combines two ingredients that it is hard to untangle: there is a "high tech" component and a "neoimperialist" component. The first corresponds to the "healthy" part of the phenomenon, which allows us to sketch the premises of a new long wave: the upturn of investment leading to a resumption of productivity. It basically amounts to a mechanism with nothing "new" about it.
What was unusual was rather the preceding long phase, characterized, since the middle of the 1980s, by a restoration of profit without resumption of accumulation.
The new technologies obviously play a decisive role, but there is nothing new about this either: in each cycle, a certain number of sectors play a motor role around key innovations.
We must also note in passing the extent to which this configuration disproves the simplistic analyses of financial capitalism as opposed to productive investment: the
US is both the most financialised country and the country where productive investment has increased the most in the course of the last cycle. It is symbolic enough however to note that a New Age is being spoken of, simply because capitalists begin to invest again and register productivity gains!
The problem is that this return to a more virtuous functioning of capitalism, to a "quasi-Fordism", , where the share of wages makes up the ground it has lost, rests on the effects of asymmetrical domination with respect to the other regions of the world. The US indeed has the ability to make the rest of the world finance its capital accumulation. Some figures are necessary to take the measure of this phenomenon. In 1992, productive investment represented 10% of GDP against 12.5% in 1999: investment flows superior to this level of 10% of GDP represented in total $250 billion. Over the same 1992-1999 period, the total external trade deficit was $225 billion. In other words, the supplementary effort of investment was financed by the rest of the world to the tune of 90%. A trade deficit certainly represents an influx of capital and, in a symmetrical fashion, a surplus implies an exit of capital.
### Well known phenomenon
A fairly well known phenomenon has taken on an added importance over the last 2 or 3 years: Japan and Europe are financing the upturn of accumulation in the US. This unequal development of accumulation makes it obvious that the US model cannot easily be reproduced in all its dimensions.
The manner in which Wall Street, including the Nasdaq, has handled the mini-crash is quite interesting. But it owes nothing to the international financial institutions - in any case it is hard to see what instruments of direct and immediate intervention these latter could use.
The manner in which the markets regained control has been aptly described by Stephen Roach, chief economist of the Morgan Stanley Dean Witter bank, in an interview in Le Monde: "nobody wants to see this market stop rising. The investors refuse to accept reality".
This poses the question of the difficult regulation of the financial markets. This latter is indirect and done through monetary policy, in other words interest rates.
But the last IMF economic report (World
Economic Outlook) stresses the contradictions of this intervention. In chapter 3, it argues that a sound policy consists in preventively braking speculative flights by a measured increase in interest rates and, if a crash comes, lowering rates significantly so as to boost the liquidity markets — as was done after the October 1987 crash. But in chapter 1 the IMF (or another of its experts) recommends a policy of progressive tightening of interest rates which comes a little late and could stiffen the cyclical reversal if one believes the analysis of the 1929 precedent offered in chapter
Guidance difficult
Guidance is all the more difficult in that the Stock Exchange is largely bereft of any objective determination, what analysts call the "fundamentals". The most commonly used ratio is the PER (Price/Earning ratio) which compares the price of a share to the profit per share realized by the company. This ratio is now in the order of 30 in the US whereas financial theory would evaluate that a ratio of 20 would be coherent with the other parameters (growth rate, interest rate, risk premium). Thus in the broadest terms we are looking at an overvaluation in the region of 50%, which means that the prices should fall by a third to return to their equilibrium values.
This reasoning corresponds to a simple logic - shares represent a right to draw on profit and their value should then reflect the profitability which underlies the financial remuneration. The gap between profitability and stock market capitalization has become particularly "monstrous" in the case of high tech companies quoted on the specialized markets like Nasdaq in the United States. In order for the real economy to deliver on the bets taken on the future in the form of share overvaluation, it would be necessary to boost profits considerably, which would imply rates of exploitation which are — happily — out of the question.
The situation cannot go on, if only because it enters into contradiction with an essential rule of the concrete functioning of capitalism which concerns competition between capitals. This latter is indeed profoundly distorted. The size of capitalization! no longer reflects the real size of capitals. That a company like AOL, which is basically only a medium size computing service company, has been able to buy up a
New Economy * International Institute for Research and Education No.1 The Place of Marxism in History. Ernest Mandel (40 pp. f2, $3.50, 20FF) No.2 The Chinese Revolution - I: The Second Chinese Revolution and the Shaping of the Maoist Outlook. Pierre Rousset (32 pp. f2, $3.50, 20FF) No. 3 The Chinese Revolution - II: The Maoist Project Tested in the Struggle for Power. Pierre Rousset (48 pp. £2.50, $4, 25FF) No. 4 Revolutionary Strategy Today. Daniel Bensaid (36 pp. f2, $3.50, 20FF) No. 5 Class Struggle and Technological Change in Japan since 1945. Muto Ichiyo (48 pp. £2.50. S4. 25FF) No. 6 Populism in Latin America. Adolfo Gilly, Helena Hirata, Carlos M. Vilas and the PRT (Argentina), introduced by Michael Lowy (40 pp. f2, $3.50, 20FF) No. 7/8 Market, Plan and Democracy; the Experience of the So-called Socialist Countries. Catherine Samary (64pp. £3, S5, 30FF) No. 9 The Formative Years of the Fourth International (1933-38). Daniel Bensaid (48 pp. f2.50, $4, 25FF) No. 10 Marxism and Liberation Theology. Michael Lowy (40 pp. f2, $3.50, 20FF) No. 11/12 The Bourgeois Revolutions. Robert Lochead (72 pp. £4, S6, 40FF) No. 13 The Spanish Civil War in Euskadi and Catalonia 1936-39. Miguel Romero (48 pp. £2.50, S4, 25FF) No. 14 The Gulf War and the New World Order. Andre Gunder Frank and Salah Jaber (72 pp. £2, S3, 15FF) No. 15 From the PCI to the PDS. Livio Maitain (48 pp. £2.50, $4, 25FF) No. 16 Do the Workers Have a Country? Jose Iriarte Bikila (48 pp. £1.50, $2.40, 12FF) No. 17/18 October 1917: Coup d'Etat or Social Revolution. Ernest Mandel (64 pp. £2, $3, 15FF) No. 19/20 The Fragmentation of Yugoslavia. An Overview. Catherine Samary (60pp. £2.50, S4, 20FF) No. 21 Factory Committees and Workers' Control in Petrograd in 1917. David Mandel (48 pp. £4, $5, 35FF) No. 22 Women's Lives in the New Global Economy, Penny Duggan & Heather Dashner (editors) (68 pp. f4, S5, 35FF) No. 24/25 World Bank/IMF/WTO: The Free-Market Fiasco, Susan George, Michel Chossudovsky et al. (116 pp. £6, $8.75) Subscription costs £30, US$50 or f 100 for 8 issues. Notebooks published in book format by Pluto Press generally count as a double issue for subscription purposes. You can request back issues as part of your subscription. Back issues are also available for the prices indicated outside Europe, add 20% for postage) We prefer payment in Dutch guilders, made by bank or giro transfer to Netherlands. Postbank account number 1757144, CER/NSR, Amsterdam. Next best are cheques made payable to P. Rousset, either sterling payable in Britain or dollars payable in the US. Contact us to pay in French or Belgian francs. Please avoid Eurocheques. Write to IRE, Postbus 53290, 1007 RG Amsterdam, The Netherlands. Tel. 31-20-67 17 263 Fax: 67 32 106. Email:[email protected] leisure industry giant like Time Warner is perfectly symbolic of the new economy, but is all the same time completely irrational from the point of view of capital in general.
The "real" companies are then exposed to a risk of being bought up by unduly inflated companies. Internet shares have been able to attract investors to the detriment of the share prices of the "traditional" companies even if they are in fact more profitable. In short, this absurd situation where Yahoo! counts for as much as
General Motors, must resolve itself in one manner or another.
Three unknowns weigh on the modalities of the correction to come: its breadth, depth and impact on the real economy. The first question concerns the relations between the two sectors of the financial markets, "traditional" and "high tech". . The overvaluation of prices being primarily (but not solely) the responsibility of the second, one could imagine a selective correction sparing the traditional heart of the Stock Exchange and which could even International Viewpoint #322 June 2000 19
* New Economy strengthen it if investors disengage from the high tech sector to orientate towards the second - a little like capital fleeing the Stock Exchanges of the emergent countries to boost the financial markets of the North in 1998.
Although the two questions are obviously linked, the second unknown concerns the depth of the correction. It is necessary to take into account here the existence of significant institutional investors -notably pension funds - which tend to stabilize the markets by forming a kind of stabilizing floor. These investment funds do not really have the possibility of leaving the Stock Exchange: the only alternative would be to move to Treasury bonds, but this road is narrow and can moreover be controlled by the government. It is undoubtedly the third dimension which will furnish the key to these two preceding unknowns: the question of the extent to which a stock market correction will be reflected in the real economy.
From this point of view, the current capitalist model has two Achilles heels, which are the "the wealth effect" and the US trade deficit. The first refers to the fact that individuals in the US, taken overall, are consuming a great deal because they have at their disposal, at least potentially, comfortable financial reserves. If these latter were to decline sharply in value, these losses would lead households to revise downwards their consumption behavior, thus helping to steepen the conjunctural downturn. This movement could well snowball, in case of the bankruptcy of households which have heavily indebted themselves in order to consume — or to speculate.
### Weak point
The second weak point is the US balance of payments. The dominant imperialism disposes of the privilege of having a significant deficit and a currency that remains strong. Europe and Japan record trade surpluses, which are recycled for the financing of accumulation in the US. But this can only work inside certain limits. The first is the dynamism of the US economy which legitimates the overall mechanism; the second is the rate of exchange of the Euro in relation to the dollar which has constantly fallen since the establishment of the common currency.
Let us suppose that the Fed increases rates to hold in inflation, and the growth of
20 International Viewpoint #322 June 2000 the trade deficit. The slowing up of the economy should then put an end to the rise of the dollar which could even fall in relation to the euro. But in this case, can the process really be controlled from one side or other of the Atlantic? It is not obvious. If the slowdown is sharp in the US and is accompanied by a fall in the dollar, the rise in interest rates and the loss of competitivity would unleash a recessionary shockwave which would invert the conjuncture in Europe, in such a way that what one could reasonably have predicted in the aftermath of the financial crisis of 1998 would finally come to pass.
This downturn would inevitably be accompanied by growing tensions inside Europe, based on the divergent reactions of each country to what the economists call "asymmetrical shock".
"Interest bearing capital, alienated form of the capitalist relationship": Marx's formula — it is the title of chapter 24 of volume 3 of Capital — shows that the miracle of the multiplication of the loaves and fishes which takes place on the Stock Exchange has fascinated capital for a long time. Here one can see "money producing money, value creating value itself, without any process of mediation ot the two prof madation of the two extremes". In persuading themselves that this miracle results from an astute application of the new technologies, the new ideologues fall for an old illusion to which Marx had replied in advance: "for the vulgar economists who try to present capital as independent source of value and the creation of value, this form is obviously a godsend since it renders unknowable the origin of profit"
### Theory of value
But can you really get richer by doing nothing? The response should be obvious, above all for Marxists armed with the theory of value: it can only amount to a transfer, a deduction made by financial incomes on wealth produced. Basically, it is because wages are held down (and productive investment does not increase in the medium term) that a part of value added can be siphoned off by astute investors -their "pennies from heaven" are none other than unpaid wages.
The particular ideology of the new capitalism takes then the form of a vast enterprise of self-persuasion which seeks to convince itself — as in the time of Marx -of the power of capital (or the Internet) to make money outside of any process of exploitation. It is what Marx calls the "capitalist fetish"
In reality, the impressive rise of the Stock Exchange for some years corresponds to a particular configuration where the rate of surplus value increases but not the rate of accumulation, and this nonaccumulated surplus value is the motor of finance. It is not then by chance that the hymns to the new economy are accompanied by eulogies to employee shareholders. The goal sought is to institutionalize this new rule: wages should be frozen, and workers who seek to improve their incomes should do so through save-asyou-earn or pension funds. The goal is to legitimize the current mode of division of incomes, to carve out a social base, to divide wage earners between shareholders and the rest, and thus bring about the freezing of wages and social protection.
Can this continue? The response is basically political and social. One of the constitutive elements of the new economy is the desire to combine sustained growth with the holding down of wages. From a strictly economic point of view, there is no limit to this configuration whose sole fault
is that it is extremely inegalitarian. But if this configuration is rejected, if wage earners demand their share, the situation becomes untenable, quite simply because one cannot distribute more wealth than one creates. If growth is maintained for some years at 3% or 4% and the wage mass grows also at 3% or 4%, then an annual progression of 30%, 50% indeed of 100% of stock market profits is no longer tenable.
### Instability
We have in any case entered into a phase of stock market instability: if the mini-crash has been wiped from memory, the euphoria has been dampened and new problems can be envisaged. A stock market crash does not for all that mean the final breakdown of capitalism. You could even say that capitalism today needs such a shock, which would lead to a significant devalorisation of capital, the ruin of the little parasitic actors, and a stimulus towards new mergers.
It is without doubt the necessary condition, from a strictly economic point of view, of a new durable phase of growth. But such a purgative would at the same time shatter any attempt to "sell" the concept of employee shareholders and would throw a sharp light on the limits of contemporary capitalism.
In an article published 2 years ago,2 we advanced the following conclusion: "World capitalism has not succeeded in establishing the basis of a new long wave of expansion, because it is unable to ensure a sustained growth of consumer (wage) demand, and because capitalism structures the world in such a way that zones of economic depression are periodically generated. The capitalist economy is mired in a recessive phase that has lasted longer than any comparable episodes.
The current cycle, developing on the basis of a crisis of overproduction, can only with great difficulty be seen as putting in place a new world economic order. But neither is the final collapse in any way automatic. The most probable outcome is general deceleration, lasting through 1999, and which could be masked by high profits. This could lead to an open crisis of legitimacy for neo-liberalism"
The manifest error as to the conjunctural profile does not imply that it is necessary to revise the overall prognostic on a new expansionary long wave. It is absolutely essential to disassociate the two questions.
The theory of long waves, as we interpret it, consists in showing that a new expansionary phase presupposes that capitalism puts in place a coherent model defined by four elements?:
• a mode of accumulation of capital;
• a type of material productive forces;
• a mode of social regulation;
• the type of international division of labour.
Indeed, the responses of contemporary capitalism to these demands are partial, contradictory and socially scarcely legitimate. The coherence of model, inasmuch as it exists, rests indeed on regressive developments on each of these points.
The mode of accumulation of capital is exclusionary from two angles, geographical and social. The countries of the South and East are subjected to a renewed, extremely selective, dependence, and wages are subjected to a new iron law according to which they represent a burden and cannot be allowed to grow. Even between the US, Europe and Japan, the dissymetries are growing.
### Commodity logic
The new technologies are not a mirage and are bearers of profound transformations and progress, but they come up against a commodity logic which impoverishes their social effects. Capitalism today transforms the gold of technological progress into social lead: the possible reduction in working time into unemployment and social marginalisation, free information into the commodification of everything, including the living.
The mode of social regulation functions on the mode of denial; to satisfy social needs would be to live above one's means. Public services and social protection are slashed back everywhere in the world, in the name of giving priority to commodity consumption which is basically that of capital.
The international division of labour, finally, is founded on a profoundly unequal development and restores the most classic imperialist processes. Certainly, the economic coherence of the overall is to a certain point assured by the rise of inequalities and by the reinforcement of the effects of domination: the consumption of the rich substitutes for that of the wage-earners which is held down, and the regime of the
New Economy dollar-king becomes the cement of the international monetary system.
But capitalism does not simply need an accountable coherence, it must also offer a model of society. It must accumulate (this is "Moses and the prophets" according to Marx), innovate, transform society, affirm itself as universal model. And the current inegalitarian coherence enters into contradiction with these demands: despite the spectacular restoration of profit, accumulation does not take off in the same proportion, medium term growth remains mediocre and the redistribution of the fruits of this growth only benefit a minority of the world population.
### Synthetic criterion
If it is necessary to give a synthetic criterion to define the start of an expansionary phase, it is that the restored profits provide a new stimulus to the dynamism of accumulation, which is basically the essence of capital.
Indeed, in the absence of proof to the contrary, this is only the case currently in the US, in conditions which prevent the generalization of this case — elsewhere, accumulation only increases over short periods which suggests, then, a conjunctural movement. The major uncertainty weighing on the conjuncture (which is in itself a trait of that conjuncture) and the possible inaccuracy of certain theoretical characterizations should not obscure what remains our fundamental postulate.
Actually existing capitalism can function more or less well in regard to its own criteria, but it is structurally incapable of transforming itself into a system capable of distributing the fruits of its success in an egalitarian manner. And this success increasingly necessitates exploitation and marginalisation as its counterparts.
Stock market profits have no other origin than the non-satisfaction of social needs, which represents the basis of the essence of contemporary capitalism. The anti-capitalist movement must draw from this a renewed legitimacy, and everyone knows that this is not something which is quoted on the Stock Exchange!* * Maxime Durand is a member of the Economic Commission of the Ligue communiste révolutionnaire (French section of the Fourth International). 1. The capitalization of a company is the total value of its shares, calculated on the basis of their Stock Exchange price. 2. Maxime Durand, "The ambiguities of the international conjuncture", ", International Viewpoint no. 300, May 1998. 3. See Christian Barsoc, Les rouages du capitalisme, Editions La Brèche, Paris 1994. International Viewpoint #322 June 2000 21
* New Economy D URING the last 25 years, the bourgeoisie, at least in North America, has been able to restore the rate of profit to the level of the postwar period. It has developed a panoply of emergent new technologies, which have begun to develop on a big scale in some sectors, above all in the United States. One can then say that the economic and technological conditions of the ascendant phase of a new long wave are partially met inside the strategic center of world capitalism and its imperialist periphery.
The recent growth of productivity in he recent grow pravy the United States demonstrates it. Let us remark that the prior creation of a final solvent demand (in other words or increased vant demand (in other words of increased popular consumption) is not one of these conditions contrary to what the Keynesians think). This latter is rather the consequence of the wave of initial investment and its breadth is a function of the ability of the proletariat to impose redistribution.
Note in passing that it is generally at the beginning of the expansionary and recessionary phase that the question of "reform or revolution" is raised. Emerging from the suffering of the long recessionary phase of the preceding wave and the individual struggle for survival that it involves, the proletariat again becomes combative, liberating a long suppressed anger. Whether this leads to revolution depends to a great extent on the accumulation of ideological and organizational forces in the course of the preceding phase.
### Appropriate conjuncture
A very favorable relationship of forces in an appropriate conjuncture could lead at least to big reforms, which at the same time would prolong the ascendant phase of the new long wave. Although the history of capitalism does not endlessly repeat itself, the passage from recessionary to expansionary phase has been accompanied in the past by a destruction/devalorization of capital (as witnessed by the depression of the 1930s and the Second World War last time round).
Such a devalorisation/destruction of capital is necessary to allow an enlargement of markets and then a wave of investments, which is sufficient to support a high and prolonged accumulation of capital The very partial opening of the markets of the East (from the GDR to China), accompanied by a significant devalorisation of
22 International Viewpoint #322 June 2000