End the cycle: the crisis is one of capitalism

“Where the US leads, we often follow,” wrote the economist Roger Bootle in the Daily Telegraph on 14 August. Indeed, Wall Street too often sets the agenda for the City of London, and the US Federal Reserve leads the Treasury. Together, they lead the globalisation of finance capital.

We are endlessly told that there is a “cost-of-living crisis”. But finance capitalists are suffering no crisis. British company dividends rose by 4.6 per cent in the first quarter of 2023, to £15.2 billion. Bank shareholders did particularly well in the first quarter of this year according to analysts Computershare. The same report forecast, “Banks are expected to be 2023’s biggest engine of dividend growth…”

We are told that the crisis is all workers’ fault, because we have borrowed too much. We are told that wage rises cause inflation, interest rate rises, unemployment.

Popular proposals like investing for growth in new and green technologies, cracking down on tax havens, and introducing wealth, property or financial transactions taxes, hardly ever appeared in media coverage of the crisis.

You never heard the argument until recently that cutting too soon and too far would actually lead to lower growth and a higher deficit. Yet that is exactly what has happened. Austerity policies supposedly aimed at addressing the debt burden tend to reduce demand further, worsening the crisis.

Instead we were told that big government is bad, small government good. That budget deficits are bad, budget surpluses good. It’s all just neoclassical economics for the needs of capitalism.

City economists, the Conservatives, and most of the press, warned that Britain could go bankrupt if we didn’t prioritise cutting the deficit. But, Britain as a sovereign nation with a central, national bank and its own currency cannot be forced into bankruptcy because it can always print money. Something we can only do because we stayed out of the euro and then left the EU.

‘The City’s regime of production for private gain is not the natural order of things…’

Capitalism is unjust and inefficient. Its regime of production for private gain is not the natural order of things, as it would have us believe. It is artificial, unsustainable. The capitalist class prefers to take the money and run. In no area of work is it investing adequately.

The economy is not in a “cyclical downturn” from which it will emerge by magic. Finance capital takes money away from investment and puts it in the accounts of the 1 per cent.

And what should workers’ response be? Industry needs services. How could we have modern industry without skilled, healthy workers? Services need industry. How could we enjoy good health without vaccines? How could we educate our young people without up-to-date IT?

National plan

We need a national plan, including the “return to the nation” of key economic sectors including mining, energy, banking and insurance. But that must not mean that the class hands over responsibility for these to the state. That would be the opposite to taking control.

Our experience of top-down nationalisation in the past is that this model is all too easily compatible with the continued existence of capitalism – and is not immune to its crises.

The capitalist class is refusing to invest. Most corporate revenue goes not into investment but into share buybacks and dividend payouts, to support company stock prices. And it boosts the value of stock options held by company directors, financial managers and speculators.

The overwhelming bulk of bank lending goes to fund commercial and property purchases. Only 10 per cent goes to companies involved in the production of goods and services.

This spiral of finance feeding finance prevents the economy from escaping its decline. Finance capital, far from enabling investment and hence production and employment, is bleeding the economy dry.

After the 2008 financial crisis our rulers resorted to “quantitative easing”, in plain English, printing money, a policy which it followed without pause for 15 years. Aided by artificially low interest rates, quantitative easing inflated asset prices, commodity prices and consumer prices, to offset the deflation that follows a crash.

And when that economic policy creates unsustainable pressure, it triggers a reaction – including inflation and business failures. That’s just what has happened; and it would have done so without pandemic or war.

Year-on-year inflation, measured by the Consumer Price Index, hit over 11 per cent last year. Prices are still rising steeply, though not quite as fast. In July the index was still 6.4 per cent. Average wage rises were 7.8 per cent in the year to June, not catching up with last year’s cost of living, but just about keeping pace this year. But that’s enough for the Bank of England to talk about further interest rate rises.

Even if producer prices fall, agricultural commodity and food production groups use financial hedging strategies to delay passing these falling prices on to consumers. So the farmers, the producers, lose out, and so do we, while the speculators and the middlemen profit.

Unpayable

The capitalist class responds to the massive overhang of unpayable, unsustainable debt (which it created) by deflation, inflation and devaluation, which led to economic debacles in the past.

This could be curtailed by breaking up the big banks and limiting them to deposit taking, consumer and commercial loans, trade finance, payments, letters of credit and a few other useful services. Proprietary trading, underwriting and dealing should be banned from banking. Make banks boring and safe.

It’s time to put a stop to so-called “derivatives”. Finance capital loves these financial instruments, which link their value to an underlying asset, index, or reference rate. They are no good for workers or the productive economy. They should be banned except for standardised exchange-traded futures with daily margins and well capitalised clearing-houses.

The other, more complex financial derivatives multiply risk and concentrate it in a few too-big-to-fail hands. Derivatives do not serve customers – they serve banks and dealers through high fees and poorly understood terms. The models used to manage derivatives risk do not work and never will work because they focus on net risk not gross risk. [See note below.]

‘Globalisation and the encouragement of offshoring have been a disaster for Britain’s manufacturing industry…’

Globalisation and the encouragement of offshoring have been a disaster for Britain’s manufacturing industry. The more that production has been outsourced abroad, the more domestic industry has declined. And the more it declined the greater the incentive to outsource.

Globalisation is the logical development of capitalism, not an aberration or the product of some global elite conspiracy. It is not the answer to developing Britain’s economy, but rather a risk to face up to.

Even the US Foreign Affairs magazine in 2020 talked about “the curse of monopoly capitalism that already affects [the USA’s] over consolidated defense sector – causing higher costs, lower quality, reduced innovation, and even corruption and fraud.”

As the editors of the MIT Technology Review observed, “Governments are more likely to fund long-term, risky bets like clean energy, sustainable materials, or smart manufacturing - the kinds of technologies the world really needs right now…it’s become increasingly clear in the West that while the venture capital model is good at building things people want, it’s less good at producing things society needs in order to solve hard, long-term problems like pandemics and climate change.”

Finance is a new, casino stage of capital. Relying on it to invest in essential industry is futile. The question for workers is how to limit and then eliminate its impact. Asserting the role of the sovereign, independent nation to make its own economic decisions and then forcing our government to act in the interest of its people are just the first steps.

• Note: this article was revised to correct an error in the last sentence of this paragraph as it appeared in the printed version.