[Marxism] The perfect circle of success
mehmetcagatayaydin at yahoo.com
Tue Feb 28 08:31:09 MST 2006
The perfect circle of success
By Michael Roberts
Friday, 10 February 2006
It works like this. The economies of the advanced world, as represented by
what is called the G7 countries (the US, Japan, Germany, the UK, France,
Italy and Canada in that order), no longer need to make things.
Increasingly, they just need to invent, design and market things. They can
leave the making of things to the less developed world in particular,
China and other parts of Asia, Mexico and Brazil.
Also the G7 countries (and other smaller advanced economies like
Switzerland) can concentrate on financing the investment in the making of
things in the less developed world. The banks and financial institutions
based in New York, London and Geneva, along with Paris and Frankfurt can
suck up the huge savings generated in China, Japan, Korea and the oil-rich
economies of the Middle East and Russia. These savings, in the hands of
the global financial sector, are used to buy the bonds of the G7
governments, the bonds of the big corporations and mortgage banks and the
shares of the major G7 corporations.
Looking down the telescope from the other end, this means that the G7
governments and the big corporations and the average households on the G7
countries can borrow huge amounts of money to finance their purchases of
houses, pay for government spending on arms, education etc., and finance
the building of factories in the so-called Third World.
Its perfect. The US now runs a huge trade deficit equivalent to 7% of its
annual national income. It also has built up net debts with the rest of
the world equivalent to 25% of its annual output and rising. But no
problem. It has this deficit because it is buying truckloads of things
from China at very cheap prices to fill its shops. It does not need to
make these things at home any more when they are so cheap from China,
Mexico or the rest of Asia. And these things are being made in China by
American, Japanese and European corporations who have transferred their
factories to China and other cheap-wage, plentiful labour locations.
It all works because the export revenues generated by Chinese sales to the
US and the rest of the G7 are put in the Chinese banks by the
foreign-owned corporations, which promptly use the money to buy US bonds
and other financial assets. Indeed, in 2005, the US ran up a trade deficit
of nearly $700bn, but it received back over $900bn in credit as foreigners
bought US government bonds, corporation bonds and mortgage bonds.
As a result, the US financial system is flush with cash. It can lend money
at historically very low rates of interest to Americans to buy ever more
expensive houses or purchase ever more quantities of Chinese goods, or
ever more clever hi-tech services from India and techno gadgets from
Korea, Taiwan and Japan.
Such is the perfect circle of success. So perfect is it that some
strategists of capital are now convinced that this has guaranteed a
prosperous capitalist world for some time ahead. They have called it Our
Brave New World. In this world, G7 capitalist companies are platform
companies. They wont make anything. The new business model is to
produce nowhere, but sell everywhere
platform companies then simply
organise the ordering by the clients and delivery by the producers
keep the high value-added parts of the research, development and marketing
in-house and farm out all the rest to external producers.
Think of the Brave New World as a new stage of capitalism. First, there
was the development of agricultural capitalism in the 17th and 18th
centuries in Europe and in the 19th century in the US and Japan. Then came
industrial capitalism, pioneered by the UK at first and then adopted by
the US, Europe and later Japan. The rest of the world was reduced to
providing the raw materials and food that enabled industrial capitalist
countries to make the things everybody wanted.
But now has come finance capitalism (more broadly defined to include what
Marx called the unproductive sectors of capitalism, namely, finance,
marketing, legal services, property development etc). This is how the G7
economies increase their wealth. They take the savings of the newly
industrialised world and invest or spend it for them!
Indeed, if you take the argument further, China would have no market to
sell its TVs, toys, textiles, bras and every other item you can think of,
if American households did not have the money or credit to buy them. What
is important in this view of capitalism is not production, but
It is a repeat of the ironic story first raised by the great Dutch
economist, Bernard Mandeville way back in 1705 of the Fable of the Bees.
As he explained in his brilliant doggerel verse, it is not the bees
(workers) that are important. Without the drones (the do-nothing members
of the community who just consume the honey), there would be no point to
the worker bees. Without somebody ready to eat you out of house and home,
there would be no need to make any food or the shopping its logical
isnt it? So without Americans spending like there was no tomorrow, China
would not be able to sell and it would have no place to lend its money.
The US spender/debtor keeps the capitalist world going round, not the
There must be something wrong with this! And there is. This whole view of
capitalism assumes that profits are irrelevant. What is important is that
the price of stocks and shares keep rising, the price of property keeps
rising and that interest rates keep low, not making profits. If the value
of your house keeps going up you can borrow more to spend more, if the
value of shares keeps rising you can borrow more to invest in factories in
China and design new things for the Chinese to make. If interest rates
stay low, the government and others can borrow more to build more
armaments while keeping taxes relatively low.
This is the view of capitalism as seen by the banker or the rich consumer.
It is not the reality of capitalism. Thats because the prices of
property, shares and government debt wont go up forever because they
depend on something else: profits of capitalists. This is the lifeblood of
capitalism. If the profits of the big corporations start to wane, then all
bets are off. Investment into China will fall off, share prices will fall
and fewer goods will be purchased. G7 economies will slow.
And profits do not come from bankers lending money, rich people buying
luxury goods, governments selling arms or people buying houses. The
profits have already been made. These economic actors are merely
redistributing profit made by others namely the producers of things in
the US and China. This is one of the fundamental discoveries of Marxist
Profits are the unpaid labour of the working class, but also they only
arise from the sale of things made that people want. The marketing,
advertising and distribution of goods add nothing to profit; but are just
a necessary (under capitalism) cost of making a profit for individual
capitalists in competition with each other.
Similarly, workers in public services are necessary to capitalism to keep
the workforce healthy, educated and functioning. But they dont produce
profits for capitalists. In that sense, they are unproductive for
capitalism. Bankers, mortgage and insurance brokers, real estate agents
and financial analysts may get paid huge sums but they do not make profits
for the capitalist system, even if they do for the companies they work
for. In that sense too, they are unproductive.
Yet the Brave New World of capitalism now suggests that it is precisely
these unproductive sectors of capitalism that keep the whole system going.
Buying a house in America keeps the whole world going round. What will
prove this wrong is when the profitability of the capitalist system starts
to fall. At present, US profitability in the whole economy is around 8.5%
of annual output. Thats very near the historic peak of the last 25 years
of 9%. But it is now beginning to decline.
There are three indicators of whether the Brave New World will end in
tears. First, are US housing prices falling? If they start to do so, then
the profit of investing US mortgage bonds for foreigners will decline and
they will stop buying them. That will force up interest rates in the US
and make it more difficult to finance the huge trade deficit. As of now,
US house prices are shooting along at near 15% a year. But they have just
started to slow.
The second indicator will be how much the US and other G7 companies keep
investing in China to boost profitability. If that starts to decline, then
it means that G7 corporations have less to spend or they are worried about
not getting enough profit out of the workers in China. In 2005, foreign
capitalists invested $58bn in China. Thats very high, but it is slightly
less than in 2004. Just the first signs.
Finally, there are the figures for Chinese exports to the rest of the
world. If they start to decline, it means that G7 consumers have less
money to spend on goods in the shops and/or foreign manufacturers are
experiencing a slowdown or fall in the profits they are making from their
exports. In 2005, exports from China were at record levels.
So far then, the Brave New World of capitalism is still holding together.
It still seems that the bankers, property developers and arms
manufacturers of the G7 economies are successful and profitable. But there
are signs of fraying at the edges.
Lets go back to Mandevilles fable. In the natural world, of course, the
drones do have a role. They may do nothing and do not even guard the Queen
bee. But they are the only males of the bee community and so they mate
with the queen, thus providing a role in procreation. The worker bees are
all female. Once mating is over, the drones are driven out of the hive by
the worker bees and left to die. In the human world, worker bees are both
male and female and do their own mating. So they have no need of drones at
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