Theory and History of World Economic Crisis

By Anil Rajimwale

We are witnessing one of the gravest crises in world economy. It is being compared with the Great Depression of 1929-33. The world economy, particularly the world imperialist economy, has seen many other severe crises e.g. of 1907-08, of early 1950s, of1973,of1990s, ek.

How do we analyse the present crisis? What is its history, nature, scope, cause/s, and how is it related with the nature of social system?

Marx's Theory on Economic Cycle

A renewed interest is to be seen among the educated sections the world over in Marx's writings, in particular in Das Capital. This interest is not confined to the educated middle classes; it goes well beyond to the well-meaning bourgeois intellectuals "'and ideologists. Even the presidents, prime ministers and governors of central banks are making a study of Marx's theories since the outbreak of the crisis in the middle of last year. The leaders and intellectuals in France, Germany, England, Japan, US, etc are now greatly attracted to the Marxist economic theory. Why this interest? Karl Marx was the [rrst to go into the working of capitalist mode of production and into the capitalist economic cycles. Marx discovered, during his research, four stages of capitalist production and economic cycle: the gradual rise, then stabilization or the 'plateau', the fall, and then another stabilization preparing grounds for recovery, at higher levels, generally. Capital goes to those industries, and 'businesses', which provide maximum profits. It is the law of the motion of capital. A point of saturation in the industry and in the economy as a whole reaches when the capital cannot gain more profit than a particular level. Then it begins to seek out new avenues; therefore, a crisis ensues in that particular industry. If the same logic is transferred to the whole economy, then all-round economic crisis ensues. There is a phase of no rise in production and profits, then a fall in them. Relaxation follows when a certain critical amount of capital withdraws, causing rise in profits and profit rates. The economic 'cycle' is not exactly a cycle, but a spiral of economic motion.

Using Marx's methodology, one could make prediction regarding the approaching crisis almost with the precision of number of years or even the year. During the 19th century, the critical economic cycles occurred at the intervals of 12 to 15 years.

With the emergence of joint stock companies and the spillover of the capital into banking, trends towards emergence of what later came to be called finance capital and new aspects came into being, which were noted by Engels towards the end of the 19th century.

"Imperialism", Finance Capital and Economic Cycle

Hilferding and Lenin used the word "imperialism" with a different connotation and content: It was full of economic content. 1t did not refer simply to territorial expansion e.g. during feudalism.

By the end of 19th century and beginning of 20th century, two new things happened to capitalism. Large scale use of Bessemer converters led to widespread steel industry and to the 'steel age'. Besides, chemicals, railways, textiles, banking etc. led to the emergence of giant monopolies. The monopolies introduced new kind of competition. They billed 'free' competition of the earlier phases, and introduced monopoly.

That was also the period of the emergence of trusts, cartels and other forms 0f monopolies. New features in capitalist economy were discovered. Hobson described finance capital and Lenin made a scientific analysis of it and defined it. Hilferding also contributed to conceptualising imperialism.

Let it be understood that the emergence of monopolies, super-profits and finance capital modified the capitalist economic cycle, which had now become imperialist. Lenin characterised imperialism as "a new stage of capitalism".

The modification and changes were caused by the emergence of 'monopoly capital' as distinct from simple capital. Earlier the economic cycles were spontaneous, more the result of 'anarchy of production'. Now, monopolies and monopoly practices began to spread in all the fields of the economy: production, circulation, banking, lending, finances, stock markets, etc. Stock markets and speculation drove monopolization to new levels. There emerged monopoly profits, monopoly investments, monopoly market and monopoly pricing and so on, besides the usual forms. This killed or reduced competition greatly and introduced monopoly competition. This point has to be borne in mind. This meant, rise of several levels and cycles of economy in various fields and industries, and their total modified result, considerably changed by the monopoly and finance, as the concentrated expression of the economy as a whole. Non-monopoly capitalism was put at a great disadvantage and was sought to be eliminated.

Emergence of monopolies meant increase in internal contradictions of capitalism

Finance capital introduced new features to the capitalist economic cycle. Lenin has characterised finance capital as 'fictitious' capital. In fact, the term was first used by Karl Marx in the third volume of Capital. A section of capital separates off, detaches itself, from the productive capital and stands in opposition to the latter. It is not 'real'. When we talk of capital, it is related with and created by production.

But in case of finance capital, it tries to do away with production, and to shift all or most of the profit-making activities to the sphere of finance, stock market and circulation. Profits and super-profits are sought to be generated through stock markets and circulating spheres through manipulations. It is here and because of it that finance-imperialism begins to appeal as a brake upon the development of the production forces. Profit is created in production, not in circulation.

Crash of 1907: A Dress Rehearsal

The crash and the panic of 1907 may be termed as the 'dress-rehearsal' for the Great Depression, 1929-33. Panics and 'crash' are a run on the banks, inconsistent with their ability to meet withdrawals.

From 1814 to 1914, the US went through 13 bank panics, with that of 1907 being the worst. Among the reasons of 1907 panic was that capital all over the nation went largely into the real estate and other fixed forms; it thereby lost its liquid quality. This point has some similarity with the present crisis.

The US no federal reserve system; the Federal Bank was the result of this crisis. The US was being led by a progressivist president Theodore Roosevelt, who represented older, industrial interests, as opposed to the monopoly and financial interests.

The US was in transition from the relatively free industrial to the monopolised stock finance capital stage.

These and the later events show that the world capitalism in advanced capitalist countries was coming into the hold of finance-monopoly capital, and was creating imperialism. The cut-throat monopoly competition led to the First World War. The crisis of imperialism, to use Lenin's words, became the general crisis. Revolution in Russia further constricted the area of operation of big capital.

To cut a long story short, what it all meant for world economic cycle was this: the finance capital had increasingly begun calling shots in the economy, and was gradually influencing and then dictating terms in more and more productive industries. It need not be concluded that it had complete domination over production, to the latter's exclusion. Besides, production was and is the ultimate source of financial capital. otherwise it is 'fictitious'. The fictitiousness of finance capital depended upon its distance from industrial capital, and on its ability to carry or not carry the 'real value’.

Great Depression: 1929-33 Crisis

Some features of the crisis of 1929-33 have to be borne in mind, particularly in the context of the present worldwide recession. The two have certain similarities and yet many differences.

The industrial production fell dramatically during that crisis. Just two or three years of crisis cost industrial production billions of dollars, far more than world economy lost in the WW I. The level of industrial production fell below the pre-1913 level. If 1913 is taken as 100, then it fell from 183 in USA to 81, 104 in Britain to 71, in Germany from 144 to 92, and so on. There were widespread closures/shutdown of factories and industries all over the world, rendering millions upon millions unemployed, starving to death or on its verge. Long lines of ordinary people for a cup of coffee or a bowl of soup was a common sight in the USA or England or Germany and other countries, and this went on for years.

The distinguishing feature of the Great Depression was the so called crisis of 'overproduction'. There was no one to buy commodities, even articles of ordinary use, even at their cheapest! The prices had tumbled. This was because the purchasing power of the people had hit the lowest levels. The articles and goods were simply thrown away in the fields and the oceans! They became valueless. Commodities were virtually dumped everywhere.

Another feature of the 1929-33 crises was the merger of the industrial crisis with the agrarian crisis. This proved to be particularly painful for the colonial world including India. The prices of the raw materials and agricultural products simply crashed, hitting the ground, so to say. That destroyed the mass of peasantry in the colonial countries.

The crisis led to series of bankruptcies of the banks, financial institutions and industries. That resulted in massive devaluation of currencies. In countries like Germany, the currency (Mark) was so devalued that people did not count them, they counted the bags that carried the money!

Politically, the crisis of 1929-33 prepared favorable grounds for the rise of fascism its capture of power. It used all the crises of imperialism to its advantage to establish naked power of extreme rightwing fascist dictatorship.

The Great Depression of 1929-33 was the result of several factors. The most important was the First World War and its results, which greatly distorted the economic cycle.

It also brought into prominence the well known economists John Maynard Keynes (his most famous work, the General Theory of Employment, Interest and Money, 1936) and Schumpeter. They were bourgeois western economists. Keynes is particularly known for his state - interventionist theory. Some economists are today making the mistake of copying Keynes in a totally different scenario.

Fictiious Vs. Real Capital: Economic Cycle, Post-World War II

The nature of the economic cycle has undergone many changes and modifications since the Second World War. In fact, these modifications had begun from around the First World War itself. One of the outstanding economists Eugene Varga was among the first to study the changes in the cycle. He pointed out that the frequency of the cycles had increased. Moreover, the cycles did not always play themselves out. One cycle was not over when another began, thus overlapping one another. The periodicity of economic cycles differed in industries, areas, countries etc, producing a complex picture. The so called 'Mexican Crisis' of the' 1990s covered some countries in Latin America and Asia (MaIaysia etc), yet the rest of the world economy continued with little changes.

The independence of most of the former colonial countries really shook the imperialist economy and its economy. It introduced complications. The newly independent countries developed their 'own' cycles. The socialist countries too contributed big modifications.

'Non-Keynesian' State

One of the major developments in the merely-independent, developing countries was the construction of a powerful public sector. This was not according to the concept of Keynes, and we should not get confused on this question. Keynes presented state -interventionist prescriptions in relation to western monopolist states. He was a bourgeois economist of the west, siding with the western state. Many economists make the mistake of not placing him correctly and in proper context, although some of his theories are useful.

The state or public sector in the developing countries was a weapon of independence, self-reliance and anti-imperialism based upon the need to develop infrastructure and heavy industry.

Cyclic Crises

There have been several cyclic crises in the post-WW II period. In the early 1950s, there was an absolute fall in industrial production in the west European countries. From the middle of 1953 there was a deep crisis in the US, Canada etc. The crisis of 1957 -58 was widespread, and many peripheral countries suffered even after the recovery of the West. The low-points of cycles almost coincided in the crises of 1954, 1958, 1961, 1967, 1971 and 1975.

The worldwide fuel-crisis of 1973 was notable for the technological changes it caused and for the rise of the fuel-efficient engines, among others.

Finance Capital and the Present Crisis

Certain developments took place in the post-WWII period, drastically affecting the world economy. One was the STR or scientific and technological revolution. It greatly increased productivity by introducing new means of production and communications.

Electronics has changed economics in many ways. Second was the growth of world market on an unprecedented scale, wherein various players, big and small, fight for space.

Third is the emergence of finance capital as a powerful factor as never before. As we have seen, finance capital emerged more than a century ago, separating out from productive capital. It was powerful during the first and the second world wars. But today it has shown unprecedented growth.

Finance capital, led in particular by the US, is trying to gain control of everything in the world economy, though it does not always succeed. It has grown to the extent that, qualitatively speaking, it tries almost to replace production and productive capitalism. This new point has to be properly understood in the present context. The Chinese president, and some other leaders of the developing nations including our own PM, hit the nail when they said that the present crisis is the result of domination of 'fictitious' capital over the productive one and the 'casino' capitalism over industrial capitalism. The two must match each other; only then the crisis can be solved. So, this is the essence of the present crisis.

1929 Vs Present How it all Began

There are some similarities between the present crisis and that of 1929-33. Yet, there are serious differences also. Some economists make the mistake of lifting the example of the Great Depression as it is, thus ignoring the new distinctive features.

The present crisis began in the United States in the real property sector, and not in the industrial sector, nor in the agricultural one. There was a sudden spurt in real estate during 200508 in the U SA, and that activated the financial and mortgage institutions on a big scale. This sector was blown out of all proportions. Huge finances were invested most of them 'without guarantees. This was a sign of confidence growing into overconfidence. Massive mortgages were undertaken with the flimsiest or virtually no guarantees.

The companies could go on making profits at small investments endlessly. So, the shares began to be oversubscribed. Millions and billions were being made with a very narrow capital base, growing narrower. The 'Wall Street', the centre of the US stock market, got inflated as never before. Many of companies with a base capital of say 25 billion dollars, borrowed more than 25 times this amount; they went beyond 650 billion dollar mark in this way, and went on loaning out or investing this amount. But a slight disturbance here or there, a delay in the payment of loans somewhere down the line, brought the whole edifice built upon finance capital down.

The real property prices began to rise extraordinary leading to huge margins of profits. But they were not backed by corresponding increase in industrial activity. The mortgage and loan market began to expand extraordinarily, which was bound to go out of control. The powerful overseas American interests, for a while, sustained this growth. This was also possible due to the electronic transactions on world stock exchanges. For a time, the electronic communications helped. But the very growth was creating conditions for its downfall.

A series of reactions in the sub-prime market was being built. There have been various indications. Two years ago, the crisis of the 'participatory notes' had given an indication of the impending trouble. The securities and derivative market has been lately growing very fast, and it had been taking up various forms. One of the forms of the derivatives was the participatory notes;. At that time too, the present author had drawn attention to the fact that all other participants on the stock market were at a disadvantage, except those of the public sector.

The investment banks and the financial institutions on the Wall Street were making huge profits from shares, stocks, bonds, notes securities, derivatives, etc. The securities and derivatives, in their wake, created 'sub-derivatives', least bothering where they were heading to.

This massive 'bubble' or 'balloon' was bound to burst at some point or the other.

Hundreds of billions of dollars were invested in the securities alone. But there was no way they could be paid back, or for that matter the massive mortgages.

Suddenly, the financial institutions collapsed. Owners of properties, mortgages, banks, insurance companies, financial institutions, and so on down the line upto the executives of the companies went bankrupt, got paralysed and collapsed. Large number of individuals began to commit suicides along with their families, or to simply run away, and the companies went bankrupt, lost huge monies, were unable to return loans, and so on. Suicides on a scale were unknown in the US in recent years. Four biggest financial giants, not only of the US but also of the whole world, suddenly collapsed like the house of cards. The fifth one, the City Group, almost collapsed, saved just in the nick of time by government backing. With the financial top decimated, the whole financial and now the industrial system are in a dizzy spin. It is in this context that the 'state intervention' is being called for.

Massive 'Bail-out'

The massive capitalist class of the west, dominated by the giant big business, cannot come out of this crisis without large-scale state intervention. That is why, all those who till yesterday were singing praises of private enterprises, business, freedom of individual, liberal growth 'free from the shackles' of the state, "withdrawal of the state' from economy, and so on, are today urgently calling upon and pressing upon the western governments to intervene and save those very enterprises/businesses who were practicing  'freedom'. Let it be clear that what they mean here is the individual freedom of the great business houses.

It is the same people who sermonized India and other developing countries about how bad was the public/state sector, and how they should dismantle and get rid of it. Today we find the same public sector to be our protective cover from worldwide crisis.

The state in the US and west European countries has come out in a big way to intervene on behalf of the big business and finance capital to save them and the whole economy.

The function of public/state sector in the developing and the developed countries is quite different; one should be clear about it. But that is a separate discussion.

The US government has set aside huge amounts to shore up the sinking boats of by business. It has already planned two installments of 600 billion and 700 billion dollars for the purpose as part of the operation 'bail-out'. It is taking over the responsibilities of mortgages, securities, bonds etc. If they all get paid out, then the government will get huge profits too. It will also help the banks to improve their balance - sheet, reduce liquidity in financial markets, shore up production, and take over and improve the liabilities. The downturn towards securities - finance may be stopped and real profits may be made in the course of industrial upturn. It is like using the tax-payers' money to save big business. But at the same time, it may help restore the balance between production and finance, reducing the 'casino' and 'crony' effect. There shall be some curbs on the finance capital.

Government of China has also set aside a fund of 600 billion dollars for bailout. China has called for a concerted worldwide efforts and state intervention to stave off the crisis, and to restore the balance by increasing production. India is also taking certain steps.

Public Sector in India

Almost everybody, except a handful, now agree that it is the public or state sector that has largely protected India from the ravages of world economic crisis. It is the CPI and T.U and working class movement under its leadership that fought the battles of nationalisation of banks and big industries and big business, as also for the creation of a powerful state sector at the commanding heights of Indian economy. Several other progressive forces. also responded, in particular people like Pt Nehru and several economists.

Nationalisation of 14 monopoly banks in 1969 is a case in point.

The public / state sector today is keeping India economically independent, strong, and helping growth of small, medium and other sectors. And it is protecting us from imperialist crisis and machinations.

Therefore, the public sector has to be protected and strengthened. Today, public sector can play a positive role and protect even stock exchanges from ravages and anarchy, and can gain in it, as was clear from the crisis of the 'participatory notes'.

Public sector is the strategic basis of the Indian economy, to be protected at all cost. The world economic crisis is now gradually entering the sectors of production. In this sense, this crisis is quite different from that of 1929-33. The crisis is likely to continue, may be with less intensity, over the next few years. It is like to be a prolonged economic cycle of spread of crisis and recession, and then recovery. The cyclic nature should be noted.

India should take necessary steps to meet this eventuality.

Economists and political economy are yet to go deep into the present crisis. There are features different from the past, not yet negotiated with by economic theory e g. information. In that sense the present is also a crisis of political economy