THE CAPITALIST OFFENSIVE 1979-PRESENT
The limits of the external market had halted the post war recovery in the mid '70's just as it had halted capitalist development in the years before World War I. Once again, capitalist profits could grow only at the expense of workers and peasants incomes, and once again the world economy would be forced into a downwards spiral of contraction. But there was one large difference between the decades that led into the Great Depression and the economic contraction of the past twenty years. The earlier period was shaped by the rivalry and conflict among competing national capitals: the US., Great Britain, France, Germany, Japan and Italy. In the present period, all those capitals were absorbed into a single unified capitalist system, led by the United States . This meant that capital could exert a much greater degree of control over the process, averting the catastrophic deflation of the Depression. However, the underlying process remained the same-- a transfer of wealth from labor to capital, a contraction of production and a global rise of unemployment, a slow-motion Depression.
As we saw in Chapter 2, in this whole period of capitalist offensive, the employers' policies have been the same the world over--austerity to drive down workers and peasant incomes, restructuring to prevent runaway deflation of prices, and privatization to open new markets and to further austerity and restructuring. The preceding chapter explained the root cause of this offensive in the limits of the external market. But how did these policies develop in the history of the past two decades? The key issues of politics today and of labor's battles --incomes policies, trade, government deficits and taxation, international debt--have their origins in this most recent period. To understand these concrete issues and their connection to capital's basic policies, we have to look at how the capitalist offensive evolved.
STALEMATE IN THE 'SEVENTIES
The economic gains of the capitalists in the mid 1970's proved extremely short lived. After the initial oil shock and sharp recession, labor succeeded in winning back much of their lost wages, while the spread of the oil price rise through the economy, combined with the rapid increase in debt, reignited inflation. By 1978, inflation was again eating away at the value of capital and profits. The net profit rate, minus inflation, again sank into the negative range -- capital was shrinking, not accumulating : the total real value of world capital in 1978 was no higher than it had been in 1968.
Capital and labor were stalemated. Employers had failed to break working class resistance to wage cuts, while workers had failed to overthrow the capitalist stranglehold that was choking the economy. Capital, faced with negative profits, would not give up concessions without a political threat to its rule, and those concessions would be only temporary unless capital's political power was cut off. The traditional trade union leadership around the world, and their political allies, were entirely unwilling to battle capital politically and there was no real alternative leadership capable of doing so.
Yet capital could not yet overcome labor either. The employers' task was far easier -- to slash wages, not to change the way society is run. But this was only very partially accomplished, for in the years immediately after the oil shock in '74 and '75, political threats were still around. In 1975 came a near-socialist revolution in Portugal, the collapse of the US war effort in Vietnam, and an upsurge in political radicalism among US workers. Faced with these events, capitalist leaders and central bankers were reluctant to press too hard for wage concessions. Real interest rates (interest rates minus the rate of inflation) were kept near zero, allowing businesses to borrow sufficiently to cover wage costs. When the recession passed, business resistance was not enough to prevent a substantial recovery of wage losses.
So, by 1978, the economic crisis of world capital was entirely unresolved. World stock values in real terms were only half what they had been a decade earlier and debt burdens were rising. In the US, the share of total wealth held by the wealthiest half-percent of the population had fallen to around 14%, only about two thirds the share typical of the '50s and '60s.
Yet in the preceding five years, capital had made some significant political gains. A decade of heavy labor conflict had brought essentially nothing to the working class except defense of their existing wages. As after previous periods of prolonged labor unrest, fatigue was setting in, and disillusionment with the possibility of real improvement. Equally important, unemployment had climbed and remained generally high, especially in Europe, sapping the willingness of workers to fight. In the seven leading capitalist countries combined, unemployment in '78 was 50% higher than in '73 and was still rising.  The vast radicalization that had shaken world society in the late sixties and seventies had ebbed into sectarianism, weariness and apathy. And finally, the betrayals of the political parties that workers had trusted -- the Democrats under Carter in the US and the Social Democrats in England and Germany, had nourished a pervasive cynicism and demoralization among the working population. By the end of the decade, capitalist leaders could see that the upsurge begun in the sixties had spent itself and that it was time to prepare for a new and much more frontal assault on worker's wages.
CAPITAL'S Offensive begins
Once again, the assault began with a huge increase in the price of oil. This time, the move was much more nakedly economic, without the immediate cover of a Mid East war. In December 1978, OPEC, led by the oil-company owned Saudi giant Armaco, initiated a continuous round of price increases. Conveniently, the next month, the Shah of Iran was overthrown, and in the ensuing revolution, Iranian oil production dropped by 2 million barrels a day, tightening supplies and putting muscle behind the price increases. By the end of '79, oil prices had again more than doubled, taking another half trillion dollars out of the world's population's pockets.
In the US, real wages dropped 8% in two years. While the oil companies pointed to the wicked OPEC cartel (which they in fact dominated), most of the money being paid at the gas pump by millions of American workers never left the country. The cost of oil products increased by $300 billion a year (95 dollars), but the cost of imported oil increased by only $22 billion -- the rest of the increase went into oil company ledgers. Americans were paying nearly as much in the "oil tax" as they were in income taxes. 
The oil price rise, as in '74, triggered a severe global recession. But this was not to be a mere re-run. In the mid '70s, the price of oil had dropped in real dollars after '74 as demand dwindled and the oil companies struggled to cut production. In the fall of '80, such a scenario seemed to be repeating itself. An oil glut had developed and the OPEC nations were squabbling over which would cut production to maintain prices. Worse, the Iranians, whose production had dropped following the revolution, were threatening to increase their output to pre-79 levels, thus either collapsing the price of oil or forcing the Saudis and other into extremely deep cuts. According to the industry newsletter, Energy User News, and other sources, the oil companies, with the backing of the US government, and the OPEC countries agreed that the way out was war. Iraqi dictator Saddam Hussein was given American backing to attack Iran and to attempt to seize Iranian oil territories. On September 20, Iraq attacked Iran. A jubilant "senior US oil company executive" gloated to the New York Times on September 25, "If this fight is not over within a week and these guys go on hitting at oil facilities, you can kiss the glut good-bye." In the ensuing war, the oil production of both countries plummeted by over 4 million barrels a day, thus ensuring the maintenance of high oil prices. The combination of the oil price increase, rapid inflation and recession had ,by the end of '80, again chopped about 10% or $500 billion from worker and peasant incomes.
But unlike in '74, this was just the beginning. With the election in the US of Ronald Reagan, world capitalist leaders were undertaking a massive shift in strategy. They were moving to confront the working class. First, in a matter of a few months, the US Federal Reserve banks sent interest rates soaring. By mid '81, rates had climbed to nearly 20% . Real interest rates, over the rate of inflation, went from a negative 5% in mid- '80 to a plus 10% a year later, a mammoth swing of 16%.
A huge burden of debt was laid on the backs of all workers. In the US, for example, total net interest payments per capita, which had been rising during the sixties and seventies, doubled in two years, reaching nearly $2,000 annually, $6,000 per family (Fig. 7) The rise in interest rates drew vast sums out of the active economy into debt payments, resulting in a massive recession, by far the worst since the '30s. Unemployment topped 10% in the US for the first time in over 40 years. In Europe, the situation was the same.
High interest rates meant that companies could not easily cheaply borrow to cover wages, so employers greatly hardened their resistance to the wage increases needed to compensate for inflation. With labor weakened by mass unemployment, and demoralized by the late '70s standoff, capital attacked. The old, business- as-usual, way of dealing with trade unions would have to go and Reagan showed the new way, when he fired the striking PATCO air controllers months after taking office. This action, combined with labor's pitifully weak response to it, showed employers that the new way was back to the '20s -- instead of taking strikes, employers were now to break them with scabs, firing strikers in defiance of labor laws ("permanently replacing them" in the current euphemism) and breaking unions.
Wages in the US and Europe plummeted (see Figure 8). By '80 US wages had given up the full $150 billion of the oil price increase. Now the full $150 billion of interest, and then some, was taken from wages. Between 1978 and 1983, US per capita real wages had dropped by 21%. For an average family of four, annual income in real terms dropped from $43,000 to $34,000. This was a huge drop: by comparison per capita real wages in the Great Depression, from '29 to '33 dropped by only slightly more, 25%, and per hour real wages actually dropped less.  (Of course, the big difference with the Depression was that unemployment levels were twice as high in the '30's.) The greater part of the whole decline in workers' real wages over the past twenty years occurred in this short period. Much the same followed in Europe and Japan, although stiffer union resistance in West Europe made the wage cuts there smaller. In Europe, housing construction, already depressed from the levels of the sixties, dropped by another third, sliding to only about a third the construction rate of twenty years previous (Figure 9).
In the Third World, the capitalist offensive was even more severe. The underdeveloped nations saw their incomes collapse as the world recession slashed their exports. At the same time, their expenses rose as interest on their debt skyrocketed and their oil bills multiplied. Worst of all, the severity of the recession, enforced by high interest rates, led to a collapse of real non-oil raw materials prices, which by the beginning of '83 had fallen by 50%. Under the impact of rising expenses, falling exports and tumbling export prices, Third World economies crumbled. Per capita real gross domestic product and real wages both fell by about 40% by '85, causing widespread privation. Unable to pay the crippling debt service, Third World countries fell deeper into the clutches of the International Monetary Fund, which, in return for debt restructuring, began to dictate their internal economic policies, enforcing cuts in services and wages.
In the capitalist countries as a whole, the wages bill fell in real terms by about a quarter, and production tumbled. . Per capita steel production fell by 29% in four years.(see Fig.4) Some 1.5 trillion dollars had been taken from the incomes of the world's population and transferred directly to capitalist income , which by 1983 had climbed to a net profit of .9 trillion from a net loss in the late '70s of .6 trillion(Fig. 3). As in the mid '70s but on a large scale, an enormous chunk of wealth had been transferred from labor to capital. In the process, the economy had greatly contracted and an equal portion of wealth had simply been destroyed -- in idled or shut down capacity and in idled labor.
ARMS AND THE DEFICIT
Up to this point, events echoed the pattern of the capitalist crisis of fifty years earlier. War and radicalization in 60's and early seventies, as in the teens and early twenties, was followed by inflation ,a bout of high interest rates , rising unemployment and a collapse of raw commodity prices and wages in the late seventies and early eighties, as had happened in the late twenties and early thirties. But a Depression with general deflation of prices, mass bankruptcies and huge unemployment did not take place in the early eighties. For one thing, the trade wars of the 30's could not occur in the tightly integrated, US-run world economy of the eighties. But fundamentally, what prevented a Depression in the eighties was exactly what ended the Depression in the thirties: massive Government deficit spending and a huge armaments program. The deficits politicans are now fond of railing against originated as a vital and deliberate effort to preserve capital as the world economy contracted.
As Germany did in the '30's, the US and the West in the '80s initiated a gigantic arms build up. From '81 to '86 US defense spending soared by almost $90 billion in real terms, an increase of one third, and the rest of the capitalist countries followed suit, with total arms expenditures surpassing half a trillion a year. Nearly half the rise in defense spending was an increase in the purchase of armaments -- defense procurement rose by 70% in real terms. This huge arms build-up, larger than the combined costs in real dollars of the Korean and Vietnam Wars, restarted and for a time maintained industrial production and employment after the '79-'82 recession. In the declining capitalist economy of the '80s, with wages shrinking, it was impossible to expand or even maintain production of the goods that people needed --socially useful production. Producing more cars is impossible if workers have no money to buy them, but producing more arms is entirely possible. Rather than being items of worker's consumption, arms are part of capital's own consumption -- material goods -- or should we say "ills" --that capitalist governments can use.
Arms production sustained global demand for goods, avoiding any runaway glut and general price deflation. It generated a new area to invest profits ,newly wrung from labor. And it prevent unemployment from rising to Depression levels, for while capitalists appreciate the weakening of labor that came with unemployment, they knew from experience that there could be too much of a good thing--mass unemployment of 20 or 25% could breed radicalization. Indeed, the stabilization of employment and wages in the mid eighties ,so clearly linked to the arms build up helped a good deal to build a "conservative mood" in the US, and to a lesser extent in Europe.
But equally important, the armaments boom greatly expanded the deficits of , especially, the US government, but also the other advanced capitalist governments. Despite the periodic orgies of political anguish over the budget deficit, the huge Reagan deficits were vital to capital at the time. For although capital had succeeded in taking a huge chunk of wealth from labor, and holding on to it, this was not enough. --the new profit had to be reinvested and arms production itself was too small a field of action. . Financing the deficit was one very safe and profitable way of reinvestment.
This problem of new areas for investment is a crucial one for capitalism in decline: since new factories, new production cannot be profitably built when the global market is contracting, where can profit be invested? With interest rates at nearly 20%, the obvious answer was to invest new money in loan capital. But loans for what? The answer in the '70s had been Third World debt, recycling petrodollars through New York and London banks and loaning them to the Third World to pay for oil. And indeed, Third World debt had doubled in five years to $800 billion. Now, however, a further expansion of this debt was impossible. In the wake of the collapse of commodity prices and the sharp contraction in Third World economies, bankers were desperately fearful the existing debt wouldn't be repaid and stopped making new loans. In any case, the Third World could not absorb the almost one trillion dollars in net profits now being made annually. Some much bigger debtor was needed.
It was at this point that Ronald Reagan rode to the rescue. Two years after his election on a platform that pledged, among other things, the curbing of the Federal deficit, that deficit had more than doubled, leaping upwards to $310 billion annually. In tandem, the conservative governments of the other leading industrial nations also massively increased their government deficits, to a collective total of over $800 billion a year.  The financing of these deficits by '83 was absorbing about 90% of the net profit produced by the world economy.
About half the increase in the deficits came from defense spending, and the other half from the surge in the interest paid by the US and other governments on the existing debt. The Federal Reserve Board kept interest rates 5-6% above the rate of inflation, so rates in general were lofty and the rapid rise in the debt pushed total interest payments upwards , which by 1986 had climbed to $260 billion a year in the US alone. But, in addition, as short term rates declined in '85 and '86, the government deliberately shifted to borrowing more at long terms rates, which remained higher. This generous subsidy to the banks and large capitalists who hold the debt added some $80 billion to interest payments and thus to the deficit.
Since the bill for this whole enterprise was laid at the door of the taxpayers, capitalists themselves were loath to increase their share. "Reaganomics" ensured that didn't happen. The much vaunted tax cuts of the early eighties succeeded in reducing the actual tax rates of the wealthy alone --the percentage of gross income paid for the richest half percent of the population from 36% to 23% a drop of a third. But this loss of some $20 billion was compensated by a $20 billion increase in taxes on workers -- in the form of increases in the social security tax rate, which rose by more than a third.
So, by 1985, capitalists had made great gains. In the US, real wages had declined by $260 billion while net real profits had increased by $300 billion. Of that $130 billion was the increase in Federal interest payments, $100 billion was increased profit on defense spending, and $70 billion was increases in other interest -- from consumers and business. Unlike the ephemeral transfer of the mid-seventies, this transfer was to hold up for the entire decade. In addition, through the arms build up and the huge deficits, runaway deflation and Depression had been avoided and new fields of investment opened up. Capital was ready to party.
1985-89: SPECULATIVE BOOM -- FOR CAPITALISTS ONLY
In November, 1985, oil prices, then near $30 a barrel, broke. Within six months, oil prices had collapsed by two thirds, to $10 a barrel. After six years of global economic contraction and sharp declines in oil consumption, the international oil cartel, led by the US oil companies, could no longer artificially maintain prices, despite the ongoing Iran-Iraq war. While the oil companies passed through only a small fraction of this drop to final consumers at retail, the sharp drop in prices of imported crude relieved pressure on most Third World countries, and set the stage for a modest recovery from the deepest economic slump since the Depression.
The benefits from this recovery accrued entirely to the capitalists, not at all to workers and peasants. As oil prices fell, stock markets around the world started to soar. Why was this so, considering that the oil price collapse could be expected to slash the fat profits gained by the increases of '79-'80? In the first place, while retail fuel prices in the advanced countries had risen more than crude prices in the early '80s, nearly doubling, they fell far less, in fact barely at all, in the mid '80s. Only where crude producers sold to state-owned distributors was money actually lost to the oil companies.
Second, by 1985, the shift, begun in the seventies, of capitalist income to interest on loans had been completed. In the US, the portion of total capitalist income represented by interest went from 43% in '78 to 69% in '83. From then on, interest on debt was the overwhelmingly most important segment of capitalist income, and the central interest of world capital became the maintenance and expansion of that debt. Falling oil prices meant a drop in inflation, and thus a rise in the real, after inflation, income from existing loans. So, capitalist real income would increase. And, indeed the US Federal Reserve and the other central banks ensured, through their control over interest rates, that real rates (subtracting inflation) remained high. During '86 the inflation rate dropped from 4% to 1% a year, while interest rates dropped only from 8% to 7%.
In addition, as inflation dropped, and interest rates dropped as well, although more slowly, the value of existing loans and stocks would rise. Thus a bond earning, say 10%, would double in price if interest rates dropped to 5%, since it would take two new bonds to equal the income from one old bond.
The fall in interest rates and the rise in real capitalist income started a speculative boom in stocks. But the boom was greatly accelerated by another factor. With the fall in oil prices, production gradually recovered as consumers, especially in the Third World had more money to spend. In the advanced countries, production, especially for export, picked up, as did employment. And with more employed wage earners, tax receipts increased, dropping the governmental deficits in the US and elsewhere. In the US deficits fell by nearly $100 billion. Now, this deficit had been the main vehicle of capitalist investments, so with the drop in the deficit, the hundreds of billions rolling in from existing loans had to seek some new field of investment. Since capitalists were intent in keeping wages down, new product investments, which would eventually lead to higher sales to workers, were out. But with the stock market taking off in '86 -- stocks were an obvious "safe" investment.
So, in '87 and '88, as the deficit dropped, hundreds of billions started to pour into the stock market. This took the form of an orgy of mergers and acquisitions -- companies buying up other companies. Such mergers soared from an already hefty $250 billion in 1984 to $440 billion in the peak year of 1988. Between the federal deficit and mergers and acquisitions some 80% of the gross capitalist income in the US was absorbed.
This huge flow of money, and the similarly sized flows in the other developed countries, was pure speculation, money lost to the real economy. Instead of being available for investment in new factories, this money just disappeared in the black hole of the stock market. For those who were on the receiving end of the money just turned around and reinvested their loot in the market again. Nor were the capitalists satisfied with merely investing what profits they had. To increase their speculative gains, they borrowed still huger sums at high interest rates through the explosion of risky "junk bonds" -- unsecured loans made by savings and loans, banks, and pension funds.
Fed on this rich diet of speculative money, the stock markets of the world grew wildly. More than doubling in real, uninflated value in just four years -- from '85 to '89. As stock prices rose, more money was pulled in, to share in the certain gains. A classic speculative bubble developed. Even the US stock collapse in '87, when stock lost a quarter of their value in a day, did not slow the speculative binge.
Nor was speculation limited to the stock market. Real estate too, in all the advanced countries, but particularly in Japan, became another avenue of speculation as land values soared. And of course, all this speculation was fed not only by capitalist profits and interest on loans, but by vast amounts of new borrowing. In the same four years that global stock prices rose by a staggering 8 trillion dollars, total debt rose by another 9 trillion. By '89 the real value of world capital had doubled to 40 trillion dollars -- $40,000 for every family on earth. Of this, nearly two thirds was debt.
This was an expansion of purely fictitious, speculative capital, bearing no relation to the real world of productive capital -- plant and equipment. In 1980, there was about $40,000 of capital for every ton of steel produced, in 1989, there was $80,000. (Figs. 4 and 5) Steel production had stagnated absolutely and in per capita terms fallen by 20% (30% since the peak in the seventies), and yet the capital based on this and other manufacturing production had doubled. Similarly, in 1980, total world capital was about four years worth of income for the entire world working population. By '89 capital was eight years' income for the world's workers. Each and every working class family or peasant or small business had hanging over it a burden of debt and stock equal to eight times its annual after-tax income.
This shift from real production to speculation , was reflected in the shifting allocation of labor.. Jobs that produced real increases in wealth -- goods producing jobs in manufacturing, mining and construction, dropped as a percentage of all jobs. In the US for example, goods-producing jobs plus essential services such as transportation and utilities dropped from 34% of all jobs in 1980 to 28% in 1990, a fall of 18%.  This was not, coincidentally, about equal to the fall in real wages per capita. With productivity nearly stagnant, fewer workers mining and transporting goods meant lower consumption. In contrast, service jobs rose from 20% to 27% of the total. While some of this increase occurred in necessary services, such as health and education, the largest fraction was in services to business -- finance, advertising and the like that produced no real wealth at all. Thus a larger and larger fraction of the workforce was engaged in wholly parasitic activities which wasted their potential productivity. And a significant part of goods-producing activity flowed to the useless defense sector.
Even from a narrow capitalist standpoint this boom was mostly fiction. In theory, the value of capital should rise only as profit and interest are added to it. Yet in the four years that saw capital increase by $17 trillion, gross capitalist income was only $10 trillion and net income, after deducting inflation, was a "mere" $3 trillion. Nearly all the gains made by capital in the Reagan speculative boom years was fictitious -- supported by the belief that values would rise--and thus was entirely vulnerable to a classic bubble burst --a crash.
The net result of this speculative boom was a massive increase in the income and wealth of the wealthiest. In the US, for example, the share of total net assets, total wealth, held by the wealthiest half percent of American families, went from 14% in 1976 to 37% by 1989.  Nearly a quarter of the wealth of the nation had been transferred from the 99.5% to the .5% in a decade of unbridled greed. The real after tax incomes of those earning more than $200,000 a year (in 95 dollars) quadrupled from $100 billion in 1979 to nearly $400 billion in 1989. As a share of total income this top layer went from 3.5% to 11%. In part this was because the number of the wealthy had expanded -- from .4% to .7% of the population. But mainly it was because each one had more than doubled their real incomes -- while the incomes of everyone else was falling.
The executives that ran the corporations redirected more of the total income directly into their own pockets as salaries. At the end of the '70s managerial salaries were only 13% of workers' -- non supervisory-- wages, but by the end of the '80s they amounted to 36%, even though, of course, the numbers of managers and supervisors were small compared with the number of workers. The sum of gross capitalist profits and managers' income (total income of capital and management) went from 90% of workers wages (all after tax) in '78 to 135% in '89. Put another way, the split between capital and labor went from 55-45 in favor of labor in 1973 to 50-50 in 1978 to nearly 60-40 in favor of capital by 1989.  Since the total wealth generated, on a per hour of labor basis, remained constant over the decade in real terms, the whole of the loss in workers wages went into the pockets of the capitalists.
The situation is summarized in Fig. 10. Up until 1973, the per hour total income rose and so both capitalist and labor income could rise simultaneously. But after 1973, the total remained stagnant-- a gain for capital could only mean a loss to labor and capital's share rose greatly from then on. This graph is by itself a simple argument against any notion of labor-management cooperation or commonalty of interests. Today, labor must lose for capital to grow and vice versa.
The same story was repeated on a global scale. By 1989, gross capital income from profits and interest amounted to over $2.2 trillion a year of which interest alone amounted to $1.5 trillion a year. This represented 46%, nearly half, of the total income of the worlds' workers and peasants. not even counting the probably equal additional sums paid to managers as salaries. And, since production globally was actually contracting, all of this vast sum was being poured into useless speculation.
KEEPING WAGES DOWN: AUSTERITY AND TRADE
To maintain their newly increased share of wealth, capitalists needed to hold wages down. In the first years of the decade, rapid inflation had eaten wages up, and then unemployment, together with a ferocious antiunion offensive, kept them falling. But with a limited recovery under way, unemployment started to fall. To be sure the recovery was mild, and much of the new employment most of it contributing to the arms industry, added nothing to real social wealth. But, in general, rising employment would strengthen unions and increase wages. Indeed, in Europe, strike waves in the mid 80's prevented further wage cuts and even regained some ground.
To prevent this, capitalists developed the basic strategies of austerity,( the first of the three capitalist Horsemen of the Apocalypse.) that were described in Chapter 2.. The most important was a coordinated global shift of manufacturing to lower wage areas. The immediate effect of this strategy was to increase exports from the low wage developing countries to the higher wage regions of Japan, West Europe and the US. From 1980 to 1985, the non-OPEC developing countries shifted from net importers of about $100 billion a year to almost exact trade balance. In other words, another $100 billion in imports was flowing on net to the advanced countries goods, that had formerly been produced in the advanced countries themselves.
Their heavy burden of debt and the heavy hand of the IMF motivated the developing countries to greatly increase their exports. After the Third World debt crisis of 1982, when poor nations, faced with staggering oil bills and falling commodity prices could barely meet debt payments, lending to these nations dropped while debt repayments rose, reversing the flow of capital and squeezing out an additional $90 billion a year in cash flowing to advanced world creditors.. To raise this money, Third World countries had to increase exports and cut imports. Under IMF austerity plans, they slashed internal consumption and investment, lowering minimum wages, slashing domestic spending on health and education. This "freed up" commodities for export and cut the demand for imports.
But the push to expand exporters from the low wage areas had to be matched by a "pull" to expand imports to high wage areas. As US defense production expanded, resources were shifted from the civilian economy to the far more profitable military one. Since it was impossible to expand production profitably, consumer goods production formerly met by US industries went unmet. This, combined with the deliberate policy of increasing the value of the dollar in the early eighties, produced a giant suction on the rest of the world economy. US industries chose to deliberately import from abroad rather than producing for consumption at home. The result was the generation of a large trade deficit for the United States.
From 1980 to 1985, US defense spending rose by $100 billion, and during that same period the trade deficit rose by $130 billion. The vast majority of the trade deficit was a direct results of the shift to defense production by US firms. As discussed in earlier chapters, the idea that US firms are the unwilling victims of vicious foreign competitors is so much baloney. In fact, US firms enthusiastically shifted production abroad or invested in foreign firms, or set up joint ventures, especially with the Japanese.
The net result was a global shift in trade. The main US deficit was with Japan, which shifted part of its production to the US import market. In turn, Japan, and to a lesser extent West Europe, started to import more goods from the low wage developing countries, in part to make up for what was being shipped to the US. In addition, about a third of the US deficit came from a direct increase in exports from the developing countries (which by this time were no longer developing at all, but rather regressing!) to the US.
The US paid for this flow of goods from the rest of the world with IOU's. By the end of the '80s the United States foreign debt amounted to nearly a trillion dollars, mainly in the form of obligations of the Federal government. Foreign capitalists thus shared in the abundant interest payments that the Federal government was showering on domestic capital.
The flow of goods from the rest of the world to the United States was disastrous all around for the world's working people. For those in the Third World, the new trade relations amounted to a reinstitution of imperial tribute. In the real world of goods, the flow was now from the poor countries to the richer ones. The hundreds of billions of dollars of US bonds given in payment for these goods benefited only the extremely wealthy individuals and corporations, not a bit those who had produced the goods.
But in the US and the advance countries, the new trade relations had bad effects as well. Goods formerly made in the US, Europe and Japan, especially consumer goods like clothing, were now made in the Third World, leading to plant closings and higher unemployment. At the same time the "pressure of foreign competition", backed up by the threat and reality of plant closings, was liberally used a club to drive down and keep down wages. A global whipsawing of workers in one country against those with lower wages somewhere else had begun. Austerity in the Third World fed austerity in the advanced countries , maintaining and enlarging the shift of wealth to capital.
THE BUBBLE DEFLATES -- THE '90s RECESSION
By the end of the '80s, capitalism seemed to be riding high with stocks booming, and the capitalists wealthier than ever before. But this apparent success was shallowly rooted. The explosive growth of capital was wholly based on a speculative bubble while the real economy continued to stagnate and decline. The underlying problem of realization of the surplus -- the limits on the world market -- was completely unresolved.
Capital has value to its holders only to the extent it earns profits. So to support the bloated value of capital, profits too had to rise rapidly. Indeed, spurred in part by speculative gains, gross profits rose by over 70% during the boom of the eighties. But with capital growth by as much, the rate of profit -- the crucial number for capital -- stayed the same at 5.5% a year. Capitalists had to run faster just to stay in the same place.
But what was worse, the crisis of realization, of the external market, had not gone away. Already by the mid eighties, net profits, after deducting inflation, were again topping the total fund for realization --sales to non capitalist producers, which barely increased over the entire decade. The net profit rate had shifted from a -2% in 1980 to a +3% in '82, a shift of a trillion dollars a year, but it could rise no further. As gross profits, buoyed by speculation continued to rise, inflation inevitably ate them away, reducing them to below the total available for realization.(fig.3) Inflation uncovered the unreality of the boom's fictitious profits and capital. So, net profits peaked in 86 at $1.1 trillion a year and began to decline, and the net rate of profit dropped still faster reaching a pitiful .8% per year by '89.(Fig.1) More capital was chasing after the same fixed amount of profit, leading to the decline in the rate of profit.
The fall in the rate of profit made capitalists far more sensitive to inflation than they had been in the seventies or early eighties. With the gross rate of profit at only 5%, a 6% rate of inflation would mean a net loss in the real value of capital. Yet by 89 inflation globally was perking along at just about 5% and real profits had all but disappeared. Despite the enormous and sustained shift of wealth and income from labor to capital, profit, the life blood of capitalism was again drying up.
In essence, the process here is simple. For capital to exist, it needs a steadily expanding stream of profit, just to maintain a constant rate of profit. With the speculative bloating of capital in the eighties, still more profit was needed. But the realization problem strictly limited the amount of profit that could actually be made. So, since capitalists cannot expand profit by selling more, they seek to expand profit by cutting their costs -- in other words, cutting wages. But this ends up cutting the market, reducing profit and leading to a new round wage cuts. From 1979 to 1989 capital had gone through one entire cycle -- it was time for another round of wage cuts.
To address this problem, the world central banks, led by the US Federal Reserve, once more jacked up interest rates. In fact, the Federal Reserve had begun increasing interest rates in '87, precipitating the sharp market crash of that year. By '89, with short term interest rates back up at 7%, net interest payments had soared up 30% in three years and were draining more and more money out of the economy. At the same time, real incomes in the US and elsewhere, which had temporarily stabilized in the mid '80s again started to drop. Purchasing slowed and a new recession began.
The recession was the deliberate route to transferring money from workers' wages to bondholders interest: unemployment soared -- to well above 10% in Europe -- and wages dropped. By 1991, real wages had dropped another 5% worldwide.
The increase in interest rates temporarily propped up capitalist incomes, and , as in the early '80s, forced debt-burdened corporations to take a hard line on workers wages. However, it is true for capitalism, as for other historical processes, that you cannot pull the same trick twice and expect the same results. The very success of capital in the '80's of generating a mass of speculative capital made it impossible for them to again send interest rates into the stratosphere. Even the more modest interest rate cuts of the 90's created dire threats to this capital.
Inevitably, high interest rates started to sap the speculative bubbles in stocks and real estate. Capitalists started shifting money out of these speculative markets into the certain high yields of government bonds. In 1989, the Japanese stock market, the most bloated by speculation, collapsed, losing half its value. This time, unlike in '87, it stayed down. Some two trillion dollars in capital was wiped out. In the US, the real estate market suffered a similar, but less drastic meltdown. Now, suddenly banks and especially savings and loans found themselves with hundreds of billions of dollars in loans to owners of empty, half build office buildings and shopping malls.
In addition, short term rates had risen far faster than long term rates, so that the subsidy paid by the Federal government to the banking system -- lending them money at low rates and borrowing back at higher ones -- dropped. From '85 to '87 this subsidy had been running around $40 billion a year, but by '89 it had dropped to $12 billion.
Beginning already in '88, the US savings and loan sector, with billions of dollars of bad loans on its hands and profits on government bonds down, buckled. By '89, the S and Ls were essentially bankrupt as a group. Indeed, the entire private financial sector in the US was in feeble shape, with assets exceeding liabilities by a bare 2.9%.
To avert a financial crisis and the destruction of capitals, the Bush administration and the US congress quickly designed a rescue -- the savings and loans bailout. This funneled taxpayer money into the S and Ls -- bankrupt institutions were taken over, their bad loans reimbursed with Federal funds, and the new sound institution turned back to the private sector for peanuts. The Republican stalwarts of free enterprise and shrinking government engineered the largest government subsidy to private industry in history. By 1992, over $200 billion dollars had been pumped into this scheme. Naturally, all this money was borrowed, sending the deficit soaring again and providing needed investment avenues for capital.
By itself, however, the S and L bailout just wiped out losses that capitalists would have otherwise sustained. The financial sector, burdened with trillions in speculative loans remained shaky. The stock markets were no longer booming. Indeed in real terms, the value global capital was again stagnating. To prop up the US banking industry, still more direct governmental subsidies were needed. The gap between short term rates that the government lent money to the banks and the long term rates it borrowed at, had to be again opened up. Under this pressure, the Federal reserve rapidly dropped its discount rate from 7% in mid 91 to only 3% a year later.
Now the government was borrowing money at twice the interest rate it was lending it. The annual subsidy to the banks widened from $23 billion in 1990, to $119 billion in '93. By 1992, total subsidies and bailouts totaled more than $560 billion, a sum equal to the total capital (assets minus liabilities) of the private financial sector. In effect, every penny of the financial sectors' net capitals had been directly contributed by the Federal government -- a fine example of free enterprise!
High interest rates, the high level of debt and the contracting global market threatened not only deflation of financial values, but a general price deflation of all goods. While capital, dependent on the value of its huge loans, could not endure much inflation that devalued those loans, it could not endure much deflation either. In an actually competitive world market, a decline in the size of the market during a recession would tend to lead to a fall in prices, as companies fought for market share by cutting prices. Deflation of raw materials prices , which had already occurred ,affected mainly Third World nations, But deflation of manufactured goods prices was another matter. Such price cuts would rapidly erode profit margins and endanger corporate debt payments, leading, as in the 30's to a wave of bankruptcies. This would prove an even more deadly threat to the value of loans than inflation, since defaulted debts are generally worthless.
Here was the origin of the second capitalist Horseman of Apocalypse, restructuring. To prevent a devastating deflationary fall in prices, capitalists from all the major countries had to collaborate to cut production and productive capacity in a planned way to maintain prices, and thus profits. This was particularly the case for primary producers such as steel. While bemoaning to their workers the threat of "international competition" the same industrialists were sitting down with that competition to carve up market share and reduce production in gigantic international cartels.
As was described in Chapter 2, the European Union systematically imposed agreements on all the European countries that would shut down steel mills and reduce global production to maintain prices. Similar cartels were set up for aluminum, again functioning at an official, governmental level. In all cases, of course, the heaviest burden of plant closing generally was put on the "highest cost" producers -- those in countries with the highest wages. Prices were maintained while costs -- wages -- were reduced.
At times, more ruthless methods were used to support prices. When overproduction by Iraq threatened to bring about a collapse in oil prices, the United States maneuvered the easily manipulable Saddam Hussein into an attack on Kuwait, stating formally through its ambassador that "broader disputes" should be settled locally. When Hussein fell into this trap, the US launched the Gulf War and the still existing embargo, which effectively shut down Iraq's production capacity, making it easier for OPEC and other oil producers to cut production and maintain oil prices.
Increasingly, world capital was walking a tightrope: even a little inflation would wipe out profits, and even a little deflation would threaten world bankruptcy. The range of price fluctuations had to be made narrower and narrower.
NEW MARKETS, PRIVATIZATION AND THE COLLAPSE OF COMMUNISM
None of this maneuvering, however, addressed the underlying problem -- the limits of the external market. The speculation and arms boom of the '80s had ended, and governmental subsidies could only temporarily paper over the continued contraction of the market and the limits on profits. New markets were essential, new sources of real profit to prop up the speculative gains of the previous decade.
The problem was somewhat analogous to the problem facing Nazi Germany at the the end of the 30's. Rearmament had stabilized the economy and built up speculative capital. But to back this capital up, real external wealth must be gained. In that case, this was by war, invasions that swallowed up entire nations' productive resources.
During the '80s the only field of wealth external to US-led capitalism was the Communist countries--Eastern Europe, the USSR and China--actually state owned, bureaucratically ruled economies. And for a time it seemed that war might be the outcome of the tremendous arms build up under Reagan. However, victory in such a nuclear war was never possible, and ,in the event, war turned out to be unnecessary. And, not only could capital set its sights on state owned property in the East, but it could absorb sate owned factories in the Third World and with the advanced industrial nations as well.
Beginning in the late '80s and accelerating through the recession, capital launched on a huge campaign of privatization, to convert markets formerly held by state owned companies to markets for private capital. Like a creditor foreclosing on a factory, international creditors, holding billions in uncollectible debts, forced Third World countries to sell off state owned factories, generally for fraction of their real value, in return for debt reduction. In the industrialized nations, too, conservative governments like Thatcher in England began to sell off state owned industries like steel, again with the rationale, or excuse of using the proceeds to reduce debt. In the US, with no state owned industries to privatize, sate run services were turned over to private contractors.
These privatizations had two main effects. First they transferred a sector of the world market that had been supplied by non-profit, state owned entities to that supplied by capitalist enterprises. To the extent that part of this world market consisted of non-capitalist petty producers, peasants, this opened up new external markets for capital. Autos that had previously been sold by sate owned firms in Mexico, or in Britain, to Mexicans, in exchange for agricultural products from Mexican peasants were now sold by capitalist auto companies. In addition as was pointed out in Chapter 2 privatization made easier the imposition of austerity, since, as workers were shifted to the private sector, including workers in traditional governmental services like transportation and education, wages and working conditions were generally slashed to "free" money for profits. Restructuring was also aided, for privatizations led to drops in production, making it easier to maintain world prices and profit levels.
Privatization in the industrial countries and the third world helped to stabilize capitalist values from the late '80's on by transferring real productive wealth to capital and by slightly expanding the external market. Inevitably, given the fact that the overwhelming majority of production in the capitalist world was already private, there were relatively limited gains.
But in one part of the world, there was the possibility that privatization could open up huge new markets. That was in the Communist nations that at the end of the '80s had about one third of the world's population, 40% of industrial production and a fifth of GNP. Their economies were, collectively, about twice the size of the entire Third World. Yet their trade with the advanced capitalist countries was only 30% that of the Third World countries. While their bureaucratic regimes were no where near "socialist", they did in fact protect the populations of these countries from the ravages of the world market, as the events of the next few years would prove.
Opening up the markets of the East bloc to capitalist trade would potentially mean almost doubling the fund for realization, since, like the peasants, the state-run enterprises of the east were non-capitalist producers. If the East bloc countries devoted a similar percentage of their total economies to imports from the advanced capitalist countries as did the Third World countries (about a sixth), advanced country exports would more than double. But there was a major problem. To pay for these three quarters of a trillion dollars of imports, roughly ten times their current levels, Communist countries would have to export three quarters of a trillion dollars in goods to the West. And that would mean diverting goods, mainly raw materials, that were essential for domestic consumption.
During the '70s and '80s this was precisely the barrier that prevented any real expansion of exports to the East bloc. Without slashing domestic production and diverting resources to exports, those regimes could not substantially increase imports. Indeed, by the end of the '80 exports to the West had dropped to $80 billion from $110 billion in 1980.
The only solution for the West was the destruction of the centrally planned economies, the elimination of government control over trade and a gigantic drop in the standard of living in the East Bloc countries. Such a drop would produce the needed surplus for export to pay for expanded imports. In addition, the whole state sector that supplied domestic needs would have to be destroyed to make open a market for Western imports. In short, a restoration of capitalism would be needed.
This turned out not to require a world war. The bureaucratic caste that ran the so-called "socialist" states had long been itching to become the real owners of the factories, not just the managers. As we'll see in later chapters, the collapse of Communism in 1989-92 was not an overthrow of the existing rulers, but a transformation of those rulers from managers into a capitalist class.
In East Europe, the restoration was partially prepared by the flow of loans to the region during the '70's . Poland and Hungary in particular used these loans for purchase of Western gods to try to diffuse growing working class opposition to the bureaucratic rule. But ,just as with Third World debtors, with the shift in economic climate in the '80s, loans dried up and demands ofr repayment necessitate internal austerity. In Poland attempts to impose such austerity through price increases led directly to the strikes in '80 and the formation of Solidarity. Later attempts to again turn the screw to liberate money for debt payments and increase exports helped to undermine Communist rule in the late 80's.
But equally important, the Eastern European ruling bureaucracies, like those in China and the Soviet Union,( where there was no significant debt), were moving towards a restoration of capitalism, with the bureaucracy becoming the junior partners of Western capitalists. The collapse of the Communist regimes in Eastern Europe and the Soviet Union, was so swift, and ,except in Romania ,so bloodless because much of the bureaucracy itself favored junking the state owned economies. In the process, the bureaucrats at the head of the Communist states were only too willing to eliminate central planning, free prices, and privatize industry, in accord with the proposals of the IMF. Even in China, where Communist rule continues, internal change has opened much of the economy up to capital.
The results for the working people of the former Soviet Union and Eastern Europe were catastrophic. Living standards fell by 50%, unemployment soared to 15% and more, public services, especially health, collapsed and the death rate rose by nearly 50% in Russia and Ukraine. The overall loss in real incomes probably exceeded two trillion dollars a year. But for Western capital, the collapse opened the East Bloc for large scale looting. As Germany did during World War II, the West, victorious in the Cold War, began buying up factories in Eastern Europe for practically nothing, transferring significant amounts of real, productive wealth to Western corporate ownership. Equally, the labor for such plants also came nearly free of charge. Real wages had been slashed, and money wages after massive devaluation of Eastern currency, were next to nothing--50 cents hour in Poland, even lower elsewhere. New markets opened up, as Moscow stores filled with Western-made clothes, and Western-grown food and Shanghai stores sold Japanese-made electronics.
But there are severe limits to the gains thatcapital has so far made from the collapse in the East. In no country has the bulk of industry been transferred wholesale to Western capital, as much of conquered nations industries were absorbed by Nazi Germany in the World War. In Russia, and the former Soviet Union generally, where there had been wholesale privatization of basic industry, the loot-- huge industrial plants-- has been pocketed by the Russian nomenklatura themselves, working , to be sure, in cooperation with the West, but not relinquishing ownership to Western corporations. In Eastern Europe, where most privatized companies have been sold to Western multinationals, growing working class opposition has prevented the privatization of key sectors. In China, privatization is as yet small scale, and new Western factories are being established primarily with imported new equipment, not factories looted from the state.
Nor is the exploitation of labor occurring on anything like the scale of Germany's salve labor camps, or even American exploitation of greatly underpaid European labor after the end of World War II. Despite the wage slashing and devaluations, labor movements from Poland to China are beginning to sharply restrict the further fall in workers' incomes, and thus the profits to be made in the East.
Even the penetration of new markets, so critical to expanding capital accumulation, has been limited. While consumer exports to the East has risen, exports of capital goods has plummeted. Indeed, in the former Soviet Union overall trade with the West is smaller than before the collapse and in East Europe only modestly larger. Only in China over the last five years, has trade expanded rapidly, and part of this is not true sales to an internal Chinese market, but imports of materials to be processed for re-export to the West.
These limitations are rooted in some fundamental realties. First, while defeated in the Cold War, the former Communist countries ,and China were not actually conquered. The working classes of these nations, although severely shaken by the rapid convulsions, retain great capacity for resistance, and the nomenklatura has its own budding capitalist interests which at times conflict with those of the West. In addition,, the destruction of the East Bloc economies has vastly decreased the potential for expanded trade. In real terms, these economies contracted in a few years by 50%. In monetary terms, huge devaluations, intended to make purchase of privatized industries cheaper, shank them still further, so that in capitalist terms they were, by '93, barely a third their former size. This meant that even if trade could grow to the same relative size as in the Third World countries, the global fund for realization would expand by at most 20%. In addition, the mass privatization of companies, while presenting Western capitalists with a one-time windfall, drastically contracted further the potential external market. For as the firms were privatized, they no longer were an external market for capitalism, they became new centers competing for the available profits. Only the agricultural sectors remained as a potential market.
The very process of capitalist restoration was so wasteful ,involving such large scale criminality, that trade could scarcely expand at all, especially during a period when the Western economies were themselves shrinking. For Western capitalists, the main effects were simply to again cut wages, as some production was shifted from the West to low wage factories in East Europe and China, with the products exported back to the West. The potential markets and profits in the East remain disappointingly small for capital.
THE UNRESOLVED CRISIS
The capitalist policies of austerity restructuring and privatization have over the past two decades vastly burdened the world's workers, but they have utterly failed to resolve the crisis facing world capital. The basic underlying problem of realization has not been solved -- now that capitalism has absorbed the entire world, the external market of agricultural petty producers remains fixed. The privatizations of the '80's, the penetration into the formerly Communist nations, has only marginally increased the fund available for accumulation. On a per capita basis, sales to the external market have only matched the level first reached in the mid '70's. Net profit remains limited by this fund , as figure 3 shows. Indeed, in real terms net profit today is no higher, despite all the wage cuts and privatizations, than thirty years ago. While renewed speculation in the world stock markets has lifted capital values, the net rate of profit has again begun to decline(fig. 1) and hovers around a sickly 2%. Like the Red Queen in Through the Looking Glass , capitalism has to run faster and faster to stay in the same place or even to go slowly backwards.
Capitalist policies cannot resolve this crisis because they cannot cure the underlying limit of the external market. Even the full integration of the former Communist countries cannot apply more than a bandaid to this fatal wound. Increasing China's trade to the same proportional level as the Third World, requiring a five fold increase, would increase the overall external market by less than 7%. The export of half of Russia's entire oil output would increase the funds available by only 3%.
Given the impossibility, for the last twenty years of increasing the size of the market, capitalist profit can only come, as it has, from the continual decrease in the incomes of working people. Capital, in order to grow, must have an increasing flow of profit. And with a fixed market, this means an ever decreasing level of wages. But once this process is set in motion, the decrease in wages and peasant income shrinks the overall size of the world economy, reducing the market and cutting the profits that can be earned. Thus even a fixed level of profits requires an ever shrinking share to workers wages and peasant income. For capital to accumulate, wages must shrink ever faster.
We have seen this transfer of wealth from wages to capital played out over the last twenty years. In 1973, for every 1,000 dollars an average workers or peasant earned capital was losing, on net $120. Today, the average worker or peasant is earning $740 and capital is gaining $150. About a quarter of workers' incomes has been transferred to capital, on a global scale a transfer of over two trillion dollars a year.
Further transfers of wealth from labor to capital, further declines in the standard of living are inevitable so long as capitalist power continues Look again at Fig. 10. In the past 20 years, capital's share of wealth had grown by nearly a third to 60% of the total, while labor share had shrunk by nearly a quarter. But as capital's share grows, greater drops in wages are needed for the same increase in capitalist income. A continuation of the same trends over the next 20 years would lead to a 75% share of capital, and a 40% fall in real wages. Those born today will be getting less than half the pay of their grandparents' generation.
The current level of production is, by itself, insufficient to even maintain the present population at the existing standard of living. The evidence for this is the sharp declines in the birth rate throughout the advanced countries. Population is already declining absolutely in central and Eastern Europe and throughout the former USSR. In every other advanced country, the average number of children per family is less than two, meaning that, in the long run, population declines are inevitable.
On this road there is no exit. As this book is being written, the US Government is paralyzed by a political circus ostensibly aimed at eliminating the budget deficit, at the same time European governments are insisting that they too must cut their deficits. We have seen that capitalist actually have very little interest in cutting the deficit, which to them is a source of immense easy profits. Rather, as many commentators have stated, the deficit reduction charade is merely a cover for further rounds of austerity--the cutting of working class pension and health benefits, reductions in unemployment compensation and welfare, and further reduction of taxes of corporate and wealthy individual capitalists. In other words, another round of transferring wealth from labor to capital.
There is every reason to believe that as the process continues it will accelerate, as the basic services supporting the population --such as health and education-- break down and the population starts to fall. In the poorest parts of the world, such as Africa, the collapse of initially abysmal living conditions will pave the way for epidemics that will make AIDs seem mild. The three capitalist Horsemen of the Apocalypse will be joined by the fouth rider-Death. As with Roman society, which destroyed itself to feed the unlimited greed of ancient capitalists, the future of capitalism leads on its present path only to the collapse of civilization and a new dark age: as Rosa Luxembourg wrote, "devastation, degeneration, depopulation, a vast cemetery".
IS THERE AN ALTERNATIVE?
Capitalist policies yield no solution for the world's working people. But is there any alternative? This is the crucial question, for if there is no alternative, there can be no effective way of fighting the onslaught of capital. In fact, there clearly are alternatives. Capitalism's future need not be humanity's future. There is no natural disaster that prevents the working people of the world from again building and producing, from increasing their standard of living. Rather, it is exclusively capital's dead claims on humanity that create the current disaster. If those claims are lifted, and if the direction of the economy is taken from the hands of the capitalists, then the human and material resources that exist can again be directed toward fulfilling human needs.
For the global economy to again provide an increasing standard of living for the world's workers, the transfer of wealth from labor to capital , and the policies of austerity, restructuring and privatization used to accomplish this transfer, must be reversed. The 1.5 trillion dollars a year taken from labor must , as a first step, be returned to labor. This means reversing the policies of austerity by globally increasing wages, reducing working hours and increasing vital social services like health and education. The money for this must come from capitalist income, income that is now wasted in the sinkhole of speculation.
The key to reversing austerity is to take resources now squandered by capital and to redirect them to production. Clearly the most massive waste is incurred by the more than 25 trillion dollars in global debt, five times the annual income of the entire world workforce, and the nearly 1.5 trillion dollars in interest on this debt. This $1.5 trillion in interest is diverted from worker and peasant incomes and flows not into production but into speculation. In the real world, the direct impact of this interest is the more than 20% of world industrial capacity that lies idle and the hundreds of millions of unemployed. Since workers are not being paid this money in wages, they cannot spend it on goods, and these goods are therefore not produced.
So the first and most fundamental step in solving the economic crisis is to wipe out this paper noose, this one and half trillion in interest and at the same time raise workers wages and standards of living back up to the level achieved in the 1970's. A 1.5 trillion dollar raise in wages and peasant incomes, combined with a similar cut in interest payment would not be inflationary -- it would create no new money. But it would create a 30% increase in world wide demand for goods. And this monetary demand could be met merely by mobilizing the idle plant and equipment now existing and the workers now unemployed. The restructuring plans that systematically close and destroy manufacturing capacity would automatically be replaced with a burgeoning demand that would reopen factories and mobilize tens of millions of workers.
By itself, the elimination of the giant debt overhang would just return the world economy to the situation of twenty years ago. It would stop and reverse the decline of living standards, but it would not move the working class forward beyond the level of the '70s. To do this, to raise living standards world wide, to rebuild crumbling cities, to carry out the vast construction in the Third World of decent housing and water supply, more production capacity, more factories , are needed. Where can such productive capacity be obtained? Again, what resource now wasted by capitalism can be mobilized? With the most technically advanced machinery, the $200 billion global arms industry is the second major area of criminal waste of resources by capital. These plants produce machinery of war today -- they can technically be converted to produce real machinery for advanced factories, factories that in turn will produce the prefabricated housing, construction machinery and industrial employment needed to develop the entire world and overcome mass poverty. As well, the additional $800 billion in other defense expenditures, mainly for personnel, can be diverted to funding essential services such as education, and the personnel involved retrained for civilian occupations.
The re-launching of economic growth and the restoration and elevation of working people standards of living are entirely economically and technically possible. Growth rates in per capita income, after the initial recovery period, of 10% per year or more are quite feasible. We will look at this again in later chapters. But the political feasibility is quite another, and more difficult matter. For there can be no doubt that the restoration of worker's living standards means nothing less than the wiping out of the great majority of the value of capital. To even return to the living standards of the 1970's, a minimum level to sustain the current population in the long run, profit levels would have to return to the levels of the mid '70s as well -- and at that time capital was making losses overall, not profits. To transfer $1.5 trillion dollars in annual income back from capital to labor means entirely wiping out the value of, at least, all the debt in the world, and that represents two thirds of the value of all capital. Furthermore, a prolonged period of net losses for capital means wiping out capital values altogether, for the value of capital is purely is ability to generate profit.
Clearly such a mammoth wiping out of capital could not be accomplished without fundamental change in the way the economy is run. For one thing, if interest rates were reduced to zero and massive amounts of international debt written off, the banking system would collapse. At a minimum, a complete state take over of all finance would be needed in the advanced countries, especially in the largest economies such as the US, Germany, Japan, France, and the UK. Similarly, large scale reconstruction programs, based on the conversion of the arms industry would require the building up of huge new industrial enterprises. But these clearly could not be privately owned, during a period where capital as a whole was operating in the red. So these new industries too would have to be non-profit, under state ownership.
In short, the reversal of austerity and restructuring would also entail the massive reversal of privatization. Rather than the public sector shrinking, as today, it would have to massively grow, not only returning industries and services previously privatized to state ownership but creating new state-owned industries. Why would this be true? Quite simply, because only state-owned industries can grow without requiring a profit. National governments can directly allocate the social surplus, can build new factories, without having to show a profit or increase their money capital, as all private entities, even worker-owned plants, must do. If, as we have shown, it is impossible in current conditions to produce a growing profit and at the same time increase workers living standards, than only state-owned industries, which require no profits, can be the engine of growth.
Put another way, if capital is not to allocate the world's resources, someone else must do it. But this poses another problem, for the experience of the Soviet Union, China and Eastern Europe have shown that mere nationalization is no solution if the state itself is run by bureaucrats, who, no more than capitalists, can run economies in the interest of workers. So the question is : how can workers themselves democratically make the key decisions in running the economy? This, the basic question of socialism,is now again central to the working class movement.
The nature of the economic crisis today poses a life and death battle for both labor and capital. For working people to even maintain their standard of living, let alone increase it, means wiping out tens of trillions of dollars in capital. It means further eliminating capital's long term capacity to expand at all, for under the circumstances of a single global market, expanding profits can come only at the expanse of workers' incomes. Conversely, for capital to even maintain its value means continued unrelenting cuts in the standards of living of workers and peasants. Of course, over a few years, capital can survive serious concessions to labor, as it did in the 1960s and '70s. But over any longer periods, such concessions threaten to destroy the very basis for capital -- the ability to produce net profit.
This situation sets the terms for labor's global struggle today. On the one hand, it means that any strategy based on cooperation with capital, on supposed common interest of employer and employees is doomed, since at present such common interest cannot exist -- capital's gain is now labor's loss, and vice versa. On the other hand, it means that any real gains by labor pose immediately the question of who runs the economy.
But the global labor movement, since the '40s, has not been oriented to contesting who runs society. It's failure to protect the interest of the world workers over the past 20 years traces directly to that unwillingness to challenge the power of capital. And it is that unwillingness that is now coming under increasing challenge from within the labor movement.
1. Global rate of profit. Dashed line is gross profit rate in percent per year: total annual profit and interest divided by total capital--the value of all stocks and loans. Solid line is real profit rate--gross profit rate minus the rate of inflation. Figures are totals for large industrial economies: U.S., Japan, Germany, France, Italy, Great Britain, and Canada, which have the overwhelming share of profit and capital in the world.
2.(p.410 Big Bang book) Natural rate of reproduction-- number of children per parent divided by two. A rate of more than 1.0 is needed for long term population growth.
3. Profit and accumulation fund. Top dashed line is total gross profit in billions of '95 dollars. Light solid line is net profit after subtracting losses due to inflation. Bold line is total fund for realization(see text).
4. Per Capita steel production(excluding socialist and ex-socialist states) kilograms per capita.
5. Total world capital in trillions of '95 dollars(solid line-left scale). total capital per tons of steel produced in thousands of '95 dollars(dashed line-right scale).
6. Per capita grain production (p.408 of book).Kilograms per capita , excluding socialist and ex-socialist countries.
7. US. Interest payments per capita, '95 dollars
8. US. Average hourly(bold line, left scale) and weekly (light line, right scale) wages, all non-supervisory workers, '95 dollars.
9. Housing construction in France and Germany, thousands of units.
10. Capital and labor share, US. total income of capital and labor per hour of non-supervisory workers work(top line, left scale),"95 dollars. Capital and labor share of total(right scale). Capital share includes gross profits after taxes, net interest and managers salaries after taxes. Labor share is non-supervisory wages after taxes.