Hayek, credit and the crisis
Unlike Keynes, who saw the problem as one of effective demand during the crisis, Hayek saw the problem as one of loose monetary policy in the period before the crisis. In particular, Hayek argued that it was government interference in the money supply –e.g. through setting low interest rates, printing too much money, and encouraging the expansion of credit – that created bubbles and distorted the market, leading to crisis when the bubbles burst and the boom was seen to be largely based on fictitious capital.
Like Keynes, Hayek only sees one side of the problem – i.e. that of supply, as opposed to Keynes and the problem of demand. And also like Keynes, Hayek does not follow through his analysis to its logical conclusion and ask the obvious question: what would happen if governments had not intervened by setting low interest rates and encouraging the expansion of credit? First, however, one must ask the even more simple question of: what is credit?
Marx explains the role of credit under capitalism in Capital, explaining that credit serves a dual function. On the one hand, relatively short-term credit is required to overcome bottlenecks in production and maintain the flow and circulation of capital. For example, businesses need to borrow money to pay for wages and raw materials whilst they wait for previous produced good to reach the market and be sold. Alternatively, credit may be used to allow firms to expand production when they don’t have the upfront capital to pay for it.
On the other hand, credit also plays the role of artificially expanding the market – i.e. effective demand – and thus helping to delay a crisis. As explained earlier, under capitalism, the working class can never buy back the full value of the commodities it creates, due to the fundamental nature of capitalism as production for profit. As was also explained earlier, capitalism traditionally overcomes this contradiction of overproduction by reinvesting the surplus value created into new means of production in the search for greater profits. This, however, only serves to create even greater productive forces, and thus an even greater mass of commodities that must find a market, and thus –rather than resolving the contradiction – only exacerbates overproduction.
Credit – formed by the concentrated savings and deposits of individuals and firms in the banks – is used to artificially increase the consumptive capacity of the masses, and thus to temporarily overcome overproduction, allowing the productive forces to continue expanding. As we have explained elsewhere, the expansion of credit over the past twenty years – and particularly since the turn of the century – created the largest credit bubble in history and was the primary factor in delaying the onset of crisis.
This expansion of credit was required to overcome the growing proportion of wealth going to capital rather than labour, which became increasingly unequal with the attacks on the working class that followed the crisis of the 1970s and continued in the 1980s with the policies of policies of Reagan, Thatcher, and the other political representatives of capitalism. This ever increasing exploitation of the working class continued into the 1990s and the 21st century though the intensification of the working week and the increase in overtime, attacks on wages and conditions, and with many workers being forced to take two jobs in order to just get by. Alongside this increasing exploitation, credit was massively expanded through the use of mortgages, credit cards, student loans, etc.
Hayek’s ideas contain an element of truth in saying that the expansion of credit causes crisis. In reality, however, the expansion of credit does not cause the crisis; rather it delays the crisis by artificially expanding the market in the short term, at the expense of exacerbating the problem of overproduction, leading to an even bigger crisis in the future. Similarly, low interest rates were used to fuel the boom beyond its limits by encouraging investment and consumer spending – consumption that was, again, reliant on credit.
The expansion of credit, however, is a dialectical process: the expansion of credit allows the productive forces to grow; the growth of the productive forces fuels the expansion of credit. As Marx explains:
“Credit is, therefore, indispensable here; credit, whose volume grows with the growing volume of value of production and whose time duration grows with the increasing distance of the markets. A mutual interaction takes place here. The development of the production process extends the credit, and credit leads to an extension of industrial and commercial operations.” (Capital, Volume III, chapter 30; Marx)
During the boom, nobody questions this seemingly virtuous circle. The bourgeoisie are filled with a sense of optimism. All is for the best in the best of all possible worlds. But as with all dialectical processes, at a certain point there must be a transformation from quantity into quality: the vast lending of credit on one side appears now as a tremendous pile of debts on the other; the restricted consumption of the masses is once again apparent, and the limits of the productive forces to expand reassert themselves; overproduction is evident and crisis breaks out. As Marx explains, this overproduction is, in the final analysis, the cause of the crisis:
“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.” (Capital, Volume III, chapter 30; Marx)
Marx also long ago answered those who claim that it is the drying up of credit – familiarly known today as the “credit crunch” – that causes crisis, pointing out that it is, in fact, not the lack of credit that is responsible for the crisis, but that it is the crisis that leads to a lack of credit:
“As long as the reproduction process is continuous and, therefore, the return flow assured, this credit exists and expands, and its expansion is based upon the expansion of the reproduction process itself. As soon as a stoppage takes place, as a result of delayed returns, glutted markets, or fallen prices, a superabundance of industrial capital becomes available, but in a form in which it cannot perform its functions. A great deal of commodity capital, but unsaleable. A great deal of fixed capital, but largely idle due to stagnant reproduction. Credit is contracted 1) because this capital is idle, i.e., blocked in one of its phases of reproduction because it cannot complete its metamorphosis; 2) because confidence in the continuity of the reproduction process has been shaken; 3) because the demand for this commercial credit diminishes...
“...Hence, if there is a disturbance in this expansion or even in the normal flow of the reproduction process, credit also becomes scarce; it is more difficult to obtain commodities on credit. However, the demand for cash payment and the caution observed toward sales on credit are particularly characteristic of the phase of the industrial cycle following a crash...
“...Factories are closed, raw materials accumulate, finished products flood the market as commodities.” (Capital, Volume III, chapter 30; Marx)
It is, therefore, neither the expansion of the credit during the boom, nor the contraction of credit, that is responsible for crisis. The expansion of credit merely delays the crisis of overproduction; the contraction of credit is simply a qualitative manifestation of this very same overproduction.
To return to Hayek and the original question that the Hayekians do not consider: what would happen if governments were not to intervene in the economy and credit was not expanded? Would crises be avoided by the magical invisible hand of the market? The modern day Hayekians imagine that without government interference, the market forces of supply and demand, with their accompanying price signals, would have solved all problems; that a crisis may still have occurred, but it would have been a minor blip in comparison to the deep recession that we are now experiencing due to a vastly inflated credit bubble.
But as we have explained above, credit does not create a crisis, but merely delays it. In the absence of the expansion of credit over, the crisis of the 1970’s would simply have continued and developed onto a new plane. The expansion of credit was required to maintain the consumptive capacity of the working class in the face of attacks on the wages – i.e. the purchasing power – of these very same workers, all in the name of maintaining profits for the capitalists. Without the expansion of credit, the expansion of the productive forces would have been met with a limited market – i.e. a lack of effective demand – at a much earlier date. Companies would have ceased to expand production in the face of a falling demand for consumer goods; unemployment would have risen; the vicious cycle of recession would have set in.
Rather than finding a stable equilibrium, the solution of the Hayekians – to remove any interference in the market and to allow the money supply to regulate itself – would simply lead to an increasingly volatile and turbulent system; to an economy that spirals out of control; i.e. to a situation that resembles that of the current period.
Once again we see that the fault of the Hayekians, as with the Keynesians, is their focus on only one side of a many sided problem. In trying to resolve one contradiction, the capitalists merely create new contradictions elsewhere on a bigger scale.
In reality, despite his unbridled faith in the free market, Hayek was never really accepted by the political representatives of capitalism, who could not swallow his creed that there should be no government interference in the economy at all. In the face of crisis, bourgeois politicians have always buckled, throwing away all talk of the “free market”, and instead doing whatever it takes to save capitalism from its own contradictions. Hence the preference amongst the bourgeois politicians such as Thatcher and Reagan for Milton Friedman, a man who preached the virtues of the free market, but who was not afraid to advocate the strong arm of the state in guiding the invisible hand. Hence also we see the acceptance of Keynesian ideas in periods of crisis, such as now, by certain elements of the bourgeoisie, who, like Keynes, see the necessity for the state to intervene in the running and regulation of capitalism.
Modern macroeconomics, based on Keynes’ ideas in the General Theory, cite four main sources of output, demand, and growth for a national economy: consumption; investment; government spending; and exports. In “normal” times, a contraction of one section would hopefully be compensated for by another. But today all four of these sectors are held back.
Consumption is restrained by the enormous amounts of private debt, with even the so-called “rich” countries of northern Europe seeing huge household debts; for example, as a percentage of income the household debt in Denmark and the Netherlands is 268% and 249% respectively, whilst the UK has a figure 143%. A Wall Street Journal article entitled “Private debt will likely weigh on growth for years” (April 13-15, 2012) states that:
“Public debt has received most of the spotlight since the European debt crisis flared up more than two years ago. But private sector debt is arguably a more intractable problem...
“..The origin of the private debt problem is mortgages: real-estate prices soared in a number of European countries, and banks were willing to lend ever-larger sums for home purchases. The real-estate boom has since hit the rocks throughout much of Europe, but mortgage debt endures as an albatross handing around the necks of European consumers.
“Economists have found a strong link between consumption, credit booms and falling real-estate prices: countries that experienced a sharp rise in household debt will experience a sharper fall in consumption than nations where debt hasn’t risen as fast. If you borrowed a lot of money to buy your house (and the land it rests on), and then prices fall soon afterwards, you are more likely to want to repay the debt than go out to dinner, buy a new car or renovate your house.”
Meanwhile, the banks, which have equally large debts on their books, are attempting to “deleverage” – i.e. to reduce their debts. Hence the apparent mystery of why there has been so little inflation in recent times, despite the huge amounts of money that have been pumped into the global economy through quantitative easing and other similar policies; rather than going into the real economy and being spent, this money is simply being used by the banks to reduce their debts.
For similar reasons to households, governments in the advanced capitalist countries are restricted in their ability to increase spending, given their already vast public debts. Far from expanding government spending, the US economy – the largest in the world – is facing a “fiscal cliff”, with cuts to public spending and increases in taxes worth a total of approximately 5% of GDP due to kick in at the end of 2012.
Given the desperate times, equally desperate measures have been proposed. Forgetting all the lessons of history, a number of commentators have suggested that governments with independent monetary policy can just print money to pay off their debts, and quantitative easing is the first step on a slippery slope towards this. At best, such policies do nothing to solve the crisis; at worst, they can lead to hyper-inflation.
Investment, as we pointed out earlier, is at a historic low, with capitalists unwilling to invest in new production when there is already excess capacity – i.e. overproduction – across the board. Finally, therefore, we are left with exports. But it is a basic truism that not every country can be a net-exporter. For every export that must be an equivalent value of imports; or, as in the case inside the eurozone at the current time, there will be a flow of exports from one country and an accumulation of debt elsewhere.
Exports, imports, and trade imbalances
Each nation’s politicians promise to export their way out of the crisis. In an ideal world they would like to do this by making their country’s exports more competitive by holding wages down, whilst simultaneously hoping that every other country increases their imports by paying their workers more. But every country’s capitalists and political representatives are attempting to do the same thing. Hence we arrive at the general pattern of overproduction, but now seen on an international scale, with competition between the capitalists of different nations leading to wages being cut across the board, demand falling, and the market shrinking.
We see this today reflected in the calls by the Keynesian commentators of various countries, who exclaim that “we must be more like Germany and China!”; “we must invest, be more competitive, and export!” But not everyone can be like Germany and China. One only needs to ask the simple question of: export to whom? At a time when governments everywhere are carrying out austerity, where is there the demand for increased imports? Hence the calls by politicians and political commentators for Germany and China to “rebalance” their economies – i.e. to increase wages, thus reducing the competitiveness of exports and providing the means for greater consumption of imports. But why would the bourgeoisie in Germany and China want to do this when they are doing very well out of the current situation?
In reality, such attempts by countries to export their way out of a crisis only lead to a race to the bottom; to trade wars, increasing protectionism, and to an exacerbation of the crisis for all. Keynes, in fact, understood the dangers of large trade imbalances in a global economy, and was keen to see an agreement within the post-war Bretton Woods system that would limit imbalances between countries. In a world where every economy is linked to every other by a thousand threads, crisis in one country affects all. We therefore end up at the situation today where the crisis in the peripheral countries of the eurozone has led to a slowing down of the economies in Germany and China, who were reliant on exports to Europe for their growth. In turn, countries such as Australia, Brazil, and South Africa, who rely on exporting raw materials to China, have also seen a slowdown.
As we have pointed out elsewhere, China’s export-led growth is no longer a reality. Instead, the Chinese government have been forced to embark on one of the largest Keynesian experiments in history, pouring government spending into housing, infrastructure, and new means of production. But like all Keynesian experiments, this is only preparing the way for an even greater crisis of overproduction in the future.
At its root, trade imbalances – with deficits at one end and surpluses at the other – are not the cause of the crisis, but are yet another manifestation of it. The huge trade deficits of the peripheral countries in Europe – Greece, Spain, Portugal, etc. – are the other side of the coin to the trade surpluses in Germany. Wages have been held down in Germany and China, whilst the productive forces have expanded. The commodities produced cannot be sold at home, but have found a market abroad. The vast wealth of German and Chinese exports are, therefore, simply an expression of the equally vast overproduction that exists within these countries.
Marx understood and explained this in Capital:
“It should be noted in regard to imports and exports, that, one after another, all countries become involved in a crisis and that it then becomes evident that all of them, with few exceptions, have exported and imported too much, so that they all have an unfavourable balance of payments. The trouble, therefore, does not actually lie with the balance of payments...
“Now comes the turn of some other country. The balance of payments was momentarily in its favour; but now the time lapse normally existing between the balance of payments and balance of trade has been eliminated or at least reduced by the crisis: all payments are now suddenly supposed to be made at once. The same thing is now repeated here... What appears in one country as excessive imports, appears in the other as excessive exports, and vice versa. But over-imports and over-exports have taken place in all countries... that is over-production promoted by credit and the general inflation of prices that goes with it...
“The balance of payments is in times of general crisis unfavourable to every nation, at least to every commercially developed nation, but always to each country in succession, as in volley firing, i.e., as soon as each one’s turn comes for making payments; and once the crisis has broken out... It then becomes evident that all these nations have simultaneously over-exported (thus over-produced) and over-imported (thus over-traded), that prices were inflated in all of them, and credit stretched too far. And the same break-down takes place in all of them. The phenomenon of a gold drain then takes place successively in all of them and proves precisely by its general character: (1) that gold drain is just a phenomenon of a crisis, not its cause; (2) that the sequence in which it hits the various countries indicates only when their judgement-day has come, i.e., when the crisis started and its latent elements come to the fore there.” (Capital, Volume III, chapter 30; Marx – emphasis in the original)
The high public debts in the weaker economies of the eurozone, such as Greece and Portugal, are similarly a symptom of this same process. As we have explained elsewhere, the creation of the Euro was most of benefit to the German capitalists, who used the single currency as a means of economic domination over the rest of the Europe. German capitalism, which was (and still is) of greater competitiveness, due to a combination of low wages and high productivity, was able to use the Euro to increase the flow of exports to the weaker peripheral countries of the eurozone. But these countries had nothing to offer in return, and could only pay for these imports using credit –primarily supplied by German banks – which had become much cheaper thanks to the low interest rates that membership of the Euro provided. The result was rising profits in Germany and rising debts in Greece, Portugal, and elsewhere.
Public debt, therefore, is not a cause of the crisis, but yet another symptom of the crisis of overproduction. This is highlighted by the example of Spain, a country that before the crisis had public debts of only 36% of GDP and consistently ran a budget surplus, and which still has a public debt of only 69% today. But yet Spain is in a deep economic crisis. Its pre-crisis boom was based on a massive housing bubble, which in turn was fuelled by cheap credit, and now these bubbles have burst leaving the contradiction of empty houses alongside mass homelessness.
The bourgeois commentators often refer to the Euro crisis as simply a problem of competitiveness. But as we have explained above regarding imports, exports, and trade imbalances, international competitiveness is fundamentally no different from the competition between different capitalist firms: under capitalism there will always winners and losers. Not everyone can be the most competitive. Competition is always relative. The main difference is that in the competition between firms, weak firms will go under and will be subsumed by the stronger ones; on the international plane, less competitive national economies cannot be so simply assimilated – although that, in essence, is the proposal for a fiscal union inside the eurozone: for a single economic zone in which the weaker economies are placed under the direct control of the stronger ones – i.e. of German capitalism.
But as with the competition between capitalist firms, the competition between capitalist nations is ultimately a race to the bottom in which the capitalists are cutting away at the very branch they are sitting on: in trying to gain competitiveness they must either cut the wages of the working class, and thus cut into the market for the commodities that are produced; or they must invest in productivity and thus expand the productive forces. In either case, the crisis of overproduction is exacerbated. Again, what makes sense from the perspective of a single national capitalism – to cut wages, increase productivity, gain competitiveness, and export abroad – is ultimately destructive for the international economy as a whole.
This, once again, demonstrates the fundamental barriers to the growth of the productive forces: the private ownership of the means of production and the nation state, both of which have become the most monstrous of fetters on the development of science, technology, culture, and society in general.
“The growth fairy foes not exist”
It is clear today that neither the Keynesians nor the monetarists have any answers. Unlike the optimism felt by the bourgeoisie in the years of boom, now there is nothing but pessimism amongst the ruling class. The monetarists and Keynesians are both wrong and they are both right; but both only see one side of the problem. It is clear that austerity is not working, but yet there is there is no money left for governments to stimulate the economy, and the financial markets are demanding cuts. The real answer is that there is no solution under capitalism.
The dichotomy of “austerity vs growth” is ultimately a false one. As The Economist highlighted (May 5th 2012), “Calling for growth is like advocating world peace: everybody agrees that it is a good thing, but nobody agrees how to do it.” To simplify: the pro-austerity camp believe that the private sector will step in to invest and create economic growth, but that debts and deficits must first be cut back and that structural “reforms” must be carried out to remove any “barriers” to labour market flexibility – e.g. trade unions, workers’ rights, health and safety regulations, etc. The Keynesians believe that it is government that must step in to stimulate the economy with investment in new infrastructure and housing.
The Keynesians are quite correct when they point out that austerity is not the answer, and that cuts are simply exacerbating the recessions across Europe. However, the Keynesians’ promises of “growth” instead of cuts are equally utopian. As we have pointed out previously, growth under capitalism cannot be created out of thin air. As The Economist eloquently put it (May 12th 2012), the “growth fairy does not exist”.
François Hollande, the newly elected President of France, has positioned himself as the leader of the “alternative to austerity”, in contrast to Merkel, who is seen as the callous representative of cuts. Opposition parties across Europe have lined up to support Hollande’s calls for a “growth pact”: Tsipras, the leader of SYRIZA in Greece, urges for a renegotiation of the memorandum; the United Left in Spain present similar demands for “investment” and “growth”; Ed Miliband and the other Labour leaders in Britain have applauded the election of Hollande and his opposition to “excessive” austerity.
But behind the platitudes and the pleasant sounding rhetoric, these very same leaders understand the true severity of the crisis and do, in fact, accept the need for austerity. For example, whilst presenting himself in opposition to cuts, Hollande has promised to reduce the French budget deficit to 3% by the end of 2013 and to eliminate the budget deficit altogether by 2017. Interestingly, these are the very same targets that the openly pro-austerity Tory party has committed to in Britain. Meanwhile, Miliband has admitted that the Labour Party cannot promise to reverse any of the Tory cuts if they win the next election in 2015.
These leaders are caught between a rock and a hard place; between the immense pressures of the financial markets and the masses of radicalised workers and youth. On the one hand they must offer some hope to the masses they are meant to represent, and who have turned to them looking for an alternative. But on the other hand, these same leaders make every attempt to reassure the markets that they are “responsible” statesmen. At heart, they understand that the cuts are not ideological and that under capitalism there is no alternative. The need for cuts is not questioned, simply the scale and the speed of these cuts.
The result is the so-called “Goldilocks” economic policy, as advocated by the IMF and others: a little bit of cutting in short-term (but not too much!), accompanied by government policies to stimulate growth, followed by longer term plans to reduce debts and deficits. As The Economist states:
“The myth of an expansionary fiscal contraction, the idea that deficit-cutting would boost growth, has been largely dispelled. The latest evidence is that in a downturn the multiplier effect of fiscal tightening can lead to deeper recession, making it even harder to cut the deficit. In the euro zone, moreover, countries cannot easily mitigate the impact through looser monetary policy or currency devaluation. Structural reforms may boost growth, but mostly in the medium term.
“Yet if high deficits were the answer, Greece and Spain should be booming. Many countries in the euro zone had no choice but austerity to try to calm bond markets that were pushing them into bankruptcy. Others cut for fear of suffering the same fate. Debt in advanced economies has reached levels exceeded only during the second world war, and the evidence is that high debt can stifle long-term growth. Sooner or later, most European countries have to start working off their debt. So the choice is not really between austerity and growth, but over the timing and speed of deficit-cutting and the right mix of structural reforms.
“The Goldilocks policy, as the IMF calls it, urges countries to embark on a gradual fiscal adjustment in the short term, if the markets allow it, coupled with a credible medium-term debt-reduction plan.”
Such a “plan” is completely Utopian and merely emphasises the complete confusion and pessimism of the bourgeoisie who, in the absence of a proper analysis of the crisis and of capitalism, are forced to react empirically to events, stumbling from one disaster to another along the way.
The need for socialism
The trade union leaders are equally enamoured with talk of “jobs, investment, and growth”. Keynesian policies are put forward, but are cloaked and sugar-coated with the language of socialism. Len McCluskey, the General Secretary of Unite, Britain’s largest trade union, has called for “socialism of the 21st Century”, but is purposefully vague about what this means. These are hollow phrases with no real meaning, acting as an empty bottle, into which any content can be poured.
McCluskey is right to call for socialism. The labour movement in all countries is in need of a socialist programme. But this socialism must be clearly defined: the nationalisation of the banks and the other commanding heights of the economy as part of a democratic plan of production. In short: the abolition of capitalism and the transformation of society.
The potential that could be achieved by such a plan of production is evident by the tremendous amounts of idle factories, empty houses, and unemployed workers that sit unoccupied due to the crisis of overproduction and the limits of a system in which production is only for profit. If these human and material resources were put to use, there would be no talk of scarcity or poverty. Living standards could be improved dramatically; the working day could be reduced to mere hours; the material basis would be laid for everyone to fully participate in the democratic running of society.
The inspiring struggles in Greece, Spain, and Portugal show the willingness to fight for an alternative. But yet, in each case, the leaders of the movement are not up to the challenge. The situation is like that before a wild forest fire breaks out: the ground is dry and a simple spark could ignite a rapid wave of flames. The workers and youth of all countries are watching each other. All that is needed is for one example to point the way forward for the rest. The call must be: neither austerity nor Keynesianism, but the socialist transformation of society.