Friday, 13 March 2009

Harry Shutt: "Prophet of doom"

I place myself firmly on the dismal side of the dismal science that is economics. It is therefore refreshing to be able to write a blog post on someone who's prognosis on the global economy is as bleak as mine.

Why is this article relevant to China? Apart from the obvious links as a result of a globalised world and the flows of capital and people is that this doom laden article is couched in the theory of Marx. The issue of the "hegemonic conquest of China" is also worth thinking about a little more carefully.

China is therefore a very interesting country to have in the back of your mind as you read this article.

This article contains some great quotes.

Prophet of doom [RedPepper]

Dissident economist Harry Shutt was arguing that capitalism was heading for a fall long before the current crisis. Interview by Mat Little

Harry Shutt is shocked that the Financial Times has published one of his letters. This doesn’t normally happen, despite his firing off regular missives. He thinks it might be a sign of the times. For if the house organ of the global financial establishment is prepared to give space to the views of someone like him, something must be seriously amiss. ‘I’m sure that this would never have been published a year ago. Now perhaps people see that the writing is on the wall,’ he says.

Talking about the decline of capitalism Shutt states:

Barely a decade after its victory over communism, and just at the point of its hegemonic conquest of China and India, capitalism, he argued, was far less healthy than it appeared to be. In fact, it was heading for a fall.

The intutition behind the following paragraphs is sound.

In order to understand Shutt’s explanation for the crisis, it is necessary to take a brief detour through Marx. According to Marx, capitalism is a system of accumulation. Profits are made but can’t all be consumed by owners. Extra profits need to be recycled through the market. ‘The only way you can successfully recycle them is to either expand your existing business or diversify into another business,’ says Shutt. ‘It all depends on the ultimate consumer, consuming more and more. It has to grow, growth is built in.’ The problem is that as profits are invested into the market, generating more profits that in turn have to be reinvested, production expands until it reaches a level that can no longer be absorbed by consumers. The market is glutted, and recession results. But the destruction of capital and jobs creates pent up demand for the whole process to begin again in time.

That, in brief, is the business cycle. But Shutt’s argument is that western political leaders have, for years, based their economic strategy on avoiding or limiting the downside of the cycle, a doctrine encapsulated in Gordon Brown’s famous boast of an ‘end to boom and bust’. Credit expansion has been fuelled, household debt recklessly encouraged, state services privatised, financial institutions subsidised and regulations banished all in order to find profitable outlets for a burgeoning ‘wall of money’ generated by the system. A high rate of growth is needed to maintain this process, but can’t be sustained because of the weakness of demand in the economy.

The consequence is that money, frustrated in its search for productive activities to invest in, has turned to speculation. ‘When you get to the point that you can’t actually make profits by producing more stuff – organic growth – profits get recycled into speculation,’ says Shutt. ‘In other words, you start placing bets that certain assets will increase in value.’ And once speculation takes hold, it becomes advantageous to bring even more money into the market, because that pushes up the value of assets. Hence, the ‘leveraging’ by speculators – the borrowing of more and more money to speculate on financial assets.

Again, one can rejoice in the bleakness of Harry Shutt. I find myself agreeing yet again with his prognosis.

It’s not a cheering prognosis – a protracted downturn of several years with the likely side effects of military conflict and scapegoating of minorities. But Shutt hasn’t finished yet. There is no light at the end of the tunnel, or if there is, it’s very dim. He believes that that this slump will be much more difficult to emerge from than in previous downturns because traditional engines of growth are no longer available to drag us out. Remove debt-fuelled consumption and property speculation from the equation, and you are left with anaemic substitutes such as the internet, the service sector and green technology. The arguments of centre-left Keynesian commentators that the answer lies in re-regulating the financial sector and encouraging consumer spending, ignore the fact, says Shutt, that the demand for capital – the availability of new profitable productive activities to invest in – is in long-term decline, and consumer spending power has been exhausted.

Shutt is wise enough to realise that there is no solution to the problem. This shows that is he is not some deluded Marxist but a simple realist.


1 comment:

Thomas said...

Sure there is a solution, if one is so inclined:

Bring the state into the picture, to redistribute the money from the rich to the poor, so that they can spend it on consumption.

And if not even the poor want to consume more when given the opportunity, well, maybe GDP just has to shrink because everyone is saturated anway...