The following podcast from the BBC Radio 4’s series, A Point of View is by John Gray, emeritus professor of European thought at the LSE and author of False Dawn: The Delusions of Global Capitalism. In the podcast, he considers whether Marx, the great 19th century thinker, was right to predict the demise of capitalism.
Marx’s picture of the end of capitalism and the stages of society that would succeed it have been dismissed by most academics and commentators as quite false. Marx predicted that as capitalist economies became increasingly unstable and unequal, so workers would rise up in revolution. What would follow would be a socialist state in which the means of production would be collectively owned and output and distribution would be planned. As socialist economies became wealthier and life was perceived to be fairer, so the need for state control would diminish. Eventually the state would wither away and the ultimate stage of communism would be reached, where there would sufficient resources to reward everyone according to their needs.
Two of the key criticisms of Marx’s analysis are: (a) capitalism was overthrown in only a few countries and (b) in the countries that did adopt central planning, such as the Soviet Union and Eastern European countries, the state did not wither away; instead, they reverted to capitalism.
But whilst Marx’s analysis of a post-capitalist world may have been flawed, his analysis of the weaknesses and tensions of capitalism have been prophetically correct in many regards. As John Gray says:
It’s not just capitalism’s endemic instability that he understood, though in this regard he was far more perceptive than most economists in his day and ours.
More profoundly, Marx understood how capitalism destroys its own social base – the middle-class way of life. The Marxist terminology of bourgeois and proletarian has an archaic ring.
But when he argued that capitalism would plunge the middle classes into something like the precarious existence of the hard-pressed workers of his time, Marx anticipated a change in the way we live that we’re only now struggling to cope with.
Listen to the podcast and try to assess whether we are witnessing a 21st century version of Marx’s 19th century vision.
A Point of View: The revolution of capitalism (article) BBC Radio 4, John Gray (4/9/11)
A Point of View: The revolution of capitalism (podcast) BBC Radio 4, John Gray (4/9/11) (see alternatively)
Has Western capitalism failed? BBC News (23/9/11)
Questions
- Why, according to Marx, do capitalist societies contain the seeds of their own destruction? What role would the middle classes play in this?
- Why does capitalism transform everything it touches?
- Explain what is meant by ‘creative destruction’.
- How would Marxists respond to the criticisms of their analysis that the middle classes have got proportionately bigger and that, with the advent of the minimum wage, even the poorest workers are protected?
- To what extent has the experience of the developed world since the banking crisis of 2007/8 lent weight to the Marxist analysis?
- John Gray says that “Today there is no haven of security.” What does he mean by this and is there an answer within capitalism?
- And here’s a hard question to finish with: if capitalism does contain the seeds of its own destruction, what will succeed it? Will it be something other than capitalism and, if so, what? Or will it be a new variety of capitalism and, if so, what will it look like?
Stock markets have been plummeting. The FTSE 100 index was 6055 on 7 July 2011; by 10 August, it was 17% lower at 5007. Since then it has risen as high as 5418, but by 13 September was down to 5092. Other stock markets have fared worse. The French index fell 30% between early July and September 13, and the German DAX index fell 32% over the same period.
These falls in share prices reflect demand and supply. Investors are worried about the future of the eurozone and the health of the European economy as Greek default looks more and more likely and as the debts of various other European countries, such as Portugal, Ireland and Spain, seem increasingly unsustainable in an environment of sluggish economic growth. They are also worried about high public-sector debt in the USA and the likelihood that global recovery will peter out.
The ‘bear’ market (falling share prices) reflects increased selling of shares and a lack of demand. Not only are investors worried about the global economy, they are also speculating that share prices will fall further, thereby compounding the falls (at least until the ‘bottom’ is reached).
But why have share prices fallen quite so much? And does it matter to the general public that this is happening? The following articles seek to answer these questions.
Articles
Shares tumble on fears over Greek default Guardian, Graeme Wearden (12/9/11)
European Factors-Shares set for steep fall on Greece worries Reuters (12/9/11)
Markets set for turmoil after G-7 letdown BusinessDay (South Africa), Mariam Isa (12/9/11)
What will happen if Greece defaults? The Conversation (Australia), Sam Wylie (12/9/11)
Germany and Greece flirt with mutual assured destruction The Telegraph, Ambrose Evans-Pritchard (11/9/11)
Market Swings Are Becoming New Standard New York Times, Louise Story and Graham Bowley (11/9/11)
The next bull market The Bull (Australia) (12/9/11)
Prepare For Recession And Bear Market Forbes, Sy Harding (9/9/11)
Eurozone crisis: What market turmoil means for you BBC News, Kevin Peachey (8/9/11)
Stock market indices
FTSE 100: historical prices, 1984 to current day Yahoo Finance
Dow Jones Industrial Average: historical prices, 1928 to current day Yahoo Finance
Nikkei 225 (Japan): historical prices, 1984 to current day Yahoo Finance
DAX (Germany): historical prices, 1990 to current day Yahoo Finance
CAC 40 (France): historical prices, 1990 to current day Yahoo Finance
Hang Seng (Hong Kong): historical prices, 1986 to current day Yahoo Finance
SSE Composite (China: Shanghai): historical prices, 2000 to current day Yahoo Finance
BSE Sensex (India): historical prices, 1997 to current day Yahoo Finance
Stock markets BBC
Questions
- What factors have led to the recent falls in stock market prices? Explain just why these factors have contributed to the falls.
- What is likely to happen to stock market prices in the coming weeks? Why is it difficult to predict this?
- What is meant by the efficient capital markets hypothesis? If markets were perfectly efficient, why would it be impossible to predict future movements in stock market prices? Why may stock markets not be perfectly efficient?
- What factors determine stock market prices over the longer term?
- How are share prices influenced by speculation? Distinguish between stabilising and destabilising speculation.
- Explain the various ways in which members of the general public can be affected by share price falls. Are you affected in any way? Explain.
- If Greece defaults, what will determine the resulting effect on stock markets?
- To what extent does the stock market demonstrate the ‘brutal face of supply and demand’?
The Brazilian economy is an emerging superpower (see A tale of two cities), but even its growth slowed in the second quarter of the year, although the economy still appears to be growing above capacity. In reaction to that latest economic data, the central bank slashed interest rates by 50 basis points to 12%. The Central Bank said:
‘Reviewing the international scenario, the monetary policy committee considers that there has been a substantial deterioration, backed up, for example, by large and widespread reductions to the growth forecasts of the main economic regions.’
Rates had previously been hiked up 5 times in the year to tackle rising inflation, which has been some way above its inflation target. Such tightening policies have become commonplace in many emerging economies to prevent overheating. However, following this reversal of policy, questions have been raised about the independence of the central bank, as some politicians have recently been calling for a cut in rates, including President Rousseff himself. As Tony Volpon at Nomura Securities said:
‘They gave in to political pressure. The costs will likely be much higher inflation and a deterioration of central bank credibility…It has damaged the inflation-targeting regime.’
Many believe the rate cut is premature and the last thing the economy needs given the inflationary pressures it’s been facing. Huge spending cuts have been announced to bring inflation back under control, together with the previous rate rises, so this cut in interest rates to stimulate growth is likely to put more pressure on costs and prices. Only time will tell exactly how effective or problematic this new direction of monetary policy will be.
Brazil’s growth slows despite resilient consumers Reuters, Brian Ellsworth and Brad Haynes (2/9/11)
Brail in surprise interest rate cut to 12% BBC News (1/9/11)
Rousseffl’s ‘Risky’ rate cut means boosting Brazil GDP outweighs inflation Bloomberg, Arnaldo Galvao and Alexander Ragir (2/9/11)
Brazil makes unexpected interest rate cut Financial Times, Samantha Pearson (1/9/11)
Brazil rate cut stirs inflation, political concerns Reuters (1/9/11)
Questions
- What is the relationship between the macroeconomic objectives of inflation and economic growth?
- Why are there concerns that the recent reduction in the interest rate may worsen inflation? Do you think that a decision has been made to sacrifice Brazil’s inflation-targeting regime to protect its economic growth?
- Why are there questions over the independence of the central bank and how will this affect its credibility? What are the arguments for central bank independence?
- Growth in Brazil, although lower this year, still remains very strong. Why has the Brazilian economy been able to continue its strong growth, despite worsening economic conditions worldwide?
- What type of inflation are emerging economies experiencing? Explain how continuous hikes in interest rates have aimed to bring it back under control.
- What is meant by overheating? How will the central bank’s past and current policies contribute towards it?
The growing interdependence of economies has never been more true than over the past few years. The credit crunch began in the US and gradually spread to the rest of the world. As the saying goes, ‘when America sneezes, the world catches a cold’. The US economy is the largest in the world and with such a close relationship to the UK, its economic situation is critical. GDP growth in the first quarter was a mere 0.4% and in the second quarter, it was revised down from the US Commerce Department’s original estimate of 1.3% to just 1%. This was attributed to weaker growth in business inventories, a fall in exports and less spending from the state and local governments. Personal consumption expenditure and exports did rise, but the increase in the former was hardly noticeable (0.4%) and in both cases, the second quarter increase was significantly down on that in the first quarter.
With GDP growth remaining low, there’s not much better news when it comes to US unemployment, which remained at 9.1% from July. It was expected that a further 70,000 jobs would be created in August, but the latest figures suggest that no new jobs were created. It seems that the data on growth and the components of aggregate demand are enough to bring consumer and investor confidence down. Virginie Maisonneuve said:
‘Companies that are overall doing OK are hesitating to hire and invest further, creating some fragility for the economy… We will need some help from the Fed and the government to avoid a recession.’
President Obama is due to make a speech in which he will outline a new plan to boost economic growth. Crucial to this will be restoring confidence, as without it, businesses will not invest, consumers will save rather than spend, jobs will not be created and growth will remain sluggish. This will do nothing to help the still weak economies of Europe. Indeed, following news of the US job situation, stock markets across the world fell, as fears of recession set in. The Dow Jones opened 2% down, the FTSE 100 ended 2.3% down (although this was also affected by a weakening in the construction sector), markets in Germany, France and Spain were down by over 3% and in Italy by over 4%.
US GDP revised down to 1pc in second quarter as growth stalls Telegraph (26/8/11)
US economy: no new jobs added in August BBC News (2/9/11)
Jobs data confirm US growth fears Financial Times, Robin Harding and Johanna Kassel (2/9/11)
Markets fall on weak U jobs data BBC News (2/9/11)
FTSE falls after weak US jobs data The Press Association (2/9/11)
European stocks knocked by dire US jobs data Reuters (2/9/11)
Fears over US economy cause world market route Economic Times (2/9/11)
FTSE 100 extends losses after poor US non farm payroll figures Guardian (2/9/11)
Questions
- What is aggregate demand? Which component is the biggest engine of growth for an economy?
- Why did markets decline following the data on US jobs?
- Why is the economic situation in America so important to the economic recovery of other countries across Europe?
- Why are there suggestions that the US is underestimating its inflation?
- Why is the US economic data for the second quarter of 2011 so much worse than that of the first quarter? What could have caused this downturn?
- What action could the government and the Fed take to boost confidence in the US economy and stimulate economic growth? Can any of this be done without causing inflation?
I found myself singing this morning which I have to admit is not the most pleasant experience for those in ear-shot. I was singing to the tune of ‘love is all around us’. But rather than the words of the song performed by the Troggs in the late 1960s and by Wet Wet Wet in the 1990s, I found myself singing ‘debt is all around us’. It could easily have been the sub-conscious effect of the headlines relating to government debt (also known as national debt). But, actually it was the effect of having looked at my latest credit card statement and noting the impact that my summer holiday had had on my financial position! Relaxation, so it seems, doesn’t come cheap. With this in mind, I have just taken a look at the latest bank of England figures on British household debt. You can do the same by going to the Bank of England’s statistical release lending to individuals.
The latest figures reveal that at the end of June 2011 households in Britain had a stock of debt of £1.451 trillion. Now this is a big number – not far short of the economy’s annual Gross Domestic Product. But, interestingly, this is its lowest level in three years. Indeed, over the past twelve months the stock of household debt has fallen by £6 billion. This is the result of the sector’s repayment of unsecured debt, such as credit card debt and overdrafts. The stock of unsecured debt has fallen by £8.2 billion or 3.8% over the past year to stand at £209.7 billion.
The remaining £1.241 trillion of household debt is secured debt which is debt secured against property. The stock of secured debt has risen by £2.16 billion over the last 12 months, but this equates to a rise of less than 0.2%. In fact, further evidence from the Bank of England reveals that households are not only looking to reduce their exposure to unsecured debt but to pay off mortgage debt too. You might wonder how this might be occurring given that the stock of mortgage debt has risen, albeit only slightly. The answer lies in the growth of housing investment relative to that of mortgage debt. Housing investment relates, in the main, to the purchase of brand new homes and to major home improvements. As our population grows and the housing stock expands and as we spend money on improving our existing housing stock we acquire more mortgage debt. Bank of England figures show that housing investment has been greater than new secured lending. Consequently, the additions to the stock of lending have been less than housing investment. This gives rise to negative housing equity withdrawal, i.e. negative HEW.
The Bank of England estimates that in Q1 of 2011 there was an increase in housing equity of £5.8 billion. Negative housing equity withdrawal (HEW), an injection of housing equity, has occurred every quarter since Q2 2008. Since then, the UK household sector has injected some £63.7 billion of housing equity. The opportunity cost of this injection is that by increasing equity in property households are using money that could have been used for consumption or for purchasing financial assets. The extent of this negative HEW over the past 12 quarters has been the equivalent to 2.2% of disposable income.
While my credit card may have ballooned this month, it would appear that the household sector is looking to reduce its debt exposure. I will be looking to do likewise!
Articles
Housing injection goes on BBC News (4/7/11)
Personal insolvencies rise Independent, Philip Whiterow (5/8/11)
Mortgage boom as homeowners cash in an try reduce debts Independent, Simeon Read (5/7/11)
Homeowners inject £5.8 billion of equity into property in first quarter Telegraph, Emma Rowley (5/7/11)
Housing equity injection continues Guardian, Hilary Osborne (4/7/11)
Data
Lending to individuals statistical release Bank of England
Housing equity withdrawal (HEW) statistical release Bank of England
Questions
- Illustrate with examples what is meant by secured and unsecured debt.
- What factors might help to explain the longer-term growth in secured and unsecured debt over recent decades?
- What factors might help to explain the more recent patterns in secured and unsecured debt?
- What do you understand by the term housing equity withdrawal?
- What is meant by negative HEW?
- What factors might help to explain the negative HEW observed for the past twelve quarters?
- What implications might there be for economic growth of negative housing equity withdrawal (HEW)?