Monday, 18 July 2011
Cyclical Crises and Capital Accumulation
If the G-7 are unable to accumulate capital by extending credit to debtor nations for civilian and military products and services during a contracting economic cycle at the level that they could during the expansionary cycle, how does the process of capital accumulation work during contracting economic cycles? In short, if accumulation does not take place primarily by selling products and services rather than interest payments owing to limited private and public demand amid rising global unemployment and downward wage and salary cycle, what is the source for capital accumulation required to strengthen finance capital in the metropolis?
Classical economists from Adam Smith, David Ricardo, John Stuart Mill to Karl Marx and F. Engels developed well-known Liberal and Marxist theories of capital accumulation–concentration and centralization at the national and international levels. Liberal pre-Keynesian theory links capital accumulation to economic growth often equated with labor force productive growth and innovation forever.
While accumulation is the engine behind growth according to the Liberal theory, capital concentration and centralization is the root cause of contracting cycles–inevitable recessions (at times severe), after periods of growth. Fernand Braudel to Immanuel Wallerstein and the theory of the evolution of the capitalist world-system provided another important dimension of capital accumulation theory and the division between core (advanced capitalist countries) where capital is concentrated and periphery (underdeveloped) areas from which capital flows out to the core.
The question of unequal economic relationships on a global scale is now more complicated largely because of institutions such as the International Monetary Fund, World Bank, OECD, European Investment Bank, Paris Club, regional development banks, World Trade Organization, and of course the US Federal Reserve, Japan’s Central Bank and European Central Bank that coordinate their policies with the IMF for the purpose of maintaining the process of capital accumulation, inevitably flowing from the periphery to the metropolis.
How does capital accumulation take place when Goldman Sachs among other investment banks engage in swaps (credit-default swaps, CDS), when semi-periphery nations such as the four PIIGS (Portugal, Ireland, Italy, Greece and Spain) share the strongest reserve currency in the world, yet, their role is to buttress the core countries within the Eurozone (France and Germany) than to operate as equal partners?
In the early 21st century the issue of capital concentration and centralization is further complicated by massive deals involving weapons sales from the advanced capitalist countries themselves as debt-ridden as the debtor nations to whom they extend credit for weapons, followed by stabilization loans to repay interest on previous loans, a process designed to make sure that the weaker debtor nations remain credit-worthy thus integrated as financial dependencies of the world-system.
During the expansionary cycles of the economy, the advanced nations concentrate capital by extending credit to chronically net debtor nations in order for the latter to purchase products and services, including weapons, from the creditor. Deutsche Bank along with other banks in Germany–the same holds true for banks in France, Holland, Belgium, Switzerland, and UK–extend credits to the rest of Europe and to non-European countries to finance purchases of everything from pharmaceuticals and consumer products to heavy machinery and submarines. US banks do the same for their client nations.
This process ensures that capital will continue to flow from the borrower purchasing products and services to the creditor who receives the benefit of stimulating the domestic industries and financial services back home. But what happens if the borrowing governments in the periphery that are the best customers and borrow heavily reach a point of inability to service their debt? This took place in the 1930s, and Cordell Hull had to arrive at individual rescheduling loan arrangements with each nation that defaulted in order to stimulate US trade and to recapture lost market share.
Capital accumulation in the 1930s had to restart largely by a new line of credit by European and US creditors to debtor nations that needed to grow their economies in order to repay interest on the debt. Capital accumulation through credit extended by the creditor nation for civilian and military goods and services does not apply during the cyclical downturn when credit is at a premium, thus the state steps in to extend credit to debtor nations so they can continue servicing their loans, a process that adds nothing to goods and services to the debtor but only transfers capital from the domestic economy, leaving much weaker and much more susceptible to predatory takeover of its most lucrative sectors by foreign companies.
One way that the US helped its own economy recover from the Great Depression, it introduced the Export-Import Bank (EXIMBANK) that became an instrument of strengthening domestic industries doing business abroad, and a bargaining chip for the debtor nations to resume payment on their defaulted debt. EXIMBANK was a state instrument of capital accumulation at a time when the state itself was engaged in deficit spending.
In a post-Keynesian environment when core countries are facing the same percentage of debt-to-GDP ratios, it is much more difficult to introduce a super-EXIMBANK type institution. Given that the surplus countries led by China practicing statism and are not in the “traditional core (US, Western Europe, Japan, Australia) of the world-system,” the accumulation process needs the state more than ever. Part of the answer for the “traditional core” rests with the strategy of forcing the surplus countries to adjust their currencies upwards and stimulate domestic consumer demand.
Another part of the strategy is to create “periphery-like” (Third-World-like) conditions in their own countries while at the same time transferring capital from the debtor nations through IMF-style stabilization programs (massive loans from the core to the periphery designed to meet interest payments). During the current contracting cycle, to speed up capital accumulation it has become necessary in the advanced, semi-developed and and less developed countries to reduce labor values across the board–lower wages/salaries, lower benefits, cuts in social programs and higher indirect taxes–while pouring government resources directly or indirectly to the strongest players private sector starting with finance institutions.
The result is that global institutions such as the IMF for example, working with member governments, are managing the world economy back to health through concentration and centralization so that there is impetus for the next expansionary cycle to be followed by the inevitable contracting cycle. Keynesian-based expansion is less an option, as it has been out of favor since the Reagan-Thatcher era. IMF-style monetarism backed by the large banks around the world, backed by a shrinking welfare state, an expanding corporate-welfare state, accompanied by a much leaner middle class and a debilitated labor force is the way capital accumulation takes place today.