By International Socialist League
We share the document of economic analysis approved by the 1st Congress of the International Socialist League
The Capitalist World Economy after almost 2 Years of Pandemic
To analyze a “snapshot” of the world economy and its possible dynamics, we believe that it is essential to take into account the following reference points:
- The pre-pandemic development of the planetary capitalist economy, its trends and outlooks without COVID
- The impact of the pandemic on a global scale and its inequalities by region, though taking the world economy as an entirety to analyze
- The rate of profit on a global scale, its declining tendency and counteracting forces
- The blind spots of the economic “rebound”
- Evergrande and the limits of the Chinese “miracle”
- The agenda of the great world bourgeoisie
- Perspectives and axes for an emergency and transitional economic program of the ISL
- Our tasks
The starting point of the pre-pandemic world: the future was already very uncertain
All the reports by multilateral organizations and private consulting firms in 2019 already anticipated a dark period for the world economy. In fact, at the ISL World Conference (Barcelona, May 2019), we discussed the situation in these terms:
- The IMF and the World Bank said the outlook was uncertain and the indicators were bad. During 2019, the GDP growth forecasts for 2020-2021 were adjusted downwards 3 times.
- Private consulting firms, starting with JP Morgan, warned their clients (banks and corporations) that their outlook showed a “concerning synchronized slowdown.” That is to say: they advised to withdraw, not risk, and suggested a conservative orientation for investments because the general deterioration of the situation appeared “global,” not limited to a region. The IMF’s last report of 2019 recognized a “slowdown in 70%” of the world economy.”
- A key data point that we pointed out was the volume of corporate or business debts: companies took debt to speculate or finance projects (more the former than the latter) and, so long as interest rates did not rise and sales and profits did not fall any further, they could face payments and avoid defaulting. But they went into the pandemic with those tensions loaded.
- In short, we identified a feedback loop of conditions for a new crisis: low profitability that discourages productive investment, therefore deepening the decline of profitability, thus prolonging a cycle of general economic depression.
Our first conclusion as a political starting point is that the capitalist economy never recovered from the crisis of 2008, which, taken as a whole, encountered the pandemic under conditions of a decade-long world depression, with a weak recovery in imperialist economic centers like the US, China and Southeast Asia, but with stagnation in Europe and the peripheral economies. Therefore, the COVID pandemic amplified and deepened those trends to explosive limits. This statement, based on abundant empirical information, challenges the thesis that COVID interrupted a virtuous and expansive capitalist cycle. This is simply false: never in the period of 2009-2019 did the world economy recover its rate of profitability prior to 2008, and that fact deepened the trend of growth of speculative capital since it does not find sufficient valuation in production. This phenomenon, called “fictitious capital” by Marx, emerged out of the last 4 world capitalist crises. It reveals the current nature of the system and it is its most acute weakness: it emerges from each crisis by expanding speculative capital, which prepares and anticipates new and more powerful crises. The recurring nature of crises is confirmed as the general law of this imperialist era.
The Scars of the Pandemic
A first comment to be made is that the pandemic, with all its monstrously capitalist nature, revealed the elements of the bluntest barbarism:
- Its origin based on the manner of producing this viral spread, predicted by scientists and researchers for at least 10 years, is a consequence of the ecocidal production matrix that violently alters ecosystems and puts humanity in contact with viruses for which it is not immunized. That matrix (we will return to it at the end), is being reinforced, not revised, in the agenda of big capital.
- The capitalist war of secrecy waged by the big laboratories and pharmaceutical companies that delayed almost a year the offer of vaccines, in addition to the death toll of millions, virtually paralyzed the economy and produced a profound damage. The debate around the commercialization of science and knowledge, based on patents, revealed another barbarity of the system. Furthermore, its imperialist distribution and its hoarding completed a sinister picture.
In strictly economic-statistical terms, the COVID pandemic eliminated all previous forecasts. If we look back at 2020, the world capitalist economy has experienced the largest and widest depression in its history, with about 95% of economies suffering a contraction in national production, investment, employment and trade. Very few countries were able to avoid a recession in 2020, namely China, Vietnam, Taiwan, and that’s it.
One way or another, most countries will end up recovering somewhat from that “abyss” due to a rebound effect. Real GDPs are growing this year, unemployment rates are down a bit and consumer spending is recovering a bit. That is just statistics and appearances. But if an economy falls 10% from, say 100 to 90 in one year, and then recovers to 95 the following year, that is a 5.5% increase. But of course the economy is still 5% below its pre-100 level. Also, if the economy hadn’t entered a recession, it could have risen, say, another 2-3% in a year. So even after the recovery this economy would be between 6 and 7% below its tendency. This is what may end up happening in most economies in 2021. But the pandemic crisis leaves huge losses in production, resources, income and jobs, many of which are gone forever.
At the global level, the recession compounded extreme poverty, famines and all the phenomena of the humanitarian crisis caused by forced migration are reinforced. These two years have been a huge disaster. JP Morgan economists have attempted to measure the rise in poverty using household income and consumption survey data from the World Bank’s PovcalNet database. The parameter that they use to consider someone in the range of “poverty” is an income level of less than 2 dollars a day. Before the pandemic, of the world’s 6.5 billion inhabitants, the World Bank considered that 3 billion had average incomes, and that 3 billion were in a vulnerable situation, 1 billion of which were in extreme poverty.
The pandemic has thrown nearly 200 million more people, not in rural but urban areas, into poverty. The situation varies from country to country, with the worst performances in Argentina, Peru and India.
Therefore: although 2021 ends with a certain “rebound” effect in the main capitalist economies, albeit with a very different outlook in the so-called emerging economies and the Global South, even that recovery will not be V-shaped, which would mean a return to the previous pre-pandemic levels of national production, employment and investment (with its “lost decade” of global depression). In fact, most IMF, World Bank and OECD forecasts do not expect major economies to return to pre-COVID levels before the end of 2022 and many will never catch up with previous growth trends (which were already scrawny). Furthermore, there are three main sets of reasons to argue that the rebound tendency will not reach pre-COVID levels:
- The impact of COVID leaves “permanent scars” on most capitalist economies. During the 2020 shut down, many companies, especially the smallest in the service sector, will not rehire the workers they laid off. Destruction of productive forces.
- There is a jump in corporate debt. This will affect the ability of many companies (not just the small ones) to return to some degree of investment. Marxist economists speak of the rise of “zombie companies” in the main economies, to refer to over-indebted companies of quasi-artificial existence. With interest rates lowered to the level of inflation and below by huge injections of credit money by major central banks, and government backed credit programs, companies dramatically increased their debt levels during the confinements of the COVID pandemic. Large companies have hoarded the money or invested it in the purchase of their own shares or financial assets, for speculative purposes. As a result, stock markets in many countries have soared to all-time highs. However, many smaller companies have had to use the additional debt to survive. The costs of maintaining their debt have plummeted, but the amount of debt has skyrocketed. This is a weak link in the world economy: insolvency.
- Finally, the third reason to not expecting a recovery that provides global capitalism with sustained growth, is that the average profitability of capital in the main economies is equal to the low points of the second postwar period, greatly aggravated by the fall of the pandemic.
We will take up this particular variable in the next section. But, summarizing:
- Unemployment and structural poverty
- Fall of investment due to low profitability.
This economic balance of the pandemic, which amplified previous developments, conditions everything that is to come.
It’s the Rate of Profit, Stupid!
For the system’s economists, profit does not matter a parameter in their analysis. Furthermore, among left-wing Keynesians, profits hardly appear. For them, the decisive categories are “demand,” “speculation” or “financialization.” Even in the field of Marxism, there are debates: whether over-production, under-consumption, or other variants are the keys to crises. All these factors play an important role, but profit is the key category for understanding the capitalist process of production and accumulation. And it is important in relation to a company’s investments: the rate of profit is the key to understanding the extent to which an economy is in “good health,” even if it is temporary. And the incontestable empirical data shows that average profitability on a global scale has tended to fall during the last 50 years, not in a linear way, with fluctuations, but downward. In this, the huge profits of technology companies like Amazon, Apple or Google cannot cover up the problem of profitability in the capitalist economy as a whole. There are many unprofitable companies and, for most, the rate of return fell sharply with the pandemic, after already having fallen before COVID. This factor directly conditions investment and is the crucial aspect of the critical approach that revolutionary Marxism can bring to the analysis of the world economy.
There are factors that counteract this law, of course: the increase in surplus value, of course, and the rate of exploitation of the labor force that compensates for the increase in the organic composition of capital. This dynamic exists and is resolved in the concrete terrain of the class struggle and the political struggle: whether or not the bourgeoisie succeeds in imposing its agenda of precarious labor, of suppressing social rights and applying austerity on workers’ and the mass movement or not. However, that the law of the tendency of the rate of profit to fall is the dominant factor is, in our opinion, beyond a doubt.
Except for the golden years of capitalism after World War II (known as the “Boom”) –which were an exception, at least in the advanced economies, with high employment rates, rising living standards, high profits and expanding trade– if one takes the complete measurable history of capitalism, the closest case to that exception would be the decades from 1890 to 1910. Faced with this, the question is: why did these phases of prosperity not endure?
In reality, neither the “orthodox” economists nor the majority of the theories of the left outside of revolutionary Marxism, have an answer to this question. There are those who say that the post-WWII phase ended because Keynesian policies were abandoned, because governments stopped spending enough money and stopped managing the economy. Thereupon, we ask ourselves again: why were those policies abandoned? The answer lies in the decreasing profitability of large capitals. This led to the neoliberal experiment of the 1970s, aimed at increasing the rate of exploitation, surplus value and imperialist looting with external debts as a mechanism of plunder. This, speaking in strictly economic terms.
This factor is key, because it encourages a circuit of recurring crises:
- The rate of profit falls, therefore, so does investment in production.
- Financial speculation and what Marx called “fictitious capital” grow: bubbles threaten to burst. In 2008 they were the “subprime” bubbles, now the Evergrande crisis in China exhibits the same dynamic there.
- To recover sustained profitability over time, the levels of labor exploitation and looting of nature that are needed on a global scale, require a historical defeat of the mass movement and barbarism.
In short: the rate of profit describes a downward cycle since at least the early 1960s. The perspective is of a continued fall, since the counteracting factors do not appear with great vitality to operate.
Three Blind Spots in Today’s Capitalist Economy
If the tendency of the rate of profit to fall is the central and structural factor, which conditions the capitalist economy, we can point out three more variables to take into account as weak links in the “snapshot” of the current situation:
- The levels of public, corporate and personal debt on a planetary scale.
- Stagnation and inflation combined: stagflation.
- The crisis of labor productivity.
The pandemic led governments around the world to apply business relief programs, fiscal stimulus and to a lesser extent, social subsidies. On average, these measures amounted to a volume of spending at least twice as large as the fiscal and monetary stimulus and crisis relief packages of 2008-2009. Global public sector debt levels exceed anything in the past 150 years, even after the two world wars. This element, with the reactivation of the economy since the return to relative normality, is tied to several factors:
- That the interest rate does not skyrocket , causing a spiral of defaults.
- That fiscal income is recovered and public spending reduced: this implies harsh social cuts.
The “debt” factor is clearly a weak and very unstable link in the economy. Dialectically, it also connects with the second: stagnation and inflation.
The fall of the rate of profit discourages productive investment. The reopening of economic activity to the extent that vaccination progresses –with many inequalities– throughout the world, causes what economists call a “shock” of demand: there is more consumption. However, non-productive investment limits the supply of goods and services, and this factor pushes prices up. This combination of weak productive investment that stagnates the economy and inflation, in turn, puts upward pressure on interest rates (this way, banks “tie” profitability) and makes debts more expensive: an explosive cocktail.
Finally, there is a process that we described above: the system in its speculative logic due to the low average rate of profitability, concentrates capital in speculation, not in production. Therefore, although some specific branches of production can be developed – digital technology, 5 G or others that are very partial – as a whole, the economy tends towards deindustrialization and, in addition, reinforces an international division of labor that consolidates the status of sub-developed countries as suppliers of commodities. Capitalism in its origin, expanded the productive forces, and encouraged productivity and industrial development, against the previous feudal mode of production. However, quickly in historical terms, it blocked the development of the productive forces and became an absolute brake. Therefore, instead of investing in technology and innovation, capital moves to the circuit of speculation, accumulating contradictions that prepare new crises.
Therefore: against the background of the tendency of the rate of profit to fall, the volume of public and corporate debt (in addition to personal debt), stagflation as a phenomenon and the capitalist crisis of productivity are added. The system shows all its contradictions and limits.
Evergrande or the Symptom of the Limits of the “Chinese Miracle”
Evergrande is the largest real estate developer in China and the world. A few weeks ago, it defaulted on the interest payment of a US$ 300 billion bond. This news caused a shock and real estate stocks plummeted. The intervention and temporary rescue by the Chinese bureaucracy tempered the impact, but left unanswered questions. In fact, 21 more real estate developers received state coverage. With that intervention, China’s real estate private property sector is now made up of “zombie” companies (indebted to the state) as well as 15-20% of companies in the main capitalist economies. That is to say: artificially sustained to avoid a contagion of the crisis. The Chinese government faces a dilemma: if it drops Evergrande and other real estate companies, then millions of homes may not be built for people and the losses incurred by lenders and investors in these companies could have an cascading effect throughout the economy. On the other hand, if the authorities bail out the companies, then speculation could continue, as the real estate sector could assume they have government backing for all their speculative projects –the same crossroads of the US government in 2008 when real estate markets sank. But beyond this circumstantial scenario, the real problem is that in the last ten years (and even before) the Chinese bureaucracy has allowed a massive expansion of unproductive and speculative investments by the capitalist sector of the economy. In fact, the real estate sector has already reached more than 20% of China’s GDP. And two more conclusions:
- This growth in speculative real estate development and other unproductive activities in finance and consumer media has been driving China’s official annual growth rate. That is to say: there was an artificial and inconsistent, non-productive leveraging of the “Chinese miracle.”
- Second, this misleading leverage is connected to a slowdown in the productive sector of industry, manufacturing, high-tech communications, etc. All for a basic reason: the limits of world consumption in a crisis phase on that mass of cheap goods produced on the basis of brutal labor exploitation.
Finally, one more element to take into account: after 2008, the Chinese government discussed dumping part of its production in the domestic market, and strengthening it to that end. Today this orientation is less profitable, because it includes strengthening wages. Hence China’s line of imperialist expansion with mega-projects like the New Silk Road and others that, in turn, feed geopolitical tensions with the United States in a stage of high world instability and disorder. In addition, of course, the perspective of China’s economic expansion occurs in a phase of systemic decline, it does so by causing all kinds of socio-environmental disasters with mega-projects in different areas of the world, which makes its dynamics highly uncertain. Of course, in addition, there is the decisive factor of the class struggle, of that giant that is the Chinese working class.
Therefore: China as a capitalist power has structural limits in its matrix of economic production that should be taken into account and we question the “siren songs” of campists who present China as a progressive alternative of rising capitalism against US imperialism.
The Orientation of the Imperialist Bourgeoisie
The general picture of the economy is crossed by all the limits that we have marked throughout this report. But, centrally, the perspective of the dominant bourgeoisie is categorical:
- The agenda of labor reforms.
- Tax reform, to encourage production.
- Pension reform
- More depredation of nature
- Imperialist plunder through external debts
In this regard, Marx continues to clarify over and over again, the way in which capitalism recovers from its crises: by reinforcing the exploitation of labor force and of nature. For this reason, it is no coincidence that when the profit equation falls, false ideologies appear transformed into campaigns that pose in a sophisticated way the old thesis of the “end of the working class,” which would be replaced by the processes of robotization, automation, artificial intelligence and the internet of things. However, these siren songs cannot counteract the hard data of the economy. For example, according to the ILO, there are 3.3 billion workers in the world: the weight of the working class has never been so great, quantitatively speaking. For this reason, its strategic position in the economy continues to be decisive; and for this reason, the way out of the capitalist crisis circle, for the bourgeoisie, consists in recovering profitability based on increasing the levels of exploitation of the labor force as never before and obtaining more cheap commodities and raw materials; and all of that is only possible by suppressing labor rights, making labor more precarious and causing more environmental catastrophes. All the system’s spokespersons and ideological factories are dedicated to explaining that it is necessary to “make flexible and modernize” the rigid labor laws of the countries; lighten the tax burden on the business community to encourage investment and, at the same time, extend the retirement age, since the pension systems are supposedly “unsustainable”. Complementarily, the external debts of the peripheral countries add an additional factor of economic looting and political conditioning in the sense of the agenda explained above. For this reason, this economic program, albeit with nuances, frictions and tensions, strategically unifies the great bourgeoisie and implies a plan of war against the masses of the world. Hence the political prognosis that the ISL reaffirms, of more social and political polarization as a tendency of the class struggle.
Our Own Programmatic Agenda
A fundamental task in this context is to thoroughly arm the cadres and militants of our organizations with a set of programmatic axes in the field of economics to allow us to fight for our socialist and revolutionary positions in the vanguard and win over the best elements to our parties and groups; and to agitate correct slogans among sectors of the masses in a perspective of polarization that will tend to amplify the social audience for our ideas. Providing our transitional, anti-capitalist and socialist answers, which explain our alternative economic approach for an independent solution of the workers and the poor masses to the systemic crisis, is one of the key tasks of this phase. We mention a few for reference:
- In defense of the social right to work, occupation of any company that closes or dismisses. Workers’ control, opening of accounting books. Abolition of trade secrets. Expropriation and nationalization without compensation, under the management of its workers.
- To guarantee full employment, distribution of working hours, reduction of working hours without affecting salaries.
- Against hunger, general increase of wages, equivalent to the real cost of living and indexed to real inflation.
- Suspension of payment of external debts. With these resources, finance public works and infrastructure plans, especially affordable housing, to reactivate the economy and guarantee the social right to housing.
- Comprehensive tax reform: elimination of all popular consumption taxes and permanent and progressive taxation of large corporate fortunes (corporations, banks) and individuals.
- In defense of the solidary social security system, retirement and pensions, not as an “old-age subsidy,” but as deferred salary, equivalent to a mobile 82% of the best salary of active workers of the same activity.
- To guarantee access to general mass consumption, price controls, against capitalist price making and speculation, in charge of workers’ and consumer organizations, including expropriation sanctions.
- To guarantee public services as social rights, nationalization of all privatized energy, transport, telecommunications, running water and other companies, without compensation, under the social control of workers and users.
- Qualitative increase of the state budget in education and health, based on the capture of resources from the mentioned sources (suspension of debts, taxes on the rich) and elimination of economic subsidies to churches and private medicine.
- In favor of scientific research and technological innovation by the State, and its massive incorporation into the production process, not to replace workers, but to alleviate the general and collective burden of socially necessary work.
- To oppose the capitalist anarchy of production, democratic planning with direct intervention of the working class in the entire circuit of the economy, including distribution and general commercialization with regional and international projection.
Approved unanimously 12/10/21
Courtesy International Socialist League