Saturday, 25 June 2016

The worldwide economic crisis and Brexit

As I said in my post on Brexit, this event is a product of the worldwide economic recession, and is a step towards extreme nationalism, growth in right wing politics, and fascism. What is the cause of this recession, and what is the solution ? This is what will be examined here.

For quite some time there has been an economic recession all over the world. From time to time we hear of a recovery, but in fact there has not been, and there is unlikely to be, a genuine recovery of the world economy for a long time. I will try to explain.

An economic recession is a feature of an industrial, not agrarian economy. In agrarian economies, too, there were catastrophies, but these were due to natural calamities like drought, epidemics, etc. An economic recession is a feature peculiar to industrial economies.

There have been recessions every eight or ten years ever since the Industrial Revolution of the 18th Century in Western Europe. These, however, were followed shortly thereafter by recoveries. But there has been one Great Depression which lasted from 1929 to 1939, and was ended only by the Second World War (in which 50 million lives were lost) which generated the massive demand for armaments, supplies to armies and war affected civilian populations, and capital for reconstruction, etc, and it was this massive demand which pulled USA out of the Great Depression. This Great Depression caused havoc in large parts of the globe, particularly in the developed countries.

We are now witnessing a persistent, and apparently unending, world economic recession, and its sweep is wider than that of the Depression of 1929, because while the latter affected mainly North America and Europe, the former is affecting the whole world, because while before the Second World War ( 1939-1945 ) many countries ( including India ) were largely unindustrialized, there has been a certain level of industrialization in most countries since then.


The principal cause of an economic recession (or depression) is lack of sales, which in turn is due to lack of purchasing power in the masses. There are other causes also, but these are only incidental, and not the main cause.

A large part of the world’s population is so poor that it hardly has sufficient purchasing power. Even in the developed countries there are many poor people.

Apart from the above, as the industrial economy develops, in the process industries tend to become larger and larger, to effect economy of scale, and more and more capital intensive ( that is, labour being replaced by machinery ). This is necessary for industries to face the competition in the market, otherwise their rivals will become larger and more capital intensive and drive them out of the market, by underselling them. This process is inevitable in most industries, but it leads to large scale unemployment, since many workers in a labor intensive industry are laid off when it becomes capital intensive. This generates unemployment.

Let me explain. There is competition between businessmen in the market. Let us take a simple illustration. Suppose A has a shop selling a loaf of bread for Rs.20. Next to his shop is the shop of B selling the same size and quality loaf for Rs. 18. What will happen ? The customers of A will gradually leave him and become the customers of B, and B will eliminate A by underselling him. Thus one businessman eliminates another not by tanks, guns or bombs but by underselling him.

Now the same thing happens on the national and even international level.

To reduce his sale price a businessman has to grow larger ( to effect economy of scale ) and to introduce new technology. This is because cost of labour is a big chunk of the total cost of production. So if the cost of labour is less, the cost of production is less, and if the cost of production is less, the businessman can sell at a cheaper price, and thus eliminate his business rival.. By introducing new and labour saving technology in his plant, the businessman can cut down his labour costs, and thereby his cost of production.

Suppose a manufacturer had 500 workers working in his plant. With the advance of technology he may get a new machinery which requires only 100 workers to produce the same amount of goods which he was producing earlier. This means 400 workers will become unemployed. Even if 100 of these 400 workers can get jobs elsewhere this still leaves 300 workers unemployed. When we enlarge our scene (because the same process is inevitable in most industries) we find large scale unemployment is being generated everywhere.

Now the worker, apart from being a producer, is also a consumer. Of course a worker in a steel factory does not consume steel. But he and his family consume food, clothes, shoes and various other articles. When he becomes unemployed his purchasing power becomes drastically reduced. And when unemployment is generated on a large scale, the market correspondingly contracts on a large scale, and this leads to a recession.

Thus we see that the very dynamics of an unregulated industrial economy is that by the very inevitable process of its growth it keeps destroying its market.

The goods produced have to be sold. But how can they be sold when people have lost their purchasing power (due to widespread unemployment)?

Mass production has to be accompanied by mass consumption. By taking purchasing power out of the hands of mass consumers the industrialists deny to themselves the effective demand for their products that would justify reinvestment of their capital accumulation in new plants (which would also provide employment ).

Before the Great Depression of 1929 high level of employment was generated by high level of debt in the form of mortgage debts (for housing etc.), loans to buy cars and other consumer goods, brokers loans (for buying shares, etc.). The same thing happened in recent times. But this cannot continue endlessly. A time comes when people cannot repay their debts (due to unemployment or cut in real wages). Then debtors curtail their consumption, which reduces demand, and the producing units have to close down or drastically cut production.

In modern economies, most businesses require loans for their normal operations. Banks normally retain a small fraction of their deposits (5% or less) and give the rest as loans to borrowers. When the banking sector does not work properly (because of defaults by loanees) businesses do not easily get loans, and consequently they have to curtail their production and lay off workers. As they curtail production they require less raw materials and other supplies. Hence their suppliers have to reduce their output and lay off their workers. The suppliers to these suppliers have to do the same.Thus, this can set off a chain reaction.

If manufacturers cannot sell they cannot generate enough revenue to repay their loans. The business goes bankrupt and the bank finds in its hand non performing assets. Hence banks want to lend less. This becomes a vicious cycle.

Depositors get scared because some banks have collapsed due to the non performing assets. Hence they start withdrawing their money, and more banks collapse.

The economic recession is thus caused by the reduction of purchasing power in the masses which is due to the very dynamics of unregulated growth. The productive capacity has been enhanced enormously, but the vast majority of people are too poor to buy.

The problem, therefore, is not how to increase production, but how to increase the purchasing power of the masses. Production can be increased easily several times because there are tens of thousands of engineers, technicians, etc., and there are immense reserves of raw materials in India. But the goods produced have to be sold, and how can they be sold when the people are poor or unemployed, and thus have very little purchasing power?

The problem is also not how to increase demand. The demand is there, but people do not have the money for purchasing goods. In India, for instance, 75% people live on bare subsistence incomes. This may not even be sufficient for buying necessities, like food or medicines, what to say of durable consumer goods like motor cars, refrigerators, computers, air conditioners and other goods.

The solution to the economic crisis can only be by raising the purchasing power of the masses. How this is to be done requires a great deal of discussion and creative thinking , and all serious thinkers must now address this main problem facing our country, and indeed the whole world.

The situation in India today is that while we have recently increased the number of billionaires in our country, the poor have become poorer and even the middle class is finding it difficult to make two ends meet because of rising prices. This is a dangerous trend and if continued is going to lead to widespread social turmoil and social unrest. It is totally unfair to the vast masses of our people and it will not be tolerated very long.

Society owes subsistence to all its citizens either in procuring work for them on a reasonable wage, or in ensuring a livelihood to those who are unable to work.

As stated by the great French thinker Rousseau in his book 'Discourse on Inequality' : “Nothing can be farther from the law of nature,however we define it, than that a handful of people be gorged with luxuries, while the starving multitude lacks the necessities of life.”

So how do we increase the purchasing power of the masses, which alone can bring us out of the recession and the economic crisis ?

In socialist countries the method of raising the purchasing power of the masses, and thereby rapidly expanding the economy and consequently abolishing unemployment, was broadly this :

1. Prices of commodities were fixed by the government.
2. These prices were reduced by 5-10% every 2 years or so
3. This resulted in steadily increasing the purchasing power of the masses, because with the same income people could buy more goods. In other words, the real income of the masses went up even if nominally it remained the same ( since real wage is relative to the price index ).
4. Simultaneously, production was stepped up, and this increased production could be sold in the domestic market, as the purchasing power of people was steadily rising.
5. This led to rapid expansion of the economy, leading to creation of millions of jobs and thereby abolition of unemployment.

During the Great Depression which hit the Western economies in 1929 ( it continued till the breakout of the Second World War in 1939 ) when about one third or more people in Western countries were unemployed and factories were shutting down, the Soviet economy was rapidly expanding and unemployed abolished by following the above methodology.

Of course this was only possible in a socialist economy, where the problem was solved by state action.

I am not saying that we must necessarily follow the method adopted by socialist countries. We can adopt any other method if thereby we can raise the purchasing power of the masses and thereby rapidly expand the Indian economy, which is the only way of abolishing unemployment in India.. The central point, and therefore the main problem before India, is how to raise the purchasing power of the masses ? Do we follow the method of socialist countries, or some other method ?

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