Commentary on Political Economy

Friday 26 August 2011

Obama, Rooseveltian Resolve and the Capitalist World Economy

As you can see from this FT article the choices open to President Obama are now as stark as "the fracture" in the US ruling elite that imposes them. The options are either to follow down the path of "austerity", of repaying "the public debt" that in fact is a "private" debt incurred by capitalist finance in the speculative bubble occasioned by the re-cycling of profits made possible by the Chinese dictatorship on the blood sweat and tears of its workers - and, by so doing seek to reduce our living standards to a level resembling that of the slaves who built the Pyramids. Or else, the other option, is to return to the better more peaceful path of "relative exploitation" whereby capitalist industry shares its ownership of social resources with workers through better living standards.

The trouble with the second option, of course, is that higher wages and living standards also entail lower "profitability" for capital - which can be re-established through higher "productivity". The demand for the higher product ahould come from those underdeveloped countries, including China, provided that their governments are thoroughly democratised and so their economies can be liberalised (the two processes go together).

The "absolute exploitation" option is akin to that which presented itself to Western democracies after World War One when they sought to re-introduce the so-called "Gold Standard", which in fact was a Gold Sterling Exchange Standard. That "standard" amounted to a "deflationary regime" whereby nation-states sought to redress balance of payments imbalances by reducing domestic consumption through lower wages. But it was the "downward stickiness or rigidity" of wages that made this "balancing" impossible. And the stability of the system derived from the ability of Britain to run huge deficits on current account that were "balanced" on capital account with equivalent "surpluses" and gold flows from the British Empire (India, Australia and Canada) which enjoyed huge trade surpluses with the rest of the world (US and Latin America mainly).

As ought to be clear by now, this system could not endure. It took President Roosevelt to abandon the Gold Sterling Exchange Standard in 1933 and replace it with a focus on boosting domestic demand by transforming the working class into the engine of capitalism - using its antagonism to improve productivity, encourage innovation, and lead the US to world leadership. That was capitalism at its best - and what allowed the US to defeat the dictatorships founded on "absolute exploitation" - Japan and Germany.

What we have called "the fracture" on this site is now in evidence. The capitalist world is on a Labor Standard, which means that with free flow of capital and trade, any improvements in productivity and innovation are quickly transmitted to nation-states that repress domestic wages and consumption, so that they run a "surplus" which they then use to impose "austerity" on the deficit countries and, by so doing, strengthen their own industrial base and boost unemployment whilst maintaining low inflation.

Normally, nation-states with free labor markets and democratic institutions will see their wages and consumption rise with the rising currency which will lead to a "balancing" of trade and capital accounts. But when dictatorships such as the Chinese Politburo or the ex-Nazi German ruling elite or the Japanese counterpart are involved, their response to a rising currency is "sterilise" capital inflows by purchasing foreign reserves or hard currencies such as the dollar and gold - that is why China, Japan, Germany and Taiwan and Korea have the biggest reserves in the world! This "mercantilist" behaviour exacerbates the imbalances and is a form of exporting both inflation and unemployment, unless... Unless the deficit countries take measures to devalue their currencies and pay for the deficits in "paper" whilst taking appropriate measures to imcrease their "competitivity" through higher productivity.

But this is hard to do when you face dictatorships like China's that keep exploiting their workers and "stealing" technologies and, with the export profits, subsidise their state-owned enterprises that then seek to take over the world. Something has to give! Let us hope that Obama finally understands this vicious circle and exhibit some of that long-awaited... "audacity of hope"!

1 comment:

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