Capitalism’s Central Contradictions as Seen in the Current Crisis

by Aaron Bass / September 2008

In recent articles on the economy we’ve explained how the current crisis of capitalism is part of a centuries-old succession of business cycles and of longer-term waves of expansion and contraction. And as in all periods of systemic decline, the growth of speculative capital due to lack of outlets for productive investments is exacerbating today’s crisis.

In 1880, Frederick Engels, in his "Socialism: Utopian and Scientific," described the central contradiction underlying these broader phenomena. Said Engels: "The productive forces have outgrown the capitalistic mode of using them. This contradiction contains the germ of the whole of the social antagonisms of today: the incompatibility of socialized production with capitalistic appropriation."

Below we’ll look at examples of how this contradiction has manifested itself in recent economic events.

Auto continues to crash

Engels writes: "No one knows whether his product will meet an actual demand. Anarchy reigns in socialized production." Underlying this anarchy are "compulsory laws of competition," which "work themselves out independently of the producers." Ironically, "the means by which the mode of production intensifie[s] this anarchy" is the exact opposite of anarchy: it is "the increasing organization of production, upon a social basis, in every individual productive establishment."

Engels also explained how this contradiction within particular industries is mirrored by the economy as a whole – and even in noneconomic phenomena which share the same schizophrenia between fragmentation and organization.

"The extension of the markets cannot keep pace with the compulsory extension of production. The collision becomes inevitable and periodic … markets are glutted, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence.

Productive forces are wasted and destroyed, until the accumulated mass of commodities finally filter off, depreciated in value." But the resumption in production leads to the same results, and the succeeding boom ends in yet another crash.

We can see Engels’ point most immediately in the U.S. auto industry. Despite millions spent on planning model changes, sales, plant locations, not to mention the planning of production within and among plants, the vagaries of the market frustrate all such collective organizational efforts.

The fallout from this contradiction continued to rack the industry this summer in layoffs and buyouts heaped on top of previous cuts.

At the end of July GM announced it would cut production by 117,000 vehicles, making a total of 300,000 this year, and promised more to come. GM suspended dividend payments for the first time since 1922. Its shares are at their lowest level since the 1950s, and it is considered by analysts to be in danger of bankruptcy. White-collar payroll costs are to be cut by 20% through a pay freeze and buyouts, and by elimination of health insurance for retirees.

GM also refused to pay a promised $1.7 billion due to a union-administered fund for retiree health insurance, with no opposition from the UAW.

The union often criticizes GM for not following the lead of Japanese manufacturers by investing in new, more fuel-efficient models, and instead returning an excessive share of profits to stockholders and executives. From 1996 to 2000, GM spent $13 billion buying back its shares (which increases their price) and $7 billion more on dividends to shareholders.

In those same years, UCLA Professor Sanford Jacoby pointed out, Toyota was "plowing cash into research and development." Which is not to say GM has undertaken no such investment: while announcing its cuts, it also announced plans for a diesel engine plant in Thailand to serve the Asian market.

Still, GM and other U.S.-owned automakers are likely to continue losing market share to Japanese and other companies. But the more fundamental question is why there are any losers in this competition, which brings us back to Engels’ fundamental contradiction. There are just too many plants, and they are too well organized, turning out cars for a glutted market.

Engels offers another insight into how winners and losers are determined under such conditions: "Modern industry and the opening of the world-market made the struggle universal. Advantages in natural or artificial conditions of production now decide the existence of individual capitalists as well as whole industries and countries."

Among those artificial conditions are a multitude of factors, such as the age of a country’s capital stock, the social, political and cultural dynamics flowing from previous decades of economic ascendancy or decline, etc.

But let’s assume such factors were irrelevant, that ALL automakers, here and abroad, had invested equally in retooling: the market would be every bit as glutted, the misery of layoffs and other cuts every bit as severe. They would just be more evenly spread.

Back in the real world, although union leaders criticize bailouts of investors and banks as a way of solving the mortgage and financial crises, they’re eager to demand such bailouts on behalf of their "partners" in the auto industry, loans also being pushed by Democratic lawmakers and by presidential candidate Barack Obama. And on Aug. 22 the Big Three demanded billions more be added to the government loans of $25 billion already approved in 2007.

The union has failed to consider demanding changes that could actually begin to overcome the contradiction between the anarchy of the car market and its too well-organized production, such as a shorter workweek with no cut in pay.

Price hikes, job cuts

In the economy as a whole this summer, prices continued to soar and jobs to disappear.

Writes Engels: "Overwork of some becomes the condition for the idleness of others, and industry forces the consumption of the masses down to a starvation minimum, and in doing thus destroys its own market.

"The perfecting of machinery means the production of workers in excess of the needs of capital, the formation of an industrial reserve army."

This reserve army has been increasing steadily for months. In August the Bureau of Labor Statistics reported that initial claims for unemployment for the first half of the year were the worst for any such period since 2003. The official unemployment rate was 5.7% in July, up from 5.5% in June and 4.6% the year before.

Meanwhile prices keep rising: The Consumer Price Index was 5.6% higher this July than in July 2007, the sharpest increase since January 1991. The CPI rose 0.8% in July, following a rise in June of 1.1%, the second highest monthly pace in 26 years.

On Aug. 20, the U.S. Agriculture Department warned consumers to "brace for the biggest increase in food prices in nearly 20 years in 2008 and even more pain in 2009."

Meanwhile, a long-delayed increase in the minimum wage, whose purchasing power plummeted to a 51-year low in 2006, still leaves it at a pitiful $6.55 an hour. And Social Security payments are going up 2.3% this year, far less than inflation, and that on top of a miserly base amount.

Normally in periods of downturn, prices fall as companies strive to get rid of "the accumulated mass of commodities." But today, as in the 1970s period of "stagflation," prices are continuing to rise despite such glutted markets. This is due primarily to the permanent inflation existing since the end of World War II, caused by military and other government spending and provision of credit, in an effort to stave off Great Depression levels of unemployment and the likely political consequences.

Clearly, just as autoworkers need a shorter workweek to reap the benefits of their heightened productivity, so too does the working class as a whole need a sliding scale of wages and hours, with the former to rise and the latter to fall in a manner determined by democratically-elected workers’ committees.

But the U.S. labor officialdom rarely goes beyond pleas for modest increases in the minimum wage. And they have never considered demanding society-wide cost-of-living increases of the type that, as The Wall Street Journal noted on Aug. 22, have protected European workers relatively more from inflation. In Europe, unions have negotiated industry-wide, or even country-wide, cost-of-living raises for all workers, regardless of whether they’re in a union.

Mortgage, financial crises continue

Engels’ contradiction can also be seen in its typical form in the housing market, with the decisions of millions of buyers frustrating any collective attempt to juggle supply and demand. This in a period when "urban planning" has been used by governments to plan and fund, as well as to destroy, tracts of thousands of homes at a time.

But in addition, housing has suffered more than almost any other industry from the influx of speculative capital caused by the crisis of the system as a whole. And ironically this phenomenon can be traced back to another form of socialization: in this case not of production, but of exchange, i.e. of finance capital.

Said Lenin: "The banking system ‘possesses the form of universal book-keeping and distribution of means of production on a social scale, but solely the form,’ wrote Marx in Capital."

Lenin went on to describe how modern banking, holding deposits for millions of workers, appears on the surface to have achieved the "universal distribution of means of production." But, he pointed out, that distribution in fact "conforms to the interests of huge, monopoly capital, which operates under conditions in which the masses live in want, in which the development of agriculture lags behind the development of industry, while within industry itself the ‘heavy industries’ exact tribute from all other branches."

Yet even these favored heavy industries suffer from profit crises and economic downturns. So capital which can’t be productively invested in them is then channeled by the banks into speculative investments, in the form of derivatives and other new financial tools, which are used to prop up glutted housing and other markets suffering from the declining purchasing power of the masses.

On Aug. 14, the Washington Post reported that large mortgage insurers, facing record delinquency rates, had reported $2.6 billion in losses so far this year, and are raising requirements for premiums, down payments, and credit scores. (This follows an earlier dramatic weakening of such requirements as these insurers, whose business had declined with the advent of second mortgages, began insuring securities based on subprime loans.)

The Post predicted that continuing mortgage insurer difficulties could lead either to a return to 20% down payments, or a shift of even more of the mortgage insurance market to the Federal Housing Administration, which requires as little as 3% down.

The question naturally arises: why doesn’t the FHA insure all mortgages, if they can do so on better terms? The answer is the same as why there is no Medicare For All, as single-payer advocates urge, despite the program’s vastly lower costs: the government socializes only that part of a market which it must to stave off a crisis.

Meanwhile, those other notorious examples of the partially socialized housing market, Fannie Mae and Freddie Mac, continue their catastrophic plunge, dragged down by the anarchy of the rest of that market.

On Aug, 18, investors dumped shares of Fannie Mae and Freddie Mac, driving them to their lowest levels in more than 18 years on fears of a government bailout that would wipe out stockholders’ investments. Overseas central banks had dumped nearly $11 billion of their securities in the preceding month.

The August panic came after reports of meetings between Freddie Mac executives and Treasury officials, compounding jitters from a report in Barron's the weekend before that government officials "may have no choice but to effectively nationalize" Fannie and Freddie.

Obviously, the key here is what is meant by "effectively." There is no sign that a genuine nationalization will occur, but instead more loans and purchase of its stocks—even though the two companies own or guarantee almost half of all U.S. mortgages.

Meanwhile, the mortgage crisis is spreading to less risky loans representing a much bigger chunk of the market. Said the New York Times on Aug. 4: "The first wave of Americans to default on their mortgages appears to be cresting, but a far larger one is quickly building."

The percentage of alternative-A mortgages in arrears quadrupled to 12% in April from a year earlier, while delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7%. "Subprime was the tip of the iceberg," said a trader in mortgage securities. "Prime will be far bigger in its impact." The chair of JPMorgan Chase said he expected his losses on prime loans to triple.

Meanwhile, home prices continued their fall, dropping 7.6% in the second quarter in metro areas.

Another shady use of speculative capital in derivatives gambling—the market for Auction-Rated Securities (ARS’s)—came to light in August, as charges were settled against the country’s biggest banks involved in their issuance.

By Aug, 22, New York State Attorney General Andrew Cuomo, in cooperation with state and federal regulators, had forced banks to agree to repurchase outstanding ARS’s from individual investors. These notes were sold with a promise that they would always be convertible into cash. But when the $330 billion market for them froze up in February, their issuers refused to pay up.

The cheapness, ease, and supposed need for little liquidity of ARS’s made them the financial equivalent of subprime mortgages—and the failure of this market proved them to be every bit as risky.

This scandal also revealed a high-tech manifestation of Engels’ basic contradiction. The banks involved in the ARS scandal possess computers able to track hundreds of millions of accounts every day and perform trillions of calculations a second. Yet as in other derivative markets coming apart in the crisis, no one knows for sure how much all the outstanding ARS’s are worth.

The geometrical expansion of computing power is thus used not to rationally plan social investment in production or services, but to multiply the number of ways to gamble away ever more fantastic sums of money.

A similar waste of planning power, by the way, can be seen in Starbucks’ announcement of store closures, the latest example of how even the monopolization of a market sector can’t overcome the competitive pressures of the system as a whole. This July, Starbucks’ stock price was half what it was a year before, and it announced it would layoff 7 percent of its global work force as it closed 600 stores.

The company had developed a reputation for using tools more advanced than any other retailer for selecting store locations, achieving what The New York Times called "its almost comic ubiquity."

But despite the lack of significant competition, Starbucks is nonetheless subject—like any other business—to demands for ever more profits from investors and banks, as well as to the general economic downturn.

In 2004, the company announced it would double its pace of expansion. Real estate brokers said this was due not to evidence of adequate sales from its forecasting tools, much less a realistic sense of the broader economy, but rather to continually increasing pressure for growth from Wall Street. So the company ignored the recommendations generated using those tools.

Calculating the costs of climate change

The abuse of computing power—i.e., the refusal to use the objectively socialized gathering of data for social uses—was shown this summer in an even more horrific form.

In August the Federal government shut down a key research institute charged with calculating, and on that basis suggesting remedies for, the impact of climate change on the world’s most vulnerable populations. By doing so Washington saved $500,000, but as a result it is less able to predict catastrophic events that involve the fates of millions of lives, and potential economic losses in the billions or even trillions.

And why waste money on such objectively socialized calculations and collective efforts that could be undertaken using them, when you can let the anarchic market do the job! Sound stupid? Can you say, "carbon trading"?

But such maddening irrationalities can be overcome precisely by resolving the very contradiction Engels analyzed: "These productive forces press forward … to the practical recognition of their character as social production forces."

Recognizing that, workers take action allowing society for the first time to "openly and directly take possession of the productive forces which have outgrown all control, except that of society as a whole. Anarchy of production gives place to a social regulation of production upon a definite plan, according to the needs of the community and of each individual."

The first step down that road is demanding society-wide solutions to the impact of the current crisis, such as a sliding scale of wages and hours for all to fight unemployment and inflation. In the process of fighting for such demands, growing parts of the working class will learn about the basic contradictions—and their solutions—described by Engels.