"Better times" cannot sustain stock prices

Patrick Bond pbond at wn.apc.org
Sun May 3 06:56:22 PDT 1998



> From: Dennis R Redmond <dredmond at gladstone.uoregon.edu>
> ... sooner or later, financial
> manias which aren't supported by a real economic boom (and for all the
> fireworks of the US stock market, real investment in America has pretty
> much stagnated throughout the 1990s, and growth rates have been miserable)
> come to a grievous end.

Can I chime in with a simplistic -- if excessively wordy -- explanation? To introduce myself, I teach at a university in Johannesburg and work a great deal (as much as possible with labour and social movements) on financial markets in South Africa and Zimbabwe. Both countries have had spells during the last decade as hosting the world's highest-flying equity market, followed by crashes and stagnation. I just finished a book, Uneven Zimbabwe: A Study of Finance, Development and Underdevelopment where I try, quite crudely, to locate these dynamics in Marxian theory. Here's the line of argument. I wonder if it makes sense to those patient enough to wander through it...

***

As overaccumulation begins to set in, as structural bottlenecks emerge, and as profit rates fall in the productive sectors of an economy, capitalists begin to shift their investable funds out of reinvestment in plant, equipment and labour power, and instead seek refuge in financial assets. To fulfil their new role as not only store of value but as investment outlet for overaccumulated capital, those financial assets must be increasingly capable of generating their own self- expansion, and also be protected (at least temporarily) against devaluation in the form of both financial crashes and inflation. Such emerging needs mean that financiers, who are after all competing against other profit-seeking capitalists for resources, induce a shift in the function of finance away from merely accommodating the circulation of capital through production, and increasingly towards both speculative and control functions. The speculative function attracts further flows of productive capital, and the control function expands to ensure the protection and the reproduction of financial markets. Where inflation may be a threat, the control functions of finance often result in high real interest rates and a reduction in the value of labour-power (and hence lower effective demand). Where bankruptcies threaten to spread as a result of overenthusiastic speculation, the control functions attempt to shift those costs elsewhere.

Historical evidence of financial ascendance during the accumulation cycle is impressive, and can be reviewed briefly at this stage in the argument. For example, the existence of "Kondratieff"-style long- waves of capital accumulation is securely established, with global crises occurring roughly from 1825-45, 1872-92, 1929-48, and 1973-present (Kondratieff, 1979; Gordon, 1980; Van Duijn, 1983; Goldstein, 1988). From either a Marxist or non-Marxist vantagepoint, though, a precise measurement of these cycles of accumulation is difficult. Variables such as price series, profitability and production estimates are central to most studies, whereas ideally measures such as capital intensity ("the organic composition of capital"), surplus value rates, the velocity of circulation of capital, the geographical expansion of capitalist relations, capacity utilisation and inventory build-up would be preferable for Marxist analysis.

Within the long-wave of accumulation, at a sub- global and sub-national scale, there are even more obvious "Kuznets cycles" of fifteen years to three decades duration (Kuznets, 1930), witnessed in particular by labour migration patterns and investment in buildings, infrastructure and other facets of the built environment (Thomas, 1972). David Harvey, in particular, has used empirical evidence of Kuznets cycles to reflect upon the Marxist theory of overaccumulation, followed by devaluation (Harvey, 1989a, 77).

Taking the next step, we can verify the rise and fall of finance during the course of accumulation cycles, especially at the global level. During four particular periods -- the late 1820s, 1870s, 1930s and 1980s -- at least one third of all nation-states fell into effective default on their external debt following an unsustainable upswing of borrowing at a time of declining foreign-sourced productive sector investment. With the exception of the 1980s (in which there was a significant lag), the onset of global debt crisis was the precursor for the onset of decades-long downswings in the Kondratieff cycles. Drawing on the world-systems perspective pioneered by Immanuel Wallerstein (1979), Christian Suter (1992) explains the "global debt cycle" by way of stages in the long-wave, beginning with technological innovation and utilising international product cycle theory.

At the upswing of a Kondratieff cycle, as basic technological innovations are introduced in a labour- intensive and unstandardised manner, both the demand for and supply of external financing are typically low, and in any case the residue of financial crisis in the previous long-cycle does not permit rapid expansion of credit or other financial assets into high-risk investments. As innovations gradually spread, however, peripheral geographical areas become more tightly integrated into the world economy, supported by international financial networks. As the power of innovation-led growth subsides, and as the consumer markets of the advanced capitalist countries become saturated, profit rates decline in the core. This pushes waves of financial capital into peripheral areas, where instead of achieving balanced accumulation and growth, low returns on investment plus a variety of other political and economic constraints inexorably lead to sovereign default. In sum, at the global scale there is a three-stage process characterised by, as Suter (1992, 41) puts it, "first, intense core capital exports and corresponding booms in credit raising activity of peripheries; second, the occurrence of debt service incapacity among peripheral countries; and third, the negotiation of debt settlement agreements between debtors and creditors."

***

Where we are in the present cycle is a bit hard to define given the system's capacity for moving devaluation around, spatially, temporally and across scales. But I wouldn't buy the argument many world- systemsites make that we're in the next big K-wave upswing yet. Lots more financial devaluation needed first.

Yes, no?



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