Dominic Alexander explains the unfolding economic turmoil and how socialists should respond

What causes inflation? 

The immediate cause of present inflation is clearly supply shocks. This is partly due to the pandemic’s disruption of globalised supply chains, which have been unable to bounce back. 

However, there are long-term issues here as well. Globalised production was developed in order to drive down labour costs, weaken trade unions and therefore wage demands across the world. The lack of resilience in global supply chains is due to cost cutting, just-in-time strategies, and the like. 

All of this was in aid of forcing profit rates upwards, so the real cause of the current crisis is the way the capitalist system requires business to seek the highest possible returns on their investments. The decline in the system’s ability to sustain the same rates of profit as the post-war period lies behind the crises of the 1970s, of 2008, and today. 

The different schools of orthodox, that is pro-capitalist, economics failed to provide a satisfactory explanation for the 1970s stagflation. According to the Keynesians, inflation goes up when the economy ‘overheats’, that is when production cannot keep pace with rising demand. 

The supposedly liberal-left Keynesians therefore call for wage restraint to reduce demand, and therefore rein in inflation. This policy didn’t fit the situation in the 1970s when unemployment was high at the same time as inflation was rising. 

The right-wing ‘monetarist’ answer to the Keynesians was that inflation was caused by government overspending, thereby increasing the money supply beyond what the economy could absorb. Their answer was massive rises in interest rates, and huge cuts in state spending. 

These policies led, in Britain and the US, to devastating recessions in the early 1980s, but inflation has failed since to behave in the way the monetarists thought it would. 

Governments have poured huge quantities of money into the economy in recent years in attempts to stimulate investment by providing cheap credit, and yet inflation remained stubbornly low all that time, until now. 

Are labour shortages causing inflation? 

There are many contributing factors to the labour shortages, including the impact of the pandemic due to Long Covid, for example. There are shortages in most economies, not just Britain’s. The ultimate cause lies in the poor conditions of work with low wages and conditions in many sectors. 

Young people are staying in education longer, and older people are leaving the workforce if they can. In addition, employers don’t want to pay the costs of training the workers they need, and seek to manage with low staff numbers anyway. The problem, once again, does not come from labour, but from capital’s demand for higher profits. 

The Bank of England and others are trying to blame the inflation crisis on rises in wages. Some have suggested that employers will have to pay higher wages, but that in return, workers have to be more ‘productive’; that means working more intensively than before, with all the poor implications for health and well-being that overwork brings. 

Either way, capital is seeking to solve its problems by pushing the burden onto workers, and raising the rate of exploitation get out of the crisis. However, workers are only attempting to make their wages catch up with inflation, and so labour has not caused the problem. 

What is stagflation? 

A period of very slow economic growth, stagnation, at the same time as high inflation is called ‘stagflation’. This combination was not supposed to happen in capitalism, until it did for the first time in the 1970s. 

The recovery from the economic shutdown during the pandemic was meant to be swift and dramatic, but instead we are mired in a cost-of-living crisis caused by rapid inflation. There was initially a dramatic rebound in 2020, but the pandemic persisted, and the recovery has stuttered since then. 

During January to March this year, growth slowed to 0.8%, down from the already anaemic 1.3% in the July-September quarter of 2021. Meanwhile, the annual inflation rate has been rising, and in April this year went over 11% (by the RPI measurement), with every sign of increasing further. 

The 1970s stagflation followed a long period of sustained high growth after World War II. This began to tail off towards the end of the 1960s, and was brought to a complete halt by the oil-price shock of 1973. 

The circumstances are different today, as the current crisis follows a long period of low growth since the 2008 crisis, but there are comparable supply shocks raising the price of energy, as well as many other goods. It is likely that we are entering another period of hyperinflation, which makes the 1970s look less like an exceptional event, and more like a recurring pattern of contemporary capitalism. 

Is the UK heading for recession? 

Even before the pandemic, many economic indications were pointing towards a likely global recession. This might seem strange when we’re hearing about the ballooning wealth of billionaires, and the bumper profits of some corporations. 

Partly, the issue is that some are doing well, but others aren’t. It is thought there are large numbers of ‘zombie corporations’ whose revenues only just cover their debt repayments, and rising interest rates may tip them over into failure. 

There is another important factor, however, which is the difference between the mass of profit, and the rate of profit. For most of us, the mass of our income is what matters; a thousand pounds more or less can mean a very great deal to our lives. Yet, for the capitalist system, it is the rate of return on investment that drives competition between corporations and the dynamism of the whole system. 

The mass of profits can be ever more gargantuan, while the rate of profit (profits divided by investments) is low or declining. A falling rate of profit eventually causes a crisis, and the inability of the system to recover to the level of returns seen in the post-war period is the ultimate cause of the recuring crises faced in recent years. 

Whether we see a recession, and how bad it will be, depends on various circumstantial factors, but that is the direction of travel for the global system. 

It is also a sign, like the return of hyperinflation, of the increasing irrationality of capitalism. What matters for most people’s lives is a decent level of income and social infrastructure, but the system that creates colossal wealth for a few has increasingly little space to deliver stability and well-being for most of us. 

Photo: G20 Rate of Profit 1950-2019. Source: Penn World Table 10.0 via Michael Roberts blog

Can state spending resolve the crisis?

For right-wing monetarists, the answer to a recession is to cut state spending, which they claim crowds out room for private investment. For liberal Keynesians, cutting spending is disastrous as it sucks more demand out of the economy at a time when it is needed to prevent a deeper crisis. They call for increased spending instead to drive up demand, and therefore, they hope, capitalist investment. 

The Keynesian answer is much better for working people than the monetarist, so long as the state spending is directed at providing social support or socially useful employment. However, the Keynesian argument can be used to justify policies such as ‘quantitative easing’, the creation of cheap credit, which largely benefits big capital instead, and has had a highly questionable track record in stimulating economic growth in recent years. 

The answer therefore is that yes, state spending is highly desirable in a recession, as it can be used to alleviate some of the damage done by an economic downturn to ordinary people. 

However, it does not necessarily solve the causes of capitalist crisis, because the health of capitalism has little to do with what is good for the standard of living of the working class, or indeed most people overall. Only if the rate of profit recovers will capital be willing to invest, and so allow the system to come out of crisis. 

What do socialists say? 

The crisis can’t be solved within the capitalist system, at least not without untold levels of suffering and destruction. It can be mitigated in the immediate term with state intervention to protect living standards. 

Energy companies should be nationalised, for example, as is the case in France, but measures should go much further. Whole sections of the economy need to be brought under state control, from public transport and the utilities to the banking system. 

All of these provide essential services and infrastructure, but under the profit motive, they are increasingly dysfunctional in providing what society needs from them. 

Immediate measures can be taken to soften the impact of the present crisis, but we must move beyond a system driven by capital’s drive for an ever-escalating share of total social resources. Instead, we need a democratically controlled economy where the social good is the priority, not private profit.

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Dominic Alexander

Dominic Alexander is a member of Counterfire, for which he is the book review editor. He is a longstanding activist in north London. He is a historian whose work includes the book Saints and Animals in the Middle Ages (2008), a social history of medieval wonder tales, and articles on London’s first revolutionary, William Longbeard, and the revolt of 1196, in Viator 48:3 (2017), and Science and Society 84:3 (July 2020). He is also the author of the Counterfire books, The Limits of Keynesianism (2018) and Trotsky in the Bronze Age (2020).

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