41. The Dotcom Bubble bursts



As commented previously, an ongoing analysis of trends in the world economy at each stage was a feature of the work both of the CWI and the Socialist Party. The change in the economic sphere of world capitalism in the early part of the 21st century led to a considerable amount of additional space given over to this question in our publications. This was necessary in order to prepare our comrades and workers we could reach for future developments. However, in approaching economic perspectives we are always conditional. Capitalism is a blind system, with economic developments unfolding behind the backs of society. Therefore, the real processes can only be fully revealed when statistics, facts and figures can be assembled afterwards, as Friedrich Engels commented in the 19th century.

This does not mean that it is impossible to analyse and predict the general character of processes in the contemporary economy as they are developing. The failure to do so would be a negation of the very essence of Marxism itself, substituting empiricism for an understanding of the laws of capitalism as worked out by Marx and Engels. Perspectives, we would emphasise, are only a rough approximation of developments. Nevertheless Marxism is the science of perspectives, which applies to the economic as well as to the political field. This necessitates the drawing of general conclusions at each stage, which can be added to and corrected as events develop.

However, the charge made by the capitalists, and their very small echoes on the outskirts of the labour movement, that Marxists in general, the CWI and Socialist Party in particular, were predicting a slump virtually every year is crude and childish. An examination of our written economic prognoses disproves this.

In the period prior to 2001, the capitalist economic pundits were upbeat for the prospects of their system, seemingly reinforced by the development of ‘new technology’, which offered a further boost to the system, they believed. We challenged this at each stage. In September 2000 the FTSE 100 fell to its lowest level for three years and prompted one fund manager to comment: “There is panic in the market and about what consumers will do. It is feeding on itself.” Another described the situation as “very hairy and very scary”. Manufacturing in Britain experienced its fourth recession in 10 years with one economist commenting “There is as yet not even a hint of a let-up in the pace of decline”.

A symptom of the situation was the crisis of the former manufacturing giant Marconi. Faced with colossal overcapacity, in one year its share value plummeted from £30 billion to £800 million. Losses of £5 billion were expected in 2001 – one of the biggest collapses in corporate history. The company’s creditworthiness was now junk status. This was accompanied by a bigger than expected rise in unemployment in the US, which in turn sent US share prices tumbling. Commentators who forecast a recovery just around the corner were now admitting that a recession seemed ‘unavoidable’.

The interconnection between the different sectors of capitalism was demonstrated as a banker warned: “The main fear is that deteriorating job prospects will finally start to undermine consumer confidence, which is the only thing standing between the US and recession.” The US Federal Reserve had already cut interest rates seven times within the previous year, to little effect. Moreover, the rest of the world was in no position to bail out the US economy. Argentina and Mexico were already in recession, Japan was on the brink after 10 years of virtually stagnant growth and output was slowing much faster than expected in Germany and the eurozone. According to the Economist, “The most striking aspect of the current slowdown is that it is more widespread than in previous world slumps in 1975, 1982, and 1991.”1

The US economy, at that stage the Atlas of world capitalism as it sustained the rest of the world, faced its worst economic contraction since 1945. The Socialist pointed out that in the previous three months, the US’s “gross domestic product (GDP) was shrinking at a 0.4% annual rate while consumer spending fell at its steepest rate for 14 years.” Japan faced a deepening crisis and unemployment was on the increase in Europe. The World Bank reported: “The global economy is slipping precariously towards recession.” The growth in world trade volume was slowing down to 2% or less a year from a record 12.5%, the sharpest drop in decades. We remarked: “This points to a serious crisis of global capitalism which could last for years. The world now has no major engine of growth.”2

We concluded that the whole of 2001 was truly an ‘annus horribilis’ following the terrorist attack on the Twin Towers. An especially poignant moment was subsequently revealed: as the Twin Towers began to disintegrate, a spaceship with an international crew had passed over New York, which witnessed and photographed the full carnage below. We commented: “In that incident alone is encapsulated the choice which confronts the peoples of the world. Together, we can harness and develop science, technique, and the organisation of labour on a gigantic scale which would eliminate the poverty and oppression which created the conditions for 11 September. Or the products of the genius of humankind can be misused to create a world of horror without end.

“The choice is not between ‘evil’ or ‘good’ as George Bush or Tony Blair pretend. It is between outmoded rotten capitalism – which will be a world ‘war without end’ according to US Vice-President Dick Cheney – or a determination to share the resources of the planet for the benefit of all. This can only be fully achieved through world democratic socialism.”

However, the current reality was a “‘vicious circle of downward adjustment’” rippling out from the battered US economy to the rest of the world.” The Guardian reported that the drop in US output in December 2001 was “almost three times faster than earlier estimates.” But could Europe and Japan take up the slack created by the downturn in the US? In Japan, unemployment climbed to 5.4% of the workforce, the highest level ever recorded up to then. The eurozone was expecting that unemployment would rise by 700,000 to 12.5 million in the next year and 9 million were expected to be unemployed in 2002 in the US.

What were the causes of this looming crisis? We sought to explain this through Marxist perspectives: “There are many factors which can lead to or trigger a crisis in capitalism such as the tendency for the rate of profit to fall and a sudden drop in profits.”

This incidentally gives the lie to assorted dogmatic critics in the recent period that the Socialist Party had rejected Karl Marx’s ideas on this issue. We accept his explanation of a tendency, over an extended period, for the rate of profits to decline. We also accept his explanation of the countervailing factors as well.3 However, we went on to explain: “The ultimate contradiction of this system is that the working class cannot buy back the full value of what they produce. What Marx called ‘surplus value’ – profits – is that part which is appropriated by the capitalists. However, this contradiction – the working class not being able to buy back the full value of their product – is temporarily overcome by the capitalists reinvesting back into production.

“For a time, the economic cycle once more goes forward but then reaches a saturation point – a market glut of unsaleable goods – which Marx described as ‘overproduction’. This is accompanied today by ‘overcapacity’.

“Part of industry lies idle because the working class and the middle class, with stagnant or even contracting incomes, cannot buy back the goods which they produce. Hence the cycle of boom and bust, which like poverty, national oppression and the other ills which beset humanity, are organic to capitalism and cannot be ‘reformed’ away.”  “The economic day of reckoning can sometimes be postponed on the basis of an injection of what Marx called ‘fictitious capital’ – massive borrowing which was a feature of the 1990s. The result is a huge piling up of debt; national debt as the case of Japan shows, corporate debt and personal debt.”

This statement, while answering the dogmatists, explains how capitalism was able to postpone the looming crisis for a temporary period, evident in 2001 by a massive injection of what they called ‘liquidity’. This postponed the ‘day of reckoning’ for a few years that nevertheless materialised in the ‘Great Recession’. Indeed, we pointed out that short-term palliatives at this time had “even led to a renewed capitalist ‘confidence’ – in the teeth of the evidence to the contrary in the real economy – that the ‘worst is over’ and the revival of world capitalism is under way.”4

This was an accurate description of the approach of capitalism in general at this stage. We correctly foretold how they can manage to put off a major crisis, which was in place even as early as 2001, only to reap the whirlwind later. Rates were slashed, with the base rate in the US dropping from 6.5% in 2001 to 0.75% in 2002. This was the explanation for the unusual resilience in consumer spending in what was still a recessionary phase in the business cycle, with abundant cheap credit for mortgages – which in turn led to the massive sub-prime crisis of 2006 – and consumer credit. This created a short-term spiral effect. An additional factor in this ‘growth’ was the running down of manufacturers and retailers’ stocks. The growth of consumer spending alarmed even capitalist economists because 1.4 million workers had lost their jobs in the previous period, indicating the boom was built on credit. Investment was falling, one of the reasons being huge overcapacity in the US and the world.

At the same time, the parasitic and predatory character of ‘modern’ capitalism was exposed in the Enron scandal of 2002. This was one of the biggest companies and therefore one of the biggest scandals in the history of US capitalism. In the top ten of Fortune 500 companies, Enron fell from a “successful business model” to bankruptcy in less than a year. In this process was revealed the involvement of the Bush regime. In return for millions of dollars of support for Bush, a climate of favouritism was created, a sleazy, unregulated environment in which Enron thrived. It had made fabulous profits gambling on future energy deliveries, while at the same time rewarding its political collaborators, mostly the Republicans in the Bush White House. From a total of $5.8 million spent in the previous 12 years of federal elections, 73% went to Republicans. Bush himself received almost $1 million, until the scandal broke, jovially referring to Kenneth Lay – his Enron Godfather – as ‘Kenny boy’.

On 1 December 2001, “America’s greatest company” filed for bankruptcy with pensions completely worthless. “The upper-level executives got their money,” said one Enron worker. “I was let go by voicemail… I don’t think I’ll ever trust another company.”5 This was a scandal which exposed both the economic skulduggery at the heart of capitalism and the close involvement of the political elite in both the Republican and Democratic parties. There was public outrage at the overwhelming corruption of elections by business money. It enhanced the case for a mass radical workers’ party in the US. We predicted that it would be the poor and working class who would be called upon to foot the bill.

The basic laws of capitalism, as analysed by Marx, remain valid, but the specific features which confronted us then were examined thoroughly in the pages of The Socialist and our theoretical magazine Socialism Today in 2001-02.

However, the collapse of one company after another – Enron, Global Crossing, WorldCom, Xerox – and the modern ‘financiers’ behind them, Kenneth Lay of Enron and Bernard Ebbers of WorldCom, made the “swindlers of Marx’s day appear like house burglars compared to bank robbers”. Even the Daily Mirror commented: “How Karl Marx must be rubbing his hands with glee and saying I told you so.”6 When the Asian crisis broke in 1997, US economic commentators growled about ‘crony capitalism’; now the much vaunted neo-liberal Anglo-Saxon model of capitalism was revealed as an even more blatant example of crony capitalism.  The parasitical character of this model – decisions on the basis of shareholder value, the colossal processes of mergers and acquisitions, which amounted to at least $1 trillion in Europe and the US alone in 1997 – was clear. It had now produced the world’s largest bankruptcy (Enron) and the world’s greatest accounting fraud (WorldCom). Will Hutton, former editor of the Observer, and defender of ‘European capitalism’ against the US model, remarked acidly at the time: “The majority of mergers and takeovers in this stock market-dominated economy have proved destructive: few add any value and most lower it. Between 1993 and 2000, Wall Street had brought 3,500 small hi-tech companies to the stock market; even before the dotcom bubble had burst, more than half were trading below their initial offer price or had gone bust. While dividend distributions have doubled as a proportion of profits, investment in the core of American business was troublingly low; the US has less invested capital per employee than France or Germany.”7

Many capitalist commentators comforted themselves with the notion that all booms bring with them ‘overheads’. “Yet, never has financial chicanery, fraud and ‘crony capitalism’ taken place on such a scale as during the 1990s boom. The late 1990s were… a time when many turned a blind eye and levels of corporate governance and auditing clearly became, in many cases, lax.” This was a polite way of saying that the system was rotten from top to bottom. This kind of situation led to the covering up of a ‘black hole’ of $4 billion in the case of WorldCom as shares were boosted to unprecedented levels 30, 40 or even 50 times the real value of assets!

This in turn led to a position where Chief Executive Officers (CEOs) in the US made $42 for every $1 made by one of his or her blue-collar workers. By 1990 that had stretched to $85 and by 2000, CEOs were earning $531 for every dollar taken home by an ordinary worker! The average industrial worker has been impoverished, relatively speaking, and many in real terms. Most voters in uS elections had lost from the shares collapse; 50% of those who voted in the previous US elections had admitted that they owned stocks and shares!

What these events underlined was the completely false picture of the 1990s boom presented by the capitalist economists at the time, which we argued against at every stage. Profits were shown to be artificially inflated in the balance sheets of companies. The much vaunted productivity miracle, touted widely at the time, was accepted as a fact; the CWI and the Socialist Party argued strongly against this in written material.

Nevertheless, this did not stop some capitalist economists from claiming that they had gone through the “recession that never was”. Comparing the world economy to an aeroplane, they argued, rather than landing in recession, it merely experienced “touchdown” on the runway and was poised once more to soar into the heavens. We flatly declared: “This is entirely false”. The period ahead was likely to be a continuation of insecurity and uncertainty. Capitalist economists were consulting the equivalent of “tea leaves, totally unaware of what was coming down the line”. Our conclusion was that “lodged in the situation today is the possibility of another devastating slump like 1929”.

An example of the ‘primitive slumpist’ analysis of which our critics accuse us? On the contrary, the more farsighted capitalists were making the same points and, moreover, this disaster came to fruition in the economic meltdown of 2007-08. They avoided this temporarily once more through the massive bail out of the banks and the financial system. This meant that a highly unstable situation persisted which clearly in the future could produce another 1929 economic scenario and one that capitalism would not be able to so easily avoid. We also sketched out the likely economic scenarios to follow: “A period of stagnation, of deflation, of an extended period of economic depression with only small anaemic growth in production and a growth in the social malignancy associated with this, of poverty, rising unemployment, increased class conflict… is possible.”8 We drew all the necessary political and social conclusions from this, which would be manifested in increased conflict between the classes.

Naturally, the defenders of the system, notwithstanding all the evident drawbacks of capitalism, still clung to the alleged efficacy of the system over all others. Polly Toynbee, a fervent Blairite and ‘liberal’ columnist of the Guardian, wrote in the system’s defence: “Capitalism is the only system that works.”9 This despite reports, factual comments and information in her own newspaper that the system she supported was working very badly. We wrote at the time: “Potentially, it is on the verge of a catastrophic breakdown. An economic tsunami on a world scale could follow the disaster in Asia.” The wealth of the super-rich had doubled since Toynbee’s hero Blair had come to power!

It certainly was working for some: inequality rose in Britain by 40% between 1979 and 2001. The number of dollar millionaires in Britain rose by 28,000 to a staggering 383,000 in 2003. We wrote that any economic and social system is “ultimately judged on the basis of whether it can develop, maintain and increase the productive forces – science, technique and the organisation of labour, and with it the living standards of the majority.” The reality was the colossal polarisation between the rich and poor, as the representatives of the rich ruthlessly applied neoliberal policies. This in turn generated incipient revolts amongst the young and growing numbers of working class people, which would turn into outright revolt later.

The US economy which, we argued, had held up the international system, “was mainly sustained after the economic shock of 1997 by huge inward investment by foreign capitalists, particularly from Asia, with the governments of Japan and China in particular also plugging the US federal deficit by buying Treasury Bonds.” Moreover, Bush had colluded in the devaluation of the dollar, which in turn cheapened US exports against the major competitors of Europe and Asia. In effect, the US would put European capitalism on reduced ‘rations’, driving up the euro to an exchange rate of almost $2, which acted to savagely undermine the stagnant eurozone economies.

However, Asian governments were also terrified of jumping off this speeding economic merry-go-round for fear of the collapse of the whole financial house of cards. A former US treasury secretary described this as “a balance of financial terror”. Significantly, we wrote, not ex post facto but in 2005: “When and just how the system could implode is unpredictable but as the British economist Wynne Godley comments: ‘The crunch may be at hand’.”10 The crunch did indeed come just a few years later in 2007-08!

One of Polly Toynbee’s colleagues at the Guardian, Martin Kettle, had sought to reinforce the message by proclaiming the previous year: “Socialism is dead. Long live liberalism and social justice.”11 We answered: “Yet the past year has shown that his claim is false. Capitalism, even ‘liberal’ capitalism, and ‘social justice’ are not twins but polar opposites. What is ‘liberal’ or democratic about Blair’s capitalist Britain? Lord Butler12 has revealed that Blair and a handful of cronies take all the decisions, with little or no reference to the rest of the government. The Cabinet meets for the same length of time as the tv programme Ready, Steady, Cook!”13

This was reinforced by the comments of one capitalist commentator in the US who wrote that politicians were “servants of the economic cycle and second to the Federal Reserve. ‘The candidates might have some impact on jobs in the margins but Greenspan is more important than the President and the economic cycle is more important than Greenspan’.”14

We also pointed to the inevitable revolt of the working class, with the continued worsening of the situation. National opinion polls had revealed that 73% of respondents were in favour of increasing the top rate of income tax on incomes of greater than £100,000 from 40p in the pound to 50p. Only 22% were opposed and even 68% of those in the top AB social grade were in favour. This was against the background of massive stagnation in wages, with big falls in real incomes recorded in some countries. Globalisation, according to economist Stephen Roach, was accelerating at hyper-speed and corporations were thinking “long and hard about giving rewards to workers at home”. Internationally, trade soared to 28% of global GDP, compared with 19% in 1991. Moreover, “a whole range of services that were once considered ‘untradeable’ can easily be provided on the other side of the globe: anything from accounting and legal services to software programming, engineering and financial analysis.”  But there was another side to the piling up of profit by big business. By cutting the share that the working class received, ultimately this cuts the ‘market’. The ability of working people to buy back the goods that they produce is therefore undermined by the threat of an economic recession or slump: “If you want to milk the cow you need to feed it,” stated one capitalist. The reaction to all this was shown in the big social explosions that were developing in Europe, the first signs of which were in France with mighty workers and students’ demonstrations in 2005.15