One cloud blots the bold New British economic horizon. While Mr Blair has been quick to inject agency into his party's free float on an economic high tide, there is a fear that events in America could yet scuttle the current British boom. Over the past twelve months, the value of the Dow Industrial has fallen by 10 percent. The value of the Nasdaq index of high technology shares is over 50 per cent down. Even inflation and unemployment are creeping up in the US. And when the US economy sneezes, the rest of the world catches cold. Yet for over a decade, the US economy seemed immune to economic good sense, almost cancerous in its growth. So what happened?
The conventional explanation is that the current problems come from an over-long stock market boom. Think back to twelve months ago. The financial press was awash with stories of American success, and Bill Gates' personal wealth was approaching a hundred billion dollars. People talked of the "Goldilocks" economy -- neither too hot nor too cold -- or "the new paradigm". AOL's business as an internet portal -- the largest, but only one in a crowded market -- was deemed valuable enough for it to take over the global entertainment business, Time Warner. The value of individual shares reached figures sometimes a hundred or even a thousand times greater than their annual earnings. Huge profits were promised, and expected soon.
Then the bubble burst. Too many companies had failed to make profits. The level of sales was too low. The Fed cut interest rates, and conversation shifted to whether the economy would experience a soft or hard landing. Apparently, the problem which had threatened the US economy was simply the over-valuation of stocks. Fix those prices, and everything else would work better. Finance was everything in the explanation, production nowhere to be seen.
This concentration on the value of internet stocks misses more important and more threatening developments taking place, just below the surface. All news, including business news, is subject to the whims of fortune and the appeal of the exotic. Yet all the fluff and punditry has missed a far more disturbing phenomenon than the mere "correction" of tech stock prices. It is in the behaviour of the real American economy, the manufacture and selling of goods, the provision of services, that the American boom has begun to end.
The timing of the decline has not been accidental. The fall in share values began in March 2000 but only became urgent in Autumn 2000. In the first quarter of 2000, investment in new machinery rose by 21 percent. In the last quarter it fell by 5 percent. The explanation then was that investors had lost confidence in the US economy. Why had the mood changed?
The phenomenon of the business cycles remains an intractable conundrum to most liberal economists. But for those with a more sociological and historical imagination, reasons for the recent turn of events are clearer. Part of the reason for this particular economic downturn must surely lie in a newly articulated generalised lack of confidence in the governance of American public life. In Britain, we are now becoming used to a situation in which our leaders are shamefully untroubled by popular opinion. Over health, education, and privatisation, ordinary people are consistently to the left of both political parties. But for the most part, this gap exists, continues and widens without the politicians yet having to fear the consequences of their isolation from the public.
In America, the gap between the politicians and what Noam Chomsky has termed the "social-democratic consensus", is far wider than it is in Britain. In any poll, you will find a majority in favour of reducing the number of people in prison, but more people are jailed in America than in any country on earth. Huge majorities favour a national health system, but the corporations even aborted Bill Clinton's puny Medicare scheme. Smaller majorities favour access to contraception and a women's rights to control her fertility. But only fourteen states still allow abortions, and these on the most limited terms.
One major reason for the unpopularity of the American system, is precisely the recent functioning of the US economy. The share of American GDP returned to labour has fallen year-on-year. While family wages have remained static, the length of the American working week has stretched. In the twenty five or so years following the 1973 recession, the hours worked by ordinary Americans have increased dramatically. Just between 1983 and 1997, the hours worked by married mothers, increased on average by 223 hours a year. Over the same period, the hours worked by married men increased by an average of 158 hours. Now the average US worker spends longer in work than their counterpart in any other country save Japan.
The size of the active, disenchanted minority has been growing in recent years. There were signs of it at the protests in Seattle, and in the successful candidacy of Ralph Nader. But the problems were most acute at the heart of the system, in the race for the White House. Only fifty-three percent of the population voted. The candidate who won most votes -- in America, and in Florida -- was blocked by a Supreme Court coup.
The business press would like to quarantine this crisis of legitimacy, and treat it as something separate from confidence in the economy, people's planning and spending, how they relate to their own debt. But the timing of the downturn in US stocks would suggest that the two crises were linked.
Twelve months ago, the model of US economic success seemed to go something as follows -- take a group of young Americans, preferably college drop-outs, locate them near a nice beach, and plenty of sun. Invite a few rich men, organise drinks to bring the geeks and the speculators together. Don't worry if it all goes belly-up, because the speculators have only borrowed the money from banks anyway. And if they fold, the public will step in.
This is precisely what oughtn't to happen in a market economy, where the purpose of shares is supposedly to generate revenue and market risk. The people who own a company make a share of it available for sale. The money they generate is then ploughed back into the company, for investment. The people who buy the shares are rewarded for what amounts to a loan - they receive a dividend on their money. But these days stocks and shares exist in almost total separation from their initial function. Stocks are traded largely on speculation on changes in their paper value.
Indeed during the recent boom, even amateur "day traders" found that their wagers were profitable. In a rising market, a large number of people learned that they could produce a year-on-year 50 percent increase on their first stake. The share boom was a horse that never lost. While the values went up, it seemed possible that they might continue, and anyone who left the game early was sure to lose.
Under capitalism, all areas of economic life become fetishised, the social relations behind commodities become mystified. Products are exchanged according to their cash value, not their intrinsic worth. And in mid-1990s America, the cash value of shares was vastly inflated by the symbolic power of the internet share. Share prices became a barometer of the economy, an indicator of social trends. And all the signs pointed up. In these conditions, internet companies took on new layers of represented meaning. In any country, there are always two stories of how things are, depending on whether you look from above or from below. America was either strong or weak. The success of the internet stocks seemed to demonstrate empirically and unimpeachably -- the truth of the boom, the truth of US prosperity, the truth of the middle-class world view.
In this context, talk of a new economic paradigm was very marketable indeed. The more serious commentators maintained that the strength of Wall Street indicated that "reality" was out of tune with perception. Clearly, there was an invisible process of productivity growth, associated with investment in computers, which explained the extraordinary character of the boom. The economy must have been stronger than the figures suggested. People just needed to check their maths, and soon the whole affair would make sense.
The crooks, the gurus and their hangers-on took a different line, arguing that soon the entire world would be buying on-line. Everything could be bought and sold more cheaply there. In the new economy, all the rules could be broken. No workers were needed to staff the boutiques. Therefore costs could be dramatically reduced. The internet was like a perpetual motion-machine. With slight encouragement, infinite energy would materialise. According to Michael Kwatinetz of Credit Suisse First Boston, "There are some situations where it's hard to value on this metric because there is an explosion to come."
When the crisis in the dot.com sector began, the trigger was a series of profit warnings. In other words, people were not buying their computers and mobile phones in sufficient volume. Internet sites like Amazon that linked together buyers and sellers, working like a cheap retail store, found that the trickle of punters embarrassingly below their worst predictions. The first sign that the slow-down was spreading to Britain came when GM announced the closure of their Vauxhall factory in Luton. The problem the company faced is that people simply weren't buying enough of their cars, in America or elsewhere. Over the next three years, GM plans to cut its product range by 20 percent. GM is closing factories all over Europe and the US, and up to wenty five thousand jobs could go. This is where the story of the US economy needs to be read, not in the entrails of yesterday's dot com carcasses.
This January, according to the firm Challenger, Gray and Christmas, U.S. companies announced plans to eliminate 142,200 jobs. That's the highest figure since they began tracking layoffs in 1993. The reasons for the crisis are the oldest reasons in the book: overproduction and under-consumption. People aren't buying the goods that have been produced. The government's solution has been to reduce interest rates, hoping to soften the impact of the economic cycle. The weaknesses of the new economy are taking effect in the most old-fashioned of ways.
I have yet to find anywhere an explanation of the economic cycle which is better than that produced over a hundred years ago by Karl Marx, and in particular the chapter of Capital Volume Three, in which he talks about the tendency for the organic composition of capital to rise. Stripped of the jargon, what did he mean? For companies to continue, they must compete, and make a profit. The first means to do this is through what the news tends to call "increasing productivity", getting people to work harder, usually through employing less people to do the same job. With a settled workforce, you can't make people work much harder. So the best means for any firm to increase its productivity is to bring in new technology. This has happened to extraordinary effect. For example over fifty years, the number of dockers in Liverpool has fallen from fifty thousand to under five hundred, but with technological advances the tonnage they move is greater than ever. The problem emerges when something that is a good solution for one company becomes general across business as a whole. More and more money is spent on machinery. Compared to this big increase, relatively less and less leaves the system as wages. In America hourly real wages fell for twenty five consecutive years from 1972. Who would buy the goods that were being made?
When Karl Marx talked about phases of boom and slump, he had two economic cycles in mind. The first took place at roughly decade intervals. First the economy boomed, then the limits of production were reached. Businesses went bankrupt and their fixed resources were sold off, cheaply. The level of spending on new machinery fell. The balance of production and purchase righted itself through this process of regular sharp recessions. But Marx also talked about a slower trend which worked itself out over decades. There were all sorts of counter-factors, including the waste of spending on luxury goods or arms. Yet over time the organic composition of capital -- the ratio of spending on machines to labour -- tended to rise. And the ability of people to buy all the new goods available was simultaneously reduced. With the invention of computer technology, all the signs are that this process has continued. The lack of spending-power in the system makes it much harder for US capitalism to right itself again.
Using Marx's categories, you can develop an explanation for the boom that cuts through the hype of the internet economy. The boom began in the early 1990s, for cyclical reasons. It continued through the mid-1990s as a result of changes to the real economy. The hours worked by American labour were going up fast, indeed more quickly than the increase in investment. In other words, the US temporarily contradicted the general trend for the organic composition of capital to rise. Then, when the average working week could be stretched no further, the distinctiveness of the US boom came to an end. The US economy has been owed a fall since 1998. Shares, credit card spending, and foreign investment kept the boom going for another two years. But it is an unsustainable process.
All predictions are useless, and there is no point guessing whether a slow-down will become a recession or a full-on crash. The point of this article is to remind the Turtle's readers that the next time they read the share-gossip in the Financial Times or the Economist, they should remember that the fate of the US economy is not decided by the relationship between the geeks and the speculators. Like any other capitalist system, ours is based on exploited labour. During the boom of the mid-1990s, business thrived off the back of falling real wages. When wages could fall no more, corporate profit margins began to feel the squeeze. And it is in this explosive situation that any new developments should be judged.
