World economic turmoil, Issue 32

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World economic turmoil

New features of world capitalism
A general crisis of the system
A crisis of bourgeois economic policy
A return to Keynesianism?
Political crisis
Neo-liberalism and Keynesianism

Russia's economic collapse at the end of August, one more broken link in the chain of international crisis, marked a qualitative turning point. Bourgeois strategists were at last forced to confront the stark reality facing them, writes LYNN WALSH.

ASIA, WHOSE INTER-REGIONAL and external trade makes up a third of the world total, has entered a deep slump, which is remorselessly spreading around the globe. Warning the US Congress against complacency, the financier George Soros said (15 September): 'The global capitalist system which has been responsible for our prosperity is falling apart at the seams'. Some commentators are now warning of the onset of a world depression.

The capitalist ruling elite is also realising another nightmare: they are now facing not only economic disaster but also the beginnings of a deep social and political crisis. This is already clear in Asia. Far from being merely a cyclical downturn, cumulative losses are leading to a breakdown of society's productive capacity, opening the door to social turmoil and political upheavals. The fall of Suharto in Indonesia is just the overture. It has also began to dawn on the gurus that, just as the economic contagion is spreading, political turmoil will also become a world-wide epidemic. In the sphere of international relations, the Indo-Pakistan nuclear tests and the US missile strikes on Afghanistan and Sudan are early symptoms of increased volatility.

The intoxicating aroma of capitalist triumphalism which flourished after the collapse of Stalinism has evaporated in a few turbulent months. The 'new economic paradigm' (model) - recently so popular on Wall Street and in academia - has been shattered. Conjured up by the born-again disciples of unfettered market forces - in reality, the advocates of the multinational corporations and banks - the new model was based on the claim that liberated market forces, combined with new technology and globalisation, have given rise to a prolonged period of unlimited economic growth and rising prosperity. This has proved to be a fantasy, more an hallucinogenic trip stimulated by the super-profits of the 1990s, than the product of rational economic thinking.

Despite repeated claims from the economic pundits that the 'fundamentals' (meaning high profits, low inflation) were now much sounder than in the bad old days, the real performance of the advanced capitalist economies (ACCs) during the 1980s and 1990s has never approached the levels of the post-war upswing(1950-73). Average annual growth in real terms (ie allowing for inflation) has been about 2.3% in the 1990s, compared with 5% during the upswing. Rates of capital accumulation (net increase of capital stock) and productivity growth have also been markedly lower. At the same time, total unemployment in the ACCs climbed another 10 million every decade, and now totals over 35 million (according to official figures, which understate the real levels).

New features of world capitalism

THERE WERE UNDOUBTEDLY new features in the world economy which appeared in the last two decades and were linked to the hollow, finance-driven booms of the eighties and nineties. But far from overcoming capitalism's long-term trend towards stagnation and decline, they have ultimately given rise to new contradictions which are aggravating the present crisis.

(1) New technology:
Microprocessors, new communications technology, and other innovations, it was claimed, would produce new products and processes, allow much more flexible methods of production, and would produce a productivity miracle. In reality, new technology has had contradictory effects. The growth of new high-tech sectors has far from compensated for the de-industrialisation and structural unemployment arising from the labour- and material-saving effects of new technology (combined with new management methods).

Microtechnology, especially in the field of communications, has served as a vehicle for globalisation, especially of financial markets. It has also allowed multinational corporations to locate plants and secure outsourcing in cheap-labour countries, with minimal taxation and negligible environmental, health and safety, or labour regulation. Through accelerating some areas of production (motor vehicles, computer equipment, etc), while causing de-industrialisation and unemployment in traditional manufacturing areas, the new technological systems have helped give rise to over-production.

Even in the US, new technology has not produced the long heralded productivity revolution. Despite a cumulative investment of $630bn (1987 constant dollars) on computers between 1980 and 1994, the US could not lift productivity growth above its pathetic post-1973 trend rate of 1.1% a year (compared with 3% between 1960-73). In the developing countries, it is also doubtful whether new technology has significantly raised productivity levels in the new plants above world averages. Multinationals have primarily relied on the intensive exploitation of plentiful cheap labour. Growth was mainly investment-driven, with the influx of capital mobilising enormously increased inputs of labour, materials and energy into production. (Ironically, this is analogous to the grossly inefficient investment-led growth during the last period of the state-planned economy in the Soviet Union.)

(2) Globalisation:
Facilitated by new technology, globalisation was increasingly finance-driven. It was an outgrowth of the relative decline of industrial production in most advanced capitalist countries. Wealthy investors sought new fields of investment for their super-profits, seeking higher profit levels than they could achieve at home. In the 1990s speculative investment in property, financial services, and shares and company bonds, became the fastest-growing sector. True, under globalisation multinational corporations seized opportunities of locating plant and securing outsourcing in about two dozen semi-developed countries, mostly in East Asia. But even investment in new production plant was increasingly through shares and company bonds, and became more and more speculative.

During the 1980s net private capital flows from the ACCs averaged $13bn a year, but rose to $90bn a year in the early 1990s. By the mid-1990s $300bn a year was flowing to about twenty-five 'emerging markets'. About 9% of this was invested in commodities, 37% in manufacturing, and 53% in services (a third of it in financial services).

Globalisation, however, works both ways. The flood of highly mobile capital to the emerging markets produced a speculative bubble, especially in Asia. This collapsed last year when inflated share and property prices and high debt levels could no longer be sustained. The rise of the US dollar, moreover, made it impossible for Thailand and the others to keep their currencies pegged to the dollar (as it raised their export prices to uncompetitive levels). However, the devaluation of the Thai bhat and other regional currencies last July shattered the confidence of foreign investors. The resulting flight of capital triggered the opening of a world crisis. The globalisation of financial markets, under which a shock in one region is rapidly transmitted to other centres, has ensured that, in less than a year, the Asian crisis has spread across the continents.

(3) Capitalist restoration in the former Stalinist states:
The capitalist re-colonisation of the former Soviet Union, Eastern Europe and the massive penetration of foreign capital into China, it was claimed, would not only prove the superiority of capitalism but play an important part in a world-wide capitalist renaissance. In reality, capitalist restoration has been a catastrophe for the people of the former Stalinist states. Russia has suffered a drop in production of between 50% and 80% since 1989. Following the collapse of the rouble and the government's default on dollar loans, the peoples of the former USSR are facing the spectre of mass starvation.

The rapacious antics of capitalism's infant prodigies, former bureaucrats and mafia turned robber barons, has provoked an economic and financial collapse which will inflict serious damage on international finance capital. Bad loans to Russia make up 20% to 25% of the loan portfolios of many US and European finance houses. At the same time, the international ambitions of Russia's emergent bourgeoisie are causing serious complications for US imperialism on the world arena. China, recently hailed as a key component of the Asian miracle, also faces serious economic problems which will soon spill over into political turmoil.

(4) Neo-liberalism:
Free-market policies (privatisation of state industries, deregulation of markets and business activity, and the undermining of work-place rights and organisation to establish labour 'flexibility') liberated big business from its Keynesian fetters (full employment, high social spending based on high taxation, strong workers' organisations). (See endnote on Neo-liberalism and Keynesianism.) The invisible hand of free-market forces, it was claimed, would regulate economic activity far better than governments. Far from being a 'natural' evolution, however, neo-liberal policies were forced through by capitalist governments using economic and state coercion, legitimatized by an array of neo-liberal legislation.

The capitalists turned to neo-liberalism after the high inflation of 1974-79 which followed the exhaustion of the upswing. The turn away from Keynesianism provoked big clashes with the working class, but the labour leaders were incapable of defending past gains. Then the collapse of Stalinism, which despite its deformations had acted as a certain counter-weight to capitalism, allowed the ruling class to abandon all restraint in its switch to uninhibited free-market policies. Events like Reagan's defeat of the air traffic controllers' strike in 1981, and Thatcher's defeat of the year-long miners' strike in 1984-85 in Britain, were crucial.

By increasing the bourgeoisie's share of the wealth, however, these policies inevitably accentuated social inequalities, ultimately undermining the market for capitalist goods and services. This inevitably sharpens one of the most basic contradictions of capitalism: the tendency of capital accumulation to outpace the growth of the employed labour force, which restricts the ability of the working class to purchase the goods they produce in the course of the capitalist production process.

In the late 1980s and 1990s the neo-liberal package appeared on the surface to have successfully provided an escape route from the contradictions of the post-war upswing period (1950-73). That period was also the era of the Cold War between imperialism and Stalinism. The increased strength of a working class enjoying full employment, together with the achievements in that period of the planned economies of the Soviet Union and Eastern Europe, compelled the capitalists to make significant concessions to the working class in the form of state welfare services and relatively high living standards. There was no shortage of demand for capitalist goods and services. On the contrary, high and sustained demand combined with new methods of mass production stimulated a prolonged investment boom and high profits, despite increased taxation.

In the early 1970s, however, that virtuous circle of economic and political factors gave way, through the internal contradictions of the system, to a crisis of capitalist profitability. As post-war technological systems (mass production of motor vehicles, chemicals, electrical equipment, etc) reached their limits, and a strengthened working class increasingly fought further intensification of exploitation, the unprecedented growth of productivity (output per worker/hour) slowed down. Rising real wage levels were therefore no longer compatible with high profits. Moreover, the workers used their industrial strength to increase their share of the wealth produced. It therefore became imperative for big business to increase the share of the wealth produced (from workers' labour power) going to profits - which could only be at the expense of wages.

After the shock of the 1973 oil price rise, which triggered a world slump (1974-75), the capitalists therefore turned away from Keynesian policies to neo-liberalism. Step by step post-war concessions were reclaimed through privatisation, cutting back the 'welfare state' and, most decisively, through attacking workplace rights and trade union organisations.

There was a similar rolling back of concessions by the advanced capitalist powers to Third World countries. Through agencies such as the IMF, the World Bank, and GATT, a free-market 'restructuring' was imposed in order to open up 'developing' countries to the free-ranging activities of the multinational corporations and banks.

Neo-liberalism restored the profitability of the capitalists in spectacular fashion. The tiny layer of wealthy capitalists reaped hyper-profits, with much reduced taxation into the bargain. Much of it came from speculating in finance and property rather than production.

But like every other capitalist 'paradigm', neo-liberalism has created the conditions of its own destruction. Hyper-profits were excavated from the chasm of inequality. In the US, the neo-liberal model, the top 1% now owns as much wealth as the bottom 90%. The earnings of a majority of workers have steadily declined since 1973. For a time, the capitalists could develop new markets for luxury goods and services amongst the affluent strata and also exploit new markets in a handful of rapidly developing economies in Asia and elsewhere.

Accelerating inequality, however, inevitably undermines markets. So the strong demand but diminishing profits of the post-war upswing have been replaced by booming profits combined with increasingly inadequate demand. The result is the currently developing world slump.

A general crisis of the system

ALL THE CONTRADICTIONS of the neo-liberal adventure are manifest in the current downturn. It is not merely, or even primarily, a financial crisis: it is a deeply rooted crisis of capital accumulation, now expressing itself as a crisis of production.

(1) Over-production:
There is a classical crisis of over-production. This is associated with the contraction of production and trade, and a general fall in prices - all coming together in a deflationary spiral. Even last year it was already clear that in Asia there was serious overcapacity (of probably 30% or more), especially in computers, electrical consumer goods, and motor vehicles. The Asian slump almost immediately caused a sharp fall in the prices of oil and other commodities (down 30% this year to a twenty-year low), transmitting the crisis to mainly commodity-exporting economies.

East Asia is, in any case, part of the US, Japanese and European multinationals' global production complex. As the crisis deepens and spreads, rising unemployment, reduced income levels, mounting business and consumer debt defaults, and government cuts, will further erode demand and accentuate over-production on a world-wide basis. Over-production will hit the advanced capitalist economies too. This must lead, according to the anarchic logic of capitalism, to a massive destruction of productive capacity and even higher levels of mass unemployment.

(2) Financial instability:
The acute instability of globalised financial markets is accelerating and will, at a certain stage, provoke a major crash. There has been continuous volatility since the 1987 crash. But in the last three or four years the volume and volatility of world capital flows has increased enormously. The recent flight from 'submerging markets' in Asia, Eastern Europe and Latin America has dramatically increased volatility. The flight to 'quality' (ie 'safe' investments in the US and Europe) has temporarily postponed a crash on US and European stock exchanges. In fact, for a time some of the capital returning from 'emerging markets' went into US and European shares, leading to further rises. In the last few weeks, however, there has been a series of sharp falls. The traders now acknowledge that, after sixteen years, the (rising) 'bull' market has given way to a (falling) 'bear' market. Nevertheless, leading shares, especially in the US, are substantially over-valued in relation to companies profit performance. It is only a matter of time before the US slow-down (which will be followed by Europe) will precipitate a much bigger stock-market 'correction' - ie an almighty crash.

At the moment, exchange rates between the US dollar and major European currencies are relatively stable (though there are some signs that the dollar is beginning to slide). But a marked decline in the dollar, which is likely in the next few months, will once again provoke world currency turmoil. Among other things, this will sink the EMU.

(3) Excessive debt:
Neo-liberal policies, despite their emphasis on sound money and balanced budgets, have not overcome the problem of excessive debt which first emerged after the 1974-75 slump. The world debt mountain (both private and government) is rising rapidly and will sooner or later collapse under its own weight.

Credit is essential for capitalist production and trade. The relative decline of production and the turn towards financial speculation, however, has produced a disproportionate burden of debt. Much of the investment in emerging markets - in shares, company bonds, privatisation, etc - has been financed on the basis of loans (ie debt). Consumer spending has relied heavily on credit cards and consumer finance. All's well when business is booming. But a downturn inevitably produces a chain of bankruptcies, a so-called credit-crunch.

The sharp fall in prices of commodities, the main exports of many Third World countries, is drastically undermining their ability to repay debt and interest. At the same time, increased unemployment and reduced incomes will make it impossible for many consumers, especially the new middle class which enjoyed a short burst of prosperity, to repay consumer debt. 'Bad debt' is a world-wide problem, but the Japanese banks excel all the others with unrepayable loans of at least $1,000bn. An implosion of the Japanese banking system and/or cumulative defaults around the world will have a devastating effect on the US and European banks and finance houses.

These are the interlocking elements of a critical chain reaction. The sequence and timing of events cannot be accurately predicted. The leaders of the major capitalist states are powerless to reverse this process and, on the basis of their current policies, are unlikely to slow it down or mitigate the effects of a major slump. Japanese capitalism, as its leaders now admit, is sliding into a deep slump. And it is only a matter of time before the US, which is already experiencing a marked slow-down, also enters a serious downturn. Given the importance of the US as a world market and the pivotal role of the dollar internationally, a slump in the US may well open the door to the deepest economic depression since the end of World War II.

A crisis of bourgeois economic policy

THE LEADERS OF the advanced capitalist countries have been plunged into a crisis of policy. Buoyed up by the apparent continuation of the rising 'bull market' on US and European stock exchanges, bourgeois strategists (with a few exceptions like George Soros) were resolutely denying the seriousness of the Asian crisis and its global effects. Earlier this year Clinton said it was just a 'glitch on the road'. Greenspan, head of the US central bank, even described the Asian crisis as 'a salutary event' which would dampen the markets' 'irrational exuberance' and help counter inflationary trends. It took the August collapse in Russia to jolt most of them out of their blind complacency.

Even now, the G7 leaders have no idea of what measures they can take to avert the onset of a world slump. Despite Clinton's call for decisive leadership, there is no real agreement on policy co-ordination by the leading capitalist powers. They are still tightly laced in the ideological strait-jacket of neo-liberalism.

The G7 governments are (a) still bound to the minimalist, non-interventionist role of the state in the capitalist economy; and (b) their thinking is still dominated by the anti-inflation policies which reinforced the financial booms of the late 1980s and early 1990s but which are counter-productive in the present situation. (a) The role of the state: Privatisation of previously state-owned industries and the cutting back of state investment in infrastructure projects, social welfare, and so on, has to some extent reduced the ability (in any case limited) of capitalist governments to influence economic trends. With the free movement of capital and commodities across frontiers, not even the major capitalist economies can, under present conditions, escape the pressures of world financial markets.

In fact, the ideologists of capitalism have in the recent period elevated 'market forces' to the level of mystical forces operating above the social and political relationships through which real economic activity develops. Some even hail 'the market' as society's ultimate - and of course benevolent - governing authority.

Government is seen merely as a ringmaster maintaining the circus arena for a troupe of private performers. If they all pursue their own individual profit (it is claimed), the 'hidden hand' of the market will ensure that everyone is better off as a result. The ringmaster, of course, is expected to use his whip when necessary against the workers outside the privileged bourgeois circle. And despite the globalisation of finance and trade, capitalist governments are still charged with the task of maintaining the apparatus (including the armed forces) of the national states, which remain capitalism's basic territorial units.

In the 1980s and 1990s it was no wonder that the major capitalist powers willingly accepted the dominance of the global market, when they operated as a siphon sucking profits from the whole world into the coffers of the metropolitan bourgeoisie.

Through the IMF, World Bank, GATT, and other agencies, backed up with threats of financial sanctions, the imperialist powers forced the underdeveloped countries to open up their economies and drastically scale down state intervention in their economies. Third-world countries, which had previously been allowed some protected national economic development, were opened up to plundering by the multi-national corporations and banks. As a result, globalisation has not only produced a slump but provoked deep social crisis, already posing the threat of revolution to the ruling class in a number of countries. That is why Mahathir Mohamad, Malaysia's president, has turned against the free market, reimposing controls on capital, foreign currency exchange and imports. This is a pointer to the future. Other governments, faced with economic collapse and the prospect of revolution, will resort to similar measures to defend the national interests of the ruling class.

The leaders of the advanced capitalist countries are, at the moment, unanimous in their condemnation of Mahathir's rejection of globalisation. But when the economic crisis hits the US and Europe with its full force, they will undoubtedly move in a similar direction. They will not be able to preserve an 'open' global economy any more than they could after 1914, when the 1870-1913 world upswing gave way to a period of depression and intense inter-capitalist rivalry.

When the US national economy faces devastation, its capitalist leaders will once again turn to controls of capital and protectionist measures against foreign imports. This will not prevent US imperialism from continuing to preach free trade to the rest of the world. In the next period, the return to protectionism will most likely be on the basis of the main trading blocs rather than individual states. Both NAFTA and the EU, while relatively open at present, have all the reserve mechanisms needed to establish a continental siege economy behind protective walls. The looser Asian block dominated by Japan would also raise protective walls.

When the capitalist class is faced with the threat of social explosions and mass political movements, it will be forced to turn back towards state intervention to prop up big business and banks. Spending programmes will not primarily be social programmes (though they will also be forced to concede temporary reforms) but the 'socialisation' of big business's liabilities. Such policies will not provide a way out for capitalism, any more than similar measures did in the Great Depression of the 1930s.

For the moment, however, the capitalist powers are still locked onto free market policies. In relation to the Asian slump, these policies, imposed through IMF intervention, have exacerbated the crisis.

(b) Neo-liberal orthodoxy: The new orthodoxy, which took over from the early 1980s, is that the 'freeing up of markets' will overcome every problem. Clearly, this corresponded with the interests of the finance capital based in the major centres. The only real danger, it was argued, was that posed by monetary and fiscal laxity (that is, excessive money supply or budget deficits). This reflects the capitalists' phobia about inflation, which above all erodes the wealth of finance capital (price rises reduce the real value of borrowers' repayments to lenders). After all, it was the high rates of inflation which infected the world economy in the late 1970s, when the Keynesian order was crumbling, that impelled the capitalist class towards the sound money policies of monetarism and neo-liberalism.

When the Asian crisis broke out with a round of currency devaluations in July 1997, the IMF intervened on the basis of anti-inflation policies. As the price of rescue loans, the IMF demanded that the governments of Indonesia, Malaysia, South Korea, etc, should shut down insolvent banks, raise interest rates, and slash government expenditure - in other words implement a severely deflationary policy.

This was a classic case of incompetent generals fighting the last war rather than the one engulfing them. Monetarist policies which preserved currencies as a store of value and a sound medium of exchange served finance capital well in the 1980s and 1990s. But in Asia today, and the world tomorrow, the capitalists face, not an imminent threat of inflation, but the reality of a deflationary spiral. The collapse of banks, a flight of capital abroad, falling prices, drastic cuts in employment and wage levels, all combine to bring about a massive reduction of liquidity in the economy. The cash flow required to finance production, trade, and all forms of commerce dries up. Government measures like interest rate increases and spending cuts can only exacerbate the problem.

Some capitalist policy-makers are now beginning to recognise this. In recent months, the IMF has begun to come under severe criticism for the policies it tried to impose on governments in South East Asia. Joseph Stiglitz, chief economist at the World Bank, complained that the IMF was pushing East Asia into a severe recession: 'virtually every American economist rejects the balanced-budget principle during a recession. Why should we ignore this when giving advice to other countries?' Now, while they would never dream of advocating such policies at home, some economists are advocating a reflationary policy for Asia, especially for Japan. In effect, they are turning back to a form of Keynesianism.

A return to Keynesianism?

COULD A RETURN to Keynesian-type policies provide a way out of the slump for capitalism? The continued paralysis of Japan shows that it will by no means provide a quick fix. Despite the complaints of western governments that Japan was not doing enough to stimulate growth, since 1993 the Japanese government has introduced six government spending packages, estimated to total over $651bn. True, a large share of it went to subsidise big construction companies to build 'roads to nowhere'. The spending packages were also undermined to some extent by the government's attempt to claw back some of the cost through increased taxation in order to prevent a further rise in the budget deficit. Nevertheless, these packages constituted the biggest Keynesian-type stimulus in modern times. But even combined with near zero interest rates, they have not succeeded in jump-starting the economy.

There is no easy way for reflationary policies to overcome the deep structural contradictions that have built up since the bubble economy of the 1980s. The banks' mountain of unrecoverable loans (which probably totals over $1,000bn) and the black hole of overvalued shares and property concealed under the fictitious figures currently entered in bank and company accounts, remain an apparently insuperable obstacle to any economic revival. Short of the liquidation of a series of banks and major industrial conglomerates, in other words allowing a slump to take its course, it is hard to see how any recovery can develop.

Defying the inflation taboo of the last period, a number of US strategists have now began to advocate the unthinkable for Japan - a policy of deliberate long-term inflation. If zero interest rates have not stimulated any upturn in spending, either by companies or consumers, then (their argument goes) there must be a prolonged period of price rises which will effectively produce a negative real interest rate (ie the nominal interest rate minus the rate of inflation). If savings are thus threatened by prolonged inflation, companies and consumers will be persuaded to spend their money on goods and services. Moreover, negative real interest rates have the inestimable advantage for governments of eroding the real value of their national debt.

Support for such a policy, strictly to be applied to Japan and 'lesser breeds without the law', is gaining ground in Washington and EU capitals. Support for inflation, however, remains an abomination for the US and Europe. This is shown by the refusal of Greenspan, chair of the US Central Bank, to substantially cut US interest rates. The fears of the capitalists that spending packages will push budget deficits up to much higher levels underlines the dilemma they face in this period. Government debt has reached historically unprecedented levels, despite a period of neo-liberal policy. (The huge costs of mass unemployment and pensions for ageing populations is a big factor in this.) But in order to stave off total economic collapse, governments will be forced to resort to new spending packages. However, this will soon impose a crippling burden of debt on many states.

Nevertheless, as the Asian slump spreads to the West, the US and Europe may well face the very same kind of liquidity trap as Japan. In that situation, regardless of government policies, 'market forces' will sooner or later produce new inflationary effects. Whether these will be effective in reviving the economy is an entirely different question. At a certain point, the spectre of inflation, even hyper-inflation, would reappear. While it can be a stimulus in mild doses, inflation is a deadly cancer in its virulent form.

Capitalism will not be able to escape from its fundamental contradictions. Whatever the depth and duration of the coming world slump, however, the world economy will sooner or later, given the political weakness of the forces opposed to capitalism, move into a new period of cyclical growth. This will not allow the capitalists to repair the damage to the system's foundations - and the ruling class will face mounting mass opposition to its rotten system.

Political crisis

THE APPROACHING ECONOMIC crisis has already begun to reveal the rotten hollowness of the world's most powerful capitalist leaders. Clinton, leader of the world's lone superpower, is embroiled in the Lewinsky affair and is threatened with impeachment. This reflects a much deeper crisis of US capitalism's political machine, which is incapable of formulating, let alone implementing, a coherent economic and foreign policy. The political impotence of Obuchi's government in Japan reflects the crumbling of the LDP's social and political base.

In Europe most of the EU leaders are fanatically committed to EMU, which will be a major casualty of the coming slump, but can agree on little else. In Germany, Kohl faces the prospect of defeat in the coming elections. Capitalist leaders have yet to grasp the scale of the crisis facing them, let alone formulate a policy to ride it out.

The real question is how did the bourgeois leaders get away with it in the last period? Governments of all complexions carried out neo-liberal policies which heaped super-profits on the rich while cutting the living standards of big sections of the working class and sections of the middle class. In several European countries, notably Italy, France, Belgium and Spain, this provoked massive waves of strikes and social protest. Yet governments of capitalist parties and also of pro-market 'socialist' parties were able to ride these out. Moreover, for a time bourgeois leaders were able to win support, or at least acquiescence, on the electoral level for the idea that the market is the only workable system and therefore the logic of market-forces and globalisation have to be accepted.

The electoral successes of pro-market governments arose from several factors. The prestige of the capitalist class - the appearance of social and economic power - was enormously enhanced by the collapse of Stalinism. Linked to that, the bourgeoisie was able to rely on the leaders of the traditional social democratic parties and trade unions for collaboration in carrying through pro-market policies.

Crucially, however, the capitalists' ability to gain wider electoral acceptance for free-market policies depended on the growth of the economy. This enabled them to spread a small sliver of their fabulous profits among a section of the middle class and skilled working class - who in most advanced capitalist countries form a wedge of floating voters whose choice of party determines the outcome of elections. Some even gained a small share of the booming financial and property markets, winning some acceptance for the idea that the further enrichment of the super-rich is a condition of increased prosperity for wider layers.

Deprived of their paupers' share of the fruits of growth, however, the acquiescence of the suburban 'middle class' will rapidly change to anger and opposition. There is already a deep reservoir of social discontent amongst this strata. They, too, have been hit by cuts in public services and are experiencing the insecurity of short-term job contracts. They cannot escape the general effects of the social alienation resulting from the dictatorship of the market - intense economic pressure on personal relations, rising crime, the commercial degradation of cultural life.

In the US, but also elsewhere, a large section of middle class and skilled workers have bought shares, or are now relying on pension schemes, annuities, life insurance, etc, which depend on the performance of shares. A major stock exchange crash would effectively wipe out their savings - provoking a tidal wave of anger against the profit system.

Historically, there has never been a mechanical link between economic crisis and mass political movements. The forms of struggle, and especially the timing, cannot be predicted in advance. But one thing is certain. A deep slump will shatter the illusions in capitalism which were built up in recent years (even though all the underlying features of a depression were already present). Consciousness will rapidly catch up with reality.

Capitalist leaders made no attempt to conceal their smug satisfaction when the crumbling Stalinist dictatorships were shaken by waves of mass protest after 1989. Thatcher, for instance, hypocritically championed 'people's power' in Eastern Europe, which Western leaders utilised as a cover for the restoration of capitalism. But as capitalism moves into a deep crisis, the system - like Stalinism in the 1980s - will also be shaken by a generalised social and political crisis. Capitalist regimes everywhere will face mass rebellion.

We have seen the outlines of such movements in recent years. In Belgium in 1996, the paedophile murder scandal provoked mass demonstrations against the rotten corruption of the state and main political parties. Workers and many sections of the middle class were drawn in. The 1995 strike wave in France evoked enormous sympathy from wide sections of society, including the middle strata and small business people. The pit closure crisis in Britain in 1992 also mobilised an extraordinary cross-section of society in two huge mass demonstrations. This is the music of the future.

It is the working class, however, which will provide the decisive forces in opposition to the effects of capitalist crisis. It remains the only force in society capable of fighting for a new social order. Undoubtedly, economic restructuring during the last 20 years has changed the structure of the working class. Some of the former 'heavy battalions' have been greatly diminished or even disappeared. Yet new contingents which have developed on the basis of new industries and services will, in the next period, begin to move into action, organise, and come to the fore as a decisive political force. Women workers, who now make up over half the workforce in some regions, will play a significant role in this process.

During the neo-liberal period the workers in many advanced capitalist countries suffered some serious set-backs. The leaders of the social democratic parties and trade unions were incapable of defending the gains of the post-war upswing. In fact, during the 1980s, most of them accepted the 'market' and 'globalisation' as justification for collaboration with capitalist governments in carrying through counter-reforms. The ideological counter-revolution launched by the capitalists internationally after 1989 played a big role in fragmenting and disorientating the active sections of the working class.

But the working class has not suffered the kind of shattering, historic defeat that was inflicted under fascist regimes in the 1930s. The proletariat has preserved its capacity to struggle, as recent European movements show. Recently there has also been an increase in strikes and other kinds of industrial protest in the US (the UPS strike, the GM shut-down) and Britain. This is only the beginning.

The main set-back of the 1980s and 1990s was a pushing back of working class consciousness. The capitalist class was only able to turn the clock back because of the political disarming of the working class. But a period of deep international crisis for the capitalist system will produce enormous struggles and a radicalisation of consciousness. What is required in addition is a programme to defend the interests of the working class and fight for an international socialist transformation. The starting point is a clear analysis of the present economic crisis and a perspective for its unfolding in the months ahead.

Neo-liberalism and Keynesianism

Neo-liberalism, or 'new-liberalism', is a return to the liberal or 'free market' policies which prevailed in the mid-nineteenth century during the first period of capitalism's world-wide industrial expansion, dominated by British capitalism. Its slogan was 'laissez-faire', or 'leave alone', and it favoured international free trade and non-interference of government in the national economy. It was based on the notion that the market (directed by 'an invisible hand') is self-regulating and that the pursuit of individual self-interest ultimately produces the best outcome for everyone.

The industrial bourgeoisie used laissez-faire policies to destroy the earlier mercantilist practices, under which vested interests such as landowners, the monarchy, merchant-bankers, etc, monopolised various fields of production and trade. However, late-developers like US, German and Japanese capitalism, followed protectionist policies (defending their developing industries with tariffs) until they were strong enough to compete openly on world markets.

Keynesianism takes its name from the British economist John Maynard Keynes, who after the great crash of 1929 advocated increased government expending on public works and social welfare in order to stimulate demand and 'pump-prime' or jump-start the stagnant economy. His policies were hardly implemented in the 1930s, except in the US New Deal, which was not very effective in reviving the US economy.

Keynesianism came into its own after the second world war on the basis of new social and economic relations which produced a prolonged economic upswing. Within the national economies Keynesianism supported increased state intervention through nationalisation of some basic industries, higher levels of welfare expenditure financed from progressive taxation, and government manipulation of spending, taxation and monetary policy to try to smooth out the boom-slump cycle, particularly to stimulate demand during a downturn.

Internationally, Keynesianism supported a politically managed money system (the so-called Bretton Woods system), with fixed exchange rates based on the dominant role of the US dollar, which was pegged to gold at a fixed price. However, subject to approval by the (US-dominated) IMF, exchange rates could be adjusted in a crisis to protect national economies. Trade was gradually liberalised through tariff reductions under the auspices of the GATT (General Agreement of Tariffs and Trade), but international capital flows and financial markets were subject to government regulation.

The acceleration of world inflation in the late 1960s, which marked the exhaustion of the post-war upswing, led to a breakdown of the Bretton Woods system, to floating exchange rates, and the growth of capital flows outside the control of national governments. Faced with declining levels of profit, big business and finance capital stepped up the pressure to roll back state intervention nationally and internationally and to open up the free movement of capital. Back to neo-liberalism.