Stagnationist roots of the current crisis

Stagnationist roots of the current crisis

Grazia Ietto-Gillies    iettogg@lsbu.ac.uk

If a Martian had visited Earth in the last 20 years she would have been pretty puzzled to see a planet where lack of food and infrastructure was endemic in many countries; where even the rich countries had many people in poverty; where there are inadequate levels of basic infrastructures and public services and yet where many resources – including many bright people – were allocated to producing strange financial products that nobody could possibly want and very few people understood among the Earthlings let alone the Martians. Moreover, the people involved in these useless and socially dangerous products were the very ones that were gaining the highest rewards. How had that come about?  

            If imagining a Martian – let alone her thoughts – is difficult for us, let us try to imagine the position of someone growing up or working in post WWII Italy: myself and my father respectively. What we saw around us was fervour (almost a fever) of construction and reconstruction – to which my father was indeed contributing – and the production of ever increasing consumption products from cars to household electrical products to holiday opportunities. Why can’t modern societies produce things the majority of people need and want, might the Martian lady as well as my father – were he still alive – ask? This is what we must try to explain.

Economic crises are always manifestations of underlying and deepening disequilibrium between the three sides of macro activity: production, demand and distribution. The last few decades have seen great developments in the forces of production and thus in the world’s potential capacity. We have also seen growth in profits and rents.

Profits and rents need outlets for investment and large capacity needs increasing demand for its absorption: unless the absorption problem is solved potential capacity cannot be realized into actual capacity and actual income. As potential and actual capacities grow, equilibrium can only be maintained if demand grows accordingly in order to absorb the growing capacity.  For demand to grow in line with potential capacity there must be a congenial income distribution.

Moreover, though modern economic systems have plenty of need for investment – in alternative energy sources; in public services such as education and health or transport – what is not plentiful is the range and volume of profitable investment opportunities in the real sector. The financial sector provided very profitable investment opportunities for the large and increasing surpluses. At the same time it contributed to increase the surplus and to shift distribution in favour of the better off, thus exacerbating the problem of demand.  

This is a key difference between advanced capitalist economies today and an emerging country such as Italy post WWII. During the Italian ‘miracolo economico’ years there were plenty of profitable investment opportunities in the real sector. The slowing down in profitable investment opportunities in modern capitalist economies after the surge of the decades following WWII – is, in my view, crucial for understanding what has been going on in the last couple of decades and what has led to the current crisis. It is this slowdown in profitable investment opportunities coupled with the wish by the top echelons of society to shift power, income and wealth in their favour that is the root cause, the causa causans – to borrow a concept from Keynes – of the developments in the last 20 years and of the resultant current crisis.

The low level of profitable investment opportunities in the real sector led also to another key development of the last two decades: the intervention of governments to enhance the sphere of profitable investment opportunities by private corporations. This was done via the privatization programmes and via the involvement of the private sector in the provision of public services. Such involvement happened and is still underway with regard to many public services including the provision of clinical services in the British National Health Service (NHS) as well as the provision of building infrastructure in hospitals, primary health care, schools and universities.

This is an extract from ‘The current economic crisis and international business.

Can we say anything meaningful about future scenarios?’ to be published in a Special Issue of Futures, 2010 dedicated to ‘The future of International Business’ edited by Ted Fuller and Joanne Roberts.