Pandemic is triggering what may be the deepest economic crisis of our lifetimes.
As its most essential level, capitalism, as Marx pointed out, is based on a circuit. Capitalists use their capital to assemble raw materials, machinery and labour-power in workplaces, and through exploiting labour-power, generate goods and services.
They sell these goods and services to other capitalists or to workers, hopefully for a profit, expanding their capital. Then they buy more raw materials and machinery, and hire more labour-power, to begin the process anew.
If at any point, and for whatever reason, this circuit breaks down, a crisis will erupt.
Consider now the impact of Covid-19. Across whole countries, the activity of labour-power has been restricted. Supplies of raw materials and machinery are disrupted. The sale of many goods and services has ground to a halt.
The impact radiated out from China, which has in recent decades placed itself at the centre of global production networks in fields such as electronics manufacturing. But now the impact is becoming general to the world economy.
This is all the more intense because of the way in which chains of credit link together the components of the world economy. Not only are there large pools of consumer debt, in the form of mortgages, loans, credit cards and so on, firms also extend credit to one another, borrow from banks, or directly access financial markets.
For instance, there are markets worth over $1 trillion in “commercial paper”, which allows companies to borrow on financial markets, usually for a few days or weeks, to fund their day to day activities.
Covid-19 is causing such markets to seize up. Who would want to lend money to most firms right now? The contraction of these kinds of markets risks a “credit crunch” in which money is simply not available to grease the wheels of capitalism.
The economic disruption has been intensified by Saudi Arabia and Russia choosing this moment to engage in an oil price war. Having colluded for many years to restrict supplies, keeping prices relatively high, and, as a result, making relatively expensive shale oil production in the US viable.
A pandemic on the scale of Covid-19, combined with the oil price war, would cause problems for the world economy at any time. However, the reason why this outbreak risks precipitating a severe global slump lies in longer-term processes preceding Covid-19.
The last major crisis, in 2008-9, emerged out of a long period of subdued profit rates, and hence sluggish levels of investment, across the capitalist system. Increasingly, from the 1980s, the system was driven forward by the expansion of credit.
The result was a series of “bubbles”—at various times in commodities, housing, or shares in high tech firms—underpinned by a mega-bubble of credit.
The year 2008 was when this type of expansion reached its limits. The crisis began in one of the bubbles—the market in risky “subprime” mortgages in the US, but quickly spread through the overextended financial system, before dragging the whole economy into recession.
When the crisis erupted, it created the possibility of a sweeping clear-out of unprofitable firms, potentially paving the way for a rebound in profitability and a new period of rapid expansion. However, this did not happen. Instead, states and central banks stepped in.
Their methods were stimulus packages, takeovers of banks, and quantitative easing—in which central banks buy assets from financial firms to increase liquidity—and ultra-low interest rates.
If that action was effective in digging the economy out of a hole, it also left the underlying problem of low profitability untouched. That is why levels of investment and productivity growth have been miserable for the past decade.
Moreover, quantitative easing and zero or negative interest rates have exacerbated the financial instability. Much of the wave of credit unleashed went into risky, speculative activities sending stock markets to dizzying heights, only for them the come crashing down once Covid-19 emerged.
However, cheap credit was also used to keep alive “zombie firms”, which were able to keep ticking over by simply servicing their debt, but doing little else besides. This has long been a commonplace among Marxist authors, but it is now recognised by mainstream figures.
“Companies have gorged on cheap debt for a decade,” noted the Financial Times, suggesting that carmakers such as General Motors and Ford, and big US retailers such as Nordstrom and Kohls, were at risk because of their debt dependency.
The ruling class response to the crisis, at time of writing, has, in some ways, echoed the moves made in 2008-9. It includes a new wave of emergency cuts to interest rates and expansion of quantitative easing programmes.
The US Federal Reserve, the most important central bank, has also intervened in key areas of the economy that seized up in the previous crisis. This includes markets in commercial paper and the “repo” market, where firms obtain short-term financing in exchange for collateral such as bonds.
The Fed also extended “swap lines”, which allow central banks in other countries to access dollars, a key lubricant for the world system, which, again, dried up in the credit crunch just over a decade ago.
However, the crisis has also exposed the limits of what can be achieved by central banks. Interest rates, for instance, are already at unusually low levels. Quantitative easing has already been done on a huge scale and is far less likely to reassure investors this time around.
That is why there has been a shift to direct government intervention in the economy. This involves providing or underwriting loans or handouts to companies, nationalisation or partial nationalisations of firms, and even one-off payments into individuals’ bank accounts in the US. Such measures generated calls to go further, guaranteeing incomes, organising production of essential goods and services, and so on.
The more this develops, the clearer the arguments become for a planned economy, organised on the basis of production for need—an economy, in other words, run along socialist lines. Simply having the capitalist state running firms does not equate to this.
A genuinely socialist economy also requires democratic control from below. Yet the suspension of much of what is thought of as the ABC of capitalism at least poses this alternative.
This crisis has already evoked a great deal of solidarity among ordinary people who are forced to deal with the twin impact of economic meltdown and a public health emergency.
The left needs to translate this solidarity into calls for a break with the whole logic of capitalism—a logic that, again and again, has been seen to fail.