Bubbles galore

Capitalism needs growth so that profits can be invested. And capitalistic growth has the dual form of production and debt, with more production to increase surplus value and more debt to realise it. A greater supply supposes a greater solvent demand, so the unpaid surplus value is paid with credit and labour borrows to consume (1). Growth also increases a government’s tax returns without modifying the rates of taxation, and thereby reduces its budget deficit (government budgets are nearly always deficient). This in turn reduces investments in Treasury bonds.

When growth is strong production increases, as do employment and consumer credit. But increasing consumer credit has less and less effect on consumer demand, so that growth slows down and occasionally drops off a cliff. Strong growth attracts large investments in increased production. Slow growth does not, but profits still roll in and need to be invested somewhere. Instead of being used to produce more, or better, or faster, investors speculate on the value of past investments, such as shares, bonds, real estate and commodities, which just pushes up their prices. Slow growth also means that governments are borrowing more, which occupies some of that money looking for a return.

Growth needs an increase in consumer demand. A part of that increased demand, especially when actual wages are stagnant, depends on credit to be solvent. But consumer credit must grow much faster than the demand it generates. At some point it can no longer grow fast enough, and consumer demand begins to contract. Then growth slows down as does investment in production, and the speculative cycle begins in earnest. The credit bubble burst in 2007/08 and never got going again. Even subprime motorcar credits have been unable to push up the growth rate to a significant level. As a result, dividends and interest have poured onto the stock market, moving up the price of shares and bonds to unprecedented heights, and pushing down the rates of interest and earnings per share to historic lows.

In 1930 Keynes published a short essay in which he imagined how things might be a century later.

“When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.” (2)

It was pleasant idea then and still is, but persistent wars and poverty, along with pollution and climate change, will probably stop it from ever becoming reality.