Global economic recession – A crisis of capitalism?

In August 2019 the top economists, CEOs and businessmen met in the US and the G7 leaders met in France to discuss ways and means of evading the looming economic recession. They had seen the early signs and were trying to prevent the occurence of yet another downturn which has now become cyclic and almost inevitable. Yet the recession seems to be upon us with a vengence, hurried on by the effects of the Covid pandemic and the war in Ukraine. We are bankrupt thanks to our politicians while the poor people in Europe it seems have to decide between eat and heat this winter.

There had been economic downturns since the early 18^th Century but the worst ones have been recorded since1929 when the Great Depression hit the world. An economic recession is defined as a significant decline in the GDP lasting several months and widespread unemployment and negative changes in other vital economic parameters. A depression is more severe in degree and longer in duration. The GDP drop in the Great Depression in 1930 was 26.7% the biggest ever. This depression was followed by rapid growth and full employment but the good times did not last long. Recession recurred in 1937 with a GDP decline of 18.3%. This cycle of boom and crisis continued with recessions occuring in 1945 (GDP drop – 12.7%), 1949, 1975, 1982, 1991, 2009 and 2021.

The main cause for the Great Depression in 1929 is said to be a reduction in spending resulting in a decline in production and rise in unemployment. The share market had also crashed. The global financial link that was in operation due to the Gold Standard had caused the depression to spread world wide. What caused the initial reduction in spending is not clearly explained. Similar theories were put forward to explain the subsequent crises but seldom were they convincing. External circumstances like pandemics, droughts and wars had sometimes been contributary factors but robust economies should not show such vulnerability.

John Maynard Keynes proposed that governments must intervene to control the ups and downs of the economy, going against the then prevalent idea that the free market should be allowed to drive the economy along its naturally advancing path. According to him the main driving force of the economy is the agregate demand which is measured as the sum of spending by households, business and government. During recession the agregate demand is reduced resulting in decreased output and unemployment. By increasing spending, both public and private, production could be stimulated and the economy would recover. This is where the government could intervene by increasing public spending and increasing the availability of money for private spending and also introducing fiscal measures. Keynes would advocate deficit spending on labour intensive infrastructure projects to stimulate employment and stabilize wages during economic downturn.

However, the Austrian School of Economics took a different stand, and they said recession and booms were a part of the natural order of capital development and government intervention could worsen the crisis. Keynesian policies dominated till about the 1970s when many advanced economies suffered inflation and slow growth. Keynesian economists had no answer to this crisis. They believed that fiscal measures could solve the crisis while the Monetarist economists advocated that judiciary use of monetary measures would aleviate the crisis. A New Generation of Keynesian economists arose in the 1970 to 1980 period who strengthened the argument that fiscal policies could be effective against economic downturn.

The global financial crisis in 2007-08 caused a resurgence in Keynesian thought and many governments including the US and the UK adopted these policies. However this crisis also showed that Keynesian theory must come to terms with the monetary aspect of the problem too and presently the Keynesians it seems are trying to address the monetary issues. It is seen that no economist seems to have an effective solution or a clear explanation for the recurrent economic recessions that had affected the world since the 18^th Century.

Sri Lankan government in 2019-20 was caught in the initial stages of the recession before it was overwhelmed by the Covid pandemic. The then government’s decision to reduce taxes and stimulate spending in a crisis situation resonate with Keynesian fiscal policy but proved to be disasterous in a country where poor people depend on state welfarism for survival. Now Sri Lanka seems to have gone in the opposite direction after consultations with IMF and has introduced high taxation while keeping the interest rates also high. The two together may discourage investment in industry and service which may worsen the economic decline. The interest rates may have to be brought down sooner than later if industries are to survive. However, all these are kneejerk reactions for nobody knows the real cause of global economic recession.

Did Karl Marx know? He said “The real barrier of capitalist production is capital itself” (Capital, Vol 111). According to him the accumulation of surplus capital due to profits adding on to the real value of a product over and above the cost of production which is determined mainly by labour, introduces a contradiction into the system. This is the cause of all the woes of capitalism. The causes are not accidental or natural in origin but arise from systemic elements of capitalism as a mode of production and basic social order. It is consequent to the profit motive as described by Marx as a two-faced law with the same cause for decrease in the rate of profits and a simultaneous increase of the mass of profits. In other words the development of productivity of labour causes on the one hand a decrease in the rate of profit (net profit expressed as a pecentage of the intial total investment) and on the other hand an increase in the absolute mass of the appropriated surplus value or prifit. This is the chaotic system that the profit motive creates which attempts to cut cost of production including labour costs with the use of machinery that replaces humans (eg. use of self-driven trucks have caused loss of employment for thousands of drivers in the US) or finding cheaper labour (in poor countries) and such other methods.

Marx may be correct in his analysis of the inherent contradiction in capitalism. If we are to explain this problem in simple words, let us imagine that the world has a population of hundred people and they have to produce an item essential for life and the owner of production pays them Rs.10 as wages and expects to sell the item at Rs.11 , such a system is not possible. The problem is of course much more complex but the system may have lasted due to its complexity although it is crisis laden and bound to collapse.

Buddhists could look at this problem from a different angle that Marx did not see though he spoke about the profit mortive. Marx had not taken into consideration the psychology of greed which is a very strong, inherent and primary character of human nature. Buddha in his endevour to find a solution to human suffering realized that greed was the cause of suffering. We may say that all ills of the world, related to economy, wars, climate etc are caused by greed. Buddha’s analysis of the psychology of greed has not been equalled by modern psychologists who seems to have omitted to delve deep into the phenomenon. According to Buddha greed could occupy the human mind at three states; a dormant state, an active state and a manifested state. Buddha had recommended measures to be taken to control all three states. The practise of “Dana, Seela, Bhavana” are the measures that could be taken to control greed in all its three states. Buddhist civilisations of yore which practised these good deeds had developed a detached attitude which restrained the acquisitive human nature. Now of course all that seems to have changed. Sri Lanka and the whole world is engulfed in greed and are doomed unless corrective measures to control greed are taken.

N.A.de S. Amaratunga