Economics for people

by Sep 13, 2012Magazine

economics-for-peopleAmandla! introduces a new column: Economics for people. In this column we demystify basic economic processes, concepts and debates so that activists are able to participate better in the struggles over the nature and direction of economic policy.

One of the factors behind the Marikana/Lonmin massacre, which is hardly mentioned, is the impact of the global economic crisis on South Africa and particularly on the platinum industry.

The price of platinum has declined from a record of $2 308 an ounce in March 2008 (+/- R18 900) to a low of $800 in November 2008 (about R6 551). It has recovered to the current price of $1 550 (about R12 692), but is still much lower than its 2008 level. Behind this slump lies the collapse of the European car market as a result of the global economic crisis.

What is the global economic crisis?

It is a crisis flowing from the workings of the capitalist system. Essentially, the world economy has too much capacity. Factories, plants and businesses can produce more than they can sell. Let’s look at the auto industry, where most of the platinum produced in Marikana is used.

Since car producers have vast factories, long production lines and huge workforces, they are often stuck with high fixed costs. To make a profit the manufacturers have to sell lots of vehicles. For many car firms, this simply isn’t happening and losses are mounting.

Peugeot is making losses of €200m (R2 billion) a month. Its shares have slumped. It is not clear whether the company can survive beyond another year or two. Peugeot’s management want to cut back on costs. Peugeot said earlier this year that it would cut 6 500 jobs and close its factory near Paris. Ford also suffered huge losses of over $1 billion in Europe this year, which is far worse than expected. Opel-Vauxhall is expected to lose more than $1 billion in 2012, on top of the $14 billion lost since 1999.

We need to ask where the excess capacity comes from.

Excess capacity arises from competition between different blocks of capital. Peugeot, in order to sell more cars than Ford, has to reduce the price of its cars to levels that are lower than its competitors’ prices. To do this it has to lower the costs of production. This can be achieved by reducing its wage bill and/or by increasing productivity – that is, by producing more cars with less labour. This is normally achieved by introducing more machinery and technology into the production process. The result is constantly expanding production.

But this can only be sustained when there is an expanding market – more and more people wanting and able to afford to buy the cars being produced. This happens when there is a general rise in living standards, as was the case in the North (America, Europe, Japan) between the 1950s and 1970s.

But when employers retrench workers and hold wages down in order to lower costs, at the same time they smash the demand and the markets for their goods. Hence we can talk of the contradictions of capitalism.

From the 1970s capitalism has been facing a situation of over-capacity or over-accumulation. Profits accumulated earlier can no longer can be invested profitably. New forms of investment are sought or sometimes artificially created, such as in the property market through the development of new malls, high-rise buildings and property more generally.

The excess money floating around in the world economy was increasingly absorbed in financial speculation once the value of currencies (such as the dollar, pound, yen or rand) were no longer fixed against each other and when the rules governing the operations of banks were changed to make it easier to lend and operate globally.

The introduction of pro-business policies in the late 1970s intensified in the 1980s and beyond. These include privatisation, tax cuts for the wealthy, and a reduction in state expenditure on welfare provisions. This has gradually killed the buying power of working people, who constitute a significant part of potential consumer markets. These policies are key aspects of what is referred to as ‘neoliberalism’, which will be covered in more detail in a subsequent edition of this column.

To make up for falling demand in a situation where workers’ wages were stagnating, easy credit was extended to the poor, especially through home loans. Trillions of dollars flowed into the housing markets around the world and the price of houses shot up. Homeowners then could borrow more money by using their houses as security.

But by 2007, more and more people became unable to keep up with their home loan instalments and the price of houses collapsed. The banks that had lent money in the housing market were bankrupted. Even worse: workers’ pension funds that were invested in the banks and housing market also became bankrupt. In the resultant financial crisis, many of the worlds leading investment banks and financial institutions collapsed, including Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, Citigroup and AIG.

Matters were made worse by the major governments around the world, who rushed in to bail out the banks using taxpayers’ money. It is estimated that the US government alone spent $29 trillion on bailing out the financial sector.

This is equal to approximately 50 times the value of all the minerals and other goods and services produced by the South African economy in a year.

The bailouts created a new crisis: a debt crisis of the world’s major governments. The centre of this crisis lies in Europe. Portugal, Ireland, Greece and Spain (PIGS) and a number of other governments had to be bailed out in turn because they took out loans to finance the bailouts of the financial institutions, which they could not repay.

A number of these financial institutions bet against their governments being able to pay back the loans, thereby making the financial crisis even worse.

Now European and other governments in the North are cutting state expenditure in an attempt to put their finances in order. However, as government expenditure is a significant aspect of economic growth, economies around the world are slumping further. Even worse is that millions of state workers are being retrenched and wages and pensions reduced, which in turn reduces still further the buying power of consumers that is so crucial for capitalist economies.

So car markets in Europe collapse, the demand for platinum plummets, and the bosses of Lonmin and other platinum producers the resist wage demands of workers, as we saw at Marikana.

The Marikana tragedy can be termed a tragedy of global capitalism.

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