EconCrisis2 Inners

THE POLITICS OF BRITAIN’S ECONOMIC CRISIS

CONTENTS page Introduction

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1.The Crisis of Britain's Productive Economy

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2. Monopoly, Imperialism and Crisis

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3. From Dominant Empire to Parasitic Dependence

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4. State-Monopoly Capitalism in Britain Today—‘When the Ruling Class is No Longer Capable of Ruling in the Old Way’

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5. Economic and Political Alternatives—'When the 33 Working Class is No Longer Willing to be Ruled in the Old Way' Notes 39

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Introduction to 2009 edition This pamphlet was first published in May 2008—nine months after the onset of the financial problems sparked by the US subprime crisis and the failure of Northern Rock, but four months before the crisis had reached its acute stage with the failure of Lehman Brothers and the threat of bankruptcy across the entire sector. The financial earthquake of September 2008 had twin epicentres in New York and London and triggered smaller but dramatic collapses in Ireland, Iceland, Belgium and the Netherlands. A serious and deepening world recession has resulted.

The original purpose of the pamphlet was not to analyse this immediate crisis but expose the longer-term damage done to Britain's productive economy by the domination of the financial sector. It was in particular to explain how this had come about. The focus was on the politics of Britain's economic crisis: the riddle of how a democratic state has been ruled for so long in the interests of a minute minority, the controllers of finance capital. The pamphlet sought to trace the strategies used by our ruling class in face of capitalism's deepening economic and social contradictions and the implications for the trade union and labour movement today.

This revised edition retains this material without alteration, apart from updating some statistics. The final sections have been developed to take account of subsequent developments. The original text noted that the main costs of the financial crisis were being passed on to working people, that the reductions in real income would quickly trigger recession and that this in turn would deepen the financial crisis as growing corporate indebtedness and falling equity prices eroded the asset base of the banks. All this has happened.

But the reality is in fact much worse. The Lehman crisis administered a shock out of proportion to what had gone before. Previously, governments believed that the debt crisis could be eased by a gradual transfer of income to the banks, a limited check to wages, a tighter regulation of 'shadow' finance and a containable and counter-inflationary economic downturn. The Lehman crisis revealed a previously unknown magnitude of debt. The US government alone had to guarantee $3,400 billion. This blow to confidence has precipitated an economic recession on a world scale that is in turn impacting on finance with quite unpredictable consequences. It has visibly changed the political options being canvassed by our ruling class and that in the US. It is therefore even more important that the trade union and labour movement understand the current options. They are now particularly sharp and unavoidable. Either the organised working class creates an alliance of forces that can salvage and redevelop our productive economy. Or we will have to submit to a resolution of the crisis on the self-serving terms set by finance capital—which means long-term recession, failing living standards and grave damage to our economic future.

The pamphlet's first section compares Britain's economy with those of other major economies and seeks to explain why Britain's is so much weaker. It argues that its decline since the 1970s can only be understood politically in terms of specific government interventions in favour of banking and finance capital. The second section looks more generally at the evolution of relationships between the state and economy in the period Page 2

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of monopoly capital and the third section applies this analysis to Britain. It argues that only by understanding how our ruling class rules, and the specific compromises and alliances it has made, is it possible to explain the policies that led to the current crisis. The fourth section examines the immediate origins of the crisis. It argues that the government's response so far has been on the terms set by British finance capital and that this will have seriously adverse consequences both for the economy overall and for the living standards of working people. The final section sets out the alternative policies needed to redevelop the economy and protect the livelihoods of future generations.

John Foster Economic Committee Communist Party February 2009

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1.THE CRISIS OF BRITAIN’S PRODUCTIVE ECONOMY Since 1965 Britain has lost six million manufacturing jobs; more than four million since 1978. Over the same period employment in banking, finance and insurance has risen from 2.5 million to almost six million (Table 1). Today manufacturing provides less than 12 per cent of all employment.

Table 1 Employment in Manufacturing and Banking, Finance & Insurance (millions) Manufacturing Banking Finance & Insurance 1978 1988 1998 2007

6.887 4.927 4.208 2.910

2.596 3.619 4.490 5.750

Source: ONS Employee Jobs by Industry www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=341

If we look at British firms within the top 500 global companies, we find that there are today just 35. Of these no more than seven are in any type of manufacturing and only one, the armaments company BAe, is in engineering. Twenty-two of the companies are in services, the biggest group being financial companies and the next privatised utilities.

Another six are in mining, oil and tobacco, all dependent on investment and production outside Britain (Table 2).

Table 2 British firms in the Global Top 500 Sector Number Banks & Finance 10 Oil, gas, mining & tobacco 6 Privatised utilities 6 Drinks, food, pharmaceuticals, household 6 Retail 4 Defence BAE 1 Property 1 Media 1 Total 35 Source: Financial Times Global Top 500 firms 30 June 2007

Defenders of current policies argue that this is nothing to worry about. Why? Because, they argue, all economies are moving in a post-industrial direction, that high profit activity lies in services—especially finance—and that the United States, the world's biggest economy with a somewhat higher growth rate, has an even smaller percentage of manufacturing jobs.

All this is both true and seriously misleading. Despite the fall in manufacturing jobs in the United States, the value of industrial output still remains the same 16 per cent of GDP it was twenty years ago. In Britain it has fallen from 17 per cent to 13 per cent. And because the US economy is four times as big, the core concentrations of manufacturing skills Page 4

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remain both much bigger and, critically, far better resourced in terms of investment and research. When compared to other countries, the loss of manufacturing jobs and value added in Britain is far more marked. Taking industrial output as a whole, including energy, Finland's industrial output stands at 26 per cent of GDP, Germany's at 25 per cent, Sweden's at 24 per cent and Japan's at 23 per cent. Britain's is 14 per cent. 1 One key explanation for the decline in Britain's manufacturing is the lack of investment in research and development (Table 3). Britain's level of R&D investment is running at scarcely half that of Sweden, Japan and Finland.

Table 3 Gross Domestic Expenditure on Research Development 2006 Percentage of GDP spent on Research and Development

Country Denmark Finland France Germany Japan Sweden United States

2.58 3.34 2.17 2.52 3.20 3.75 2.66

United Kingdom

1.79

OECD Fact book 2008: Economic, Environmental and Social Statistics - ISBN 92-64-04054-4

The result of this, and of Britain's parallel lack of investment in both capital and labour, has been a long-term lag in productivity (Table 4). Even before the recent depreciation of the pound, the value of output per hour was significantly below that of France, Germany and the US. Country United Kingdom France Germany United States

Table 4 GDP output per hour worked 2005 Value of output per hour 100 119 115 116

S. Dey-Chouwdhury, ‘International Comparisons of Productivity’, Economic and Labour Market Review Vol.1/8, August 2007

This long term decline in Britain's productive economy is damaging for three reasons.

First, it is already creating major problems for Britain's balance of payments. Second, because the service sector—and especially financial services—cannot be sustained by themselves in the long run. And third, because the decline in the productive economy will, if continued for another decade, become irreversible.

Britain currently has a balance of payments deficit for goods and services of over 4 per cent of GDP, almost as high as that of the United States, and resulting entirely from the deficit in manufactured exports running at over 6 per cent of GDP in 2008.2 Deficits of this magnitude can only temporarily be made up by external borrowing, by maintaining high interest rates or by government-enforced reductions in living standards. Sooner or later they trigger currency depreciation, which in turn will affect the international standing The Politics of Britain’s Economic Crisis

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of London as a banking centre. Internally, Britain's booming service economy was only sustained over the past decade by unprecedented levels of consumer debt, inflation in house prices and the availability of easy credit. 3 Why has Britain's manufacturing sector declined so disproportionately? There is one immediate explanation. In Britain it has been much more profitable to invest in services and oil, gas and minerals than in manufacturing. Over the past three years, the rate of return on manufacturing capital has been running at around 7 per cent, in services at 20 per cent and in oil and gas at over 30 per cent.4 And for this there are two further explanations. First, the low return in manufacturing is a long-term product of low investment and a failure to move into high value areas—itself a consequence of the ownership structure of British industry. In France, Germany, Sweden or Japan, the norm is long-term investment, often with a sizeable element of state or local government shareholding. In Britain it is not. Investment today is increasingly short-term and speculative, with a few dozen big investing institutions and hedge funds constantly shifting their holdings from company to company in search of maximum 'shareholder value' by the end of the year. Those managing companies in Britain have rarely had the opportunity to plan long-term investment programmes lasting ten or twenty years. Their competitors have. 5 The second explanation is that governments have made services and finance more profitable. The privatisations of the 1980s and 1990s were vastly profitable to the private sector and in many cases the privatised companies, especially in transport and to a lesser extent in energy, continue to draw massive subsidies from government.6 The same is true of the Private Finance Initiative and the companies which today draw revenue from their ownership of roads, hospitals and schools. Indeed, by the year 2028 the public purse will have paid more than £150 billion for the use of assets worth barely one-third of that sum. Equally profitable for the private sector was the privatisation of state supplementary pensions – at the expense, shamefully, of the pensioners affected by it.

Even worse in terms of its effect on consumer indebtedness was the privatisation of housing. In the 1980s, subsidies were perversely switched from council rents to mortgage tax relief, council houses were sold off at discount and council house building was ended. Financial deregulation then allowed building societies to transform themselves into banks and the basis was created for an inflationary spiral in house prices and housing-related debt—again to the great profit of the property sector and financial services. Finally, there has been the development of a massive outsourcing industry, quite distinct from PFI, by which the state contracts out the delivery of specific services. Today, the annual cost of such private sector delivery of services to the public sector is £25 billion. It makes up a fifth of all public sector service delivery and employs 700,000 people. Much of the recent increase in expenditures in the NHS, in social care and education has gone straight back into the private sector. 7 This is one reason why services are so profitable. It is not high investment and productivity but government subsidy and the use of very cheap, casual and temporary labour.

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There is also a further explanation for the decline of manufacturing: this is the long term effect of British capitalism's investment overseas. In 1981, British owned assets overseas were worth the equivalent of 29 per cent of Britain's GDP. In 1991 they were equivalent to 74 per cent. By 2007 they were worth 473 per cent. 8 This is the highest ratio for any major economy in the capitalist world. What is more, these assets have changed in character over the period. Originally they were predominantly direct investments by British companies producing overseas. Today, they are overwhelmingly (over 85 per cent) investments in shares and bonds in overseas companies and financial institutions. This build-up of capital invested overseas has been a major factor in starving domestic industry of the long-term investment it needs. And today a converse phenomenon is well underway: the takeover of large sections of Britain's weakened industrial sector by overseas companies wanting to seize market share in Britain and, even more, wanting to get access to the very lucrative government subsidies flowing into the service sector. By 2007, the value of these overseas investments in Britain was equivalent to 502 per cent of GDP—significantly more than the stock of British capital invested overseas (Table 5). By 2007, the Treasury was listing the outflow of profit made on this capital as one of the main contributors to the balance of payments deficit. The United Nations' 2007 World Investment Report highlighted the scale of external takeovers of domestic companies in Britain, takeovers that were very beneficial for the corporate shareholders but not for their workers or the long-term strength of the economy.9 This internationalisation of ownership, and the scale of British investment overseas, has been linked to one final cause of manufacturing's difficulties—the maintenance of internationally high interest rates up to autumn 2008. The City of London's international banking and currency activities required sterling to be at a stable (and generally overvalued) level. Ever since New Labour handed over control of interest rates to the Table 5 Britain’s overseas investment and overseas investment in Britain 2003 2004 2005 2006 2007 UK ASSETS £billion Direct 691 689 752 770 875 Portfolio 935 1,092 1,374 1,563 1,713 Other 1,885 2,156 2,745 2,926 3,737 Total 3,535 3,960 4,897 5,282 6,347 UK LIABILITIES Direct Portfolio Other Total Net

355 1,047 2,177 3,579 -44

384 1,177 2,509 4,071 -110

501 1,431 3,108 5,040 -143

579 1,652 3,242 5,574 -291

672 1,921 4,135 6,728 -381

The Pink Book 2008, HMSO

Bank of England's monetary policy committee in 1997, the City has had virtually a free

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hand to keep interest rates at whatever level it thinks necessary for this purpose.

So, to sum up. At the onset of the current crisis, household consumer debt was running at 1.6 times average income—higher even than that in the US.10 Average house prices had reached seven times average income—again higher than the United States. Financial and business services provided 19 per cent of national income, as against 13 per cent from manufacturing. Today the balance of payments deficit is second only to that of the United States. The areas of the productive economy in which Britain possesses any kind of international competitive advantage are largely limited to defence engineering and, to a lesser extent, pharmaceuticals. Across a whole range of industries, computing and electronics, motors, advanced rail transport, metallurgy, chemicals, shipbuilding, general engineering and machine tools, Britain no longer has a significant presence.

All this makes Britain's economy, one that is much smaller than that of the US, desperately vulnerable in face of the current world financial crisis.11 It may just escape the most serious consequences on this occasion. But its course is clearly not sustainable, particularly in terms of the longer-run escalation in the global costs of energy and food and intensified industrial competition.

So the question arises: who is responsible? How could governments and their advisers have pursued such a maverick and irresponsible course—one that is in such marked contrast to that of most other major industrial economies?

Defenders of the New Labour government would answer that they simply followed the best possible economic advice. They allowed markets the freedom to do their work: to allocate resources to where they are most productively used and that government intervention would have distorted markets and wasted resources.

Communists would argue these are the wrong economics. They may have had some justification 150 years ago. But not now. Perfect markets are a self-serving figment of the New Labour imagination.

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2. MONOPOLY, IMPERIALISM AND CRISIS ‘The two characteristics immanent in the credit system are, on the one hand, to develop the incentive of capitalist production, enrichment through the exploitation of the labour of others, to the purest and most colossal form of gambling and swindling, and to reduce more and more the number of the few who exploit the social wealth; on the other hand, to constitute the form of transition to another mode of production.’12 When Marx wrote Capital in the 1860s, he presented the capitalist market as economically progressive. It drove the capitalist system forward, compelled employers to invest in new technology and eliminated those that did not. But Marx also had two important points to make about this market. The first was that it was a market of a special kind. It had had to be created politically by state action. Its key characteristic was the existence of a 'free market' in labour and the concentration of capital in the hands of a few. Its creation had required a series of brutal interventions to end peasant agriculture and separate the working population from the land—depriving the new workforce of any means of subsistence apart from selling their labour power. And to ensure there was competition among workers for work, the capitalist state had to prevent the collective organisation of working people and make sure there was a steady supply of new labour. In this way the price of labour power would always be the minimum—effectively its cost of reproduction—and capital would secure the whole additional 'surplus value' produced by the labour employed. This was the secret of capitalist accumulation.

But Marx also made another point about the capitalist market. He noted out that as individual units of capital became bigger, monopoly would sooner or later come into being and distort relations between capitals and the distribution of the surplus among capitalists. He pointed to the new joint stock and limited liability companies as already creating giant concentrations of capital—and to a future in which monopoly would dislocate the capitalist economy and in which the creation and control of credit would become a principal mechanism for exploitation.13 A generation later, Lenin analysed the results of this tendency in Imperialism—the Highest Stage of Capitalism. By the 1900s, monopoly dominated the world's two biggest economies Germany and the United States. In oil, steel, chemicals and electrical engineering one or two companies controlled production. Lenin argued that this development set up key tensions within the capitalist market. Monopoly producers in these industries were able to control prices and to make a 'super profit' at the expense of other producers who bought their steel, oil or chemicals. This monopoly position depended to a degree on restricting the amount produced. And, as the super profits could not be fully invested The Politics of Britain’s Economic Crisis

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within the monopoly, they had to go elsewhere—into the banking system. Hence, increasingly, there was a merger of industrial and banking capital to create what Lenin called 'finance capital'. The oil monopolist JD Rockefeller took over the Chase Manhattan Bank. In Germany, there were close relations between the electrical monopolist AEG and the Deutsche Bank.

Yet this did not of itself resolve the problem. The money still had to be invested—if possible at a super profit. So further monopolisation had to take place through the banks.

But this also had its limits. It still depended on redistributing surplus value from the nonmonopoly sector and so led to an increasing depression of profits for these producers— resulting either in bankruptcies and lower investment or employers being forced into conflict with labour to increase the rate of exploitation. Either way, political and economic crisis would result. The only escape was to find investments externally. This, said Lenin, was the explanation of the new era of imperialist competition in the 1900s which ultimately led to war. The 1914-18 war killed more people than any previous war, resulted in the destruction of large amounts of capital and intensified the concentration of production. It also brought socialist revolution—successfully in Russia, unsuccessfully in Germany, Finland and Hungary—and the beginnings of mass struggle for colonial liberation.

Communists described capitalism at that point as being in 'general crisis'. By this they did not mean that capitalism was about to collapse or that it no longer had the potential for dynamic growth. What this term did signify was that capitalism had entered a period of systemic crisis: of full monopolisation and market dislocation, of division within the capitalist class, of trends to authoritarianism and militarism, of intensifying inter-imperialist rivalries, a loss of cultural integrity and—because of the example of the Soviet Union—of growing confidence among working people in their own collective strength and the feasibility of an alternative social system based on social ownership.

Economically, the 1930s slump was described as the first crisis of a 'special kind'. Its scale and duration was seen to derive from the completion of the process of monopolisation across the world economy. It was 'special' in the sense that monopolisation prevented any automatic resolution of the crisis. Previously, the crisis cycle of competitive capitalism had enabled the system to rebalance itself and move forward. Marxists explained these crises as the product of capitalism's rapid, chaotic process of investment and innovation and the resulting disproportions between prices and labour cost—triggering the temporary halting of exchange relationships between capitalists. Market forces then beat down prices to their new labour values and ensured that surplus value was once more distributed more or less in line with the living and stored-up labour employed. Inefficient producers were eliminated. Innovations were generalised and no longer able to secure super profits at the expense of other capitalists. Exchange relations could then resume and a new cycle begin.

In the 1930s, this market mechanism no longer worked. Prices of non-monopolised goods, foods and certain manufactured goods fell precipitately. The prices of monopolised Page 10

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products hardly fell at all as monopoly producers colluded to cut back production to sustain their profits. Instead of bottoming out, the fall in economic activity intensified. This brought long-term mass unemployment and growing political crisis involving not just workers but the small business and farming sectors—a political challenge made even sharper by the continuing fast growth of the Soviet Union's planned economy.

In these circumstances big business had to put forward a political alternative. Its answer was state intervention. This took two forms, although both ultimately depended on a coerced, political redistribution of income to monopoly capital.

The first form, adopted in Sweden and the United States, would later be described as Keynesianism. An inflationary expansion of the money supply was used by the state to create employment and new demand. In the New Deal the United States government provided employment creation schemes. In Sweden there was also additional welfare spending. In both cases this provided the stimulus for the economically-dominant monopolies to re-expand production. But it was on their terms. With demand restored they could now increase production without sacrificing their profits. Managed inflation redistributed income from those who could not control the price of what they sell, whether labour power or other commodities, to those who could. In Germany the redistribution was more direct. Under the Nazis, the state gave massive armament contracts to the big monopolies, paid for by the destruction of labour organisation, the outright appropriation of the entire Jewish population and increasingly of neighbouring countries.

Politically, Communists saw this period as marking a decisive change in the character of capitalist state power. The state no longer reflected the interests of all owners of capital. It primarily reflected those of monopoly capital and its defence of these interests was at the expense of non-monopoly capital as well as the working class. This new state formation, described as 'state monopoly capitalism', therefore represented an intensification of the trends already seen in the pre-1914 imperialism and was even more unstable and aggressive. It intensified the concentration of capital. Its reliance on the redistribution of income to fuel growth demanded external imperialism or internal appropriation. Although in the post-war period these policies did, under US suzerainty, produce a long period of economic expansion in the major imperialist countries, they still did so at the expense of small farmer and business sectors internally, and of primary producing countries externally. They also met with decisive checks—as signified by the inflationary crisis in the 1970s and credit crises of the 1990s and subsequently. 14 These are the real economics of the past century. They provide the key to understanding the changing strategies of Britain's ruling class and the compromises and alliances it has had to make to sustain its position—compromises and alliances which largely explain the disastrous policies of the past decades. They are outlined in the next section.

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3. FROM DOMINANT EMPIRE TO PARASITIC DEPENDENCE Britain's capitalist ruling class is the world's oldest. It was the first to end feudal relations in agriculture, dispossess the peasantry and create a majority labouring population. It was the first to create a capitalist empire based on the production of commodities. It was the first to industrialise. It was also, as Marx pointed out, the first to devise a system of state power that could respond to the needs of a social system that, as well as being dynamic, was by its nature individualised, chaotic and subject to rapid changes in the economically dominant forms of capitalist property. This British Constitution, the model for most subsequent capitalist states, separated the powers of the executive, judiciary and legislature and made the legislature supreme.15 However, Britain's parliament had nothing to do with democracy. What it represented was property—and capitalist property at that. Pro-feudal Catholic property owners were excluded for almost 200 years. Capital, on the other hand, was represented in the House of Commons more or less proportionately. As one trade or interest went into decline, so its representation would reduce at the next election. The executive (namely, the government and civil service) was separate and distinct. Its task was to respond strategically to the challenges faced by capital as a whole as reflected by the changing composition of parliament. In this way the executive would not become identified with any particular faction of capital. Finally the third element in the constitution, the judiciary, was to be independent of both executive and legislature. Its role was to defend the basic principles of the capitalist system as enshrined in common law: the sanctity of property and contract and the freedom of competition. Overall, it was the legislature that was supreme. It could dismiss ministers and change laws. And it could do so because it directly represented the ruling capitalist class.

This system gave capitalist rule in Britain a stability which enabled what was one of the smaller European states in the 17th century to accumulate disproportionate amounts of capital, to borrow internationally, to equip massive armies and navies and by the early 19th century emerge as the dominant world power, economically and militarily. Its state did indeed represent the 'executive committee' of the ruling class and created a cadre of highly experienced governing politicians as ruthless as capitalism itself. They ran the world's biggest slave trade for a century and a half. They adopted the Roman principle of divide and rule to maintain their grip over a vast colonial empire—starting with Ireland, North America and the Caribbean in the 1600s and quickly extending to the Indian subcontinent and Africa.

Their biggest challenge, however, was always domestic. From the 17th century the majority of the population were landless labourers. The political dangers were exposed when the Levellers won control of Cromwell's New Model Army and demanded the vote.

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Thereafter, the priority was—using the tools of ideological intimidation and outright repression—to prevent the emergence of any national movement that could again give coherent expression to the demands of the dispossessed. Printing was strictly regulated.

Trade unions were illegal. Free speech was limited. By the time of the French Revolution even the possession of Thomas Paine's Rights of Man or public criticism of the British Constitution had become capital offences. Any kind of nationally-organised federated body was illegal.

Yet capitalist growth was itself making these policies increasingly unsustainable. The industrial revolution concentrated workers in urban centres, produced an increasingly powerful underground trade union movement and saw the fight for trade union freedom merge with that for political emancipation and the vote.

The 1832 Parliamentary Reform Act represented a first response. This was based firmly on the principle of the representation of property. It dealt with anomalies that gave capitalist landlords disproportionate representation. It rigidly excluded the 85 per cent without property. But in an attempt to divide the opposition it diluted the property qualification to include those on the fringes of the working class, shopkeepers and small employing tradesmen, who had hitherto provided a significant part of the leadership of the democratic movement.

This, however, failed to prevent the emergence of the biggest democratic movement so far, the People's Charter. The Chartists were temporarily suppressed by mass arrests in 1839. In 1842 they mounted an even bigger challenge culminating in a national general strike that was only put down by military intervention and arrests running into thousands.

At this point, in 1842-43, the ruling class started to rethink its approach.

The new strategy had three main elements. The first was to divide the trade unions from the Chartists. Unions were granted a limited legality. The second was to make some concessions on the vote—far short of democracy—to draw the best paid of the skilled working class into the orbit of the bourgeois political parties. The third was to moderate the pace of industrial growth, and with it the numerical expansion of the working class, by encouraging the export of capital. The main theorists of the new approach were the economist John Stuart Mill and the banker Walter Bagehot. Mill, a leading policy-maker at the India Office, argued that henceforth Britain's main focus for investment should be overseas and that in Britain the stress should be on welfare reform and bringing workers gradually within the electoral system—though stopping well short of full democracy. 16 Bagehot also supported a limited extension of the vote combined with the use of the pomp and circumstance of the constitution and the monarchy to hold the population in awe and win their support for the existing party system. Both revealed the confidence of a ruling class at the peak of its imperial power in its ability to manipulate and control.

The new strategy represented the first of a series of governing compromises that have marked the modern history of the British ruling class. This particular strategy worked The Politics of Britain’s Economic Crisis

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effectively for almost half a century.

The newly legal trade union movement moved into the orbit of the Liberal Party.

Independent class-based political organisation of working people largely disappeared. And Parliament underwent a significant change. The executive exercised increasing control over the legislature in circumstances in which parliamentary representation was no longer primarily dependent on property. The key instrument was a new type of party system whereby MPs held their seats through party endorsement rather than because they themselves directly represented capitalist property. At the same time, a permanent civil service was created which recruited its elite administrative grade direct from the ruling class. The Treasury was its command centre. The Treasury in turn worked closely with the Bank of England, a private body run by the merchant banks which organised the flow of capital overseas and which effectively administered the world's financial system. Over these years, Britain became the world's dominant capital exporter not just to its own empire but also to the United States and much of Europe.

This structure only started to come under significant strain at the end of the century.

The export of capital diminished the competitive effectiveness of British industry compared to Germany and the US, and by the 1890s profit rates had declined significantly.

Employers then launched an offensive against the trade union movement ultimately leading to a High Court judgement, Taff Vale, which undermined the legal status of the trade union movement. In response, the trade union movement established its own independent party—the Labour Party—and the call for full suffrage, now including the vote for women as well, again became a mass demand.

These pressures were contained before the First World War, although this period did see a major strengthening of the apparatus of executive control. The Cabinet Committee system brought together the key administrative centres of the formal state, the Treasury, the Chiefs of Staff (including intelligence), the Colonial Office and Home Office, with advisers from the City of London. These committees became the key forums for policy formation, bypassing the House of Commons and linking directly with the dominant banking sector of British capital.17 It was the First World War which inflicted the first decisive check on the global dominance of the British ruling class. Although formally victorious and taking over control of the Middle East and much of eastern Europe, Britain's ruling class lost its grip on the world financial system. At home, the situation was even worse. Wartime full employment trebled the size of the trade union movement and massively strengthened the influence of the socialist left. The Labour Party adopted a constitution calling for the social ownership of the means of production: Britain's rulers were for the first time faced by an organised mass working class movement demanding full democracy including economic democracy.

As they financed and officered the million-strong army of intervention against the young Soviet republic, Britain's ruling class can be said to have stood at the epicentre of Page 14

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capitalism's general crisis. They presided over a massive territorial empire riven with demands for independence. They inherited an obsolescent industrial economy. They were challenged by the United States for control of world banking and they were threatened by socialism at home.

The ruling class have manifestly survived. But they have only done so by adopting a series of increasingly desperate strategems which have, in their failure, led directly to the current crisis of Britain's productive economy. 18 What follows is a schematic account of these strategems—on which the following general points can be made. At each stage, Britain's rulers have over-estimated what they could secure—confused by their previous positions of dominance.

Internationally, they have sought alliances which they believed would enable them to control the world 'balance of power'—but have increasingly done so from positions of weakness which have further compromised their position.

Internally, their guiding principle has been to secure ideological control over the organisations of the opposing class, of the working population, and to outlaw any perspective which could mobilise an alliance capable of exposing and isolating monopoly capital and its system of state power.

1919-1931:Tactical alliance with the US to re-establish London as world financial and banking centre The key objective in 1919 was to restore London as the centre for world banking and to do so by putting the pound sterling back on the Gold Standard—at a time when the US was the major world creditor. Two rival strategies were advanced. One was for an immediate return to the gold standard on the basis of an alliance with the United States.

This was based on the assumption that Britain's imperial control over world markets and strategic minerals was sufficiently strong to persuade the US, in return for access to these markets, to provide the financial cover for the restoration of sterling. In Britain itself an immediate return to the gold standard would require sharp deflation and unemployment to force down wage rates.

This line was opposed in the Cabinet by those who were fearful of the resulting social unrest. They argued for a less ambitious strategy based on an Empire trading bloc which could sustain industrial investment and full employment at home, be supported internationally by an alliance with France, while temporarily abandoning attempts to make sterling the prime world currency. The Cabinet Committee minutes for 1919 put these strategic alternatives almost as starkly as set out here.

The gold standard strategy, though victorious in 1919, eventually failed because, firstly, the US double-crossed the British and forced them to return sterling to the gold standard at an unsustainable level as a condition for the necessary loans; and secondly, the 1926 The Politics of Britain’s Economic Crisis

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General Strike convinced the government that further attempts to depress wage rates would see the left and the Communists gaining control of the trade union movement and the Labour Party Sterling was consequently unable hold its value and Britain was forced off the Gold Standard in 1931. Meantime, high interest rates and deflation had resulted in an unprecedented check to Britain's industrial growth. Economic recession recession also led to massive industrial concentration, under the control of the banking sector, and the emergence of giant companies such as Imperial Chemical Industries, Imperial Metal Industries, Anglo-Persian Oil (BP) and Shell. Finance capital consolidated its grip on the capitalist state.

1931-1940:Tactical alliance with Germany to protect Britain's empire trading block The new strategy was effectively the one rejected in 1919. Britain created a closed Empire-based sterling trading block supplemented with cartel arrangements with Germany covering coal, chemicals and steel. This empire trading block enabled British profit rates to be maintained during the 1930s depression on the basis of cheap empire food and monopolised pricing for British goods. It was dependent on the exclusion of goods from the far bigger and more productive US economy.

Internationally, the viability of this strategy depended on avoiding war with Germany. As Roosevelt made clear 1936, the US condition for any alliance against Germany was access to empire markets. The Chamberlain government rejected this and sought to tie Germany into economic dependence on Britain and turn its military expansionism east against the Soviet Union. The strategy brought Britain to the brink of disaster because, firstly, the dynamics of German state monopoly capitalism made external expansion against British strategic interests virtually inevitable; and secondly, the small group of bankers, politicians and senior civil servants identified with the strategy were able to use their grip on the (highly concentrated) apparatus of monopoly capitalist state power to pursue this line long after it had clearly failed. The Chamberlain government was only forced from office nine months after the beginning of the war when its final bid for peace via Mussolini (involving the surrender of Malta) was rejected The post-mortem within the ruling class was significant and explicitly recognised the narrowness of the evolving state monopoly capitalist structures. Key figures argued that concentration of control over the press, cabinet committees, 'expert bodies' and all channels of communication by one strategic group had been used to exclude alternative perspectives. Henceforth, balancing positions should be maintained by a plurality of expert advisory bodies and press agencies sponsored by finance capital.

1941-1956:Tactical alliance with the US to defend a reduced empire and defeat socialism at home and abroad Wartime support from the US involved accepting the terms originally offered in 1936. In Page 16

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return for war finance, the US got access to British empire markets and, after the war, the pound sterling was linked to a managed capitalist world currency system based on the dollar. This expanded the supply of dollars annually within a free trade system which maximised the trading advantages for US companies and banks. Britain's rulers had to accept this deal from a much less advantageous position than the 1930s. Their economic and political grip over the empire was weaker and they soon lost two key areas of prewar control: the India sub-continent (1947) and the east Mediterranean (Greece in 1945 and Palestine in 1947). In Britain, they faced a much strengthened labour movement, a disastrous loss of standing for the established order (deemed responsible for pre-war unemployment and near-capitulation to Hitler) and much greater prestige for the Soviet Union and a planned economy.

The subtlety and speed of the ruling class response demonstrates its capacity for dramatic switches of direction when confronted with a direct threat to its existence. In face of popular anger, leading business figures now argued for Keynesian policies. In 1942 Samuel Courtauld, President of the Federation of British Industries and father-in-law of the leading Conservative reformer RA Butler, wrote that social reform was the only alternative to 'complete socialist revolution'. Keynesian full employment and monopolyled expansion was also inherent in the US plans for a dollar-based world currency and the setting up of the International Monetary Fund.

In Britain, the necessary sequel was some system to prevent workers utilising full employment to enhance wages and thereby block the redistribution of income to monopoly capital. A Labour government that could incorporate and control trade union leaderships was seen as the best way of achieving this. Both the Economist and the Financial Times gave support to the Labour Party in the 1945 election.

The post-war policies involved the following elements: 

 

Support for a Labour government, led by figures like Herbert Morrison and Ernest Bevin trusted for their pre-war anti-Communist stance, which could introduce Keynesian full employment policies matched with incomes policies and control over trade union bargaining.

Support for US Cold War nuclear encirclement of the Soviet Union and the new socialist states in return for US support for Britain's colonial wars.

Nationalisation of the now obsolescent industrial infrastructure—transport, energy, communications and steel—to subsidise private manufacturing and boost exports.

The priority was to restore sterling currency reserves, as a basis for resuming control over strategic empire resources, and hence re-establish London's wider banking role.

The Labour government of 1945 was torn by the resulting contradictions. It was elected by a population looking for a new progressive and socialist alternative and contained a number of socialists committed to these objectives. But it was locked into state The Politics of Britain’s Economic Crisis

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structures which were entirely aligned to ruling class perspectives: the preservation of empire, the Cold War alliance with the US and control over trade union bargaining. It lost office to the Conservatives in 1951after years of wage restraint, restrictions on trade union activity and the launch of a massive and costly rearmament programme. The Conservatives continued the previous combination of Keynesian policies at home with the defence of empire overseas.

By 1956, this strategy had also failed. At Suez the US made clear that it would not tolerate Britain's unilateral attempt to re-establish a position in the Middle East which challenged US control over oil. At home, the continued diversion of capital overseas and the focus on defending formal empire had left Britain's productive economy obsolescent, uncompetitive and prone to inflationary pressures.

1957-1974: Dependent alliance with the US—Britain as 'bridge to Europe' Prime Minister Macmillan signalled the final withdrawal from formal empire and a new 'special relationship' with the US. Britain was to be the US 'bridge' into Europe. In place of empire the focus was on the modernisation of Britain's manufacturing base. This was to be done both through the attraction of a new generation of US branch plants into Britain and the introduction of a National Plan and state-aid for the creation of giant British firms such as GEC and BMC. Britain also abandoned its independent nuclear weapons system and opted to buy US missiles. These policies were continued under the Labour governments of Harold Wilson.

This strategic switch might have had some chance of success had it been adopted at the end of the war, but by the 1960s the productivity of German and Japanese industries was far ahead. Moreover, by then, the contradictions inherent in the US administered post-war financial settlement had started to become unmanageable. Inflationary pressures mounted.

The initially moderate inflationary redistribution of income to big business had begun to precipitate political resistance—particularly from newly-liberated Third World producers of oil and strategic minerals. At the same time, workers were also fighting back to protect their living standards.

In these circumstances finance capital was only willing to commit money to Britain's industrial modernisation if governments took new powers to control the trade union movement. Wilson attempted this in 1969 and was defeated. Heath's Conservative government from 1970 sought even more draconian powers. It also increased unemployment to beyond one million for the first time since 1945 to weaken trade union bargaining power.

1972-1978: British finance capital politically exposed—deep divisions within the ruling class The response of the trade union movement precipitated the deepest crisis within the ruling class for a century. The trade union movement swung to the Left under pressure from a shop stewards movement mainly based in the big engineering plants and mines.

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The TUC called a series of one day 'political' general strikes for the first time since the 1920s. Broad regional alliances mobilised wider communities and small business around the demand for the right to work—with two hundred workplaces facing closure being occupied by the workers.

In response to these mass struggles the Labour Party adopted a programme calling for an 'irreversible shift of wealth and power in favour of working people and their families' and defeated the Tories in 1974. Fierce conflict then erupted within both the Conservative Party and the state apparatus about how to maintain capitalist rule. The previous Tory government was accused of allowing the country to become ungovernable.

Calls were made for a decisive break with Keynesianism.

This debate within the ruling class had some important characteristics. Because the Conservative Party was still dominated by the old leaders, the debate was, in part, conducted publicly through establishment think-tanks and journals. It was overlaid by the discovery of North Sea oil and its potential for transforming Britain's international financial status. It revealed the vulnerability of British state monopoly capitalist structures to influence by external capital—in particular through the think-tanks or 'expert bodies' which mediate between finance capital and the state apparatus.

The scale of North Sea oil had become apparent in 1971. Strategically, the US wanted to use this oil to break the new Third World oil cartel OPEC as did the British and US oil monopolies. In 1971-72 agreements were made between the US and British governments for its fastest possible extraction. This involved unprecedented levels of capital investment, ultimately equivalent to a third of all British investment in the 1970s, with the bulk coming from the US. The fall of the Conservative government threatened these objectives. The incoming Labour government was committed to public control of the oil industry and the imposition of depletion controls.

North Sea oil also directly impacted on divisions within British finance capital. Those sections most closely linked to industrial monopolies, such as GEC and ICI, were fearful of the effects of a rapid revaluation of sterling as a petro-currency. Instead, they wanted to see slow extraction and the internal investment of the revenue in infrastructure. They therefore gave guarded support to the Labour government's development of the British National Oil Corporation and Britoil.

The 'public' character of the ensuing debate resulted from the need of those Conservatives advocating a complete break to win a new constituency within the ruling class against the Conservative Party establishment and its friends in finance. A key feature was the degree to which certain 'expert bodies' such as the Institute of Economic Affairs became mouthpieces for US interests. The Conservative establishment led by Heath, Prior, Heseltine and Patten had the backing of the CBI, Financial Times and the Economist.

Their opponents, led by Keith Joseph and Margaret Thatcher, were supported by the Institute of Directors, the Daily Telegraph and a number of think tanks which promoted The Politics of Britain’s Economic Crisis

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theorists from the monetarist New Right in the US. The most notable of these, Milton Friedman, advocated economic 'shock treatment' as the only solution to labour militancy—to be triggered by drastic deflation, mass unemployment and the selling off of all public assets. [19] At the time, Friedman was acting as economic adviser to the fascist regime in Chile installed by the US after the overthrow of the socialist Allende government. He made direct parallels between Britain and Chile: 'Certain of the fundamental parameters are almost identical with the British case. The government deficit in Chile, which was being financed by printing money, was about 10 per cent of national income ... at that time [1973] the British government deficit was about 10 per cent ... Britain is far enough along the way to make it a good candidate for shock treatment'. It was argued that the availability of oil revenues provided an ideal opportunity for implementing such a strategy and re-establishing the City of London as a world banking centre. The plan was based on the fast extraction of oil, allowing sterling to rise in value as a petro-currency, deregulating capital movements, building up assets abroad and drastically deflating the domestic economy in order to permanently break the power of the British trade union movement.

In 1976, intervention by the IMF led to the destabilisation of the Labour government, the enforced adoption of right-wing monetarist policies, attacks on wages and election defeat in 1979.

1979-1990: Subordinate alliance with the US—Britain as base for US finance capital The Thatcher group succeeded in implementing its programme almost in its entirety—but without the promised benefits for British finance capital. The deregulated City of London now became the base for US banking in Europe. By the early 1990s, all British merchant banks had been bought up by external banks, mainly US. Much of the insurance sector was also taken over. [20] The UN World Investment Report for 2001 estimated that twothirds of the capital and two-thirds of the financial institutions in the City of London were overseas-owned, mostly by US financial institutions. [21] At the same time, the London stock exchange, and with it British-registered companies, had become subject to shortterm speculative investment, merger and takeover.

The years up to 1990 saw a decisive check to Britain's productive economy. Areas of established British expertise in engineering, metallurgy and capital goods were permanently surrendered, only slightly offset by the arrival of non-union 'sunrise economy' electronics plants from the US and Japan. The revenues from North Sea oil— used in Norway for industrial investment—served to de-industrialise Britain, losing the best opportunity of the 20th century to reverse Britain's industrial decline.

In parallel to the switch to finance and services there was a sharp change in the economic functioning of British state monopoly capitalism. It moved from being primarily based on an indirect 'external' Keynesian market redistribution of income to monopoly Page 20

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capital to a direct and internal income redistribution. The primary mechanisms were through, firstly, lucrative privatisation of state industries and utilities, the Private Finance Initiative, direct state subsidies to big business for the provisions of services such as transport and the shift of pensions and housing into the private sector; and secondly, military expenditure—Britain was the prime mover in NATO for the US Cold War rearmament drive, requiring annual increases in expenditure from 1979.

In terms of the structure of state monopoly capitalism, this led to increasingly close and corrupt links between the state and particular elements within big business. It also resulted in the ultimately disastrous shift of borrowing and debt – for house construction and many areas of infrastructure—from the public sector to the private sector This period also saw the beginning of the process of using the European Union to bypass democratic procedures in Britain. The 1986 Single European Act, largely drafted by the British government, committed the EU to open all markets to free competition, including industries and services previously in the state sector. It sought to make the Conservative privatisations in Britain irreversible and to open European markets in energy and other utilities to British and US monopolies and, above all, to open up European banking. [22] However, the Thatcher government resisted Franco-German plans for a single currency and as threatening the independence of sterling and hence of the City of London as a base for US capital. Thatcher was ousted in 1990.

The key factors leading to the disintegration of this faction in the Conservative Party were: 





The defeat of OPEC and the sharp decline in the oil price from 1985, which created a divergence of interests between the British and US oil companies. US companies disinvested from the North Sea and sought cheaper oil elsewhere. Shell and BP, locked into their North Sea investments, saw the future in terms of dominating the EU market for oil and gas.23 The Stock Exchange collapse of 1987, followed by inflationary pressures and property market depression, which exposed the dangers of the existing financebased strategy.

The public reaction against 'Thatcherism', which was making the Conservative party politically unelectable at a time when the Labour Party remained unreliable for finance capital.

1990-1997: Partial realignment to Europe—final bid to salvage the industrial base of British finance capital The Conservative revolt against Thatcher was led by Michael Heseltine who took control of industrial policy under John Major. These years can be seen as a final attempt to revive British monopoly capital's industrial base, concentrating particularly on energy and aerospace in tactical alliance with Germany and France and adopting somewhat similar state-led methods. The immediate objective was membership of the euro-zone. This The Politics of Britain’s Economic Crisis

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attempt ended in September 1992, when international money markets forced the pound out of the European exchange rate mechanism. From then on, Major's administration remained paralysed by divisions between supporters of EU integration (Heseltine and Clarke) and those supporting a US alignment based on sterling and an 'independent' City of London (Portillo, Howard, Redwood).

In parallel with the paralysis of the Conservatives, the Labour Party came under the administrative dominance of a strongly Atlanticist group led by Blair, Brown and Mandelson. This takeover was assisted by the weakened position of the trade union movement and active intervention in it by state agencies to marginalise the left.

Parasitic dependence on the US since 1997 New Labour's policies have been closely aligned to those of the US. With the disintegration of the socialist bloc, the eastward expansion of the European Union made it of key strategic importance to the US. Initially New Labour became the EU champion for Clintonite free market globalisation. This sought a further opening the EU financial markets, banking system and company ownership to penetration by US and British financial institutions and pressed for the neo-liberal transformation of national labour markets, social security and pension systems (a programme pushed through by Blair at the 2000 Lisbon summit). Under Bush, Britain worked to achieve the military integration of the EU with NATO and to secure new pro-US allies through the incorporation of exsocialist states in eastern Europe.

These years saw a precipitate drop in manufacturing employment, far more than over the previous ten years, an intensification of privatisation and of public subsidy to the private sector and a credit-fed boom in the service sector that led directly to the current crisis. The greatest folly of these neo-liberal policies was the belief that the transfer of borrowing from the public sector to the private somehow negated its economic consequences and contributed to national well-being. In the short run it did produce massive profits for finance capital. In the long run it led directly to the current crisis.

Politically, in terms of the structures of British state monopoly capitalism, this period saw closer integration at military and intelligence levels with the US. There has also been a formal shift of powers away from the Westminster Parliament to the EU Council of Ministers under the treaties of Nice and Lisbon. The mandatory opening of services to competition undermines Parliament's ability to provide comprehensive public sector provision. More important still, the transfer of economic powers to the EU limits the scope for any parliamentary action to curb big business and places major barriers in the way of state interventions to protect industrial employment. Above all, Parliament loses the power to implement the type of alternative economic and political programme which mobilised opposition to state-monopoly capitalism in the 1970s. Across the EU as a whole, the treaties of Nice and Lisbon have seriously weakened the potential of democratic institutions to intervene against monopoly capital. The timing of these changes is not accidental. They meet the common interests of finance capital in a period when Page 22

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monopoly capital in France, Germany and Britain is having to attack the post-war economic and political gains of working people and when national politics are therefore becoming more volatile and unpredictable. Hence, far from weakening the existing structure of state power at the level of the nation-state, the transfer of powers from national parliaments to the EU directly strengthens the state power of monopoly capital in each.

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4. STATE-MONOPOLY CAPITALISM IN BRITAIN TODAY—'WHEN THE RULING CLASS IS NO LONGER ABLE TO RULE IN THE OLD WAY' State-monopoly capitalism was earlier described as a product of the political and economic contradictions of capitalism in its monopoly phase. Monopoly and super-profit lead to the fusion of banking and industrial capital and drive forward the process of capital export and external expansion. Monopoly dislocates the normal capitalist crisis cycle. It demands, as a condition for resumed investment, the intervention of the state to redistribute income to finance capital. The state increasingly becomes the state of monopoly capital rather than of capital as a whole.

From this point, the division within the capitalist class overlies the fundamental class cleavage between capital and working people. It is a division which complicates and deepens the challenge of maintaining capitalist rule in the era of formal democracy and makes it a prime necessity to conceal just how small a constituency state-monopoly capitalism now represents and how far its policies—imperialism, militarism and income redistribution to finance capital—are at the expense of the great majority. 24 The previous section has sought to demonstrate how the politics of capitalism in Britain determined the special characteristics of British state-monopoly capitalism:  

 





Britain's capitalist ruling class was the world's first—and created the world's first majority proletariat.

The British ruling class developed the first capitalist 'Constitution'—but was compelled to adopt a series of governing compromises in its attempts to incorporate and control the organisations of labour.

Britain's ruling class was the first to create a capitalist empire and the first to establish a world-wide control over banking and currency.

Its attempts to maintain this external imperialism, integral to the needs of British finance capital, have led to a series of unsustainable and damaging alliances with other capitalist powers.

The apparatus of state-monopoly capitalist rule was developed as a tight linkage between the City of London, the Bank of England and Cabinet committees representing the key arms of state power. This was later extended to include a plurality of expert advisory bodies and journals funded by finance capital and providing additional linkages.

The change in ownership and control of finance capital in Britain, matched with its external alliances, has led to the increasing penetration of the apparatus of statemonopoly capitalism by these external interests, above all those of the US. This has made it increasingly difficult to develop coherent strategy.

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In this respect it is important to emphasise that Britain's penetration by external capital is exceptional. The dominance of externally-controlled capital within the City of London has already been noted. But there is also a parallel dominance within industry and the broader economy. Table 6 shows the percentage of directly invested US capital compared to GDP. Britain has by far the biggest percentage. US direct investment dominates the high technology sectors such as computing and electronics, provides a disproportionate share of exports and consumes an equally disproportionate share of scientific and research personnel.

Country Italy France Germany Japan UK

Table 6 US Foreign Direct Investment in 2004 as percentage of GDP Percentage of US direct investment to GDP 2004 1.8 2.6 2.7 3.2 13.2 Source: www.bea.gov.uk/international.htm#usdia

The same external dominance shows up in the ownership of shares in British registered companies. Over 40 per cent of shares are now owned externally, a proportion that has increased rapidly over the past decade.25 Again, the bulk of external ownership is from the US. Here it is important to note the quite different structures of ownership in most other European countries. In France and Germany dominant blocs of shares are held long -term by both dynastic capitalist interests and the public sector, often through banks controlled at local government level. While it has been a major objective of US capital to force open such 'closed' financial structures, latest estimates show that still between 70 and 80 per cent of all major companies in France and Germany are owned in this way.26 This is in stark contrast to Britain, where share ownership is dominated by investment banks and financial institutions, many externally-owned, which on average turn over their entire ownership portfolios every two years.

This level of external penetration explains the difficulties faced by British finance capital in developing coherent policy. Before the current crisis its core was restricted to the four major clearing banks: Barclays, LloydsTSB, RBS and HBoS (all of which, however, have major external shareholders); and some major companies with close traditional links to the City of London: the two oil companies BP and Shell (both of which had very large US shareholdings) and a number of industrials such as Rolls Royce, BAe, BAT, Rio Tinto, Vodaphone and GlaxoSmithKline (although this also has a large measure of US ownership).27 In 1990, it was an earlier version of this grouping that backed the Heseltine-Major bid to salvage what remained of Britain's industrial base. By then, however, it was too weak— both in terms of its capital base and leverage over the state-monopoly capitalist apparatus—to sustain this course in the face of opposing interests. In the credit crisis of 2007-08 the weakness of British state-monopoly capitalism's response was even more The Politics of Britain’s Economic Crisis

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marked. The Bank of England was issuing warnings from autumn 2005 on the inflationary credit instruments being created in the financial sector.28 But, unlike the 1930s or even the 1960s, it had very little power to do anything about it. Most of the banks and investment funds were owned externally and based in London precisely because it had been deregulated as a financial centre in the 1980s.

It is therefore important to stress just how far this 'shadow banking' sector is now integral to the operations of finance capital in Britain and its ability to generate above average super-profits.

Fifty years ago the 'super-profit' sector of banking was still largely represented by traditional British merchant banks. These specialised in providing short-term capital at high rates of interest—for mercantile credit, discounting of bills and increasingly for the floatations required for new stock exchange listings and for mergers and acquisitions.

Partners and clients came from a very small circle of the very rich. Until the Bank of England was nationalised in 1945 the merchant banks still provided all the members for its governing body, elected its Governor and at the same time provided directors for most of retail banking and insurance companies. They represented the core inner circle of Britain's ruling class.29 After Thatcher's deregulation the much bigger US investment banks flooded into the City of London and started to snap up the most lucrative business.

The British merchant banks were forced to convert themselves into public listed companies to secure more capital and in the process all were eventually taken over by external investment banks.30 The focus of high profit investment then moved into the deregulated banking sector. For the US-owned investment banks London provided the necessary base by which they evaded US banking and tax regulations. British investment companies based themselves in British-controlled 'Crown-dependencies' such as Jersey, the Isle of Man, Gibraltar, the Virgin Isles or the Bahamas which were outside the British banking and tax regime. This enabled them to escape tax and also to borrow much higher volumes of credit than regulated banks. In the 1990s this produced the phenomenon of the 'hedge fund'. These were private investment vehicles (that did not have to make their accounts public) which managed funds from very wealthy clients, borrowed large amounts of cheap short-term credit to magnify or 'lever up' profits and then used these vast sums for speculation on stock exchanges and in commodities. The average rate of profit for all hedge funds from 1990 to 2000 was 15 per cent. Before the 2008 crash the total value of hedge fund assets had reached $2,000 billion.31 The last decade saw an additional phenomenon: the private equity companies. These were exactly the same as hedge funds but specialised in purchasing listed stock exchange companies, turning them into private companies (not subject to public legal scrutiny), usually asset stripping them, often breaking them up and then usually selling them on. Each one of these stages yielded a profit which was magnified or levered by massive borrowings. These debts then remained with the company when it was sold on. Over the Page 26

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three years 2005-2007 private equity funds secured profits that were 3.3 times as high as the profits for FTSE listed companies and of this profit more than half derived from credit 'leverage'.32 A significant part of the disastrous burden of company debt in the British economy today derives from this source.

In the decade preceding the 2008 crash the bulk of the world's hedge funds, unregulated investment companies and private equity funded operated out of either the City of London or British Crown dependencies. All Britain's retail banks, including the demutualised building societies, had by then developed investment banking subsidiaries based in Crown Dependencies. And it was these unregulated investment banks, US and British, that transmuted much of the growing mountain of housing and personal debt into securities, the most risky part of it into apparently high yield ones, and then sold them on to the retail banks. Once this material had been absorbed into the banking system the trail was laid for the series of explosions that followed.

By 2007-8 Britain's banks were among the most over-lent and highly geared in the world and had become very dependent on short-term borrowing at low rates from other banks and investment companies to fund this debt. According to the Bank of England's November 2008 Inflation Report, such borrowings rose from nothing in 2000 to £740 billion in 2007 (Chart 1.2). The fall in the US housing market now radically devalued the debt-based securities and by August 2007 the most over-borrowed of the British banks, Northern Rock, was unable to meet its obligations and the government had to take it over. By then a number of smaller banks were in trouble across Europe and some bigger ones in the US, particularly the privatised Federal banks handling sub-prime mortgages.

It was at this point that the wholesale market for cheap short-term lending between banks seized up. None of them knew how far others were in trouble and, as their asset base shrank, all were short of cash. From September 2007 central banks in Europe, Britain and the US had to step in as short-term cash providers. The banks themselves sharply reduced their own retail mortgage lending—puncturing the European property boom.

From spring 2008 the British banks were urgently demanding that greater liquidity be made available by central banks. By May 2008 the Bank of England's short-term lending facility had reached £50 billion.

Early summer 2008 saw a paradox. The banks were desperately short of cash and the property and construction sectors had gone into acute recession. But the world economy was experiencing an unprecedented expansion. Inflation was at levels not seen since the 1990s and money from the shadow banking sector poured into commodities such as oil, food stocks and minerals. Profits of companies in these areas reached record highs.

Governments at this stage believed they could manage the financial crisis without major dislocation. They planned to cut back wages and public spending to pay for the bank subsidies but reckoned inflation would redistribute income to big business and keep the economy moving. On a world scale China, India and the emerging economies were still The Politics of Britain’s Economic Crisis

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growing fast and could, it was believed, compensate for weak growth in the West. In the meantime government support and tighter regulation would enable the banks to rebuild reserves and restore their wider credibility.

These hopes were dashed by developments in August and September 2008.The Federal mortgage companies reached breaking point and major US investment banks and insurance companies were unable to pay institutional creditors. The US government was confronted with the demand to bail them out and did so—with the exception of Lehman Brothers. Its crash on September 15 revealed the sheer scale of debt across the banking system and resulted in an immediate cessation of inter-bank lending. Over the following two weeks the governments of Greece, Ireland, Iceland, Belgium and the Netherlands had to rescue their national banks. In Britain Bradford and Bingley was nationalised on September 29 and a week later the government had to rescue of three of the country's major retail banks, the core of the British banking system. At this point the IMF estimated the net indebtedness of the US banks at $800 billion and its Director described the world banking as on the brink of 'systemic meltdown'.33 Only the US Congressional announcement of a $3,400 billion banking guarantee and a parallel commitment of 1,000 billion euros by the German Chancellor prevented a total financial panic.

These four weeks also marked a turning point in attitudes. The crisis was no longer seen as ultimately manageable but instead as totally unpredictable and threatening the fundamentals of the world capitalist economy. By October the contagion was spreading uncontrollably. Consumer spending slumped and the car industry in the US, Britain and in Europe was put on short-time. Within a matter of weeks the boom in commodity prices collapsed devastating the hedge funds that had switched into commodity indexes earlier in the summer. At this point the crisis assumed a self-consuming character. The value of shares fell sharply in face of mounting company indebtedness—further reducing the asset base of the banks and ending any finance for capital expenditure in the real economy. In turn unemployment mounted and consumption fell further. Within weeks Hungary, Latvia and Iceland had to be provided with IMF/World Bank loans amid fears of defaults across Eastern Europe and in the emerging economies. As growth in China and India slowed sharply, governments in the US, Britain, France and Germany became increasingly concerned that the broader decline in economic activity, reducing profits and depressing asset values, would provoke a still more serious banking crisis. By the beginning of November, the international asset value of hedge funds had dropped by a quarter to $1,500 billion.34 This was the background to the sharp reduction of interest rates in the US and Britain in October and the coordinated commitment to Keynesian-style reflationary packages at the end of November: £20 billion in Britain; $650 billion in the US and 200 billion euro in the EU. Nothing like this had ever happened before.

These three months also saw a significant shift in Britain's internal politics. In July Gordon Brown's government appeared to be heading for massive electoral defeat. The media was unremittingly hostile and in the Glasgow East by-election it lost its third safest seat in its Scottish working class heartland.Yet just three months later, in November 2008, Page 28

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Labour secured 55 per cent of the vote in Glenrothes. The intervening period had seen a perceptible change in press coverage. Brown's international interventions in October were given very positive treatment. In the same month Peter Mandelson surrendered his post as EU Commissioner and was brought back to the government.

A reassessment had clearly taken place at the highest levels of the British financial establishment. Editorials in both the Financial Times and Times at the end of September reveal an unprecedented level of concern not just for the viability of the banking system but for the ideological credibility of capitalism as an economic system. Those at the heart of the crisis clearly knew that its origins lay precisely in the uncontrollable logic of capital accumulation in its monopoly phase. They also knew the destructive force of the outcome. Millions would lose their jobs, many more would face devalued pensions and tens of thousands of the small businesses would go bankrupt. 'The financial system has now reached its point of maximum peril ... after years of profligacy ...Yet there is an even greater risk ... that the politicians lose their faith in markets and draw the wrong conclusions' wrote the Financial Times on September 27. It did so, bizarrely, in polemic against the Archbishops of Canterbury and York. For it was the bishops, and not the leaders of organised labour, who had criticised capitalism as such.

But what if by 2009-10, with Labour in opposition and the economic crisis worsening, trade union leaders were not held in check and put the case for an alternative economic strategy as in the 1980s? Ideologically, there would be no answer. And politically there would be much wider social forces likely to respond. This seems to be the reason for the reversal attitudes to Brown's government. A Conservative government led by upper class chancers was no longer seen as safe or suitable. Only if right-wing Labour was in still power, either alone or in a coalition National Government, would it have the authority to control the unions and prevent the emergence of challenging perspectives. Moreover, there was also the issue of inflation. Government measures to save the banks were inherently inflationary. The sharp cut in interest rates, the pumping of credit back into the banks, the very high levels of government borrowing and the consequent heavy depreciation of the pound would all have highly inflationary consequences in the medium run. But this inflation would only work to redistribute income to big business—and resolve the crisis on capitalist terms—if trade unions did not use their bargaining power.

As in the period of post-war Keynesianism, it would be essential that the unions were held in check. Any conflicting ideological position had to be stifled. Hence, the renewed relevance of a right-wing controlled Labour government—with Mandelson's return an additional guarantee that pro-big business ideas would prevail.

At this point it is important to stand back from the detail and re-emphasise the systemic character of the 2008 crisis. Irresponsible bankers played their part. But the crisis itself can only be explained not just as a crisis of capitalism but capitalism in its current state monopoly phase.

Clearly there was a crisis of overproduction. Correspondingly, there was also overThe Politics of Britain’s Economic Crisis

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accumulation of capital. And this followed a decade and a half of very fast expansion and high profits following the dismantling of the Soviet Union and the resulting change in the balance of world forces—a change which allowed capital access to vast new resources across the world and which seriously weakened the working class movement in the capitalist countries.

But the precise character of the crisis cannot be explained without looking concretely at the evolution of state monopoly capitalism and the response to the preceding politicoeconomic crisis of the 1970s. This, as was detailed earlier, involved a switch from an indirect, Keynesian, redistribution of income to finance capital, to a far more direct channelling of income. It required a major restructuring of the capitalist market which today goes under the title of neo-liberalism. It had four main elements.   



A direct attack on the bargaining strength of organised labour and the shift to a flexible, casualised workforce.

The privatisation of utilities and services allowing a direct income stream from the state.

The deregulation of capital movements, the creation of 'off-shore' (but still British controlled) centres for investment and tax avoidance and the growth of the shadow banking sector.

And, most crucial of all for understanding the current crisis, the financialisation of pensions, insurance and housing, essentially the savings of working people, and their transfer into the private sector. This provided a key new mechanism for the extraction of super profit.

The bulk of capital in stock exchange listed public companies, insurance companies and high street banks now comes from these savings. These earn a low and sometimes negative rate of real interest. But, as noted earlier, around these listed companies and retail banks cluster an ever more complex array of financial vehicles for the very wealthy—merchant banks in the 1980s, hedge funds from the 1990s and private equity investors in the 2000s. These secure massive profits by effectively buying and selling listed public companies and advancing them short-term cash. They operate offshore. They do not pay tax. And they use the financialised savings of working people to lever up their profits.

This neo-liberal transformation of the capitalist market happened first and most fundamentally in Britain and the United States but to some degree or other in all European countries. By the 2000s this state-sustained primacy of credit-based finance capital dominated the world economy.

It was, however, no more immune from capitalism's contradictions than its predecessors.

The accelerated accumulation of capital placed pressure on the average rate of profit. The export of capital to countries like China and India generated immense imbalances in trade and currency reserves. Most fatally of all, the system fell prey to the poverty and Page 30

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inequality which it created. The real incomes of working people stagnated. Those of the worst off, particularly in the US, declined absolutely. Hence, in order to maintain demand, governments and banks colluded in the creation of massive levels of sanctioned debt, above all in mortgages.35 In the hands of finance capital's investment specialists this became the credit required for one last round of leveraged speculation in property, commodities and private equity buy-outs. Then the bubble burst.

Where does it leave Britain? Very dangerously exposed. Of all the major economies its production base is, as has been outlined, is the weakest. Most of its advanced computing and electronics is externally owned and will be subject to corporate rationalisation as the world economy shrinks. The reputation of its banking sector has been badly damaged and the US investment banks that provided much of its business have suffered massive losses.

The response of the British government revealed the sheer closeness of links between finance capital and the state. Brown's rescue was first and foremost a bankers' rescue— symbolised by the entry into the government in January 2009 of the chair of Standard Chartered Bank, Mervyn Davies, effectively as banking minister. All the government's actions up to January 2009 have been related to sustaining bank credit. This was so for its economic stimulus in November 2008—principally directed at maintaining the asset base of the banks by boosting spending and providing cheap credit. Money earmarked for direct infrastructure spending was miniscule: less than £2 billion out of a £20 billion package. There was virtually no allocation for direct government construction of council houses for rent—despite an acute and worsening housing shortage. Unlike Obama's proposals in the US, there was nothing at all for strategic government investment in the research and development for new production in sustainable development and energy saving. It was equally so with the twin rescue packages of January 2009. By then the bankers were petrified at the unprecedented levels of company debt: £72 billion had to be renegotiated and rolled forward almost immediately in 2009—difficult even before recession struck. At this point the government could easily have nationalised the banks.

But it chose not to do so. Instead it guaranteed inter-company transactions to the value of £20 billion and provided £200 billion bad debt insurance to the banks.

In total the credit guarantees to both firms and banks exceed £700 billion—plus direct government spending of upwards of £180 billion on bank recapitalisation and another £20 billion on the fiscal stimulus. Combined with the cut in interest rates, this creates, as noted previously, a strongly inflationary potential and is leading to a long-term deterioration in international credit conditions for the Bank of England and the government. On any terms it represents a highly risky and dangerous strategy. But for British finance capital there was little alternative.

Only the bankers know the real scale of the financial disaster. In Britain it was not a matter of two or three banks going broke.Virtually the entire British-based retail banking sector became insolvent. Four of the six big banks, Barclays, RBS, HBoS and Lloyds, required government guarantees of recapitalisation. Barclays later did its own deal with The Politics of Britain’s Economic Crisis

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the royal family of Abu Dhabi, is now one-third owned from this source and is having to live with the consequences. But the three other big banks, now reduced to two, are dependent on government shareholdings.

In stressing that this was a bankers' rescue, specifically within the terms of state monopoly capitalism, it is equally important to note what the government has not done.

Initially ministers echoed Obama's words when he talked of the need to regulate shadow banking. But the government has done nothing. The British-controlled tax avoidance centres, providing over half the international venues for unregulated financial activities, have escaped unscathed. No significant proposals have emerged for the tougher regulation and taxing of foreign-owned financial companies in the City of London. Nothing has been done to control capital movements. Private equity investment firms and hedge funds continue as before.

And that, of course, is the whole point. The retail banks and insurance companies are being rescued and their credibility restored precisely because they are the key conduits for collecting the savings of working people. Without them, and the public listed companies they finance, British finance capital, through its hedge funds, investment banks and private equity firms, could not secure super-profits. Nor would London be an attractive proposition for the US investment banks.

So what is the result? For British finance capital its parasitic dependence on others is intensified—particularly capital owners in the US and the Middle East. In Britain the nexus between finance capital and the state has become even tighter. As a result of governmentengineered mergers the banking sector is still more concentrated. And nothing has been done for the productive economy. Indeed, the position is than this. The credit guarantees simply perpetuate the existing orientation of the economy geared to the market patterns of 2007. These markets will never return. If there is to be a redevelopment of Britain's productive base, it has to be led by the government. A fraction of the money squandered on successive bank rescues—instead of outright nationalisation from the beginning— would have transformed the productive economy. It would have funded the massive infrastructure development desperately needed in energy, transport and housing and at the same time provided the investment for the sustainable energy-saving technologies required to open up new areas of production. In the absence of such intervention we can already see the future. Capitalist crises are partly resolved by destroying marginal capital.

Much of Britain industry is now of this character and many areas of our productive economy will shrink below critical mass. And when banking stabilises and the world economy recovers, the hedge funds and private equity companies will be back to organise a final car boot sale of what remains.

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5. ECONOMIC AND POLITICAL ALTERNATIVES— 'WHEN THE WORKING CLASS IS NO LONGER WILLING TO BE RULED IN THE OLD WAY' Politically, the key power of state monopoly capitalism resides in its ability to divide its potential opponents and to ensure that the organisations representing working people do not develop a clear alternative programme around which the majority can unite.

The ability of our ruling class to do this over the past decade has depended on two things. One is its grip over the leadership of the Labour Party and its ability to embed it within policy structures responsible to finance capital. The second is ideological: its wider power to influence the way the great majority of people see the world.

Currently this ideology can be summed up by one phrase: 'globalisation—you have to accept it'.

As developed by New Labour publicists such as Lord Giddens, the globalisation thesis does not deny the existence of great concentrations of economic power, but asserts that they exist beyond the control of any nation-state. It argues that, in a world dominated by giant corporations, ordinary people are vulnerable and exposed to unpredictable risk. The role of government is to minimise this risk. It can do so by ensuring that people are best equipped in terms of education and skills to secure investment and employment ('supply side' economics) and that labour market conditions are optimally developed. The resulting provision of 'flexible' labour should be combined with a minimum safety net ('flexicurity') —although not one that is so costly in terms of tax as to deter investors. Any attempt to interfere in this market, to direct investment or for the state itself to undertake production, imposes unacceptable costs which will drive away global investors and lead to disastrous economic consequences.36 In turn, it is argued that the only way of imposing social and political constraints on the big corporations is at the same global level as they operate themselves. For this reason, the input to such world institutions as the IMF, the World Bank, the United Nations and the development of institutions at continental level such as the European Union is increasingly vital. Britain, it is claimed, is just too small. Especially in periods of economic crisis and financial instability Britain has to work with the grain of these international institutions and if this means accepting their neo-liberal, 'free market' rules, then this is the hard medicine which Britain has to take.

It is this ideology which provides the smoke and mirrors for the great conjuring trick of the modern world. While the public is straining its eyes to see the monsters of economic life somewhere 'out there', state-monopoly capitalism can get on untroubled with its business at home. For, as we have seen, finance capital is more than ever dependent on The Politics of Britain’s Economic Crisis

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the direct redistribution of income by its 'own' state (as well as the state's protection of its overseas investments). British finance capital has indeed entered into an increasingly parasitic relationship with US finance capital. But that relationship is developed and handled at the level of the two states. States declare war. States send troops. States decide on the recipients of the military contracts. State banks hand over the billions required to keep 'their' banks afloat. The 'special' characteristic of British state-monopoly capitalism is not that power does not reside at British level, because largely it still does. It is, on the one hand, that immediate access to super-profits depends on finance capital's relationship with US capital in the City of London and, on the other, that the presence of this capital has itself increasingly influenced and determined policy.

The sons and daughters of the finance capitalists of the 1960s have not vanished. Their wealth today is even greater. The Matthew Ridley of Northern Rock was nephew of the Nicholas Ridley who drew up the plans for Thatcher's assault on the unions—himself the grandson of the Ridleys who built the giant ironclad battleships which enforced the will of British imperialism in the 1900s. The problem is that their greed and irresponsibility have now left ordinary people with precisely that 'global risk' and industrial devastation used by the propagandists of globalisation to scare away any challenge.

As a result our society has been transformed for the worse. It has become more insecure, intolerant and far more unequal (see Table 7 below).

Table 7 Shares of Wealth: marketable wealth less value of dwellings Percentage of wealth 1976 1986 1996 2000 2003 owned by Most wealthy 1% Most wealthy 5% Most wealthy 10% Most wealthy 25% Poorest 50%

23 47 57 73 12

25 46 58 75 11

26 49 63 81 6

33 59 73 89 2

34 58 71 85 1

www.statistics.gov.uk/ccilnugget.asp?id=2 (HM Revenue and Customs April 2008)

Manufacturing's decline has decimated the number of well-paid and permanent jobs and replaced them with low paid, part-time and casual jobs. The weakening of the trade union movement and the deregulation of capital movements have intensified exploitation and sharply increased the share of national income going to profits.

The increase in inequality has gone hand in hand with a reduction in every aspect of collective support since 1979: benefits, pensions, services for children, services for older people, services for the disabled, council housing, libraries, museums and sports.

Combined with heightened income segregation within towns and cities, this has produced intense local concentrations of poverty, ill-health and despair. These local concentrations in turn explain the massive differentials in health and educational achievement that mark out Britain from most other countries of similar size and wealth. It is an impoverishment that is, in its most dangerous form, political as well cultural. Fatalism and racism result— Page 34

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outcomes actively promoted by our grossly corrupt, finance capital-owned media. [37] This has been the cost of paying heed to the experts and pundits hired by finance capital.

It is why an alternative economic and political strategy is now so essential—one that explains the current crisis, advances immediate proposals but also opens the way for more fundamental change. The Communist Party's Left Wing Programme provides the basis for such an alternative. [38] Three general points can be made about it: It is a programme for mobilisation and the creation of alliances. It sets out demands that can win support well beyond the organised core of the working class and the trade union movement. It does so because only through such alliances can the working class present itself as raising the needs of society as a whole against monopoly capital.

It is a programme for democratic change in a fundamental sense. It does not stress democracy simply as a matter of form. Central to any progressive change is the removal of the blocks to democracy posed by the state-monopoly capitalist apparatus of power.

It is a programme for cumulative advance. It puts forward a series of demands which are immediately feasible and which will in turn raise needs for further change.

The immediate demands are limited. They would simply take us some of the way back to where we were before Thatcher's assault on the welfare state, the trade union movement and democratic control of the economy. They are: 



 

 

To restore the controls over banking that existed before 1979, to give the state jurisdiction over capital movements and to end the 'shadow banking' sector. This means closing the tax and regulation avoidance centres in the British Crown dependencies – which would become subject to British law. At the same time, to prevent a succession of further liquidity crises, the three surviving big retail banks should be taken fully into public ownership.

In order to get the construction sector moving again, a major programme of council house building on the scale demanded by housing charities such as Shelter—available at affordable rents and financed on the same basis as in the 1950s and '60s through public borrowing.

The re-nationalisation of transport and energy; the end of PFI and of outsourcing in the NHS. Support for industries and workplaces menaced by the collapse of private loan facilities (the next area of financial dislocation after mortgages) and the outlawing of mass redundancies in viable enterprises.

The cancellation of Trident and reallocation of the scientific and engineering staff to support the productive economy.

The complete repeal of the Tory anti-trade union laws—particularly those banning solidarity strikes in support of other sections of workers or issues affecting the

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 

wider community.

Taking back democratic control over the setting of interest rates and monetary policy which existed until 1997.

Steps to maintain purchasing power including statutory equal pay audits, the introduction of a uniform national minimum wage set at half median male earnings— rising to two-thirds over time—and a universal pension which increases in step with earnings or prices, whichever is the higher.

These immediate demands are closely inter-related and are designed to counter the likely demands of finance capital.

Council house building, transport and power are important for two reasons. The first is that the private ownership of transport and power imposes massive costs on both consumers and the state—and that finance capital is highly likely to demand a 'solution' to the housing crisis by the state takeover of mortgage risk. This will do nothing for the housing shortage and simply allow time for finance capital to screw repayments out of mortgage holders. By contrast, a strategic council house building programme, on the same scale as the 1950s, will address housing need, boost economic activity and leave finance capital to deal with its own improvidence. Taking housing, transport and energy back within the public sector will also save money. The Tories and New Labour argued that housing and public utilities had to be privatised to reduce public borrowing. But they still involved borrowing. It was, however, borrowing at much higher rates of interest to the great benefit of finance capital. It is this debt which is now creating a massive financial crisis.

The second reason for the public ownership of housing, transport and energy is that these three areas are central to tackling the challenges of carbon emissions and energy scarcity. Planned new communities with integrated public transport, micro-energy systems, combined heat and power and energy conservation would make the most direct and immediate contribution to tackling climate change and provide a template for more general implementation. Such a state-directed programme would also provide the basis for engaging Britain's scientific skills in developing new technologies and create new products and markets for productive industry.

The cancelling of Trident and support for productive industry are also linked. Trident and the manufacture of a new generation of nuclear weapons ties up a significant proportion of Britain's scientific personnel as well as being a massive financial burden (£76 billion over its projected lifetime). These resources need to be redirected to productive industry.

Direct government intervention in industry will also be crucial. Many viable firms have been subject to buyout and merger and saddled with levels of borrowing which place at risk both jobs and key areas of technical expertise. What is needed is not more government cash for the corporate lenders but government intervention to salvage these productive resources and redevelop them in a planned and integrated way—as was done to an extent in the 1960s—but this time using the knowledge and expertise of their Page 36

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workers and their representative organisations.

These plans are modest. None involves doing anything that has not been done before in Britain (or, somewhat more effectively, in France or Germany). They are manifestly necessary. If such measures are not taken, even the short-term consequences will be severe: very high unemployment and acute problems of homelessness and repossession. In the longer-run the scale of government lending to the banks will result in an inflationary assault on living standards. Only an expansion of the real economy can absorb and moderate these inflationary pressures.

But however necessary and economically defensible such policies are, they will be seen as acutely destabilising by finance capital. In particular the ending of the shadow banking sector and the nationalisation of retail banking and utilities would represent a key blow to its ability to generate super-profits. Such moves would therefore be fiercely resisted and it does not need great imagination to conjure up the newspaper headlines with which they would be greeted. Finance capital's use of the media is a central aspect of its antidemocratic power.

This is why the issue of democracy cannot be ignored. It is not an optional extra.

Without democratisation, progressive economic reform is not sustainable. The labour and trade union movement needs to take democracy as seriously as it did in the 1900s. Then the demand for the vote and a political party for labour were seen as integral to trade union objectives. Today three areas need to be addressed immediately.

The first is the media itself. Its ownership is undemocratic and its use is anti-democratic.

Its monopoly control has to be broken up. Models for doing this already exist. The BBC has functioned as a public sector provider of news for two generations. Over the recent period its own independence has been compromised and the post-Iraq controls now need to be reversed. But the same model of independence combined with public accountability can be extended to the press—complementing the Morning Star as the paper of the labour movement. This is a campaign that needs to be initiated now.

The second is the restoration of the democratic powers of the House of Commons. As a result of changes over the past twenty years, all the proposals outlined above would be declared unlawful under European Union law. This would include the integrated public ownership and planning of transport and energy, the ending of 'competition' in the NHS, the state support for industry and the scale of public borrowing required for council housing and the repurchase of privatised assets. The trade union movement needs to lead a campaign to repeal the relevant sections of the EU treaties both in alliance with workers elsewhere in Europe and directly in terms of demands on the British government. Restoring the democratic powers of Parliament is an essential precondition for any challenge to the executive power of state-monopoly capital.

The third area for immediate action is the democracy of the labour movement. Trade unions represent Britain's biggest democratic organisation. They include six million people.

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They have policy in favour of virtually all the measures proposed above.Yet the political party they founded and still finance implements quite contrary measures—the disastrous anti-working class and anti-democratic policies of finance capital. This must be ended and the Labour Party reclaimed or, if necessary and possible, re-established for working people. The Labour Representation Committee has as a central objective the mobilisation of trade unions and constituency parties to fight for the restoration of internal Labour Party democracy—a process which could be driven forward and given momentum by mass campaigning in a way that impacts directly upon the struggle between left and right inside the trade union movement and the Labour Party. The People's Charter, in process of being endorsed by trade unions, provides a unifying focus for mass campaigning and politicisation within and beyond the labour movement.

The importance of mass campaigning, actively redeveloping working class organisation and confidence, cannot be overestimated. Collective class organisation ultimately represents the only force capable of counteracting the power of big business. It is also the only force able to challenge its ideological control and generalise an alternative world view.

In the longer run this struggle for democracy is also an essential precondition for any progressive government. The capitalist state machine is designed to capture and control any government with conflicting class objectives. Only working class organisation can prevent it. The trade union movement needs to have the ideological strength to defend its members' class interests in the full sense. This means creating its own 'expert bodies' loyal to democratic and anti-monopoly objectives that can provide a framework for government and advise in the interests of the great majority. However, if democracy is to be defended and advanced, there is also a still more fundamental condition for democratic progress. It is activity at the level of the workplace and the community. It is here that ordinary people need to have the confidence to develop their own plans and perspectives.

It was this level of struggle that transformed politics in the 1970s. It is here also that practical alliances can be created and attitudes transformed. And, finally, it is here, directly among working people, that a new participatory democracy must eventually emerge if there is ever to be a transformation of state power.

It was Lenin who argued that socialist change would only come when the ruling class was no longer capable of ruling in the old way. But he added a key condition: the working class had to show itself on a mass scale no longer willing to be ruled in the old way.

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Notes 1. OECD Fact Book, 2008 2. ONS January 13 2009 3. The IMF Global Financial Stability Report for 2005 was already warning of unsustainable levels of consumer debt in Britain. In 2004 it was equivalent to 95 per cent of GDP as against 82 per cent in the US and 48 per cent in the Eurozone. Wynne Godley and A. Izurieta, ‘Coasting the Lending Bubble’, Cambridge Endowment for Research in Finance Strategic Analysis, June 2003, argued that that the main driver of growth in Britain since 1997 had been consumer debt and that this would reach its limit within two or three years.

4. Third quarter 2007 corporate profitability: www.statistics.gov.uk/cci/nugget.asp?id=196 5. Bruno Amable, The Diversity of Modern Capitalism, Oxford University Press, 2003; Peter A Hall and David Soskice (eds), Varieties of Capitalism, the Institutional Foundations of Comparative Advantage, Oxford University Press, 2001.

6. Massimo Florio, The Great Divestiture: evaluating the welfare impact of British privatisations, MIT 2004.

7. Research conducted for the CBI by Oxford Economics published December 5 2007: Financial Times December 5 2007.

8. HMSO Pink Book 2008.

9. UNCTAD, World Investment Report 2007: Mergers and Acquisitions.

10. Household Debt Monitoring Paper H2 2006.www.berr.gov.uk/files/file 39339.pdf.

11. IMF World Economic Outlook Update for January 2009.

12. Marx, Capital,Vol. III, chapter 27, Collected Works,Vol. 37, p.439.

13. Marx, Capital, III, chapter 27. The main sources for this section are: Lenin, ‘Speech to the Seventh AllRussian Conference of the RSDLP’ (1917), Collected Works,Vol. 24; Lenin, ‘The Impending Catastrophe and How to Avoid it’ (1917), Collected Works, Vol. 25; Eugene Varga, The Great Crisis and its Political Consequences, London, 1934; Maurice Dobb, Studies in the Development of Capitalism, London, 1947; J. Winternitz, ‘The Marxist Theory of the Crisis’, Modern Quarterly, 1948, 4/4; State Monopoly Capitalism, Communist Party Central Education Department education syllabus 1971.

14. The major analysis of state monopoly capitalism for the second half of the last century is provided by Paul Boccara (ed), Traite Marxiste d’Economie Politique: Le Capitalism Monopoliste d’ Etat, Vols I and II, Paris, 1971. Victor Perlo, in The Unstable Economy (1974) and Superprofits and Crises (1988), provides the best analysis of state monopoly capitalism in the US. Sergei Menshikov, The Economic Cycle: Post War Development, Moscow 1974, examines world trends after 1945. Sam Aaronovitch, The Ruling Class, 1961, and Big Business, 1974, analyses post-war developments in Britain as do Ben Fine and Lawrence Harris in The Peculiarities of the British Economy, 1985. Mervyn King, ‘The UK Profits Crisis’, Economic Journal, March 1975, demonstrates the way the state steadily reduced corporate taxation to sustain profits in the post-war period and provides a defence of state monopoly capitalism against Glyn and Sutcliffe’s British Capitalism: Workers and the Profits Squeeze. David Harvey, The Limits to Capital, 1982 and 1999, offers a pioneering examination of the relationship between cycles of capitalist accumulation, finance capital and property. John Scott’s Corporate Business and Capitalist Classes, 1997, makes a less explicitly Marxist analysis.

15. This based upon Marx’s 1850 review of Guizot’s Pourquoi la revolution d’Angleterre?, Collected Works, Vol. X, pp. 251-255.

16. John Stuart Mill, Principles of Political Economy, 1848, Vol.IV. 17. Katherine Hood and James Harvey (Noreen Branson and Roger Simon), The British State, Lawrence and Wishart, 1958.

18. The best initial guide to the tactics of Britain’s ruling class is Ralph Miliband, Parliamentary Socialism, 1962 19. Friedman, From Galbraith to Economic Freedom, IEA, London, 1977.

20. Richard Roberts and David Kynaston, City State, 2002.

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21. UNCTAD, World Investment Report, 2001, p.38.

22. Financial Times interview with Kenneth Clarke 26 July 2008: ‘Thatcher was lobbied by British banks struggling to get into the German market. She saw no alternative: she supported the scrapping of national vetoes to ensure that single market legislation could be pushed’.

23. This divergence is examined in detail by Charles Woolfson, Paying for the Piper: capital and labour in Britain’s offshore oil industry, 1996.

24. It should be stressed that over the past century finance capital has repeatedly transformed the way it extracts superprofit—although in general, as the basic contradictions within capitalism multiply, it has tended to become more directly dependent on the state to redistribute income. The scale of capital commanded by monopoly firms remains important for their control over technologies and brands (as with software companies), their ability to dominate markets (as with the oil companies) and to force down suppliers margins (as with the supermarkets). But the fusion with banking capital has rendered the role of finance companies, previously merchant banks, now also private equity and other investment funds, increasingly important in the differentiation of rates of return between the small saver (sometimes receiving a negative return) and the super rich. Theoretically this was examined by S. Menshikov, Millionaires and Managers, Moscow 1969; Robert Peston, Who Runs Britain? How the superrich are changing our lives, 2008, provides contemporary examples.

25. ONS, http://www.statistics.gov.uk/cci/nugget.asp?id=107.

26. T. Heinze, ‘Dynamics in the German System of Corporate Governance: empirical findings regarding interlocking directorships’. Economy and Society, 2004, vol.33, 2, pp. 218-238.

27. HSBC is formally registered in Hong Kong which has much stricter financial regulations; the operations of the Standard Chartered Bank are mainly in Asia and Africa.

28. Bank of England Quarterly, Autumn 2005, p.316.

29. Sam Aaronovitch, The Ruling Class, 1961, and Big Business, 1974 provides an illuminating analysis.

30. Richard Roberts and David Kynaston, City State, 2002.

31. Financial Times December 31 2008 citing Hedge Funds Research.

32. Research by the Private Equity and Venture Capital Association (Financial Times January 15 2009) showed that the profit rate of the 14 biggest private equity firms for the three years 2005-2007 ran at 330 per cent that of companies listed on the FTSE All Share Index. Of this 167 per cent came from higher debt levels (or leverage) as against debt levels for comparable companies. Average hedge fund profits were running at 15 per cent through the 1990s.

33. IMF, World Economic Outlook Update, January 2009. In October 2008 total bad debts were estimated at $1,400,000—of which $600,000 were covered by bank assets. By January 2009 the total bad debt for US banks was revised to $2.200,000.

34. Financial Times December 31 2008 citing Hedge Funds Research 35. Carmen Reinhof and Kenneth Rogoff, NBER Working Paper 13761: ‘Is the 2007 subprime crisis so different?’ and ‘This Time is Different’, NBER Working Paper 13882.

36. Lord Giddens’ latest book is Europe in the Global Age (2007). Robert Griffiths provides a critique of the globalisation thesis in Global Imperialism or Peace and Popular Sovereignty?, CPB 2007. Other critical approaches are provided by Paul Hirst and Graeme Thompson, Globalisation in Question, 1999, Paul Krugman, The Accidental Theorist., 1998, Joseph Stiglitz, Globalisation and its Discontents, 2002, L. Weiss, States in the Global Economy, 2003 and David Harvey, The New Imperialism, 2005. Naomi Klein’s The Shock Doctrine: the Rise of Disaster Capitalism, 2007 more concretely focuses on the role of the state than her two previous books.

37. Guy Palmer, Monitoring Poverty and Social Exclusion, Joseph Rowntree Foundation and New Policy Institute, 2007; Daniel Dorling, Poverty, Wealth and Place in Britain, 1965-2005, Joseph Rowntree Foundation, 2007 38. CPB, The Left Wing Programme, 2007, provides a comprehensive perspective of which only an outline is provided here.

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