Prophet of doom

Dissident economist Harry Shutt was arguing that capitalism was heading for a fall long before the current crisis. Interview by Mat Little

December 9, 2008
9 min read

Harry Shutt is shocked that the Financial Times has published one of his letters. This doesn’t normally happen, despite his firing off regular missives. He thinks it might be a sign of the times. For if the house organ of the global financial establishment is prepared to give space to the views of someone like him, something must be seriously amiss. ‘I’m sure that this would never have been published a year ago. Now perhaps people see that the writing is on the wall,’ he says.

Shutt is an economist who occupies the dissident edge of his profession. At the height of the boom, while the masters of the universe where hiring the Palace of Versailles for weddings and Jennifer Lopez for birthday parties, Shutt was busy writing densely argued, if casually dismissed, counterblasts such as The Decline of Capitalism. Barely a decade after its victory over communism, and just at the point of its hegemonic conquest of China and India, capitalism, he argued, was far less healthy than it appeared to be. In fact, it was heading for a fall.

Now, in the midst of the worst global downturn for 70 years, Shutt’s words have an eerie prescience. ‘The lies and financial crimes that have underpinned this evanescent economic ‘miracle’ are only now being exposed as a result of a financial crisis, which , it is already clear, is the most catastrophic to hit the world since that of 1929-31, which heralded the Depression of the 1930s,’ he wrote in 2004.

Greed is not to blame

But now that the crisis that Shutt predicted has finally arrived, he is concerned that blame is being pinned on the wrong culprit. ‘People are hitting on greed,’ he says. ‘But greed is not a cause of things, greed is a symptom. Greed has been with us since the Garden of Eden.’

And it’s not just greed. For Shutt, many of the headline features of the economic crisis – sub-prime mortgages, liberalisation, fraud and unsustainable personal debt – are mere symptoms of something more fundamentally wrong. That something, in his view, is the deepening stagnation of the capitalist system over the last 30 years and increasingly desperate measures on the part of western governments and financial elites to avert a major collapse. ‘Instead of the promised revival of economic growth from the 1970s the rate of increase in global output has continued to decline in each succeeding decade,’ he says.

You don’t have to be a starry-eyed cheerleader for the market economy to retain a certain scepticism about claims for a fatal crisis of capitalism. This is a system that has shrugged off perennial Marxist predictions of its imminent demise and penetrated into every corner of the globe. But Shutt claims that through ‘Orwellian processes of deception’ the global establishment has been able to divert attention from the reality of deepening economic crisis and maintain the illusion that the system was working well. Until reality got too real to ignore.

In order to understand Shutt’s explanation for the crisis, it is necessary to take a brief detour through Marx. According to Marx, capitalism is a system of accumulation. Profits are made but can’t all be consumed by owners. Extra profits need to be recycled through the market. ‘The only way you can successfully recycle them is to either expand your existing business or diversify into another business,’ says Shutt. ‘It all depends on the ultimate consumer, consuming more and more. It has to grow, growth is built in.’ The problem is that as profits are invested into the market, generating more profits that in turn have to be reinvested, production expands until it reaches a level that can no longer be absorbed by consumers. The market is glutted, and recession results. But the destruction of capital and jobs creates pent up demand for the whole process to begin again in time.

That, in brief, is the business cycle. But Shutt’s argument is that western political leaders have, for years, based their economic strategy on avoiding or limiting the downside of the cycle, a doctrine encapsulated in Gordon Brown’s famous boast of an ‘end to boom and bust’. Credit expansion has been fuelled, household debt recklessly encouraged, state services privatised, financial institutions subsidised and regulations banished all in order to find profitable outlets for a burgeoning ‘wall of money’ generated by the system. A high rate of growth is needed to maintain this process, but can’t be sustained because of the weakness of demand in the economy.

The consequence is that money, frustrated in its search for productive activities to invest in, has turned to speculation. ‘When you get to the point that you can’t actually make profits by producing more stuff – organic growth – profits get recycled into speculation,’ says Shutt. ‘In other words, you start placing bets that certain assets will increase in value.’ And once speculation takes hold, it becomes advantageous to bring even more money into the market, because that pushes up the value of assets. Hence, the ‘leveraging’ by speculators – the borrowing of more and more money to speculate on financial assets.

‘Over the last 30 years you’ve had a progressive postponing of the evil day,’ he says. ‘1974/5 was the first financial crisis since the second world war, then you had the 1987 crash, which was inflated away by pumping lots of money into the banks. Then it was shifted offshore. We’ve had the Mexican crisis, the East Asian crisis and the Russian crisis. The big one was the dotcom bubble eight years ago. And since then, we’ve been building up to this one.’

What the prolonged amassing of this huge surplus of capital cum fraud-driven credit bubble, means, according to Shutt, is the inevitable crash – the inexorable end of the business cycle – is going to be far more severe that it would otherwise have been. ‘I think we are looking at negative growth, for an absolute minimum of two or three years and I wouldn’t be surprised if it’s five or ten. That would be a depression,’ he says.

No light at the end of the tunnel

It’s not a cheering prognosis – a protracted downturn of several years with the likely side effects of military conflict and scapegoating of minorities. But Shutt hasn’t finished yet. There is no light at the end of the tunnel, or if there is, it’s very dim. He believes that that this slump will be much more difficult to emerge from than in previous downturns because traditional engines of growth are no longer available to drag us out. Remove debt-fuelled consumption and property speculation from the equation, and you are left with anaemic subsititues such as the internet, the service sector and green technology. The arguments of centre-left Keynesian commentators that the answer lies in re-regulating the financial sector and encouraging consumer spending, ignore the fact, says Shutt, that the demand for capital – the availability of new profitable productive activities to invest in – is in long-term decline, and consumer spending power has been exhausted.

‘It is easy to say that we’ll emerge from the slump eventually, but to quote Keynes, “in the long run we are all dead”,’ he says. ‘In other words there has to be a huge contraction in the meantime and the impact on livelihoods and lives is likely to be intolerable. The fundamental misconception of mainstream commentators is that people can and should be induced to consume more when they’re already ‘maxed out’ on credit. In practice it is right and necessary that they should now be forced to rebuild their personal balance sheets, which means saving rather than spending. Only once they’ve done this, probably after several years will they be able to start spending again. This pinpoints a fundamental weakness of capitalism. In order to function it requires the perpetuation of unsustainable levels of consumption in order to absorb the endlessly expanding stock of capital.’

The bust and its consequences demonstrate that the profit maximising model results in an unacceptably large number of losers says Shutt. ‘And people, as we know from long historical experience, don’t accept being losers forever. Destitution and hopelessness is not something they will accept peacefully and indefinitely.’ We need a rational alternative. But he is not advocating taking control of the commanding heights of the economy, in erstwhile Marxist fashion. He is not advocating nationalisation at all. Instead, he says, enterprise should be made answerable to the public interest.

‘I wouldn’t say abolish private property. If people want to invest in risky ventures, such as gold mining in Angola and they want to maximise profits from that, that’s fine, go off and do it. They can even do it in Scotland, provided they adhere to environmental standards. But if it fails you’re on your own,’ he says.

‘On their own’ means that investors would no longer enjoy the protection of limited liability, which restricts their financial liability to the amount they have invested. If enterprises wanted the legal privilege of limited liability, they would have to demonstrate that what they were doing was in the public interest and they respected the public interest in the way they ran their business: ‘As an entrepreneur, you must tailor your policies and what you do in terms of investment, employment, wages and prices in the interests of the public, and we are going to have a veto over what you do.’ Growth would cease to be seen as a public good. Any bank, which sought public funds, would be subject to these conditions.

Shutt is not delusional. He is quite aware that such proposals are nowhere near even being contemplated in any mainstream circles. But he is also convinced that the ruling elites of western societies are also clueless about the nature of their predicament. ‘The confidence of our rulers, be they business leaders, politicians, or journalists, is shot to bits,’ he says. ‘They don’t know a thing and they are floundering.’

But despite his comparison of today’s elites with the French aristocracy before 1789 and the Soviet regime prior to the fall of the Berlin Wall, Shutt believes there will come a point when reality has to be confronted. ‘There are limits to denial,’ he says. ‘If the consequence of this is that nobody can step out of their house in Mayfair without being mugged, they maybe they might think differently. All I can do is to try and get people to recognise the realities.’

The Decline of Capitalism is published by Zed Books


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