Cooking the Books 1: Economic cycling

Gordon Brown, as Chancellor, laid down a “golden rule” that the government’s current spending and its income from taxes should balance, not every year as hard-line fiscal conservatives want, but at least over a complete “economic cycle”. But how measure the beginning and end of one of these?

The trend of economic growth (additions to GDP) under capitalism is upward but not smoothly in a straight line; rather it is like the teeth of a saw, only with each peak being higher than the previous one, with a trough in between. Brown’s Treasury officials defined a cycle as the time between two peaks of growth above the long-term trend. So, if the long-term growth trend was, say, 2.5 percent then, if for a number of consecutive quarters, it was above this level, that counted as the beginning of the cycle, which could be considered as coming to an end the next time this happened.

This is reasonable enough in principle. The trouble is that it is open to manipulation by redefining the long-term growth trend. Which is what the government has been accused of by the opposition. And is why the financial editor of the Times, Graham Searjeant, wrote an article headlined “We need new economic cycle to understand changing world” (26 April). He was just interested in defining a measurable economic cycle so as to establish a period over which government spending and income balance. But government spending and taxes are irrelevant to the economic cycle as such.

In the 19th century, it was generally accepted that the economic cycle lasted about 10 years and was measured from one financial crisis to the next. Marx shared this view, and described the course of capitalist economic activity as typically taking the form of “a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation” (Capital, Vol. 1, ch. 15, section 7).

Marx saw financial crashes as being a symptom of industrial overproduction (in relation to market demand). As the market for a key product expanded, the firms producing for it all invested in expanding their productive capacity in the expectation of it being them who would benefit from the increased demand, with the result that when the new productive capacity came on stream output proved to be greater than the demand; sales fell off meaning that firms had less money from which to repay loans contracted to expand productive capacity; credit (loans) became harder to get; creditors demanded repayment in cash; in the end a financial crash occurred.

Searjeant’s argument for a “new economic cycle” is that today industry has become less significant:

“Conventional economic cycles lean heavily on factors specific to industry, such as investment in new capacity and changes in materials and parts. But UK industry is now too small to drive the cycle, which is as well because manufacturing has been in near-recession for years”.

He speaks instead of “an economy powered by London financial services”. In answer, two points can be made. While UK industry is not so important as before, world industry – as in China, India, Brazil, etc – is and the world economy is driven by world industry, which is still liable to crises of overproduction. Second, financial services are dependent upon and subordinate to (world) industry since the services in question are precisely services connected with world trade in industrial and agricultural products, including hedge betting on how their prices will move. The production of material things is still the basis of the economy.