When Capitalism Met Covid
Covid-19 has exposed the frailties and myths of capitalism. Now is the time to break with the dominance of the market – and rebuild an economy where the state intervenes in the public interest.
Coronavirus has sparked a public health emergency that rapidly turned into a global economic crisis for two fundamental reasons. The first is that in early 2020, before the pandemic, the world economy was already in a precarious state. The second is that nation states took extraordinary actions to confront the pandemic, thus disrupting production, trade, and finance. The crisis has been justifiably compared to a war since it has involved curfews, wholesale disruption of economic activity, and direct state intervention in production, finance, and the labour market. But the analogy is also misleading, since the economic disturbance has several features in common with the regular crises of neoliberal, financialised capitalism.
Unemployment in several countries rose precipitously after the imposition of lockdowns — a trend which is not what typically happens when states start wars. It is indisputable, furthermore, that the crisis is global, engulfing both developed and developing countries, and thus complicates the prospects of recovery. In this respect too, the coronavirus crisis is quite unique in the peacetime history of capitalism.
While the epidemiological aspects of the crisis and the medical effectiveness of the state’s responses will long remain a matter of debate. At the time of writing, it is not clear that dampening down the spread of the disease through lockdowns would be an effective measure in the longer term. The lockdown strategy reflected both the vulnerability and power of contemporary states. On the one hand, they were unable to confront the epidemic through intensive testing and isolation, mostly because the health systems of even the richest countries were not equipped to meet the task. On the other, they were fully capable of imposing peacetime curfews that deadened the social life of vast metropoles and paralysed economic activity.
Moreover, lockdowns restricted civil rights and freedoms by forcing or scaring entire populations to comply with harsh restrictions. The mobilisation of the internet and new technologies points to new relations between nation states and big business, with ominous implications for freedoms and democratic rights.
Once the extent of the economic disaster became clear, nation states took unprecedented action to confront it, directly flouting the ideological dogmas of neoliberal capitalism. The costs and implications of their actions will be felt for many years ahead and may even change the balance of power in the world economy. China, the country where the outbreak first occurred, was also the first country to impose a severe lockdown of vast areas.
In contrast, the still hegemonic United States was slow to respond and appeared far less coordinated. The lack of public provision of universal health services, profound inequality, and lack of effective coordination of the state machinery turned the epidemic into a major social shock. The largest economy in the world — and the leading imperial nation — became the recipient of medical aid from China, Turkey, and others.
Even sharper divergences emerged between countries of the core and the periphery of the world economy. In the Global South, it was often impossible in practice to impose strict social isolation or distancing among the poorest social strata. Responses varied greatly in Asia, Latin America, and Africa, reflecting the different mode of integration of countries in the world economy, the structure of health systems, the institutional capabilities of nation states, and the dominant public culture.
However, the most striking evidence of fresh divisions between core and periphery emerged in Europe. The Southern periphery of the European Union imposed very severe lockdowns and took an economic hammer blow. Northern Europe showed far greater capacity to deal with the impact of the lockdown, thus causing renewed tensions in the EU. Meanwhile, the UK — after blundering hopelessly for several weeks — imposed a severe lockdown with major economic costs.
Despite these differences, there is little doubt that the nation state took centre stage in the crisis. After four decades of relentless neoliberal humbug about the triumph of markets, the enormous power of the state became starkly evident. At the same time, it was also shown to be profoundly weak, even in the leading countries of the world economy. The struggle for hegemony was sharpened and fresh divisions emerged between core and peripheral countries, nowhere moreso than in Europe.
It will take time to fully assess the implications of the pandemic for world capitalism. But one question is already pressing: who will bear the costs of this gigantic crisis? The answer is of crucial importance for socialists, since it would shape the demands for economic policies that defend the livelihood of workers and change the social balance against capital. It must also be fully cognisant of the extraordinary role of the nation state in both causing and confronting the crisis.
Mechanisms of Crisis
State-imposed lockdowns triggered the crisis in three interrelated ways. Firstly, they delivered a shock to manufacturing by disrupting supply chains across the world, with greater shock to services such as travel, tourism, entertainment, and restaurants. Secondly, they immediately affected aggregate demand as consumption declined and household saving increased. As enterprises set plans aside in the face of extreme uncertainty, investment also collapsed in developed and developing countries. Thirdly, they affected finance by pricking the bubble that had emerged in stock markets, particularly since 2018, but also by restricting portfolio flows to developing countries, raising the prospect of a full-blown global financial crisis.
The immediate triple shock was followed by a series of secondary shocks. The collapse of aggregate demand led to a rise in unemployment and downward pressure on incomes. At the same time, commodities that could be remotely delivered received far greater demand. While some service providers such as hotels and restaurants were devastated, others that required limited physical contact such as Amazon benefited greatly. Service provision (even within manufacturing) was also affected by the boom in remote conferencing facilities, which benefitted advanced technology giants like Microsoft. Coronavirus appeared to favour the great monopolies of the era of financialisation, whose power derives from new technologies.
By March 2020, it was apparent that lockdowns had induced a gigantic and global economic crisis, forcing nation states to respond. Their responses were again unprecedented. Monetary policy was mobilised to provide liquidity, while driving interest rates close to zero. The monopoly of nation states over fiat money — the final means of payment — once again proved the foundation of state economic power in financialised capitalism. Central banks expanded their balance sheets rapidly and enormously, providing liquidity to banks as they had done via quantitative easing following the 2008 Financial Crisis.
In 2020, however, banks did not hoard the liquidity as reserves but greatly expanded, lending to commercial and industrial enterprises with explicit government guarantees. The result was an extraordinarily rapid growth of the money supply, notably in the US, which facilitated the sharp recovery of stock markets and the renewal of capital flows to developing countries. A global financial crisis was averted for the time being.
Fiscal policy was deployed in extraordinary ways, dumping some of the biggest shibboleths of neoliberalism. Some governments paid the wages of workers to limit the rise of unemployment, effectively nationalising the wage bill of a broad swathe of enterprises. Others boosted the disposable income of families by making direct cash subventions, providing a measure of universal basic income to millions of people. Others also provided support to private businesses by deferring taxes and social security contributions, while also providing credit and export guarantees — in practice nationalising the income statement of enterprises. The sums were enormous and, in view of the inevitable fall of tax income as economies went into recession, the projected fiscal deficits were comparable to wartime levels.
In terms of the US, the role of the dollar as quasi-world-money was carefully defended. Faced with a shortage of international liquidity as international capital flows dried up and trade was disturbed, the Federal Reserve stepped in and provided dollar liquidity through swaps with a group of other central banks. The US showed itself determined to prevent any challenges to the dollar in the world market.
The crucial role of the state reflected the great unevenness that already characterises the world economy. It is difficult to tell at this stage which parts of the world economy will be hardest hit in the longer run, particularly as the rapid escalation of public and private debt has heightened the risk of a fresh debt crisis in the near future. Nonetheless, it’s clear that the lockdowns have already catalysed a great recession, while state policies have resembled war measures, bringing large areas of economic life under temporary national control. The question naturally arises: who will bear the costs of these actions?
Paying for Coronavirus
At the outbreak of the Second World War, John Maynard Keynes wrote a pamphlet on how Britain could pay for the huge costs of the conflict — that is, how it could provide the real resources commanded by the government and directed toward military production. He noted that the war would provide a strong boost to aggregate demand through government expenditure on war equipment, thus leading to full employment and more. However, the aggregate supply of peacetime goods would be severely constrained, as real resources would be directed toward military production.
The imbalance of aggregate demand and supply immediately raised the prospect of inflation, which could also be an answer to how to pay for the war. Since an established system of wage indexation did not exist, the nominal income of workers would not keep pace with the rising price level. Workers would consume less, thus releasing real resources that the government would direct to the war effort. At the same time, as prices rose, so would capitalist profits. In effect, inflation would amount to a direct reduction of income for workers — a forced saving — that would pay for the war, but it would also be a transfer of income from workers to capitalists. For this reason, Keynes was against it.
Furthermore, it was clear that borrowing from the rich and the middle class would not be sufficient to cover the real costs of war. Even worse, it would create claims onto future national income that would substantially alter the distribution of income in favour of the rich. For Keynes, the preferred way to pay for the war was a national plan of direct forced saving — taxing a part of workers’ income and placing it in a special national account that would be available after the war. Reduced workers’ consumption would still be the answer to meeting the resource costs of the war, but it would be through a planned tax and it would not lead to increased capitalist profits. Not surprisingly, the labour movement in Britain was against Keynes’s plan because of its calculated contractionary effect on workers’ income.
Keynes’s analysis remains instructive. But the conditions of this crisis are very different, even if they bear a resemblance to war. Above all, coronavirus has depressed aggregate demand, leading to rapid increases in unemployment and underutilisation of resources. Far from confronting an excess demand (for military and peacetime goods), advanced capitalist countries are faced with workers restraining consumption and enterprises postponing investment. Without the extraordinary fiscal boost since March 2020, unemployment and underutilised resources would have reached unprecedented levels in several developed countries. It is imperative, therefore, that the state should continue supporting aggregate demand through the methods they have already adopted.
The outlook of aggregate supply is also very different from the conditions that exercised Keynes. The British problem in 1940 was that productive capacity would reach its limits as the output of military goods expanded greatly, making it impossible to increase the supply of peacetime goods to meet rising aggregate demand. But the pandemic has seen the supply side fall rapidly below capacity and a flood of underutilised resources emerged, mostly in the form of laid-off workers. At present there is ample spare capacity on the supply side.
Nonetheless, two factors militate against the ability of production to respond in the period ahead. Firstly, much will depend on the pace of the pandemic. If the public health emergency does not recede sufficiently, then significant state restrictions will remain on economic and social life, even without full lockdowns. The trajectory of economies in 2021 and perhaps beyond will depend directly on coronavirus. Secondly, productivity growth and profitability in developed countries have been low for a long time, especially the US. This weakness partly reflects the existence of broad swathes of ‘zombie’ firms that have survived due to cheap credit and low interest rates since 2008. The extraordinarily loose credit conditions and the great increase in company debt following the outbreak of the pandemic will further postpone the rationalisation of these enterprises. In short, the supply side of financialised capitalism is structurally weak.
Aggregate demand and supply aside, it is also clear that the real resource costs of the crisis are not analogous to war. The increase in health expenditure — which is necessary across a range of developed and developing countries to strengthen inadequate health systems — is a small fraction of the fiscal costs incurred by governments. The real resource costs of the pandemic are similar to those of a common crisis of financialised capitalism, namely workers becoming idle and productive capacity becoming degraded. Some of these costs have already been imposed on society as unemployment escalated and production declined since the beginning of 2020, but they were also ameliorated through the vast monetary and fiscal boosts of government policy.
The resource costs of government policy are unlikely to be met through inflation. Despite the extraordinary increase of money by central banks and the escalation of credit by commercial banks, the depressed state of aggregate demand and the underutilisation of aggregate supply imply a low risk of inflation. Much will depend on the behaviour of nominal and real wages. The organised working class has long been unable to successfully demand nominal wage increases in several advanced countries. On the other hand, real wages have remained subdued as capitalists took advantage of the rising productivity of labour in developing countries, such as China and other parts of Asia, to import cheap consumer goods. It is possible that if the balance of forces determining nominal and real wages was changed in favour of wage labour, the general price level would begin to rise in the future. The prospect cannot be dismissed, but there is little hard evidence at present.
Moreover, there is one further crucial reason why inflation is unlikely to be the way of covering the costs of the pandemic. Inflation would entail real resource losses for lenders unable to obtain a full return for the value they advanced. Owners of loanable capital are already bearing some of the costs of loose monetary policy since zero (or even negative) interest rates have put pressure on financial profits and reduced the income from lending. But rising inflation is a threat of a different order. It would partly destroy the existing stock of debt and directly undermine the pre-eminence of finance during the last four decades. That would be the death knell of financialisation, and it would certainly not come to pass without ruling-class opposition. So it is probable that governments will opt for their tried and tested methods of imposing austerity, and the fiscal boost will be restrained to limit the deficit and slow down the national debt, with the cost being met by reducing the consumption of workers through cuts in welfare spending, increased taxes, and possibly wage contraction.
Such policies should be resisted at all costs. The extraordinary nature of the crisis makes it necessary to maintain the boost to demand and supply for as long as it takes to stabilise economic activity. The real resource costs should be partly met through increases in future income generated, as total output and employment are sustained. Some of the costs should also be met through increased taxation of the rich, including a severe wealth tax. Finally, some of the costs should be shifted onto the owners of loanable capital through selective cancellation of public and private debt based on explicit social criteria.
The crisis is not a war and does not require a contraction of workers’ consumption to meet its costs. It was induced by state responses to a health emergency occurring in weakened financialised capitalism. Its costs ought to be paid for by the rich and the lenders who have benefited most from this diseased social system. There should also be sustained public intervention to restructure the supply side. The weakness of production after years of neoliberal financialisation requires bold steps, not merely providing cheap credit to private enterprises. Faced with the pandemic, governments took extraordinary steps by nationalising the wage bills and income statements of enterprises. It’s time they also nationalised the equity by taking over ownership and control of productive resources.
In the period ahead, there will likely be a wave of failures of debt-laden private businesses. The question of public ownership on a collective and democratic basis will come to the forefront. The opportunity should be grasped, together with a wave of public investment. The weakened productive fabric could be renewed by laying the foundations for social and environmentally responsible production. To that purpose it would be vital to improve the executive and financial capabilities of regional and local administrations. These would be truly radical ways to tackle the pandemic crisis, while tilting the balance of social power in favour of workers and the poor.