Sitting there looking vainly at the growth, or lack of it to be more precise, of the British economy quarter by quarter following the introduction of austerity measures is a dubious use of time. So rather than sit there each quarter and discuss a dismal economy, I think the first step is to understand that we are in a world-wide economic crisis of the capitalist system. We also need to understand that the policies being introduced are actually not only extending the current crisis, but given that they are leading to increased income and wealth inequality, they will have a devastating impact upon the working classes in the countries introducing these measures. Moreover, the impact of austerity is not accident, it is being introduced specifically to create the economic contraction and the increased wealth and income inequality in the hope that private sector will take over the state sector services being undermined.

Triple-dip recession?

We need to understand that the introduction of austerity in an economic crisis does not lead to economic growth contrary to the absurd pronouncements of Prime Minister, David Cameron. Essentially, following a slight blip caused by the Olympics, I suspect we will be witnessing rather bad news. The combination of “beggar thy neighbour” low corporate taxation (to supposedly encourage investment in Britain) and cuts to public spending, services and benefits is not leading to a reinvigoration of the economy; rather the opposite is occurring.

Quite simply, the fall in service sector activity (which accounts for 75% of British economic activity) for the first time in two years (note that it was not in great shape beforehand) means that the economy is contracting.

“The closely watched CIPS/Markit purchasing managers index (PMI) for services dropped from 50.2 to 48.9 in December, below the 50 mark that separates expansion from contraction. It is the lowest reading since April 2009 and substantially undershot analyst forecasts of a rise to 50.5 (http://www.guardian.co.uk/business/2013/jan/04/uk-service-sector-contracts-pmi).”

There are additional things that indicate future problems. The manufacturing sector is geared towards export; decreases in demand due to the introduction of austerity in the periphery in the EU are starting to be felt in Great Britain (http://www.guardian.co.uk/business/2013/jan/11/honda-cuts-800-jobs-swindon), whether this will be balanced by increased demand for luxury cars in China (http://www.bbc.co.uk/news/business-21003670) is another important question depending on the amount of trade to each area.

The collapse into administration of three high street companies [Jessops (2000 jobs at risk), HMV (4500 jobs at risk) and Blockbuster (4190 jobs at risk) will clearly add to unemployment. The fact that the internet buying is replacing these businesses means that workers who have lost jobs will not be rehired by these companies and some of these companies pay minimal taxes in Britain (e.g., Amazon).

In Britain we are seeing declining productivity because businesses use cheap labour rather than making capital investments (it makes no sense to introduce capital and increase productivity both due to labour costs being so low and no demand for increased goods and services); it also indicates that they are keeping people on irrespective of declining demand for goods:

“Figures for the economy as a whole were not much better, with a 2.4% decline in productivity over the year. The figures take the sheen off supposedly buoyant employment statistics that showed companies continuing to create jobs throughout last year.
Some companies have retained staff by forcing employees to accept pay freezes, or in some cases a cut in wages. But, as productivity declined, labour costs per unit of output rose by more than 3% over the year to October (http://www.guardian.co.uk/business/2013/jan/03/business-productivity-declines-demand-falls).”

If businesses are keeping workers on irrespective of demand for their goods and services and waiting for the economy to pick up, what will happen if the economy does not pick up? Clearly, they will sack workers if the economy contracts. Moreover, if the economy picks up, most probably, they will force an increase in productivity by using speed-up or forcing workers to work harder to raise productivity. In either case, it is not a good sign for employment possibilities for workers in the near future. Additionally, there may be some problems with the government’s argument that jobs are being created in the private sector as they seemed to have misused the employment statistics of Office of National Statistics by including as employed those in government programmes who are not being paid by employers but rather through benefits (http://www.guardian.co.uk/business/2013/jan/15/uk-jobs-soar-real?INTCMP=SRCH) which are far lower than even the woefully inadequate minimum wage that is not a living wage.

Government concentration on the supply side of the labour market, as though people are lazy and do not want to work is the reason for unemployment is more than an obvious denial of reality. It is part of a divide and rule campaign demonising the poor and disabled as scroungers rather than addressing the fact that there are no jobs. This amounts to punishing the victims of the economic system (the poor and unemployed) and those that quite simply are unable to work due to illness and chronic health conditions. Cutting benefit will not force people into work, there need to be available jobs for that to occur; it will simply increase impoverishment and misery. An estimated 200,000 children are being pushed into poverty by the government’s policy of a 1% benefit cap over the next three years, (http://www.guardian.co.uk/society/2013/jan/17/benefits-squeeze-200000-children-poverty), a statistic not being disputed by the government.

Quite simply, the attack is hitting the most vulnerable: the disabled, single mothers, the elderly and the long-term unemployed who are already barely surviving on benefits that are meagre to say the least. The government’s argument when introducing the 1% cap on benefits that benefits should not increase faster than wages (when stagnating and decreasing wages is part of government policy and benefits are so very low) is playing off the working class and the poor against each other. In a period of deliberately created increases income and wealth inequality fuelled by the incorrect view that profits and the income of the wealthy are the basis for economic growth, it is the majority in British society that are paying for the class warfare being waged in the advanced capitalist world.

Austerity and its impact:

While leading members of the IMF claim that they underestimated the impact of the introduction of austerity and pretend to be shocked at the situation in Greece, the British government pretends that it does not understand that austerity is introduced to contract an economic system in the short run; both claims are extremely dubious to any person that has studied mainstream macroeconomic theory.

So, why is austerity being introduced and how has the government (and the Troika for that matter) got the strange idea that austerity will lead to economic growth? This relates to the impact of these measures in the long-run which attempt to remove “imbalances” between the public and private sector in favour of the later; in fact, David Cameron alludes to this when he makes the absurd argument “that the public sector cannot create growth.” However, for those that have any memory of the post-war period, we are well-aware that the public sector can create growth; it does so in three ways:

1) Hiring people in the public sector (direct government job creation) creates jobs and income for those that did not have it who then use that money to buy goods and services from the private sector;

2) The social welfare state provides additional income for those that do not have it and also provides services so that income is not spent on things provided by the government (e.g., health care), this means that there is more income to buy goods and services from the private sector;

3) The government demands goods and services from the private sector; this removes uncertainty for the private sector in terms of investment, output production, and job creation.

All of these things benefit the private sector and are part of what enable economic growth especially following a bust in the economy; both government investment and higher incomes can create economic growth. Austerity measures will not do this in the short run and it is debatable whether this will be a successful strategy for economic growth in the long-term; the increasing instability introduced by increased wealth and income inequality and lack of regulation will certainly lead to deeper and stronger fluctuations.
However, the government and large numbers of people in extra-governmental agencies (e.g., the IMF and the World Bank) believe that it is the private sector that are so-called “wealth creators” and they believe that privatisation (which enables the private sector to make profits providing these services instead of the government) and squeezing wages will enable profitability leading to economic growth. What we are seeing is that while this ideological argument may sound wonderful, reality is quite another story.

It is necessary to understand the interrelationships between production, consumption and distribution in the context of a capitalist economic system to understand what is happening today. The capitalist system hit a point of over-accumulation in the collapse of the financial sector in 2008 and we are still in an economic crisis. While the financial sector recovered from the crisis due to bank bailouts and centralisation of surviving capital, the rest of the economy is not faring as well as an understatement.

We are seeing the result of the long-term attack on the standards of living of working people in the advanced capitalist world from the late 1970s forwards, falling rates of profits in the industrial/manufacturing sectors in the advanced capitalist world due to high wages and decent working conditions leading to MNCs shifting production to the capitalist periphery to cut both labour costs and costs of raw materials has led to the creation of persistent unemployment in the advanced capitalist world and the shift of the economies in the advanced capitalist world to dependence upon the service sector.

Instead of shoring up the social welfare state and the state sector to keep employment and income up following the crash to enable a recovery, austerity measures have been either forced upon so-called debtor countries or introduced by right-wing governments throughout the majority of the advanced capitalist world. Bailout of the financial sectors led to both rising government deficits and rising public debt/GDP, the introduction of “austerity measures” essentially forced the majority to pay for the crisis due to deficit and debt reduction policies that they had no responsibility in creating. Shrinking the public sector, privatisation of public sector services (e.g., public health services) and selling off of nationalised companies (e.g., Greece, Spain and Italy), lowering pensions directly (e.g., Greece) and through changes in inflation indices (e.g., Great Britain), decreasing benefits, and wage and pension freezes for state workers is a direct assault on incomes. The attack on the public sector has also led to increased unemployment and the ability to introduce a wage squeeze for those still employed. While theoretically this will cut costs and raise profits, the problem arises that decreased incomes means that demand has decreased and there will be no increased investment, employment and output in the absence of demand for these goods and services.

While this has limited effect on the export-oriented manufacturing sector, that sector will certainly be affected by the introduction of austerity in the periphery of Europe.

Who are the wealth creators?

When Cameron (and other leaders in the advanced capitalist world) describe businessmen as “wealth creators” they seem to have forgotten the contribution of labour; land lying fallow creates nothing except spontaneously, capital does nothing in and of itself … it is the direct application of human labour (in combination with land and capital) that enables the creation of wealth. In the absence of sale at a price ensuring that profits are returned, profits remain unrealised. It is the incomes of working people that enable the sale of goods and undercutting their incomes means that goods and services will remain unsold. This deliberate inversion of the reality of the capitalist system serves them ideologically, but demonstrates a lack of understanding of the interrelationship between production, consumption and distribution.

So while privatisation potentially creates an area of profitable exploitation for the private sector, the decreased incomes of the majority means that they are unable to purchase services that were formerly socialised. For those on lower incomes and those on benefits, purchase of services is far too expensive and it is women that are filling in the gap in services (e.g., child-care, caring for the sick and elderly) in their homes. Contrary to neoliberal expectations, the private sector has not jumped into fill the gap, that is, because demand is not being matched by the income to pay for these things and the private sector will not create growth in the absence of perceived increases in demand and hence profitability. That means, that all these policies will do is eliminate access to services on the part of the majority as they cannot pay for them and further increase impoverishment. The so-called wealth creators cannot create wealth without labour both in production and in consumption.

Perhaps, they are taking their inversion of reality too seriously ... without demand there is no growth, without income there is no demand, without labour there is neither production nor consumption!