The current trade cycle

— Dr Prabin Baishya The Trade Cycle “is a highly complex” phenomenon of the prevailing economic system as it was depicted by the famous economist J M Keynes in his General Theory. The essential character of the cycle, especially its regularity of time-sequence and duration is mainly due to fluctuations of marginal efficiency or simply expected profitability of capital investment. The crisis of 1825 is said to be the first one after “modern industry itself was emerging from the age of childhood” as was observed by Karl Marx in January 24,1873 in his Afterward to the 2nd German Edition of Capital Vol I.

Prof Samuelson, a Nobel Laureate, maintained that “the economic system was plagued with the uncertainties of business cycle throughout our history as a nation”. The cycle called by different names like ‘trade’, ‘business’ ‘industrial’ or ‘financial’ occurs every ten years according to Marx with stages of stagnation, prosperity, overproduction and crisis ever recurrent from 1825. Other economists hold a time-sequence of 8 to 10 years with boom busting into downturn of recession leading to slump or depression, then recovery with an upward trend. This cyclical fluctuation is a curse of historic capitalism though some think tanks, particularly American capitalists boasted of reducing recessions after the 2nd World War. “A mixed economy may still be subject to occasional recessions wrote Prof. Samuelson in his revised text book of 1970. Now the crisis has hit the heart of the preachers of a global laissez-faire capitalism of the American economy although Prof. Samuelson expected ‘no returning’ to a free market economy. According to Prof Paul Krugman, another Nobel Laureate, the September 2008 financial crisis of America is the second worst after 79 years since October 29/1929 Wall Street stock market crash which had created the great depression of 1933.

The present crisis is also primarily a financial one like that of 1929 and it has affected not only all the sectors of the American economy but also all the countries of the world through market forces. The first crisis of financial character occurred in England in 1866 `signalised by the failure of a gigantic London Bank immediately followed by collapse of countless swindling companies. The present crisis in the USA started with the bankruptcy of the major investment bank Lehman Brothers losing $ 68 billion in real estate followed by failure of several other financial institutions.

The crisis was heightened by an accumulated loss of $ 18.5 billion by America’s largest insurer American International Group (AIL). All these led to a sharp fall in stock market prices indicating the worst financial crisis since 1929. The recession had started in 2007 in the real estate market mainly in the housing loan market where Lehman Brothers invested many billions, but failed to recover and the bubble had bust due to fall in demand for buildings. This aspects once again indicates the Marxian over production theory of economic crisis. But this is not all. Since the introduction of the stock markets money took the form of a commodity bought and sold by money makers through the stock markets in the form of equities or shares, bonds and securities. Revaluation of their prices is done by the stock exchanges ‘daily, even hourly’. The `game players’ buy and sell these money commodities “as there is a peculiar zest in making money quickly’ said Keynes. This is what is called speculation or gambling in casino, the stock market table. But “the job is likely to be ill-done. The measure of success attained by Wall. Street cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism” - wrote Keynes in 1936 during the crisis of New York suggesting state intervention through capital investment and other ways.

Now the world is again dancing to the tune of Washington consensus after introducing free market economy by privatisation of public sector enterprises by selling shares to multinational corporations and opening other markets. The countries of Asia are facing the financial crisis. As per print media records Japanese shares dropped almost by 5 per cent while Hong Kong shares were off 5.9 per cent and South Korea shares closed at 6.1 per cent lower. In our country stock market dipped by nearly two-thirds due mainly to sales by Foreign Institutional Investors (FII). Industrialists have complained about rise in inventories, i.e. stocks of finished and semi-finished products while the IT industry has fired many employees due to fall in export market. All the industrial sectors excluding agriculture are now pessimistic about the future as the inflation rate has fallen to three decade low 0.44 per cent from 12 per cent during 2007-2008 (higher the rate of inflation / price rise, higher is the profit for manufacturers, wholesalers and retailers while the consumers breed leading ultimately to fall in demand which create crisis). Therefore, the Chambers of Commerce have urged for further reduction of the rate of interest on credit (given the price level, lower rate of interest means higher rate of profit). On the fiscal front government has already reduced excise duty, central value added tax and the ensuing budget of 2009-2010 is expected to reduce taxes on the corporate sector and large incomes while raising subsidies to industrialists. Let me add in the context that Prof Krugmas has asked’ the capitalists to check their greed for earning more during the crisis.

What, however, might be the monetary and fiscal measures besides the sarcastic ‘socialist’ way (actually Keynesian) of bailing out the financial institutions by the State buying of their shares and temporary take over of the management in the U.S.A., the world situation is not likely to improve soon. The recovery of the crisis, it is said by experts, may take about two years upto mid 2010. For helping the crisis ridden countries of the world the World Bank has suggested the creation of a Vulnerability Fund of at least 270 billion dollars to encourage stimulous finance and has asked governments to invest in safety nets, infrastructures, shares of .small and medium size companies and “to create jobs to avoid social and political unrest”.

ln the context of periodic crisis of the economic system let us recall Keynes again. According to him “the outstanding faults of the economic society ..., are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and income”. Hence he has suggested a ‘somewhat comprehensive socialization of investment’ in co-operation with private initiative. Socialisation of investment is, however, a gradual process and it does not mean state ownership of instruments of production, it is a means of directing resources for augmenting the instruments of production. This is an `enlargement of the functions of Government’ as a ‘Practicable means of avoiding the destruction of existing economic forms’. Hope, our economic policy makers would pay heed to the vision of Keynes, if not of Marx for a humanitarian society of economics bliss.
(The writer is former Principal of Sualkuchi BMS College) ASSAM TRIBUNE