When significant US economic markets went haywire in the summer and fall of 2008, a fear, even panic, struck those charged with developing and implementing economic policy. The prevailing thinking-- unbridled capitalism with near-religious confidence in market mechanisms-- appeared to be in irreversible retreat.
The housing market cooled, home values shrank, and the financial structure built around home ownership began to collapse. As the stock market fell freely from previous highs, led by the implosion of bank stocks, investors withdrew dramatically from the market. Credit froze and consumption slowed. Thus began a downward spiral of employee layoffs, reduced consumption, capital hoarding, and retarded growth, followed by more layoffs, etc. etc.
As fear set in, policy makers scrambled to find an answer to a crisis that threatened to deepen and spread to the far reaches of the global economy. With interest rates near zero, they recognized that the monetarist toolbox, in use since the Carter administration, offered no answer.
At the end of the Bush administration, bi-partisan leaders approved the injection of hundreds of billions of public dollars into the financial system with the hope of stabilizing the collapsing market value of banks, a move popularly dubbed a “bailout.”
Early in the Obama administration, Democratic Party administrators crafted another recovery program totaling about three-quarters of a trillion dollars, a program involving a mix of tax cuts, public-private infrastructure projects, and expanded direct relief. Economists generally viewed this effort as a “stimulus” program designed to trigger a burst of economic activity to jump-start a stalled economic engine. Dollar estimates of aggregate US Federal bailouts and stimuli meant to overcome the crisis rose as high as the value of one year's Gross Domestic Product in the early years after the initial free fall. The Federal Reserve continues to offer a $75 billion transfusion every month into the veins of the yet ailing US economy.
The last three decades of the twentieth century brought forth a new economic consensus of not merely market primacy, but total market governance of economic life. Regulation of markets was believed to destabilize markets and not correct them. Public ownership and public services were seen as inefficient and untenable holdouts from market forces. Public and private life beyond the economic universe were subjected to markets, measured by market mechanisms, and analyzed through the lens of market-thought. Indeed, market-speak became the lingua franca unifying all of the social sciences and humanities in this era. With the fall of the Soviet Union, capital and its profit-driven processes penetrated every corner of the world. Only independent, anti-imperialist, market-wary movements like those led by Hugo Chavez, Evo Morales, and a few others gained some political success against the unprecedented global dominance of private ownership and market mechanisms.
While capitalism in its most unadorned, aggressive form enjoyed the moments of triumph, forces were at play undermining that celebration. Those forces crashed the party in 2000 in the form of a serious economic downturn, the so-called “Dot-com Recession” featuring a $5 trillion stock market value loss and the disappearance of millions of jobs. Economists marveled at how slowly the jobs were returning before the US and global economy were hit with another, more powerful blow in 2008. Clearly, the first decade of the twenty-first century will be remembered as one of economic crisis and uncertainty, a turmoil that continues to this day.
Apart from the human toll-- millions of lost jobs, poverty, homelessness, lost opportunities, destruction of personal wealth-- the crisis-ridden twenty-first century challenged the prevailing orthodoxy of unfettered markets and private ownership. Even such solid and fervent advocates of that orthodoxy as the Wall Street Journal, The Economist, and The Times were rocked by the crisis, questioning the soundness of classical economic principles. No principle is more dear and essential for the free marketeers than the idea that markets are self-correcting. While there may be short-term economic imbalances or downturns, free-market advocates believe that market movement always tends towards balance and expansion in the long run. Thus, a persistent, long term stagnation or decline is thought to be virtually impossible (with the caveat that there are no restrictions imposed on the market mechanism).
So when perhaps the greatest era of extensive global open-market economy experienced the most catastrophic economic collapse since the Great Depression, serious doubts arose about the fundamental tenets of market ideology. And during the darkest days of 2008 and 2009, a veritable ideological panic swept over pundits and experts of the Right and the “respectable” Left. Some rehabilitated an out-of-fashion economist and spoke of a “Minsky moment.” Liberals proclaimed the death of neo-liberalism (the popular term for the return to respectability of classical economics that began in the late 1970s). And still others foresaw a restoration of the interventionist economics represented by John Maynard Keynes, the economic theories that guided the capitalist economy through most of the post-war period. Even the most conservative economists conceded that market oversight, if not regulation, was both necessary and forthcoming.
Yet, change has not come forth. Despite over five years of decline and stagnation, despite a continued failure of markets to self-correct, free-market ideology continues to dominate both thinking and policy, clearly more faith-based than reality-based. In part, the resilience of open-market philosophy emanates from the shrewd manufacture of debt-fear by politicians and debt-mongering by financial institutions. By raising the shrill cry of exploding debt and impending doom, attention was diverted from the failings of the unfettered market and towards government austerity and massive debt reduction.
Clearly all the Nobel Prize-winning mathematical economic models thought to capture economic activity failed to predict and explain the 2008 crash. No amount of faith could disguise the monumental failure of raw, unregulated markets and the policies that promoted them. Two competing, sharply contrasting, and simplistic explanations came forward.
Defenders of free markets shamelessly, brazenly argue that government meddling thwarted the full and free operation of market mechanisms, thus, exacerbating what would have been a painful, but quickly resolved correction. Following the metaphor alluded to in this article’s title, heartburn was misdiagnosed, treated with radical surgery, only to create a life-threatening condition.
Of course this is self-serving nonsense.
Whatever else we may know about markets, we know this: since the process of deregulating markets began in earnest in the late 1970s, crises have only occurred more frequently, with greater amplitude, and harsher human consequences. Before that, and throughout the earlier post-war period, government intervention and regulation tended to forestall downturns, moderate their nadir, and soften the human toll. And a glimpse at an earlier period of market-friendly policy– the early years of the Great Depression-- demonstrates the folly of simply waiting for the promised correction: matters only grew worse. Then, as now, life proved to be a hard taskmaster; when market mechanisms really go awry, no one can afford to wait for self-correction.
Liberal and soft-Left opponents of an unfettered market offer a different argument. They saw the crisis as, not the absence of free markets, but the failure to oversee and regulate markets adequately. On this view, shared by nearly all liberals and most of the non-Communist Left, markets are fundamental economic mechanisms-- essential, if you will-- but best shepherded by government controls that steer markets back when they threaten to run amok.
Thus, the 2008 crisis would have been averted, they believe, if rules and regulations remained in place that were previously designed and implemented to protect the economy from market excesses; if we had not loosened the rules and regulations, we would never have experienced the disaster of 2008.
This view is bad history and even worse economics.
While liberals would like to believe that regulations and institutions spawned by the New Deal of the 1930s stabilized capitalism and tamed markets, the truth is otherwise. The massive war spending initiated sometime before the US entry into World War II solved the problems of growth and excess manpower associated with the long decade of stagnation, hesitant recovery, retreat, and further stagnation that befell the economy beginning in 1929.
Capitalism gained new momentum with post-war reconstruction. Productive forces were restored where they had been destroyed, refreshed where they were worn, and improved in the face of new challenges. This broad restructuring of capitalism produced new opportunities for both profit and growth. At the same time, the lesson of massive socialized, public, and planned military spending were not lost. New threats were conjured, new fears constructed. The hot war in Korea and the ever-expanding Cold War fueled an unprecedented US expansion. It is not inappropriate to characterize this post-war expansion as a period of “military-Keynesianism.” That is, it was an era of Keynesian policies of planned, extensive government spending married to military orders outside of the market. Insofar as it transferred a significant share of the capitalist economy to a command, extra-market sector, it marked a new stage of state-monopoly capitalism, a stage embracing some of the features of socialism.
But by the mid-1960s this “adjustment” began to lose its vitality. Profit growth, the driving force of capitalist expansion, started a persistent decline (for a graphic depiction of this trend, see the chart on page 103 of Robert Brenner's The Economics of Global Turbulence (New Left Review, May/June 1998).
The falling rate of profit coupled with raging inflation by the middle of the 1970s. The military-Keynesian solutions to capitalist crisis were spent, exhausted, proving inadequate to address a new expression of the instability of capitalism. Perhaps nothing signaled the bankruptcy of the prevailing (Keynesian) orthodoxy more than the desperate WIN campaign-- Whip Inflation Now of the Gerald Ford presidency, an impotent attempt to stem the crisis with mass will-power where intervention failed.
Contrary to the claims of liberals, social democrats and other reform-minded saviors of capitalism, the resultant shift in orthodoxy was not merely a political coup, a victory of retrograde ideology, but instead it was an unwinding of the failed Keynesian policies of the moment. Thus, the Thatcher/Reagan “revolution” was only the vehicle for a dramatic adjustment of the course of capitalism away from a spent, ineffective paradigm.
With Paul Volker assuming the chairmanship of the Federal Reserve and the beginnings of systematic deregulation, the Carter administration planted the seeds of the retreat from the old prescriptions. Volker, with his growth-choking interest rates, ensured a recession that would sweep away any will to resist belt-tightening. But it took the election of the dogma-driven Ronald Reagan to emulate the UK's Margaret Thatcher and use the occasion to eviscerate wages and benefits in order to pave the way for profit growth.
The cost of restoring life to the moribund capitalist economy was borne by the working class. Foolishly, the stolid, complacent labor leadership had banked on the continuation of the tacit Cold War contract: Labor supports the anti-Communist campaign and the corporations honor labor peace with consistent wage and benefit growth. Instead, profit growth was restored by suppressing the living standards of labor-- cutting “costs.” A vicious anti-labor offensive ensued.
While the loyal opposition insists on portraying the break with Keynesian economics as something new (commonly dubbed “neo-liberalism”), it was, in fact, a surrender to the old. The bankruptcy of bourgeois economics could offer no new, creative answer to capitalist crisis; it could only cast off a failed approach and restore profits by relentlessly squeezing the labor market.
This response could and only did succeed because of the extraordinary weakness of the labor movement. As the profit rate began to rebound, labor lacked the leadership and will to not only secure a share of productivity increases, but to even defend its previous gains.
Thus, capitalism caught a second wind by retreating from the post-war economic consensus and reneging on the implicit labor peace treaty. Profit growth returned and the system sailed on.
But the continuing advance of deregulation and privatization brought with it a return to the unbuffered anarchy of markets. The Savings and Loan crises of the 1980s and 1990s and the stock market crash of October 1987 were all harbingers of things to come and reflections of deeper instability.
With the fall of the Soviet Union and Eastern European socialism, a huge new market was delivered to the global capitalist system, a market that further energized the opportunities for capital accumulation and expanded profits. Millions of educated, newly “free” (free of security, safe working conditions, legal protection, and organization) workers joined reduced-wage and low-wage workers from the rest of the world to form a vast pool of cheap labor. From the point of view of the owners of capital, paradise had truly arrived. Thus, an immense, one-sided class war and the wage-depressing integration of millions of new workers set capitalism on a profit-restoring path to health, putting the now impotent Keynesian orthodoxy in the rear-view mirror. Few would guess that this trip would endure for less than two decades before capitalism would again encounter serious crises.
Significant economic growth in a period of weak labor necessarily produces galloping inequality. With corporate and wealthy-friendly tax policies, many government redistribution mechanisms are starved or dismantled. The flow of wealth accelerates to corporations and the super-rich and away from those who work for a living. The coffers of the investor class swell with money anxious for a meaningful, significant return on investment. As the process of capital accumulation intensifies, fewer and fewer safe, high-yield productive investment opportunities arise to absorb the vast pool of ever-expanding wealth concentrated in the hands of a small minority.
In a mature capitalism, new, riskier avenues-- typically removed from the productive sector-- emerge to offer a home for capital and promise a return. Bankers and other financial “wizards” compete ferociously to construct profit-generating devices that promise more and more. These instruments grow further and further from productive activity. Moreover, their resultant “profits” are ever further removed from real, tangible, material value. Instead, they virtually exist as “hypothetical” capital, or “counter-factual” capital, or “future-directed” capital, or “contingent” capital. Some Marxists rush to label this product of speculation as “fictitious,” but that obscures its ultimate origin in exploitative acts in the commodity-production process. It is this expansion of promissory capital that fuels round after round of speculative investment lubricated with greater and greater debt.
Metaphors abound for the end game of this process: “bubbles,” “house of cards,” etc. But the ultimate cause of crisis is the failure to satisfy the never ending search for return. That is, the cause of crisis resides in the process of accumulation intrinsic to capitalism and the inability to sustain a viable return on an ever enlarging pool of capital and promissory capital. Capitalists measure their success by how their resources are fully and effectively put to use to generate new surpluses. That is the deepest, most telling sense of “rate of profit.” It is the gauge guiding the capitalist-- an effective rate of profit based on accumulated assets. Apart from official and contrived measures of profit rates, the growth of accumulated capital, weighed against the available investment opportunities, drives future investment and determines the course of economic activity.
In 1999, the profitability of the technology sector dropped precipitously as a result of the unrealizable investment of billions of yield-seeking dollars in marginal Dot.com companies and internet services. As an answer to the problem of over-accumulation, investing in the fantasies of 20-year-old whiz kids proved to be as irrational as sane observers thought it to be. The crash followed.
And again in the heady days of 2005, buying bizarre securities packed with the flotsam and jetsam of mortgage shenanigans seemed a way of finding a home for vast sums of “unproductive” capital. After all, capital cannot remain idle; it must find a way to reproduce itself. But what to do with the earnings from reselling the demand-driven securities? More of the same? More risk? More debt? And repeat?
The portion of US corporate profits “earned” by the financial sector grew dramatically from 1990 until the 2008 crash, touching nearly 40% in the mid-2000s and demonstrating the explosion of alternative investment vehicles occupying idle capital. It is crucial to see a link, an evolutionary necessity, between the restoration of profitability, intense capital accumulation, and the tendency for profitability to be challenged by the lack of promising investment opportunities. It is not the whim of bankers or the cleverness of entrepreneurs that drives this process, but the logical imperative of capital to produce and reproduce.
Some Comments and Observations
There are other theories of crisis offered by the left. One theory, embraced by many Communist Parties, maintains that crisis emerges from over-production. Of course, in one sense, over-accumulation is a kind of overproduction, an overproduction of capital that lacks a productive investment destination. But many on the left mean something different. They argue that capitalism produces more commodities in the market place than impoverished, poorly paid workers can purchase. There are two objections to this: one theoretical, one ideological.
First, evidence shows that a slump in consumption or a spike in production does not, in fact, precede economic decline in our era. If overproduction or its cousin, under-consumption, were the cause of the 2008 downturn, data would necessarily show some prior deviation from production/consumption patterns. But there are none. Instead, the reverse was the case: the crisis itself caused a massive gap between production and consumption, exacerbating the crisis. The threat of oversupply lingers in the enormous deflationary pressure churning in the global economy. Despite the fact that consumer spending is such a large component of the US economy, the effects of its secular stagnation or decline has been largely muted by the expansion of consumer credit and the existence, though tenuous, of social welfare programs like unemployment insurance.
Second, if retarded or inadequate consumption were the cause of crises, then redistributive policies or tax policies would offer a simple solution to downturns, both to prevent them and reverse them. Thus, capitalism could go on its merry way with little fear of crisis. Certainly this is the ideological attraction of overproduction explanations of crises: they allow liberals and social democrats to tout their ability to manage capitalism through government policies.
However they cannot manage capitalism because crises are located, not in the arena of circulation (matching production and consumption), but in the profit-generating mechanism of capitalism, its veritable soul.
Because of the centrality of profit, the over-accumulation explanation has an affinity with another theory of crisis: Marx's argument for the tendency of the rate of profit to fall. In fact, it can be viewed as a contemporary version of the argument without nineteenth-century assumptions.
Happily, many commentators today have revisited the theory outlined in Volume III of Capital, finding a relevance ignored throughout most of the twentieth century. Only a handful of admirers of Marx's work kept the theory alive in that era, writers like Henryk Grossman, John Strachey, and Paul Mattick. Unfortunately, today's admirers, like the aforementioned predecessors, share the flaw of uncritically taking Marx's schema to be Holy Grail. For the most part, Marx used very occasional formalism as an expository tool and not as the axioms of a formal system. Those trained in modern economics are prone to leap on these formulae with an undergraduate zeal. They debate the tenability of a model that depicts the global economy as a collection of enterprises devouring constant capital at a greater rate than employment of labor and mechanically depressing the rate of profit. This is to confuse simplified exposition with robust explanation. Much can be learned from Marx's exposition without turning it into a scholastic exercise.
Among our left friends, it has become popular to speak of the crisis and era as one of “financialization.” This is most unhelpful. Indeed, the crisis had much to do with the financial sector; indeed, the financial sector played and is playing a greater role in the global economy, especially in the US and UK; but conjuring a new name does nothing to expose or explain the role of finance. Like “globalization” in an earlier time, the word “financialization” may be gripping, fashionable, and handy, but it otherwise hides the mechanisms at work; it’s a lazy word.
There is a point to this somewhat lengthy, but sketchy journey through the history of post-war capitalism. Hopefully, the journey demonstrates or suggests strongly that past economic events were neither random nor simply politically driven. Instead, they were the product of capitalism's internal logic; they sprang from roadblocks to and adjustments of capitalism's trajectory. As directions proved barren, new directions were taken. While it is not possible to rule out further maneuvers addressing the inherent problem of over-accumulation, the problem will not go away. It will return to haunt any attempt that presumes to conquer it once and for all. And if capitalism carries this gene, then it would be wise to look to a better economic system that promises both greater stability and greater social justice. Of course, finding that alternative begins with revisiting the two-hundred-year-old idea long favored by the working class movement: socialism. Affixed to that project is the task of rebuilding the movement, the political organization needed to achieve socialism.
As things stand in today's world, there are most often only two meager options on the regular menu: one, to save and maintain capitalism with the sacrifices of working people and the other, to save and maintain capitalism with the sacrifices of working people and a token “fair share” sacrifice on the part of corporations and the rich. Neither is very nourishing.
The first option is based on the thin gruel of “trickle down” economics and the nursery-rhyme wisdom of “a rising tide raises all boats.” It is the prescription of both of the major US political parties, Japan's Abe, the European center parties, and UK Labour.
The second option promises to save capitalism as well, but through a bogus fair distribution of hardship across all classes. This is the course offered by most European left parties and even some Communist Parties.
But a system-- capitalism-- that is genetically disposed to extreme wealth distribution and persistent crisis does not make for an appetizing meal. Instead, we need to dispense with programs that promise to better manage capitalism, as Greek Communists (KKE) like to say. That is for others who are at peace with capitalism or underestimate its inevitable failings.
The only answer to the heart failure of capitalism is to change the diet and put socialism on the menu.