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.
Bad
Faith
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.
Diagnosis?
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.
Zoltan
Zigedy
zoltanzigedy@gmail.com
