Global capitalism is currently in the grip of the most severe economic contraction since the Great Depression of the 1930s. The ultimate depth and duration of the downturn remain to be seen, but there are many indicators that point to a lengthy period of massive unemployment in the imperialist camp and a steep fall in living standards in the so-called developing countries.
The bourgeois press is relentless in seizing on even the smallest signs of possible “recovery” to reassure consumers and investors that better days are just around the corner. This paternalistic “optimism” recalls similar prognostications following the 1929 Wall Street crash: “Depression has reached or passed its bottom, [Assistant Secretary of Commerce Julius] Klein told the Detroit Board of Commerce, although ‘we may bump along’ for a while in returning to higher trade levels” (New York Times, 19 March 1931). The next month, in a major speech approved by President Herbert Hoover, Klein’s boss, Secretary of Commerce Robert P. Lamont, reiterated this upbeat projection:
“Declaring that after such industrial cataclysm, time and the slow working of economic readjustments were necessary before the world could return to economic health and vigor, Mr. Lamont said that there could be no doubt that many of these necessary readjustments had been and are being made and that business even now was responding sluggishly to the stimulus of these needed changes. He added that whatever were the causes of our present difficulties, the corrective influences now had been at work for many months.”
—New York Times, 30 April 1931
But Hoover’s stimulus failed to produce the anticipated “corrective influences” and the depression dragged on for years, turning the 1930s into a lost decade of unthinkable hardship for tens of millions of ordinary working people.
Today, parallels with the 1930s are becoming increasingly obvious:
“With the release of the jobs report on Friday, the broadest measure of unemployment and underemployment tracked by the Labor Department has reached its highest level in decades. If statistics went back so far, the measure would almost certainly be at its highest level since the Great Depression.
“In all, more than one out of every six workers—17.5 percent—were unemployed or underemployed in October.”
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“Nearly 16 million people are now unemployed and more than seven million jobs have been lost since late 2007.
“Officially, the Labor Department’s broad measure of unemployment goes back only to 1994. But early this year, with the help of economists at the department, The New York Times created a version that estimates it going back to 1970. If such a measure were available for the Depression, it probably would have exceeded 30 percent.”
—New York Times, 8 November 2009
The U.S. economy, which grew by 2.1 percent in 2007, stagnated in 2008 and shrank by 2.5 percent in 2009. The economies of the Eurozone and Japan also contracted, by 3.9 and 5.3 percent respectively (IMF, World Economic Outlook Update, January). Gross fixed capital formation in the advanced industrial economies, which fell 2.1 percent in 2008, was projected to drop another 12.4 percent in 2009. Meanwhile government deficits and levels of national debt have climbed sharply, particularly in the U.S. Some of this is attributable to declining tax revenues as unemployment rises and incomes fall, but much of it stems from the costs of the failed military adventures in Iraq and Afghanistan, and the government bailout of Wall Street speculators that Neil M. Barofsky, inspector general for the Troubled Asset Relief Program, estimates “could end up costing $3 trillion” (New York Times, 21 July 2009).
The effect of a prolonged downturn in a “globalized” economy, characterized by fabulous wealth for a handful at the top and desperate poverty for billions at the bottom, will inevitably magnify the already enormous disparities. For those in the neocolonies struggling to eke out a living on a dollar or two a day, this crisis will literally be a matter of life and death.
After the experience of the 1930s, bourgeois economists paid a good deal of attention to the origins of capitalism’s inherent boom-bust tendency, but in recent decades most considered that the problem of periodic crises had been solved. Paul Krugman, winner of the 2008 Nobel Prize for Economics, recalled how a previous Nobel laureate declared that the business cycle had been tamed:
“In 2003 Robert Lucas, a professor at the University of Chicago and winner of the 1995 Nobel Memorial Prize in Economics, gave the presidential address at the annual meetings of the American Economic Association. After explaining that macroeconomics began as a response to the Great Depression, he declared that it was time for the field to move on: the ‘central problem of depression-prevention,’ he declared, ‘has been solved, for all practical purposes.’”
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“Lucas wasn’t alone in claiming that depression-prevention was a solved problem. A year later Ben Bernanke, a former Princeton professor [who currently chairs the U.S. Federal Reserve]…gave a remarkably upbeat speech titled ‘The Great Moderation,’ in which he argued, much as Lucas had, that modern macroeconomic policy had solved the problem of the business cycle….
“Looking back from only a few years later…these optimistic pronouncements sound almost incredibly smug.”
—The Return of Depression Economics and the Crisis of 2008
Liberals like Krugman trace the origin of the current difficulties of international capitalism to the dismantling of the regulatory framework established in the United States in the 1930s. This explanation comes with easily identifiable “bad guys” (Bernie Madoff and the unindicted crooks running Goldman Sachs et al) as well as a ready-made solution—to simply reverse the “neoliberal” measures introduced by Ronald Reagan, Margaret Thatcher and their counterparts. But the present crisis is not simply a matter of bad policies pursued by short-sighted politicians. The union-bashing, deregulatory program of the neoliberals was itself a response to the stagnation of the major capitalist economies in the mid-1970s that followed two decades of relatively high growth rates and rising living standards.
The Great Depression, which had been triggered by the bursting of a U.S. stock-market bubble, was only overcome through the massive devastation of World War II—a cataclysm that killed some 70 million people and shattered the economies of much of the advanced capitalist world. This unprecedented social catastrophe resulted in a marked leftward shift of the entire political terrain, particularly in continental Europe, where most of the traditional ruling elites were discredited by their collaboration with the Nazis. Soviet-style “socialism” was seen as an appealing alternative by millions of workers in Western Europe and beyond. The physical destruction of most of Europe’s and Japan’s industrial plant required massive capital investments (often financed by U.S. “reconstruction” money), which, combined with pent-up demand from the depression and wartime austerity, produced conditions for robust growth. The triumphant American bourgeoisie sought to secure its position at home with a postwar “labor accord” that entrenched a viciously anti-communist trade-union bureaucracy, while conceding significant improvements in wages, living standards and social services (see “American Labor Besieged,” 1917 No. 19). In Europe, the generally more combative workers’ movement was also able to wrest concessions from their rulers.
Between 1950 and 1973, gross domestic product (GDP) in the countries of the Organization for Economic Cooperation and Development grew by an average of 4.3 percent annually. During this period most bourgeois economists agreed that a Keynesian “mixed economy” could ensure continual expansion with only relatively mild cyclical fluctuations. Most mainstream observers attributed the global recession of 1974-75, which shattered this comfortable illusion, to a combination of a spike in crude oil prices and a “wage-price spiral” caused by excessively powerful unions. In fact, this conjunctural crisis was a manifestation of a deeper structural decline in the profit rate beginning in the 1960s. The response of leading sections of international capital was to rip up the “postwar consensus” and return to a more bare-knuckled, old-fashioned brand of capitalist rule.
Reagan’s successful smashing of the air traffic controllers’ union in 1981 and Thatcher’s victory over the British miners a few years later marked important victories for the capitalists’ campaign to increase profits at the expense of wages and social entitlements. In the U.S., the workday was lengthened, wages driven down and many workers compelled to take on multiple jobs to make ends meet. In the imperialist heartlands, deindustrialization increased the pool of unemployed workers and undermined the unions, as corporations shifted production to “newly industrializing” areas in Latin America and East Asia where wages were lower. At the same time, manufacturers were investing heavily in robotics and computerization and introducing “lean production” techniques in a bid to raise productivity.
A key component of what became known as “neoliberalism” involved trade agreements aimed at eliminating tariff protection for domestic producers, particularly in “developing” (i.e., neocolonial) countries, and removing restrictions on capital mobility across national borders. While free-market apologists hailed the shift of manufacturing to the Third World as evidence that capital was leveling the international playing field, the reality was rather different. Thomas Pogge of Yale University found that whereas per capita income in countries making up the richest 10 percent of the world’s population was 60 times greater than that of the poorest 10 percent in 1980, it had increased to 122 times by 2005. To illustrate the grotesque inequalities of global capitalism, Pogge calculated that “Doubling the wealth of all in the bottom four quintiles would still take just 15.3 percent of the wealth of the top 1 percent” (Dissent, Winter 2008).
The Reagan/Thatcher neoliberal program also involved large-scale deregulation of finance, transport and communications to unleash the “creative power” of market competition and open up new avenues for profitable investment. The deregulation of the banking system in the U.S., which set a pattern for the rest of the “developed” countries, had unintended consequences. In 2005, Harry Shutt, formerly of the Economist Intelligence Unit, observed that by permitting financial institutions to issue virtually unlimited credit, state authorities were, in effect, ceding to them the power to create money:
“For, by giving private enterprise, particularly in the financial sector, increased license to create and allocate credit while yet maintaining an implicit or explicit guarantee that the state would underwrite any major losses, the authorities were giving a powerful incentive to irresponsible, or even criminal, behaviour….Moreover, in a climate of intensifying stagnation, where corporate profitability was ever harder to sustain at minimum acceptable levels, the temptation for corporate managers not merely to allocate funds to excessively risky investment but to resort to outright fraud became increasingly irresistible.”
—The Decline of Capitalism
Neoliberalism produced a major upward redistribution of wealth. Between 1974 and 2004, the median annual income of American men in their thirties fell from $40,000 to $35,000 a year in constant dollars, while “CEO pay increased to 262 times the average worker’s pay in 2005 from 35 times in 1978” (Associated Press, 25 May 2007). At the same time, the capitalists reduced systemic overhead costs by slashing government social spending and cutting corporate taxes:
“Over the three decades from 1972 to 2001, the wages and salaries of even those Americans at the 90th percentile (those doing better than 90 percent of their fellow citizens) experienced income gains of only 1 percent a year on average. Those at the 99.9th percentile saw their income rise by 181 percent over these years (to an income averaging almost $1.7 million). Those at the 99.99th percentile had income growth of 497 percent.”
—Monthly Review, June 2007
The fall in real wages and deregulation of banking, transportation and communications produced a partial restoration of profitability (see Fred Moseley, “The United States Economy at the Turn of the Century: Entering a New Era of Prosperity?”), though GDP growth and capital accumulation rates remained lower than in the 1950s and early 1960s. Big capital increasingly turned to financial speculation in search of higher returns. This pushed up nominal profit rates during the 1990s and 2000s but, as has become evident, much of this was fictitious.
The expansion of the financial bubble was presided over by Federal Reserve Chairman Alan Greenspan, a disciple of Ayn Rand and Milton Friedman (high priest of the “Chicago School” of free-market theology). During Greenspan’s tenure at the Fed (from 1987 to 2005) total public and private debt in the U.S. soared, from roughly $20 to $50 trillion, while the financial sector’s share of gross profits quadrupled from 10 percent in the early 1980s to 40 percent in 2006 (see Robert Chernomas, “The Economic Crisis: Class Warfare from Reagan to Obama,” in Bankruptcies and Bailouts). This was paralleled by a shift in the ratio of U.S. GDP to total financial assets (including bank deposits, stocks, bonds and other securities), from 1:4 to 1:10 in the same period. A similar process was underway internationally. In 1980, total global financial assets were valued at 119 percent of total production; by 2007 this had tripled to 356 percent. Mitsubishi Securities estimated the size of the global “real economy” in 2008 to be $48.1 trillion, compared to a global financial economy (stocks, securities and deposits) of $151.8 trillion.
The internationalization of financial speculation, which allowed highly-leveraged institutions to make risky bets in overseas markets, ensured that a major problem anywhere in the system would quickly become a problem everywhere. This became evident as American real-estate values began to sour and a chaotic chain reaction rocked global credit markets in 2008. In the U.S., home mortgages had been pooled and “securitized” for decades without problems. Investors bought shares of the total payments from long-term “prime” mortgages issued to borrowers with substantial equity in their properties and sufficient income to make the payments. Defaults were unusual, so these investments were generally considered safe. This changed with the introduction of “collateralized debt obligations” (CDOs) in the 1990s, which expanded the mortgage pool beyond—and eventually far beyond—prime mortgages.
Millions of working people lured by the banks into taking out these “subprime” mortgages did so in an attempt to maintain their living standards in the face of falling real wages. To offset concerns about higher risks, the CDOs were tiered—with “senior” shareholders entitled to get paid before others. This was sufficient for the rating agencies to grade them as “triple-A” on the grounds that even if many borrowers defaulted there would still be enough cash flow to cover the “seniors.” The triple-A rating in turn attracted pension funds and other institutional investors looking for better rates of return than government or corporate bonds offered. To meet the increased demand, those packaging the CDOs simply ventured deeper into subprime territory.
Illusions that CDOs, “credit default swaps” and other high-return “derivative” investments could somehow indefinitely defy gravity did not survive the bursting of the speculative housing bubble in the U.S. The macro irrationality generated by the innovations of Wall Street’s “financial engineering” was of no concern to most of the participants so long as their portfolios continued to grow, as BusinessWeek’s Paul M. Barrett observed:
“It’s rational for a mortgage company to loan $500,000 to a borrower who can’t pay back the money if the lender can immediately sell the loan to a Wall Street investment bank. It’s also rational for the investment bank to bundle a bunch of risky home loans and resell them—for a tidy profit, of course—to hedge funds as a bond. Such bonds, known as mortgage-backed securities, were attractive to hedge funds and other investors because they paid relatively high interest. Sure, the bonds were risky (remember that the home buyers never really should have qualified as borrowers in the first place), but many investors bought a form of insurance against the bonds’ defaulting. The sellers of this insurance, called credit default swaps, assumed they’d be able to collect premiums and never have to pay out very much because real estate prices would keep rising forever—so those original dubious borrowers would be able to refinance their unrealistic loans. Everyone felt especially rational about all of this because prestigious credit-rating agencies issued triple-A stamps of approval for the exotic, high-interest securities. Never mind that the rating agencies were paid—i.e., bought off—by the very investment banks peddling the mortgage-backed securities.”
—New York Times Book Review, 15 November 2009
The rapid deflation of the American real-estate market produced a panic which, in September 2008, brought the entire financial system to the brink of collapse. To avert a total meltdown, the U.S. government agreed to cover the liabilities of institutions deemed “too big to fail.” While the con artists running Ponzi schemes had their losses made good with hundreds of billions of dollars from the public coffers, millions of their victims watched as their mortgages went “underwater” (the market price of their houses shrinking beneath the amount still owed).
The bailout of the financial racketeers in the U.S. (paralleled by similar interventions in other rich countries) provides an object lesson in the realities of class politics. This has not been entirely lost on the public, which is deeply disturbed that the architects of the disastrous collapse not only escaped any consequences, but are now collecting new windfall profits for supposedly helping to clean up the mess they made.
In November 2008, Timothy Geithner, who is currently U.S. secretary of the treasury but was then heading the Federal Reserve Bank of New York, decided to bail out American International Group (AIG). AIG got into trouble when it was unable to cover credit default swaps it had issued to Goldman Sachs and various other high rollers to insure them against losses on CDOs involving subprime mortgages. Robert Scheer, a former reporter for the Los Angeles Times, observed:
“Now Geithner’s Treasury concedes that AIG ‘should never have been allowed to escape tough, consolidated supervision.’ But none of AIG’s scams were regulated, nor were any of the others at the center of the larger financial debacle, because of laws pushed through Congress by Geithner’s boss, Lawrence Summers, when they both were in the Clinton administration. Specifically, they prevented regulation of those opaque CDOs and CDSs [credit default swaps] that would come to derail the world’s economy.
“As the inspector general’s report stated: ‘In 2000, the [Clinton administration-backed] Commodity Futures Modernization Act (CFMA)…barred the regulation of credit default swaps and other derivatives.’ Why did the financial geniuses of the Clinton administration seek to prevent that obviously needed regulation? Because the Clintonistas believed the Wall Street guys knew what they were doing….
“Sounds nonsensical today: The inspector general’s report notes that AIG, because of the deregulatory law that Summers and Geithner pushed through, was ‘able to sell swaps on $72 billion worth of CDOs to counterparties without holding reserves that a regulated insurance company would be required to maintain.’ But why, then, is Summers once again running the show with Geithner when both have made careers of exhibiting total contempt for the public interest?”
—www.truthdig.com, 25 November 2009
Scheer and other liberals call for increased government supervision and a return to the policies enacted under Franklin Delano Roosevelt. But FDR was responding to a powerful labor movement and growing leftist sentiment in favor of a radical overhaul of the entire social system. After decades of capitulation by the leaders of the unions in the U.S. and other advanced capitalist countries, the workers’ movement is not seen as capable of threatening the interests of the ruling elites. So instead of a policy of populist concessions, the Obama administration, which is willing to spend trillions of dollars bailing out the Wall Street speculators, is issuing dark warnings of “hard choices” ahead because “the country must live within its means.”
Even during the post-war “boom” years, a significant percentage of the population in the richest countries was condemned to chronic poverty. Today, the vast majority is facing the prospect of sharply declining living standards as jobs disappear and wages fall. Pensions, social security, unemployment insurance and what remains of gains won through hard class struggle in the past are coming under increasing pressure.
Marxism offers much more than a moral critique of the irrationality of capitalism. In the Communist Manifesto, Karl Marx and Frederick Engels referred to “crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly.” In the third volume of Capital, Marx analyzed how such events result from the inner dynamics of capital accumulation, which create a tendency for the rate of profit to fall, and observed that during crises “production comes to a standstill not at the point where needs are satisfied, but rather where the production and realization of profit impose this.”
Financial meltdowns, recessions and depressions must be understood in relation to the economic structure and development of capitalist production. Under capitalism, value (represented by money) is created at the point of production by “living labor,” i.e., the activity of human beings producing commodities. By setting in motion the means of production, workers conserve and transfer the pre-existing value of “constant capital” (raw materials, machinery, etc.) to the final product. But their labor also creates two streams of new value: “variable capital,” which is equivalent to their wages (i.e., the money with which the capitalist purchases the unique commodity known as “labor power”) and “surplus value,” from which all profits, interest and ground rents ultimately derive.
The dynamics of capitalist competition compel each enterprise to seek to maximize profits by underselling its competitors and enlarging its market share. To this end, capitalists attempt to gain an advantage by lowering production costs through technological improvements that raise labor productivity. To remain competitive, rival firms are forced to introduce similar technology, thus negating the initial advantage of the original innovators. The net effect is to increase the total constant capital invested while reducing the proportional weight of labor inputs—thereby raising what Marx referred to as the “organic composition of capital” (the ratio of constant capital to variable capital plus surplus value). A rise in the organic composition is associated with increasing productivity, but also with a long-term decline in the average rate of profit, i.e., the return on total capital outlay.
The rate of profit is the basic regulator of economic life under capitalism, and its upper limit is set by the ratio of surplus value to the constant capital stock. The fundamental contradiction of “free-market” economics is that the sole source of the surplus value from which profit derives (living labor) is systematically displaced from the production process by capitalists compelled by competition (and the basic antagonism between bosses and workers) to reduce costs by introducing labor-saving technology. This increases the rate of exploitation (i.e., the ratio of surplus value to variable capital) but tends to depress the average rate of profit over time. To be sure, there are counter-tendencies that slow the decline, and the process is periodically interrupted by the destruction of a portion of constant capital during crises and wars. Yet in the long run no countervailing force is sufficient to negate the tendency of surplus value to decline in relation to the stock of constant capital.
Marx’s observation that “[t]he true barrier to capitalist production is capital itself” refers to the fact that the tendency of the rate of profit to fall is embedded in the very structure of capitalism. Empirical analysis of the performance of major capitalist economies in recent decades tends to conform to Marx’s projections, as Murray E.G. Smith outlined in a talk reprinted in 1917 No. 31. Smith’s conclusions are paralleled in broadly similar studies produced by Gérard Duménil and Dominique Lévy, Fred Moseley, Anwar Shaikh and Ahmet Tonak. The current crisis is a violent reassertion of the capitalist law of value, i.e., the relatively depressed real profit rate has pulled back down to earth a nominally higher profit rate artificially inflated by dividends on fictitious (unproductive) capital.
The basic irrationality of capitalism makes both economic and political crises inevitable. There is already evidence of rising bitterness with the “free-market” economy. A 9 November 2009 BBC poll commissioned on the occasion of the 20th anniversary of the fall of the Berlin Wall found “widespread dissatisfaction with free-market capitalism.” Only “11% of those questioned across 27 countries said that it was working well” whereas “23% of those who responded…feel it is fatally flawed. That is the view of 43% in France, 38% in Mexico and 35% in Brazil.” These numbers, already high, are likely to go up if the economic situation continues to deteriorate.
Yet disenchantment will not automatically translate into increased support for a socialist alternative. With protectionism and xenophobia on the rise, immigrants, refugees and migrant laborers in the advanced countries are being scapegoated for the system’s failures. This underscores the burning necessity of mobilizing the workers’ movement to crush the nuclei of fascist formations like the British National Party and abort their efforts to direct popular distress into attacks on the organized labor movement and the oppressed (see 1917 No. 31).
In the early years of the 20th century, and again in the 1930s, attempts by each of the major capitalist powers to solve their economic problems at the expense of their rivals produced trade wars, economic blockades and eventually world wars. The first great inter-imperialist conflict created the preconditions for the successful workers’ revolution in Russia in 1917. Krugman, whose breadth of vision distinguishes him from many of his liberal colleagues, is well aware that the counterrevolutionary destruction of the degenerated Soviet workers’ state in 1991 was a decisive factor in shaping the world we live in today:
“This is a book about economics; but economics inevitably takes place in a political context, and one cannot understand the world as it appeared a few years ago without considering the fundamental political fact of the 1990s: the collapse of socialism, not merely as a ruling ideology, but as an idea with the power to move men’s minds.”
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“For the first time since 1917, then, we live in a world in which property rights and free markets are viewed as fundamental principles, not grudging expedients; where the unpleasant aspects of a market system—inequality, unemployment, injustice—are accepted as facts of life. As in the Victorian era, capitalism is secure…because nobody has a plausible alternative.
“This situation will not last forever. Surely there will be other ideologies, other dreams; and they will emerge sooner rather than later if the current economic crisis persists and deepens.”
There will inevitably be revolts against a system characterized by “inequality, unemployment, injustice,” where factories are closed, production cut back and the lives of billions shattered. The pathology of capitalism is also apparent in the wholesale degradation of the natural environment upon which all life depends. Croplands are turned into deserts, tropical rainforests are clear cut, marine life is wiped out by factory fishing, the ozone layer is severely depleted and climate change threatens massive destruction. All of this is the direct result of the pursuit of maximum profit—a single metric that assigns no particular value to clean air and water and regards human health and well-being as “externalities.”
Krugman and his fellow bourgeois ideologues are not entirely wrong to talk of “the collapse of socialism.” In organizational terms, the socialist movement is weaker today than it has been for a century and a half. Moreover much of what passes for the “far left” no longer even pretends to uphold the tradition represented by the giants of revolutionary socialism (see our article on France’s “Nouveau Parti anticapitaliste” elsewhere in this issue). Yet capitalism’s defenders engage in wishful thinking to imagine that a future mass turn toward finding a plausible alternative to capitalism will not arrive at the need to “expropriate the expropriators.” A modern economy can only transcend the anarchic chaos of capitalism through through reorganizing production on a collectivized, i.e., socialist, basis. Only socialism offers a realistic plan for employing the enormous technological capacity developed under capitalism to ensure a secure, comfortable and sustainable material existence for all.
The first step on the road to the socialist future is a revolution to uproot global capitalism and establish the direct rule of the working class and the oppressed. This in turn requires the forging of a revolutionary party committed to the political program elaborated by Marx, Lenin and Trotsky. There is no other way for humanity to escape the madhouse of capitalism.