the financialization of accumulation

8/8/2019 The Financialization of Accumulation

1/33

Monthly Review October 2010, Volume 62, Number 5 Page 1 of 33

The Financialization of AccumulationJohn Bellamy Foster

In the way that even an accumulation of debts can appear as an accumulationof capital, we see the distortion involved in the credit system reach its

culmination.

Karl Marx1

In 1997, in his last published article, Paul Sweezy referred to the

financialization of the capital accumulation process as one of the three maineconomic tendencies at the turn of the century (the oth er two were the growth ofmonopoly power and stagnation).2 Those familiar with economic theory willrealize that the phrase was meant to be paradoxical. All traditions of economics,to varying degrees, have sought to separate out analytically the role of financefrom the real economy. Accumulation is conceived as real capital formation,which increases overall economic output, as opposed to the appreciation offinancial assets, which increases wealth claims but not output. In highlightingthe financialization of accumulation, Sweezy was therefore pointing to what canbe regarded as the enigma of capital in our time. 3

To be sure, finance has always played a central, even indispensable, role incapital accumulation. Joseph Schumpeter referred to the creation of credit adhoc as one of the defining traits of capitalism. The money market, he added,is alwaysthe headquarters of the capitalist system. 4 Yet somethingfundamental has changed in the nature of capitalism in the closing decades ofthe twentieth century. Accumulationreal capital formation in the realm ofgoods and serviceshas become increasingly subordinate to finance. Keynesswell-known fear that speculation would come to dominate over productionseems to have finally materialized.

When Sweezy made his observation with respect to the financialization ofcapital accumulation more than a decade ago, it drew very little attention. Buttoday, following the greatest financial and economic crisis since the GreatDepression, we can no longer ignore the question it raises. Now more than ever,as Marx said, an accumulation of debts appears as an accumulation ofcapital, with the former increasingly effacing the latter. As shown in Chart 1,net private borrowing has far overshot total net private fixed investment over the


2/33


last third of a centuryin a process culminating in 2007-2009 with the burstingof the massive housing-financial bubble and the plummeting of both borrowingand investment.5

Indeed, since the 1970s we have witnessed what Kari Polanyi Levittappropriately called The Great Financialization. 6 Financialization can bedefined as the long-run shift in the center of gravity of the capitalist economyfrom production to finance. This change has been reflected in every aspect of theeconomy, including: (1) increasing financial profits as a share of total profits;(2) rising debt relative to GDP; (3) the growth of FIRE (finance, insurance, andreal estate) as a share of national income; (4) the proliferation of exotic andopaque financial instruments; and (5) the expanding role of financial bubbles. 7In 1957 manufacturing accounted for 27 percent of U.S. GDP, while FIREaccounted for only 13 percent. By 2008 the relationship had reversed, with the

share of manufacturing dropping to 12 percent and FIRE rising to 20 percent.8Even with the setback of the Great Financial Crisis, there is every indication thatthis general trend to financialization of the economy is continuing, withneoliberal economic policy aiding and abetting it at every turn. The questiontherefore becomes: How is such an inversion of the roles of production andfinance to be explained?


3/33


Keynes and Marx

In any attempt to address the role of finance in the modern economy, the workof John Maynard Keynes is indispensable. This is especially true ofKeynessachievements in the early 1930s when he was working on The GeneralTheory

of Employment, Interest and Money (1936). It is here, in fact, that Marx figurescentrally in Keyness analysis.

In 1933 Keynes published a short piece called A Monetary Theory ofProduction, which was also the title he gave to his lectures at the time. Hestressed that the orthodox economic theory of exchange was modeled on thenotion of a barter economy. Although it was understood that money wasemployed in all market transactions under capitalism, money was nonethelesstreated in orthodox or neoclassical theory as being in some sense neutral. Itwas not supposed to affect the essential nature of the transaction as onebetween real things. In stark opposition, Keynes proposed a monetary theory ofproduction in which money was one of the operative aspects of the economy.

The principal advantage of such an approach was that it established howeconomic crises were possible. In this, Keynes was launching a direct attack onthe orthodox economic notion of Says Law that supply created its owndemandhence, on the view that economic crisis was, in principle, impossible.Challenging this, he wrote, booms and depressions are phenomena peculiar toan economy in whichmoney is not neutral. 9

In order to develop this crucial insight, Keynes distinguished between what he

called a co-operative economy (essentially a barter system) and anentrepreneur economy, where monetary transactions entered into thedetermination of real-exchange relations. This distinction, Keynes went on toexplain in his lectures, bears some relation to a pregnant observation made byKarl Marx.He pointed out that the nature of production in the actual world isnot, as economists seem often to suppose, a case of C-M-C, i.e., of exchangingcommodity (or effort) for money in order to obtain another commodity (oreffort). That may be the standpoint of the private consumer. But it is not theattitude ofbusiness, which is a case ofM-C-M, i.e., of parting with money forcommodity (or effort) in order to obtain more money.10

An entrepreneur, Keynes insisted, in line with Marx, is interested, not in theamount of product, but in the amount of money which will fall to his share. Hewill increase his output if by so doing he expects to increase his money profit.Conversely, the entrepreneur (or capitalist) will decrease the level of output ifthe expectation is that the money profit will not increase. The monetary aspectof exchange, as depicted by Marxs M-C-M, thus suggested, not only thatmonetary gain was the sole object of capitalist production, but that it was also


4/33


possible for economic crises to arise due to interruptions in the process.Following his discussion of Marxs M-C-M, Keynes went on to declare in termssimilar to Marx: The firm is dealing throughout in terms of sums of money. Ithas no object in the world except to end up with more money than it startedwith. That is the essential characteristic of the entrepreneur econo my.11

Keynes, as is well known, was no Marx scholar.12 The immediate inspirationfor his references to Marx in his lectures was the work of the Americaneconomist Harlan McCracken, who had sent Keynes his book, Value Theory andBusiness Cycles, upon its publication in 1933. McCrackens analysis focused onthe problem of effective demand and the role of money, in t he tradition ofMalthus. But he dealt quite broadly with the history of economic thought. In hischapter on Marx, which Keynes cited in his lecture notes, and which is wellworth quoting at length in this context, McCracken wrote:

In dealing with exchange or the metamorphosis of commodities, he [Marx]

first treated C-M-C (Commodity for Money for Commodity). Such an exchangehe considered no different in principle from barter since the object of exchangewas to transfer a commodity of little or no utility to its possessor for a different

commodity of high utility, and money entered in as a convenient medium toeffect the transaction. The double transaction indicated no exploitation, for the

assumption was that in each transaction there was an exchange of equivalentvalues, or quantities of embodied labor, so the final commodity had neither

more nor less value than the original commodity, but had a higher utility for the

recipient. Thus the metamorphosis C-M-C represented an exchange ofequivalent values and no exploitation.

But the metamorphosis M-C-M was fundamentally different. And it was inexplaining this formula that Marx treated thoroughly the nature and source ofsurplus value. In this case, the individual starts with money and ends withmoney. The only possible motive, then, for making the two exchanges was to end

with more money than at the beginning. And the extent to which the second M orM exceeds the first, is the measure of surplus value. However, surplus valuewas not created or gained in the circulation of commodities but in

production.13

In a letter to McCracken, dated August 31, 1933, Keynes thanked him for his book, adding: For I have found it of much interest, particularly perhaps the passages relating toKarl Marx, with which I have never been so familiar as Iought to have been.14

Basing himself on McCrackens exposition of Marx, Keynes proceeded toexplain that a crisis could occur if M exceeded M, i.e., if capitalists were not


5/33


able, in Marxs terms, to realize the potential profits generated in production,and ended up losing money. Marx, Keynes explained,

was approaching the intermediate truth when he added that the continuous

excess ofM would be inevitably interrupted by a series of crises, gradually

increasing in intensity, or entrepreneur bankruptcy and underemployment,during which, presumably, M [as opposed to M] must be in excess. My ownargument, if it is accepted, should at least serve to effect a reconciliationbetween the followers of Marx and those of Major Douglas [a leading British

underconsumptionist], leaving the classical economists still high and dry in thebelief thatM andM are always equal!

Marxs general formula for capital, or M-C-M, Keynes suggested, not onlyoffered credence to the views of Major Douglas, but also to theunderconsumptionist perspectives of [John] Hobson, or [William T.] Foster and[Waddill] Catchingswho believe in its [the capitalist systems] inherenttendency toward deflation and under-employment.15 Shortly after readingMcCrackens Value Theory and Business Cycles and encountering its treatmentof Marxs M-C-Mformula, Keynes made direct reference in his lectures to therealisation problem of Marx as related to the problem of effective demand. 16

Without a great deal of direct knowledge of Marxs analysis, Keynes thusgrasped the implications of Marxs general formula for capital, its relation to thecritique of Says Law, and the necessity that it pointed to of integrating within asingle system the real and the monetary, production and f inance. All of thisconverged with Keyness own attempts to construct a monetary theory of production (i.e., The GeneralTheory). As Sweezy was to observe more than ahalf-century later when Keyness lectures on the monetary theory of productionfirst came to light, these remarks on Marxs general formula for capital indicatedthat: (1) Keynes was in important respects closer to Marxs way of thinkingabout money and capital accumulation than he was to the accepted neoclassicalorthodoxy, and (2) he had an eye for what is important in Marx far keenerthan any of the other bourgeois economists. 17

Indeed, it is remarkable, in looking back, just how much ofKeyness thinkinghere converged with that of Marx. In Theories of Surplus Value,Marx pointed to

what he called the abstract possibility of crisis, based on the M-C-M. If thecrisis appearsbecause purchase and sale become separated, it becomes amoney crisis, associated with money as a means of payment...[I]n so far as thedevelopment of money as means of payment is linked with the development ofcredit and ofexcess credit the causes of the latter [too] have to be examined.For Marx, then, a realization crisis, or crisis of effective demand, was alwaystied to the monetary character of the system, and necessarily extended not just to


6/33


the phenomenon of credit but also to excess credit. It thus pointed to potentialcrises of overindebtedness.18

Hidden within the general formula for capital, M -C-M, Marx argued, was atendency of capital to try to transform itself into a pure money (or speculative)

economy; i.e., M-M, in which money begat money without the in termediatelink of commodity production. In M-M, he wrote, the capital relationshipreaches its most superficial and fetishized form.19 If M-Moriginally referredsimply to interest-bearing capital, it metamorphosed in the course of capitalistdevelopment into the speculative demand for money more generally. Credit,Marx explained, displaces money and usurps its position. Capital more andmore took on the duplicate forms of: (1) real capital, i.e., the stock of plant,equipment and goods generated in production, and (2) fictitious capital, i.e.,the structure of financial claims produced by the paper title to this real capital.Insofar as economic activity was directed to the appreciation of fictitious

capital in the realm of finance rather than the accumulation of real capitalwithin production, Marx argued, it had metamorphosed into a purely speculativeform.20

Production and Finance

Marx and Keynes both rejected, as we have seen, the rigid separation of the realand the monetary that characterized orthodox economic theory. A monetarytheory of production of the sort advanced, in somewhat different ways, by bothMarx and Keynes led naturally to a theory of finance as a realm not removedfrom the workings of the economy, but integrated fully with it hence, to atheory of financial crisis. Decisions on whether (or where) to invest today in thisconceptionas developed by Keynes, in particularwere affected by bothexpected profits on such new investment and by the speculative demand formoney and near money (credit) in relation to the interest rate.

The growing centrality of finance was a product of the historical development ofthe system. During the classical phase of political economy, in capitalismsyouth, it was natural enough that economic theory would rest on the simpleconception of a modified barter economy in which money was a mere means ofexchange but did not otherwise materially affect basic economic relations. By

the late nineteenth century, however, there were already signs that what Marxcalled the concentration and centralization of production, associated with theemergence of the giant corporation, was giving rise to the modern credit system,based on the market for industrial securities.

This rise of the modern credit system vastly changed the nature of capitalaccumulation, as the ownership of real capital assets became secondary to theownership of paper shares or assetsleveraged ever higher by debt.


7/33


Speculation about the value of productive assets, Minsky wrote in his book onKeynes, is a characteristic of a capitalisteconomy. The relevant paradigm forthe analysis of a [developed] capitalist economy is not a barter economy, but asystem with a City [that is, Londons financial center] or a Wall Street whereasset holdings as well as current transactions are financed by debt. 21

Rationally, the rigid separation between the real and the monetary in orthodoxeconomicscontinuing even up to the presenthas no solid basis. Although itis certainly legitimate to distinguish the real economy (and real capital )from the realm of finance (and what Marx called fictitious capital), thisdistinction should obviously not be taken to imply that monetary or financialclaims are not themselves real in the normal sense of the word. There is, infact, no separation, Harry Magdoff and Sweezy observed, between the realand the monetary: in a developed capitalist economy practically all transactionsare expressed in monetary terms and require the mediation of actual amounts of

(cash or credit) money. Rather, the appropriate analytical separation is between the underlying productive base of the economy and the financialsuperstructure.22

We can picture this dialectic of production and finance, following HymanMinsky, in terms of the existence of two different pricing structures in themodern economy: (1) the pricing of current real output, and (2) the pricing offinancial (and real estate) assets. More and more, the speculative asset-pricingstructure, related to the inflation (or deflation) of paper titles to wealth, has cometo hold sway over the real pricing structure associated with output (GDP). 23Hence, money capital that could be used for accumulation (assuming theexistence of profitable investment outlets) within the economic base isfrequently diverted into M-M, i.e., speculation in asset prices.24 Insofar as thishas taken the form of a long-term trend, the result has been a major structuralchange in the capitalist economy.

Viewed from this general standpoint, financial bubbles can be designated asshort periods of extraordinarily rapid asset-price inflation within the financialsuperstructure of the economyovershooting growth in the underlyingproductive base. In contrast, financialization represents a much longer tendencytoward the expansion of the size and importance of the financial superstructure

in relation to the economic base, occurring over decades. The final decades ofthe twentieth century, Jan Toporowski (professor of econo mics at theUniversity of London) observed in The End of Finance, have seen theemergence of an era of finance that is the greatest since the 1890s and 1900sand, in terms of the values turned over in securities markets, the greatest era offinance in history. By era of finance is meant a period of history in which


8/33


financetakes over from the industrial entrepreneur the leading role in capitalistdevelopment.25

Such an era of finance raises the specter of a pure speculative economyhighlighted by Keynes: Speculators may do no harm as bubbles on a steady

stream of enterprise. But the position is serious when enterprise becomes thebubble on a whirlpool of speculation.26 By the 1990s, Sweezy observed, theoccupants of [corporate] boardrooms were to an increasing extent constrainedand controlled by financial capital as it operates through the global network offinancial markets. Hence, real power was to be found not so much incorporate boardrooms, as in the financial markets. This inverted relation between the financial and the real, he argued, was the key to understandingthe new trends in the world economy.27

Financial Crises and Financialization

In their attempt to deny any real historical significance to the Great FinancialCrisis, most mainstream economists and financial analysts have naturallydownplayed its systemic character, presenting it as a black swan phenomenon,i.e., as a rare and completely unpredictable but massive event of the kind thatmight appear, seemingly out of nowhere, once every century or so. (The termblack swan is taken from the title of Nassim Nicholas Talebs book publishedon the eve of the Great Financial Crisis, where a black swan event is definedas a game-changing occurrence that is both exceedingly rare and impossible topredict.)28

However, some of the more critical economists, even within the establishment,such as Nouriel Roubini and Stephen Mihm in their Crisis Economics, haverejected this black swan theory, characterizing the Great Financial Crisisinstead as a white swan phenomenon, i.e., as the product of a perfectlyordinary, recurring, and predictable process, subject to systematic analysis. 29The most impressive attempt to provide a data-based approach to financial crisesover the centuries, emphasizing the regularity of such credit disturbances, is to be found in Carmen Reinhart and Kenneth Rogoffs This Time Is Different:Eight Centuries of Financial Folly.30 (The title of their book is meant to refer tothe euphoric phase in any financial bubble, where the notion arises that the

business-financial cycle has been transcended and a speculative expansion cango on forever.)

The greatest white swan theorist in this sense was, of course, Minksy, who gaveus the financial instability hypothesis, building on Keyness fundamental insightof the fragility introduced into the capitalist accumulation process by someinescapable properties of capitalist financial structures. 31


9/33


Nevertheless, what thinkers like Minsky, Roubini and Mihm, and Reinhart andRogoff tend to miss, in their exclusive focus on the financial cycle, is the long -run structural changes in the accumulation process of the capitalist system.Minsky went so far as to chastise Keynes himself for letting stagnationist andexhaustion-of-investment-opportunity ideas take over from a cyclical

perspective. Thus, Minsky explicitly sought to correct Keyness theory,especially his analysis of financial instability, by placing it entirely in short -run business cycle terms, ignoring the long-run tendencies in whichKeynes hadlargely couched his financial-crisis analysis.32

Keyness own argument was therefore quite different from the theory that wehave become accustomed to via Minsky. He stressed that the stagnationtendencyor the decline in expected profit on new investment in a capital -richeconomyserved to increase the power of money and finance. Thus, forKeynes, Minsky noted, Money rules the roost as the expected yield of real

assets declines.33 AsK

eynes put it: Owing to its accumulation of capitalalready being larger in a mature, capital-rich economy, the opportunities forfurther investment are less attractive unless the rate of interest falls at asufficiently rapid rate. The uncertainty associated with the tendency ofexpected profit on new investment to decline gave an enormous boost toliquidity preference (or as Keynes also called it the propensity to hoardmoney) and to financial speculation as an alternative to capital formation,compounding the overall difficulties of the economy.

Underlying all of this was a tendency of the economy to sink into a condition ofslow growth and underemployment: It is an outstanding characteristic of theeconomic system in which we live, Keynes wrote, thatit seems capable ofremaining in a chronic condition of sub -normal activity for a considerable period without any marked tendency either towards recovery or towardscomplete collapse. Moreover, the evidence indicates that full, or evenapproximately full, employment is of rare and short-lived occurrence. Theseconditions led Keynes to his longer-run policy proposals for a euthanasia of therentier and a somewhat comprehensive socialisation of investment. 34

Keynes did not develop his long-run theory of stagnation and financialspeculation. Yet subsequent elaborations of stagnation theory that built on his

insights were to arise in the work of his leading early U.S. follower, AlvinHansen, and in the neo-Marxian tradition associated with Michal Kalecki, JosefSteindl, Paul Baran, and Paul Sweezy. There were essentially two stran ds to thestagnation theory that developed based on Keynes (and Marx). The first,emphasized by Hansen, and by the later Sweezy but characterizing all thesethinkers in one way or anotherexamined the question of the maturation ofcapitalism, i.e., the development of capital-rich economies with massive, unused


10/33


productive capacity that could be expanded relatively quickly. 35 This enormouspotential to build up productive capacity came up against the reality of vanishingoutlets for investment, since current investment was hindered (under conditionsof industrial maturity) by investment that had occurred in the past. The tragedyof investment, Kalecki remarked, is that it causes crisis because it is

useful.36

The second strand, in which Baran and Sweezys Monopoly Capitalisundoubtedly the best known example, centered on the growing monopolizationin the modern economy, that is, the tendency of surplus to rise in an economydominated by the giant firm, and the negative effects this had on accumulation.

In both cases, the potential savings or surplus generated by the economynormally outweighed the opportunities for profitable investment of that surplus,leading to a tendency to stagnation (slow growth and risingunemployment/underemployment and idle capacity). The normal state of themonopoly capitalist economy, Baran and Sweezy wrote, is stagnation. 37Rapid growth could thus not simply be assumed, in the manner of mainstreameconomics, as a natural outgrowth of the system in the mature/monopoly stage,but became dependent, as Kalecki stated, on specific development factors toboost output. For example, military spending, the sales effort, the expansion offinancial services, and epoch-making innovations such as the automobile allserved as props to lift the economy, outside the interna l logic of accumulation.38

None of these thinkers, it should be noted, focused initially on themacroeconomic relation between production and finance, or on finance as anoutlet for surplus.39 Although Monopoly Capitalargued that FIRE could helpabsorb the economic surplus, this was consigned to the last part of a chapter onthe sales effort, and not given strong emphasis.40 However, the 1970s and 80ssaw a deceleration of the growth rate of the capitalist economy at the center ofthe system, resulting in ballooning finance, acting as a compen satory factor.Lacking an outlet in production, capital took refuge in speculation in debt -leveraged finance (a bewildering array of options, futures, derivatives, swaps,etc.). In the 1970s total outstanding debt in the United States was about one andone-half the size of GDP. By 2005 it was almost three and a half times GDP andnot far from the $44 trillion world GDP.41

Speculative finance increasingly took on a life of its own. Although in the priorhistory of the system financial bubbles had come at the end of a cyclical boom,and were short-term events, financialization now seemed, paradoxically, to feednot on prosperity but on stagnation, and to be long lasting. 42 Crucial in keepingthis process going were the central banks of the leading capitalist states, whichwere assigned the role of lenders of last resort, with the task of bolstering and


11/33


ultimately bailing out the major financial institutions whenever necessary (basedon the too big to fail principle).

A key contradiction was that the financial explosion, while spurring growth inthe economy in the short run, generated greater instability and uncertai nty in the

long run. Thus, Magdoff and Sweezy, who engaged in a running commentary onthese developments from the 1970s to the late 1990s, argued that sooner orlatergiven the globalization of finance and the impossibility of managing it atthat levelthe ballooning of the financial superstructure atop a stagnantproductive base was likely to lead to a major crash on the level of the 1930s. Butwhether even such a massive financial collapse, if it were to occur, would bringfinancialization to a halt remained, in their view, an open question. 43

In an era of finance, Toporowski writes, finance mostly finances finance. 44Hence, production in recent decades has become increasingly incidental to themuch more lucrative business of balance-sheet restructuring. With the bigmotor of capital accumulation within production no longer firing on allcylinders, the emergency backup engine of financial expansion took over.Growing employment and profit in the FIRE sector helped stimulate theeconomy, while the speculative growth of financial assets led to a wealtheffect by means of which a certain portion of the capital gains from assetappreciation accruing to the well-to-do were funneled into increased luxuryconsumption, thereby stimulating investment. Even for the broad middle strata(professionals, civil servants, lower management, skilled workers), rapid asset price inflation enabled a large portion of employed homeowners to consumethrough new debt the apparent capital gains on their homes. 45 In this manner,the expansion of debt raised asset prices, which in turn led to a further expansionof debt that raised asset prices, and so on: a bubble.

Debt can be seen as a drug that serves, under conditions of endemic stagnation,to lift the economy. Yet the use of it in ever larger doses, which such a processnecessitates, does nothing to overcome the underlying disease, and serves togenerate its own disastrous long-run side effects. The result is a stagnation -financialization trap. The seriousness of this trap today is evident in the fact thatcapital and its state have no answer to the present Great Financial Crisis/GreatRecession but to bail out financial institutions and investors (both corporate and

individual) to the tune of trillions of dollars with the object of debt-leveragingup the system all over again. This dynamic of financialization in relation to anunderlying stagnant economy is the enigma of monopoly-finance capital. AsToporowski has observed, The apparent paradox of capitalism at the beginning of the twenty-first century is that financial innovation and growthare associated with speculative industrial expansion, while addingsystematically to economic stagnation and decline. 46


12/33


The Logical End-Point of Capitalism

Hence, financialization, while boosting capital accumulation through a processof speculative expansion, ultimately contributes to the corrosion of the entireeconomic and social order, hastening its decline. What we are witnessing today

in society as a whole is what might be called the financialization of class.The credit system, David Harvey observes, has now becomethe majormodern lever for the extraction of wealth by finance capital from the rest of thepopulation.47 In recent years, workers wages have stagnated along withemployment, while both income and wealth inequality have increased sharply.In 1976 the top 1 percent of households in the United States accounted for 9percent of income generated in the country; by 2007 this share had risen to 24 percent. According to Raghuram Rajan (former chief economist for the IMF),for every dollar of real income growth that was generated [in the United States]between 1976 and 2007, 58 cents went to the top 1 percent of households. In

2007 a single hedge fund manager, John Paulson, earned $3.7 billion, around74,000 times the median household income in the country. Between 1989 and2007, the share of total wealth held by the top 5 percent of wealth-holders in theUnited States rose from 59 percent to 62 percent, far outweighing the wealth ofthe bottom 95 percent of the population. Middle-class homeowners benefittedfor a while in the housing boom, but are now losing ground with the housing bust. This increasing inequality in the distribution of income and wealth in anage of financialization has taken the form of a growing distinction between thebalance sheet rich and the balance sheet poor. It is the enforced savings ofthe latter that help augment the exorbitant gains of the former. 48

The rapid increase in income and wealth polarization in recent decades ismirrored in the growing concentration and centralization of capital. In 2000, atthe peak of the merger and acquisition frenzy associated with the New Economy bubble, the value of global mergers and acquisitions rose to $3.4 trilliondeclining sharply after the New Economy bubble burst. This record was onlysurpassed (in real terms) in 2007, during the peak of the housing bubble, whenthe value of global mergers and acquisitions rose to over $4 trilliondroppingoff when the housing bubble popped. The result of all this merger activity has been a decline in the number of firms controlling major industries. Thisincreasing monopolization (or oligopolization) has been particularly evident inrecent years within finance itself. Thus, the share of U.S. financial -industryassets held by the top ten financial conglomerates increased by six timesbetween 1990 and 2008, from 10 percent to 60 percent. 49

This analysis of how financialization has heightened the disparities in income,wealth, and power helps us to put into perspective the view, now common on theleft, that neoliberalism, or the advent of extreme free-market ideology, is the


13/33


chief source of todays economic problems. Instead, neoliberalism is best seenas the political expression of capitals response to the stagnation -financializationtrap. So extreme has the dominant pro-market or neoliberal orientation ofmonopoly-finance capital now become that, even in the context of the greatesteconomic crisis since the 1930s, the state is unable to respond effectively.

Hence, the total government-spending stimulus in the United States in the lastcouple of years has been almost nil, with the meager federal stimulus underObama negated by deep cuts in state and local spending. 50 The state at everylevel seems to be stopped in its tracks by pro-market ideology, attacks ongovernment deficits, and irrational fears of inflation. None of this makes anysense in the context of what, to quote Paul Krugman, looks increasingly likea permanent state of stagnation and high unemployment. 51 The same basicproblem is evident in the other advanced capitalist countries.

At the world level, what can be called a new phase of financial imperialism, in

the context of sluggish growth at the center of the system, constitutes thedominant reality of todays globalization. Extremely high rates of exploit ation,rooted in low wages in the export-oriented periphery, including emergingeconomies, have given rise to global surpluses that can nowhere be profitablyabsorbed within production. The exports of such economies are dependent onthe consumption of wealthy economies, particularly the United States, with itsmassive current account deficit. At the same time, the vast export surplusesgenerated in these emerging export economies are attracted to the highlyleveraged capital markets of the global North, where such global surpluses serveto reinforce the financialization of the accumulation process centered in the rich

economies. Hence, bubble-led growth, associated with financialization, asPrabhat Patnaik has argued in The Structural Crisis of Capitalism,camouflages the root problem of accumulation at the world level: a rise inincome inequalities across the globe and a global tendency of surplus torise.52

Despite flat world notions propagated by establishment figures like ThomasFriedman, imperialist divisions are becoming, in many ways, more severe,exacerbating inequalities within countries, as well as sharpening thecontradictions between the richest and poorest regions/countries. If, in thegolden age of monopoly capitalism from 1950-1973, the disparity in percapita GDP between the richest and poorest regions of the world decreased from15:1 to 13:1, in the era of monopoly-finance capital this trend was reversed, withthe gap growing again to 19:1 by centurys close. 53

More and more, the financialization of accumulation in the center of the system,backed by neoliberal policy, has generated a global regime of shock therapy.Rather than Keyness euthanasia of the rentier, we are seeing the threatened


14/33


euthanasia of almost everything else in society and nature. The consequences ofthis, as Naomi Klein suggested in her book, The Shock Doctrine , extend farbeyond the underlying financialized accumulation associated with the neoliberalera, to a much broader set of consequences that can be described as disastercapitalism evident in widening social and economic inequality, deepening

instability, expanding militarism and war, and seemingly unstoppable planetaryenvironmental destruction.54

Never before has the conflict between private appropriation and the social needs(even survival) of humanity been so stark. Consequently, never before has theneed for revolution been so great. In place of a global system given over entirelyto monetary gain, we need to create a new society directed at substantiveequality and sustainable human development: a socialism for the twenty -firstcentury.

Notes

1. Karl Marx, Capital, vol. 3 (London: Penguin, 1981), 607-08.2. Paul M. Sweezy, More (or Less) on Globalization,Monthly Review 49, no. 4

(September 1997): 3. Globalization was, in Sweezys view, a much longer and widerphenomenon, characteristic of all stages of capitalisms historical development, andhence not an outgrowth of changing modes of accumulation.

3. The term the enigma of capital is taken from David Harvey, The Enigma ofCapital(London:Profile Books, 2010). Although Harvey does not use the term in

precisely this way, the approach outlined here is generally in accord with the outlookin his latest book.

4. Joseph A. Schumpeter, The Theory of Economic Development(New York: OxfordUniversity Press, 1961), 107, 126, and Essays (Cambridge, Mass.: Addison-Wesley,1951), 170.

5. The drop in investment in the crisis is reflected in the fact that in 2009 the totalcapital stock of business equipment in the United States dropped by 0.9 percent from2008, its first decline since the 1940s; meaning that firms did not even spend enoughon new equipment to offset the wear and tear on their existing equipment. FirmsSpend MoreCarefully, Wall Street Journal, August 11, 2010.

6. Kari Polanyi Levitt, The Great Financialization, John Kenneth Galbraith PrizeLecture, June 8, 2008, http://karipolanyilevitt.com/documents/The-Great-Financialization.pdf.

7. For evidence of these trends, see John Bellamy Foster and Fred Magdoff, The GreatFinancial Crisis (New York: Monthly Review Press, 2009). It should be noted that

this usage of the term financialization, as related to a secular trend in todayseconomy, is quite different from its usage in the work of world-system theorists suchas Giovanni Arrighi and Beverly Silver, who basically refer to it as a phase in thehegemonic cycles of the capitalist world-system. See Giovanni Arrighi and Beverly J.Silver, Chaos and Governance in the Modern World System (Minneapolis: Universityof Minnesota Press, 1999), 213.

8. Robert E. Yuskavage and Mahnaz Fahim-Nader, Gross Domestic Product byIndustry for 1947-86, Bureau of Economic Analysis, Survey of Current Business,December 2005, 71; U.S. Census Bureau, The 2010 Statistical Abstract, Table 656,


15/33


Gross Domestic Product by Industry and State: 2008; Kevin Phillips, Bad Money(New York: Viking, 2008), 31.

9. John Maynard Keynes, A Monetary Theory of Production, in Keynes, CollectedWritings, vol. 13 (London: Macmillan, 1973), 408-11. As Kenneth Arrow put it: Theview that only real magnitudes matter can be defended only if it is assumed that thelabor market (and all other markets) always clear, that is, that all unemployment is

essentially voluntarily. Kenneth, J. Arrow, Real and Nominal Magnitudes inEconomics,Journal of Financial and Quantitative Analysis 15, no. 4 (November1980): 773-74.

10. John Maynard Keynes, Collected Writings, vol. 29 (London: Macmillan, 1979), 81-82. See also Dudley Dillard, Keynes and Marx: A Centennial Appraisal, Journal of

Post Keynesian Economics 6, no. 3 (Spring 1984), 421-24.11.Keynes, Collected Writings, vol. 13, 89.12.When Sweezy wrote to Keyness younger colleague Joan Robinson in 1982 about

the publication ofKeyness 1930s lecture notes in which he discussed Marx, asking ifshe had any additional knowledge of this, she replied: I was also surprised at the noteabout Keynes and Marx. Keynes said to me that he used to try to get Sraffa to explainto him the meaning of labor value, etc., and recommend passages to read, but that he

could never make out what it was about. Quoted in Paul M. Sweezy, The Regime ofCapital,Monthly Review 37, no. 8 (January 1986): 2.

13. Harlan Linneus McCracken, Value Theory and Business Cycles (Binghampton,New York: Falcon Press, 1933), 46-47.

14.Keynes to McCracken, August 31, 1933, in Steven Kates, A Letter from Keynes toHarlan McCracken dated 31st August 1933: Why the Standard Story on the Origins ofthe GeneralTheoryNeeds to Be Rewritten, October 25, 2007, Social ScienceResearch Network, Working Paper Series, http://ssrn.com/abstract=1024388.

15.Keynes, Collected Writings, vol. 29, 81-82. Some will recognize this as the basis forKeyness later allusion in The GeneralTheory to the underworlds of economics inwhich the great puzzle of effective demand has its furtive existenceand wheremention is made of Marx, Hobson, and Douglas. On this, see Keynes, The GeneralTheory of Employment, Interest and Money in Keynes, Collected Writings, vol. 7(London: Macmillan, 1973), 32, 355, 364-71. In referring favorably in his lectures tothe American underconsumptionists William T. Foster and Waddill Catchings, Keyneswas clearly influenced by McCrackens chapter on these thinkers. See McCracken,Value Theory and Business Cycles, 157-68.

16.Keynes, Collected Writings, vol. 13, 420. See also Donald Moggridge, From theTreatise to the General Theory: An Exercise in Chronology,History of Political

Economy 5, no. 1 (Spring 1973), 82.17. Sweezy, The Regime of Capital, 2.18.Karl Marx, Theories of Surplus Value, Part 2 (Moscow: Progress Publishers, 1968),

509-15. For a good rendition of the overlap of the analysis of Marx and Keynes in this

area, see PeterK

enway, Marx,K

eynes, and the Possibility of Crisis, CambridgeJournal of Economics 4 (1980): 23-36.19.Marx, Capital, vol. 3, 515.20.Marx, Capital, vol. 3, 607-610, 707; Karl Marx and Frederick Engels, Selected

Correspondence (Moscow: Progress Publishers), 396-402; Jan Toporowski, Theoriesof Financial Disturbance (Northampton, Mass.: Edward Elgar, 2005), 54. For adetailed description of Marxs theory of fictitious capital see Michael Perelman,

Marxs Crises Theory (New York: Praeger, 1987), 170-217.


16/33


21. Hyman P. Minsky,John Maynard Keynes (New York: Columbia University Press,1975), 72-73.

22. Harry Magdoff and Paul M. Sweezy, Stagnation and the Financial Explosion (NewYork: Monthly Review Press, 1987), 94-95. The distinction between production andfinance, as representing base and superstructure, should not, of course, be confusedMagdoff and Sweezy arguedwith the wider, all-encompassing base-superstructure

metaphor of historical materialism. Both sets of relations and processes, to which thebase-superstructure metaphors refer, must alike be understood as dialectical. Thehistorical emergence of finance from production gives no warrant for reductiveexplanations of how the structured process functions (or malfunctions) today. This isan error exactly parallel to a frequent, crude misunderstanding of the base-superstructure metaphor of historical materialism by the critics of Marxism. See IstvnMszros, Social Structure and Forms of Consciousness, vol. 2 (New York: MonthlyReview Press, forthcoming), chapter 1.

Thus, it is a mistake to argue reductionistically, as even some Marxists theoristshave, that the financial cycle is only a reflection of the economic cycle, monetary andfinancial movements reflect non-monetary and non-financial internal and internationaldisturbances. Suzanne de Brunhoff,Marx on Money (New York: Urizen Books,

1973), 100-01.It should be added that Keynes, too, distinguished between separate realms of

industry and financeas a complex relation where the latter did not simply reflectthe formerin his chapter on The Industrial Circulation and the FinancialCirculation ofThe Treatise on Money. John Maynard Keynes, Collected Writings,vol. 5 (London: Macmillan, 1971), 217-30.

23. Hyman P. Minsky, Hyman P. Minsky (autobiographical entry), in Philip Arestisand Malcolm Sawyer,A Biographical Dictionary of Dissenting Economists(Northampton, Mass.: Edward Elgar, 2000), 414-15; Minsky, Money and Crisis inSchumpeter and Keynes, 115. Compare Marx, Capital, vol. 3, 608-09.

24. See Magdoff and Sweezy, Stagnation and the Financial Explosion, 93-94.25. Jan Toporowski, The End of Finance (London: Routledge, 2000), 1.26.Keynes, The GeneralTheory, 159.27. Paul M. Sweezy, The Triumph of Financial Capital,Monthly Review 46, no. 2

(June 1994): 8-10. For a discussion of the growing political-economic role of financein U.S. society, see John Bellamy Foster and Hannah Holleman, The Financial PowerElite,Monthly Review 62, no. 1 (May 2010): 1-19.

28. Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable(New York: Random House, 2007).

29. Nouriel Roubini and Stephen Mihm, Crisis Economics: A Crash Course in theFuture of Finance (New York: Penguin, 2010), 13-37.

30. Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: EightCenturies of Financial Folly (Princeton: Princeton University Press, 2009).

31.

Minsky, Money and Crisis in Schumpeter andK

eynes, 121; also see Minsky,John Maynard Keynes.32.Minsky,John Maynard Keynes, 79-80.33.Minsky,John Maynard Keynes, 78.34.Keynes, The GeneralTheory, 31, 228, 242, 249-50, 376-78; John Maynard Keynes,

The General Theory of Employment, Quarterly Journal of Economics 51 (February1937): 216; Dudley Dillard, The Economics of John Maynard Keynes (New York:Prentice-Hall, 1948), 146-54.


17/33


35. The maturity argument was evident in Sweezy as early as the 1940s in The Theoryof Capitalist Development(New York: Monthly Review Press, 1972), 220-21. But ittook on far greater prominence in his later work beginning in the early 1980s. See

Four Lectures on Marxism (New York: Monthly Review Press, 1981), 26-45.36.Michal Kalecki,Essays in the Theory of Economic Fluctuations (New York:

Russell and Russell, 1939), 149; Alvin H. Hansen,Full Recovery or Stagnation? (New

York: W.W. Norton, 1938).37. Paul A. Baran and Paul M. Sweezy, Monopoly Capital(New York: Monthly

Review Press, 1966), 108.38.Michal Kalecki, Theory of Economic Dynamics (New York: Augustus M. Kelley,

1969), 161. See also Josef Steindl, Maturity and Stagnation in American Capitalism(New York: Monthly Review Press, 1976), 130-37.

39. Toporowski argues that Kalecki and Steindl, beginning with Kaleckis 1937 articleon The Principle of Increasing Risk, dealt extensively with the contradictions at thelevel of the firm of reliance on external financing and rentier savings (as opposed tothe internal funds of corporations) in funding investment. This was never developed,however, into a theory of credit inflation or integrated with a notion of finance as ameans of boosting aggregate demand. See Toporowski, Theories of Financial

Disturbance, 109-30; Michal Kalecki, The Principle of Increasing Risk,Economica4, no. 16 (1937): 440-46.

40. Baran and Sweezy,Monopoly Capital, 139-41.41. Total outstanding debt here includes household, business, and government

(national, state, and local); Federal Reserve, Flow of Funds Accounts of the UnitedStates, Tables L.1 and L.2;Economic Report of the President, 2006, Table B-78; alsosee Foster and Magdoff, The Great Financial Crisis, 45-46.

42.Sweezy, The Triumph of Financial Capital, 8.43. Harry Magdoff and Paul M. Sweezy, Financial Instability: Where Will It All

End?Monthly Review 34, no. 6 (November 1982): 18-23, and Stagnation and theFinancial Explosion , 103-05.

44. Jan Toporowski, The Wisdom of Property and the Politics of the Middle Classes,Monthly Review 62, no. 4 (September 2010): 12.

45. Toporowski, The Wisdom of Property, 11. Keynes himself pointed to a negativewealth effect whereby stagnation tendencies (the decline in the marginal efficiency ofcapital) negatively affected stock equities thereby, resulting in declines inconsumption by rentiers, which then intensified stagnation. See Keynes, The GeneralTheory, 319. Asset-price inflation, together with the subsequent collapse of thefinancialization era, have extended both the wealth effect and the negative wealtheffect far beyond the relatively few rentiers to the broad intermediate strata (middleclasses).

46. Toporowski,End of Finance, 8-9.47. Harvey, The Enigma of Capital, 245.48.

Raghuram G. Rajan,Fault Lines (Princeton: Princeton University Press, 2010), 8;Edward N. Wolff, Recent Trends in Household Wealth in the United States: Rising

Debt and the Middle-Class SqueezeAn Update to 2007, Levy Economics Institute,Working Paper no. 589 (March 2010), 11, http://levy.org; Arthur B. Kennickell,Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007, Federal ReserveBoard Working Paper, 2009-23 (2009), 55, 63; Toporowski, The Wisdom ofProperty. 12, 14.

49. Bloomberg, 2010 M&A Outlook, bloomberg.com, 8, accessed 8/28/2010; M&A in2007, Wall Street Journal, January 3, 2008; A Record Year for M&A, New York


18/33


Times, December 18, 2006; Floyd Norris, To Rein in Pay, Rein in Wall Street,NewYorkTimes, October 30, 2009; Henry Kaufman, The Road to Financial Reformation(Hoboken, New Jersey: John Wiley and Sons, 2009), 97-106, 234. Traditionally,economic textbooks have treated new stock issues as raising capital for investment.The proliferation of merger activity highlights the fact that this is, in fact, hardly everthe case, and that most stock activity is directed at increasing financial gains.

50. Paul Krugman, America Goes Dark,New YorkTimes, August 8, 2010. Theoverwhelming of federal spending by the cuts in state and local spending replicates theexperience of the 1930s. See John Bellamy Foster and Robert W. McChesney, A

New Deal Under Obama? Monthly Review 60, no. 9 (February 2009), 2-3.51.Krugman, This Is Not a Recovery, New YorkTimes, August 6, 2010.52. Prabhat Patnaik, The Structural Crisis of Capitalism,MRzine, August 3, 2010;

Rajan,Fault Lines , 6.53. The gap between the richest and poorest country in 1992 was 72:1. Angus

Maddison, The World Economy: A Millennial Perspective (Paris: DevelopmentCentre, OECD, 2001), 125; Branko Milanovic, Worlds Apart: Measuring

International and Global Inequality (Princeton: Princeton University Press, 2005), 40-50, 61-81; Thomas L. Friedman, The World is Flat(New York: Farrar, Straus and

Giroux, 2005).54. Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (New York:

Henry Holt, 2007).


19/33


The Crisis of Capitalism in Europe, West and East

zlem Onaran

zlem Onaran (o.onaran [at] mdx.ac.uk) is senior lecturer in economics and

statistics in the School of Business at Middlesex University in the UnitedKingdom. She has published numerous articles on growth, development, andemployment in the global economy. This is her first essay in Monthly Review.

Correction: In "Chart 1" on page 20 of the print version of this article the lines inthe legend denoting wage share for United Kingdom and United Statesshould have been dashed.

There are three dimensions to the current, unprecedented global crisis ofcapitalism: economic, ecological, and politica l.

Let us look first at the economic dimension, which will be our main concern inthis article. Capitalism is facing a major realization crisisan inability to sellthe output produced, i.e., to realize, in the form of profits, the surplus valueextracted from workers labor. Neoliberalism can be viewed as an attemptinitially to solve the stagflation crisis of the 1970s by abandoning theKeynesian consensus of the golden age of capitalism (relatively high social

welfare spending, strong unions, and labor-management cooperation), via anattack on labor. It succeeded, in that profit rates eventually recovered in themajor capitalist economies by the 1990s.

However, the systems success, partially due to neoliberalism, in reviving profitsengendered apotentialrealization crisis, due to low wages and investment. Thedramatic deterioration in wages limited consumption, forcing workers to resortto increased borrowing. The decline in investment in physical capital went hand -in-hand with the growth of a casino economy, in which profits were funneledinto speculation in financial assets. In the last two decades, the rapid

financialization of the U.S. economy helped to increase demand through variouswealth effects and debt-credit stimuli, despite the weakening of the underlyingeconomy. Eventually, however, debt-led growth could not be sustained.Beginning in the summer of 2007, this solution also collapsed, and the capitalisteconomy has come to face a major systemic crisis, comparable to the GreatDepressionexcept for the unprecedented state intervention moderating thevisible dimensions of the downturn. Now, with the collapse of the financial


20/33


mechanisms that allowed for all the debt, it is unclear how these state policiescan overcome the realization crisis.

Second, consider the ecological dimension. Recovery efforts have been centeredon maintaining growth and employment through high consumption. It is

assumed that we can go on consuming as before, by means of magicaltechnological innovations engendering ever higher energy efficiency. However,today the ecological limits to growth have been scientifically established, so wecannot return to business as usual. To sustain our environment, long -termeconomic growth must be zero or lowequal to the growth rate ofenvironmental productivity. For this to be socially desirable, however, therehas to be a guarantee of high employment and an equitable distribution ofincome. The latter is clearly at odds with capitalism.

Third, the depth of the present crisis has created holes in the legitimacy ofneoliberalism. The rise in unemployment and inequality after the crisis inWestern Europe, similar to the transition crisis of twenty years ago in EasternEurope, will lead to serious political discontent. Thus, there is space forradicalization, but the left has yet to challenge the hegemony of capitalism.

In what follows we will focus primarily on the economic crisis of capitalism inEurope, West and East. Nevertheless, since this cannot be separated entirelyfrom the simultaneous crises of the environment and of neoliberalism, we willreturn to these other dimensions of the general crisis of the system, whenaddressing possible political responses, in our conclusion.

The Crisis of the Neoliberal Era of Accumulation

Since the 1980s, the world economy has been guided by deregulation in labor,goods, and financial markets. This deregulation has been helped along by thetransformation of the Soviet Union and Eastern Europe, which opened up newmarkets, provided a large reserve army of cheap labor, and relieved the pressureon the welfare states of the West to maintain decent living standards for theworking masses.

The outcome has been a dramatic decline in labors bargaining power, as shown

by the long-run decline in labors share in national income across the globe (seeChart 1). It should be noted that, although this global trend with regard to thewage share of income is striking, concealed within it is the fact that the veryhigh compensation of CEOs and other top managers is included in total wageincome. Since the earnings of these strata have increased dramaticallyrelative to ordinary workers, the shift in the class basis of income is muchsharper than the data indicate.


21/33


Declining worker power in this period has therefore led to widening profitmargins, contributing to the recovery of profit rates. The neoliberal era alsogenerated higher global profits for multinational firms, especially those in the

financial sector.

Financial sector profits in many ways displaced profits from actual production.As finance became dominant, the investment behavior of business firms wasincreasingly shaped by a shareholder-value orientation. A shift in managementbehavior from retain and reinvest to downsize and distribute occurred.Remuneration schemes, based on short-term profitability, shifted the orientationof management toward shareholders objectives. Unregulated fina ncial marketsand the pressure of financial market investors created a bias in favor of assetpurchases, as opposed to asset creation. At the same time, most of the efforts of

macroeconomic policymakers were skewed toward retaining the confidence ofvolatile financial markets.

Markets have been deregulated mainly to support the interests of rentier -capitalists. Consequently, the relationship between profits and investmentchanged: higher profits did not automatically lead to higher investment. In spiteof higher profit rates and a boom-euphoric business environment in manycountries, economic growth rates have been well below their historical trends. In


22/33


a deregulated financial environment, it would be irrational for capitalists to giveup the short-term, high-profit options in financial speculation and engage inlong-term, irreversible, and uncertain physical investment.

The decline in the labor share and stagnant real wages has been a potential

source of a realization crisis for the system. Profits can only be realized if thereis sufficient effective demand for the goods and services produced. But thedecline in the purchasing power of labor has a negative effect on consumption,given that spending out of profit income is relatively lower than that out ofwages (a dollar transferred from a worker to a capitalist reduces totalconsumption spending). This further reduces investment, because capitalspending depends on the demand for the products that capital helps to produce.

Financial innovations seemed to offer a short-term solution to any realizationcrisis: debt-led consumption growth. Of course, without the unequal incomedistribution, the debt-led growth model would not have been necessary. In theUnited States and in parts of Europe, household debt increased dramatically.The increase in mortgage debt and house prices reinforced one another.Increased housing wealth served as collateral for further debt, and then moneyfrom the loans fueled consumption and growth, maintaining high profit rates.This phase, despite growth rates lower than in the 1960s, provided the basis of along expansion, with the attendant peculiarities of profits without investment,growth without jobs, and increased financial fragility. Debt -financedconsumption may fuel growth, but debt eventually has to be serviced. Becauseof high debt levels, the fragility of the economy to possible shocks in the creditmarket also increases.

The deregulation of financial markets and the consequent innovations inmortgage-backed securities, collateralized debt obligations (CDO), and creditdefault swaps facilitated the debt-led growth model. These innovations,combined with the originate and distribute model of banking, have multipliedthe amount of credit that banks could extend, given the lim its of their capital.The premiums earned by the bankers, the commissions of the banks, the highCEO incomes (thanks to high bank profits), and the commissions of the ratingagencies all created perverse incentives that led to a short -term mindset andignorance about the risks of this banking model. Even if the risk of default in the

subprime credit market was known, it was not perceived as a major issue. Mostof these loans were sold to other investors in the form of mortgage-backedsecurities with high ratings, and in case of default, the houses could berepossessed. As long as house prices kept increasing, this remained a profitablebusiness for the creditor.

But this banking model was very risky, a time bomb destined to explode.Distress in the subprime markets eventually triggered the explosion. First, the


23/33


market for CDOs, then the interbank market, and finally the whole credit marketcollapsed on a global scale.

It is interesting to ask why it took so long for the bomb to explode. The reason isthe endogenous evolution of expectations (Keyness animal spirits). As the

debt-led growth model produced high short-term growth and profits, optimismwas stimulated and fed on itself, so that risks were more and moreunderestimated, even by those who were conservative at the beginning. In acompetitive world, even those who see the risks are forced to take riskypositions, if they are to keep their jobs as dealers, bankers, or CEOs. Just acouple of weeks before the big collapse in July 2007, the ex -CEO of Citibank,Chuck Prince, said, [W]hen the music stops, in terms of liquidity, things will becomplicated. But as long as the music is playing, youve got to get up and dance.Were still dancing.1 When the shock came, a credit crunch and the collapse ofthe debt-led growth model was inevitable.

A crisis might conceivably have been averted, at least for a while, if somethinghad been done about the growing inequality in income and wealth t hat wouldeventually stifle aggregate demand. But the powerful global elites who havegreat influence over global policy-making would not agree to this solution.Everyone hoped for a soft-lending that would correct the bubbles withouttouching the distribution issue.

The debt-led consumption model helped generate a current account deficit in theUnited States that exceeded 6 percent of the Gross Domestic Product. Thisdeficit was financed by the surpluses of developed countries such as Germanyand Japan, emerging economies such as China and South Korea, and the oilrich Middle Eastern nations. In Germany and Japan, current account surplusesand the consequent capital outflows to the United States were made possible bywage moderation, which suppressed domestic consumption and fueled exports.This again was an outcome of the crisis of distribution.

In emerging economies such as China and South Korea, the experience of theAsian and Latin American crises stimulated a policy of accumulation of foreignreserves as a hedge against speculative capital outflows. Here, the internationaldimension of inequality played an important role: these countries, threatened by

the free mobility and volatility of short-term international financial flows,invested their current account surpluses in U.S. government bonds instead offinancing their domestic development plans.

In the European context, strong wage moderation in Germany created furtherimbalances within the West, as well as between the East and the West. Withinthe West, the lack of a comprehensive industrial policy and public investmentscreated a rise in the costs of production (unit labor costs, that is, wages divided


24/33


by productivity) in countries such as Spain, Greece, Portugal, Italy, and Ireland.Thus, the high current account surpluses of Germany, Austria, the Netherlands,and Finland existed along with widening trade deficits in the other EU countries.The low level of wages in Eastern Europe also did not save its countries fromrunning high current account deficits, due to high imports from the international

supplier networks of the European multinational companies, as well as the highprofits of these foreign investors (repatriated as well as reinvested).

Western Europes Economic Malaise

Although the crisis originated in the United States, the impact has been heavierin Europe, partially due to the larger size and faster implementation of fiscalstimulus in the United States. According to the OECD Economic Outlook(March 2010), U.S. GDP fell by 2.6 percent in 2009, whereas the Euro areacontracted by 4 percent, and the United Kingdom by 4.9 percent. The UnitedKingdom is experiencing a deeper recession, largely because of the housingbubble and household debt. The prospects within the Euro area are also ra therdiverse. Both German and Italian GDP declined by 5 percent in 2009, whileFrench GDP contracted by just 2.6 percent.

There are also diverging sources of fragility in different Western EU countries.As export markets shrink, Germany is suffering from the curse of its neo-mercantilist strategygrowth based on export markets via stagnant or decliningwages, which had led to decades of stagnant domestic demand. The chroniccurrent account deficits of Greece, Portugal, Spain, and Italy the outcome ofthe historical failure of the European Union and its single currency to providefor regional convergenceare now proving to be detrimental, as financialinvestors are asking for much higher interest rates in return for the governmentbonds of these deficit countries. This is even bringing the stability of the Eurointo question.

The ability of these countries to respond to the shocks is also constrained bytheir fiscal capacity. Austria is paying high interest rate spreads, due to theexcessive expansion of its banks in Eastern Europe. Both Ireland, with itsdisproportionately large banking sector and the bust of its housing bubble, andSpain, with the collapse of the housing bubble and the consequent contraction in

construction, are expected to be in continuing recession, with limited capacity toreverse course.

Real wages began to turn down decisively in 2010 in the United Kingdom,Ireland, Germany, and Italy, following wage cuts arising with the onset of thecrisis in practically all European countries. Greece, Portugal, and Spain, inparticular, are under the ax of the EU and financial markets, and are beingcompelled to increase their competitiveness via deep real wage cuts, as part of a


25/33


more general shock therapy in these countries. Sharp and long -lasting increasesin unemployment, augmenting the industrial reserve army, are likely to make thewage losses much stronger, leading to dramatic further declines in laborsbargaining power.

The case of Japan shows that during the initial phase of a deflationary c risis (ora long-lasting recession), labors income share either stagnates or slightlyincreases, but as recession and deflation persist, even nominal wage declinestake place. In Japan, for example, the wage share declined by 8.9 percentbetween 1992 and in 2007.

The decline in the wages in Eastern Europe will also add further internationalcompetitive pressures on wages in Western Europe, whose impacts will bedifferent on different groups of workers. Temporary workers are losing theirjobs first, while more qualified workers are being retained. However, someskilled workers in the automotive industry, metal industry, and finance havealready been affected. Furthermore, future cuts in government socialexpenditures will also asymmetrically affect labor, with an additional burden onwomens unpaid care work.

Unemployment increased substantially in the United Kingdom and in the Euroarea in 2009, and further unemployment is expected in 2010. Particularly highincreases in unemployment emerged in Ireland and Spain. Overall, their greaterfiscal capacity has helped many Western European countries to weather theshock better than developing countries. However, without the support of strongfiscal stimuli, a long recession seems very likely. Although the economi es mayhave hit bottom, they may not be able to climb out for a long time, and furtherdeteriorations cannot be excluded.

The Eastern European Slowdown

It now appears that the early optimism about the decoupling of the East from theWest has proved to be wrong. The fundamental problem of the region was anexcessive dependence on foreign capital flows; when these were reversed by thecrisis, catastrophe followed. Consequently, the emerging markets of EasternEurope have been severely affected by the credit crash, capital outflows, and the

currency crises accompanying the banking crisis. Following the initial shock oftransition from planned to market economies and a decade of restructuring, thesecountries are once again facing the costs of integration into unregulated globalmarkets.

The difference between this crisis and ordinary boom-bust cycles in theperiphery is that this is a global, not simply a regional, crisis. It originated in thecore capitalist nations, but the consequences for the periphery of Europe have


26/33


been and will be heavier. The credit crunch also has a global dimension, whichmakes the usual capital inflows after a typical bust phase and resulting currencydepreciation unlikely. Export markets have severely contracted, and thedepreciation of the local currency, which is a usual outcome of boom -bustcycles, will now only have a negative balance sheet effect, with no positive

demand effect. The extent of debt-led consumption growth and household debt,payable mostly in foreign currency, has made this crisis more severe, and iflocal currencies depreciate further, debt burdens will rise further as well,deepening the crisis.

The slowdown in global demand, the decline in foreign direct investment (FDI)inflows, portfolio investment outflows, the contraction in remittances, and thecredit crash are affecting all the developing countries, but the degree ofaccumulated imbalances will determine the differences in the depth of theeffects among these countries. The Baltic Countries, Hungary, Romania, and

Bulgaria, are more exposed than Poland, the Czech Republic, Slovenia, andSlovakia. But even the latter group is suffering from the slowdown in globaldemand and the decline in FDI inflows.

The contraction in remittances can also become an issue i n the future. Excessivedependence on export markets and a dangerous specialization in the automobileindustryin the case of Slovakia in particular, but also in the Czech Republicand Sloveniahave turned out to be major risks. Poland is only experiencingstagnation rather than recession, thanks to its more diversified market and largedomestic economy, with a lower trade volume as a ratio to GDP. Both Slovakiaand Slovenia have escaped turbulence in the currency markets by adopting theEuro; however, their problem will be a permanent loss of internationalcompetitiveness relative to their competitors, which are devaluing.

The notion that Eastern European countries would not experience bottlenecksregarding current account deficits, thanks to FDI serving a s a major source offinance for the deficit, proved to be a myth. It is true that FDI is still more robustthan other capital flows, but in the first quarter of 2009, FDI inflows fell by 20 -80 percent, reaching 2001-2002 levels.2 Although the current account deficitsare also falling because of lower imports due to the slowdown, FDI is nowfinancing a declining part of the deficits. Furthermore, FDI not only finances but

also creates current account deficits; the average profit repatriation rate has been70 percent in the region, and FDI has been about equal or less than therepatriated profits in Hungary, Slovakia, and the Czech Republic.

A major difference between what transpired in Eastern Europe and whathappened in East Asia and Latin America in past crises is that Eastern Europeancountries relied on parent banks in the developed nations that had a longer -termstrategy in the region. However, given the crunch in wholesale credit mar kets,


27/33


the ability of parent banks to maintain credit to the region is now exhausted.Borrowing requirements in the Western countries are also creating rivalinvestment opportunities for limited global funds. Currency depreciation inEastern Europe, along with recession, will lead to increases in nonperformingloans and further affect the parent banks approach to Eastern affiliates.

The Baltic States and Bulgaria have currencies pegged to the Euro, and if theycannot maintain these pegs (which require these countries to have access toEuros with which to buy their own currencies to maintain the pegs in case ofcapital outflows), more devaluations will occur, and these will trigger furthercontagion effects in the region. For example, Swedish banks in the Ba ltic Statesand Austrian banks in Bulgaria, along with their governments, are pushing tomaintain the pegs and avoid devaluation, in fear of high default rates on loans.Local governments also stand behind the pegs. However, preserving overvaluedfixed exchange rates under the current policy framework will come at the cost of

a very deep recession and deflation, which will create a de facto realdevaluation. The mechanism for this seems to be massive wage cuts, as inLatvia.

The consequences of an unmanaged devaluation following a market-madecurrency crisis might lead to very severe distributional effects, as was the caseduring the Asian and Latin American crises. If a nations currency buys lessforeign currency, imports become more expensive. If the econ omy depends onimports, as many do, devaluation in turn leads to inflation. Workers will sufferfrom this inflation more than the wealthy. So far, the depreciation rate has beenmoderate, and inflation has been restrained by a deflationary environment andfalling commodity prices. However, both can become more severe in the future.

Unemployment in all the East European economies in the EU (New MemberStates) has grown significantly, with the sharpest increases taking place in theBaltic countries. Real wages have fallen in Hungary, the Baltic countries,Romania, the Czech Republic. The austerity programs in Hungary, Romania,and Latvia will further reinforce the pressures of the crisis.

In the Eastern European economies, the record of GDP, employment, and real-wage growth over the past twenty years has been shocking: first a transition

recession and then a global crisis. The gains in terms of growth and wages arefar from spectacular. Employment has at best stagnated, and it has decreased inRomania, Estonia, Lithuania, and Hungary. Real wages have stagnated inHungary and Slovenia, even fallen in Lithuania and Bulgaria. Real wage growthoverall has lagged behind productivity growth. Even in Romania, where real -wage growth was maintained for a time, it never exceeded improvements inproductivity. This does not look like a politically and socially viable balancesheet.


28/33


Reactionary Policy Responses

All advanced countries reacted to the crisis with unprecedented rescue efforts.Monetary policy tools were mobilized; financial rescue packages were created inthe form of guarantees of private deposits, state participation via capital

injections into banks, and even nationalization and purchases of toxic assets;and fiscal rescue packages were initiated, albeit slowly, in the form of newspending on public goods and services, help for consumers (tax cuts andtransfers), and stimulus for firms (corporate tax cuts and sectoral subsidies). TheU.S. fiscal stimulus was the largestif still meager in terms of what wasrequiredwhile European efforts were much smaller in size (as a percentage ofGDP).

Generally, fiscal measures have been relatively inadequate. In thirty -twocountries, stimulus spending in 2009 was equal to just 1.7 percent of GDP, lessthan the 2 percent recommended by the IMF. Rescue packages were based onrelatively optimistic forecasts, and financial measures have outweighed fiscalmeasures by a factor of ten.3 In Ireland, fiscal policy was actuallycontractionary. In addition, some of the financial measures may be very risky:purchase of high-risk U.S. bank financial instruments (Germany); overexposureto the possibility of Eastern European defaults (Austria and Sweden); and lackof any penalties for banks that do not make loans after getting public monies.

The composition of the fiscal packages was also inadequate: in the mostadvanced economies, only 3 percent of total spending is on employment, just10.8 percent on social transfers to low-income households, and 15 percent oninfrastructure.

Apart from the size of the packages, one major problem in the European Unionis the absence of a coordinated policy, one that addresses the differences amongthe nations in the Union. In 2009 the European Commission asked that countriesimplement a stimulus plan equal to 2 percent of GDP, but divergences within theEU were not sufficiently addressed. The increase in risk evaluation of thegovernment bonds of Greece, Spain, and Portugal by finan cial speculators in2010 shows that these divergences are the major Achilles heel in the EU. Tomake matters worse, market players and neoliberal economists have been

pushing for fiscal discipline to prevent sovereign debt default and futureinflation.

Overall, what is missing is any grasp of the underlying causes of the crisis.There is an overemphasis on low interest rates in the United States and verylittle debate about the liberalization of financial markets. This has meant thatreforms have been inadequate, with few real demands made on the financialinstitutions responsible for so much of the crisis. Although the costs of the


29/33


rescue packages are clear, no effort is being made to make the responsible andthe wealthy pay. The tax on bank bonuses and ba lance sheets in the UnitedKingdom only targets a small dimension of the problem of inequality. Policiesto address a major root of the crisis, the dramatic pro-capital shift in incomedistribution, are nowhere to be found. With regard to global imbalances , much

of the emphasis is on the overconsumption of the United States or low wagesand an undervalued currency of China, rather than wage dumping and stagnantdomestic consumption in Germany.

Even before the call for budget cuts, it would have been diffic ult to label thepolicies asKeynesian. True Keynesian policies would foster a broad program tostimulate investments through public initiatives as well as incentives to theprivate sector, a re-regulation of the financial system, and, at the internationallevel, capital controls and fixed exchange rates. With the current balance of classpower, ruling elites will not voluntarily implement Keynesian policies. Even to

return to the golden age of managed capitalism would require majororganizational efforts by working people, efforts that would effect a radical shiftin class power. In the absence of such a shift the modest expansionary anti -crisispolicies proved to have a short life, and massive budget cuts are on the way withdevastating effects on the working class.

In Eastern Europe, the concerns of the European Union are shaped by theinterests of the multinational corporations, in particular Western banks, and arelimited to maintaining currency stability rather than employment and income.The European Union actually delegated the problems of the Eastern Europeaneconomies to the IMF, albeit with some financial support to prevent a bigmeltdown of Western European businesses.

With the IMF, it has been pretty much business as usual, despite the seemingl ydiverse discourse. Faced with the pressure of capital outflows, Hungary, Latvia,and Romania have resorted to the IMF. As was the case for developing nationsin the 1990s and early 2000s, IMF policies are again much more restrictive thanwhat the IMF finds appropriate for Western European countries such asGermany. The unconditional credit line to Poland is the only new tool the IMFhas used. Otherwise Hungary, Romania, and Latvia have been pressured toaccept strongly pro-cyclical fiscal policies. Fiscal discipline is still the norm, and

cuts in public sector wages and pensions are part of the recipes. In Latvia, publicwage bills have been cut by 23.7 percent, pensions by 10 percent. Together withincreases in the Value Added Tax (VAT) rate from 18 to 21 percent, these werethe conditions to which the Latvian government had to agree in order to get thesecond tranche of the IMF package. In Estonia and Lithuania, a 20 percent cut inpublic wages and a reduction in social benefits was enforced. Capital cont rols to


30/33


avoid speculative outflows or a managed devaluation are not even mentioned inthe IMF or EU debates.

There Is an Alternative!

There is great public discontent with the way ruling governments have reacted tothe crisis. Ironically, this has decreased the legitimacy of any policy alternativethat includes collective mechanisms in governance or nationalization. Thereis, however, a window of opportunity, for the first time since the fall of theBerlin Wall, to argue that capitalism is economically, ecologically, andpolitically unstable and unsustainable. The road to channeling populardiscontent toward an alternative sustainable, egalitarian, democratic,participatory, and planned socialist economic model is rocky, but we now haveadvantages. It is clear that higher profits do not lead to investments or morejobs; growth does not mean a decrease in inequality; and capitalist marketeconomies are prone to systemic crisis. However, to formulate policyalternatives, it is important to emphasize what has caused the crisis. This is notjust a crisis of improperly regulated markets. It is a crisis of unequal distribution,and it should be asked why labor continues to suffer. Business as usual is not anoption.

Our starting point must be the urgent problems of employment, distribution, andecological sustainability:

First, fiscal policy has to be centered around a public employment program anda distributional policy. Public expenditures in labor -intensive services like

education, child care, nursing homes, health, community and social services, aswell as in public infrastructure and green investments, should be made. Theseare also areas in which the economy can be redirected toward sustainable andsolidaristic development. Such services are now provided e ither at very lowwages, often as luxury services for the upper classes, or via unpaid female laborwithin the home. They should be provided by the state or by nonprofitorganizations, which must be legally bound to redress gender disparities.

For ecological sustainability, there must be a shift in the composition of demandtoward long-term green investments; this cannot be achieved without active

public investments.

Regarding private-sector employment, it is important to avoid socialization ofthe costs. That is, working people and the unemployed should not have to paythe costs of the irresponsible behavior of global capital. An example would bewhere some firms use the crisis to implement their long-term downsizingstrategies. Short work regulations are being used in many European countriesto tame unemploymentgovernment transfers offset part of the wages lost due


31/33


to employer-mandated shorter work hours. An alternative would be to make theemployers pay the costs through legal measures that freeze f irings andimplement wage floors. In firms that are in a position to distribute dividends andpay high managerial wages, the logical thing would be to ban layoffs. If thefiring freeze leads to bankruptcy in certain firms, these firms can be revitalized

under workers control, supported by public credits. Widespread examples ofthat were seen in Argentina during the last decade, as a survival strategy ofworkers in shut-down companies, which often closed without paying past wagesand severance pay. As of 2007, ten thousand people were employed in self -managed businesses in Argentina. In cases of sectors such as the auto industry,under threat of mass layoffs, socialization and restructuring should beconsidered. In the auto industry, there could be a shift o f focus toward theproduction of public transport vehicles and a gradual transfer of labor towardnew innovative sectors.

The stimulus, employment packages, and green recovery plans should befinanced from progressive income and wealth taxes, higher corpor ate tax rates,inheritance taxes, and taxes on financial transactions. This would make thoseresponsible pay for the costs of crisis, and would avoid future budget cuts insocial expenditures, education, health, child, and elderly care.

Tax rebates and subsidies to low-income groups or extended unemploymentbenefits have been typical short-run solutions. However, these do not correct theoverall deterioration in working class lives. This is not only an egalitarian butalso a macroeconomic concern. Wage -moderation policies only worsen thedemand deficiency problem and ensure a future of low wages. In order toaddress the most fundamental aspect of the crisis, economic policy must firstsolve the distributional crisis. There must be a substantial shortening of work-time (in parallel with the growth of labor productivity), with upward wagecorrections. The high profits of the past are responsible for the crisis, so now therecipients of these profits have to pay the costs.

This is not only a crucial answer to the problem of unemployment; it is also ananswer to the ecological crisis: sustainable development requires zero or loweconomic growth in the developed countries, so full employment can only beachieved through shorter working times. The income losses for the working

masses can be prevented through substantial redistribution. Shorter workinghours will also help us to achieve democracy in decision making, by givingworkers time for participation.

Second, the redesign of the financial sector is urgent. Regulation is importantbut insufficient; the financial institutions have an amazing capacity to avoidregulations through new innovations. The crisis has shown us that large privatebanks

the financialization of accumulation

Documents