The Great Financial Crisis: A Review

30 years ago, academic sociology took two things seriously: the idea that as a discipline it was, as my non-Marxist professor told me in the first week of my undergraduate degree, 'nothing more than a century long conversation with the ghost of Marx' and the concept that it was the last redoubt of the idea of 'political economy' as conceived of by the pre-Marginal Revolution classical economists. Whether either of these propositions were ever true is a matter I'll leave to those who specialise in the archeology of academic pedagogy. But I have a very definite sense that they soon stopped being true as the postmodernists swept through sociology departments throughout the land in the 1980s.

But what it did mean was that the spotty faced young Charlie got to read, if not always understand, a number of left wing economic texts, notably Monopoly Capital (1966) by the Americans, Paul Baran and Paul Sweezy. (Sweezy has some claim to be American Marxism's only authentic native genius, a claim I'll leave others to debate). It was a conscious attempt to describe and analyse the political economy of the United States in the post war 'Golden Age', and to meld together Marxist and (left) Keynesian economic theory.

The key idea of Monopoly Capital was that capitalism creates huge surpluses for a small oligarchical group which led to economic stagnation, a term which is to be understood technically as meaning the economy functions well below its capacity with inherent unused productive capacity and significant unemployment and underemployment. (Stagnation in this sense is quite compatible with most people feeling richer over time, which clearly has happened in both North America and throughout the West). There are countervailing tendencies of course - notably military spending, a massive sales effort ( cf 'the rise of Madison Avenue') and the stimulus of new innovations - but these are intermittent and not always successful, whilst the tendency towards stagnation is permanent and structural. In retrospect it can be seen as the perfect theoretical lens for a left wing economist who grew to maturity during the Great Depression to use to look at the Keynesian Golden Age: it didn't deny things had changed since the 1930s, but questioned how long this could last.

Stagnation occurs because owners of capital must have something to invest in in order to further accumulate, but this depends on there being sufficient demand. But as industries mature they require less investment; not all new technologies need huge sums of investment in the manner , say, the switch from railways to cars did; growing inequality can limit demand in mass markets; and, in any event, the process of capitalist monopolisation reduces competitive pressures and allows the build up of larger and larger surpluses.

Baran and Sweezy did mention the growth of debt as a further possible countervailing tendency to stagnation but didn't accord it any great priority. Sweezy came to see this was a mistake, and did quite a lot of work later in life on the growing financialisation of US capitalism. Now his ideological heirs, two American scholars associated with the independent Marxist journal Sweezy founded, The Monthly Review, have published a series of essays of great interest - The Great Financial Crisis, Causes and Consequences by John Bellamy Foster and Fred Magdoff.

They quote Sweezy himself on the changes since the 1960s:

"...By the end [of the 1980s] the old structure of the economy, consisting of a production system served by a modest financial adjunct, had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system."

In the 1960s, manufacturing was the source of 50% of all the profits in the USA, and the financial sector only produced 15%; by 2005 the position had almost reversed with only 15% of profits coming from manufacturing and around 40% from financial activities. The vast surpluses have been invested in FIRE (finance, insurance and real estate) activities; consumption and therefore demand have been buoyed by increasingly sophisticated instruments of debt, which allowed even a population on stagnant wage levels to live beyond their means. But - and this is crucial for understanding the power of Bellamy Foster's and Magdoff's argument - it isn't just a question of household debt alone. The more the growth in the productive economy slowed, the more capital sought to leverage its way out of problems by expanding debt and gaining speculative profits. So by 2007, when US GDP was around $13.8 trillion dollars, total national debt amounted to no less than $47.7 trillion - of which $13.8 trillion was specifically household debt, but a further $16 trillion was held by financial firms and $10.6 trillion by non financial business. (table 6.1, page 121).

So this financialisation of capital is not just a question of 'irresponsible' families taking on mortgages they couldn't possibly afford - it's a systematic change. The crisis might have come in the sub prime mortgage market but this was merely 'the straw that broke the camel's back': it wouldn't have mattered have so much if the whole system wasn't now orientated towards endless financial speculation. A new term for this system is now required: Monopoly Finance Capital. It is inherently unstable, requiring a constant stream of speculative bubbles to keep the show on the road. Minsky is much referred too.

Is there a way out of this nightmare? Bellamy Foster and Magdoff quote Sweezy again, on the desirability of a redistribution of income and wealth on a massive scale, and/or a massive expansion of civilian state spending. But they doubt the feasibility of a conventional Keynesian expansion (aka 'Obamanomics') because of resistance from the financial markets (aka 'class struggle from above'). So they end on a rising polemical note of rhetoric calling for 'labor to rise from its ashes' and the population to seize control of its political economy. Which does rather remind me of a line from the Billy Bragg song, North Sea Bubble :

"My American friends know what to do - but they'll wait a long time for a Beverly Hills Coup"

But it would be unfair to end on this note. This is a clearly written and very accessible collection of essays which deserves a wide readership on both sides of the Atlantic. It demonstrates the possibility of linking left Keynesian and Marxist theory in a powerful way, and indeed of the continued relevance of a specifically Marxist economic framework. What it doesn't do, ultimately, is convince me as a work of political economy because it doesn't link its' economic analysis to a strategy for change, however sketchily identified. This is not just a question of its vagueness on the subject of agency referred to above, but also its lack of engagement with the global aspects of financialisation, especially the degree to which Chinese, Japanese and Middle Eastern money now prop up the American economy. Nonetheless, it's hard to imagine any comprehensive explanation of the current crisis which doesn't engage with the Monthly Review analysis.