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.

Middle England Susses Out Key G20 Issue

I'm on a break in the Peak District. The local paper has this picture on its front page:

"PRESIDENT Barack Obama turned to Buxton Water for a bit of liquidity of his own after signing a deal aimed at saving the world's financial system.

The American leader was photographed slaking his thirst with the town's spa water at the G20 conference in London.

Paolo Sangiorgi, MD of Nestlé Waters said: "We're delighted that President Obama is keeping healthily hydrated with bottled water, especially a local natural water brand such as Buxton."

Buxton is Britain's best selling home grown mineral water and it also uses the lightest bottles of all brands, giving it one of the lowest carbon footprints of any such product.

"I always knew that the President was a man of good judgment and taste," said High Peak MP Tom Levitt."

"Who's this 'we', Paleface...."

"I used to believe this state capture [by the finance sector] took the form of cognitive capture, rather than financial capture. I still believe this to be the case for many, perhaps even most of the policy makers and officials involved, but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture."

Willem Buiter - Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions - enters the 'relative autonomy' of the state debate. It's contracting, according to him it seems.

We're still playing pass the parcel with the unimaginable levels of debt, and the governments of the world are primed to pass them onto - well, not to those who created them, but the rest of us:

"For political expediency reasons, cuts in public spending are likely to fall first on maintenance, public sector capital formation and other forms of productive public expenditure, including spending on education, health and research. Welfare spending in cash or in kind is likely to be the last to be cut"

You don't have to expert in socialist theories of the state to understand this point. Try this analogy: every time a economist on TV uses the word 'us' or 'we' remember the old Lone Ranger joke.

He and his faithful Native American companion Tonto find themselves surround by a Sioux war band, and the masked man asks, "What are we going to do now Tonto?""Who's this 'we', Paleface...." comes the response.

So it is with the banking bailouts.
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What Do We Want? Who Will Help us Get It?

Chris over @ S&M has a challenging post today, bewailing 'just how very far we are from any Marxist notion of revolution'. He says this for three reasons: the weakness of any plausible agency of change; the similar absence (or at least lack of popular awareness) of any plausible non capitalist economic models; and the continual framing of the debate in terms of a state v free markets dichotomy. He is, of course, completely right.

Of course, there are those on the left who, like some mechanistic old Social Democrat of the 1890s, feel capitalism is quite capable of seriously shooting itself in the foot without very much opposition at all. But even GTR ,who likes this stuff, only concludes it means ,"We are all fucked in other words. Unless we all get our shit together."

Well, yeah. No shit Sherlock.

A British Left has disappeared before. In some obscure way, I find it comforting that the 'Left' which disappeared, more or less, during the mid nineteen century, was driven by a democratic, ultimately post French Revolution agenda, albeit with an important Owenite subsidiary strand. It was primarily about electoral arrangements and the franchise (cf Chartism). The 'Left' which re-emerged afterwards was different - more focussed on industrial struggles, more concerned with financial as well as democratic equality, more 'socialist' or at least incipiently socialist) in a sense those of born in the twentieth century might recognise.

I've often wondered if we're currently living through a similar period, when the ideological foundations of the Left of my youth crumbles - but a period of apparent capitalist hegemony actually acts of a midwife to a new way of looking at the world. A flight of fancy, perhaps, but one way of looking at the times we're living through in terms of framing a coherent Red-Green response to changing conditions. But it won't happen during this crisis. I fear the most we can hope for is that the coming economic storm - and it is still coming, for the majority of us, no matter what happened at the G20 - acts as a midwife for the popularisation of some of the ideas Chris Dillow is talking about.

But that will still leave us with the problem of agency, a subject to which I'll have to return another time.

"When a debt can't be paid, it won't be"

Michael Hudson says an oligarchy is emerging all over the world - they are the bulk of the creditors who are insisting on repayment of unrepayable debt. Debt-peonage and neo-feudalism are waiting in the wings for the debtors if they accept the dominance of the creditors. Iceland is under financial attack. They shouldn't accept the IMF diktats. See the video six paragraphs down here (don't worry, it's in English even if the blog is in Icelandic) or read his long article here.

'Can't Pay, Won't Pay' reemerges as a slogan of the left?

Put like that it sounds crazy - but look at the words on that £10 note in your pocket. 'I promise to pay' says the Chief Cashier. Money is embodied trust. No-one believes that Iceland can really repay- it's only a question of whether they sell themselves into debt-peonage before everyone acknowledges that truth. There's no real trust behind the IMF proposals- just naked power. Hudson is saying call their bluff. Re-establish real trust by saying what you will and won't give up as a country and only deal on that basis. Force a debt jubilee.

5 Minutes of Heaven

It's your choice - sign on at the LSE for this course, or just go to BBC i-player and download this. A drama about 'reconciliation' in Northern Ireland - and about how the media spins such processes - that was so good even James Nesbitt couldn't ruin it.

Green Socialist Thinking: As All-American As......

A poster called Sandwich Man on Econospeak reveals Benjamin Franklin to be an unexpected devotee of the green and simple life. Yeah, that Benjamin Franklin - him on the $100 dollar bill. Apparently, our Ben was no fan of the injunction to 'accumulate, accumulate':

"It has been computed by some political arithmetician, that, if every man and woman would work for four hours each day on something useful, that labour would produce sufficient to procure all the necessaries and comforts of life: want and misery would be banished out of the world, and the rest of the twenty-four hours might be leisure and pleasure.

What occasions then so much want and misery? It is the employment of men and women in works that produce neither the necessaries nor conveniences of life, who, with those who do nothing, consume necessaries raised by the laborious...

Look round the world, and see the millions employed in doing nothing, or in something that amounts to nothing, when the necessaries and conveniences of life are in question. What is the bulk of commerce, for which we fight and destroy each other but the toil of millions for superfluities, to the great hazard and loss of many lives by the constant dangers of the sea?...

A question may be asked; Could all these people now employed in raising, making, or carrying superfluities, be subsisted by raising necessaries? I think they might....

It is, however, some comfort to reflect that, upon the whole, the quantity of industry and prudence among mankind exceeds the quantity of idleness and folly....

One reflection more, and I will end this long rambling letter... Our eyes, though exceeding useful, ask, when reasonable, only the cheap assistance of spectacles, which could not much impair our finances. But the eyes of other people are the eyes that ruin us. If all but myself were blind, I should want neither fine clothes, fine houses, nor fine furniture."(letter to Benjamin Vaughn, dated July 1784)