[Marxism] Query on Devine on Henryk Grossman

[Patrick Bond]

Louis Proyect wrote:
> (posted to PEN-L by Jim Devine)
> In my dissertation, my emphasis was on
> over-accumulation (of fixed capital) relative to supply constraints.
> This is akin to the first of the Big Three sketched above, but can
> bring in the effects of a rising organic composition, which is also a
> "supply side" theory.
>   

Ditto on mine, which was partly based on measurements in Zimbabwe of 
Census of Industrial Production stats regarding both fixed capital 
overinvestment and the crucial proxy I found for the signal to 
subsequently cut back investment: rising inventory ratios.

> In my 1983 article in the REVIEW OF RADICAL POLITICAL ECONOMICS and my
> 1994 article in Paul Zarembka's RESEARCH IN POLITICAL ECONOMICS, I
> presented an alternative possibility: over-accumulation relative to
> (stagnant) consumer demand, along with the possibility of an
> "underconsumption trap" in the aftermath of the downturn.

This too could be observed in Zimbabwe at times. But it followed the 
emergence of the overinvestment problem in Department 1, so consumer 
demand was not the essence of the problem, just a contributing factor.

But the real point of this sort of argument, which regrettably wasn't 
raised at the otherwise stimulating panel on capitalist crises last 
Saturday morning at the Left Forum at Cooper Union, is that once 
overinvestment emerges and profit rates fall within the value-producing 
complex, financial circuitries rise in terms of both profitability and 
power. (Lots of mitigating spatio-temporal fixes and accumulation by 
dispossession join Marx's other countervailing tendencies, here, of 
course - but the general direction is to amplify uneven development 
between financial and value-productive sites.)

In this, Grossmann's view was much more useful than, say, Hilferding's, 
who emphasised financial power (finance capital) at the expense of 
understanding financial vulnerability.

The same debate - is capitalism strong or weak, based on whether you 
read finance as accommodating or speculative - is underway within the 
Socialist Register crowd, it seems to me. Below is the summary I did of 
this about three years ago for ZNet.

If anyone wants that PhD thesis (1992 at Johns Hopkins, under David 
Harvey's supervision), it was published in 1998 as "Uneven Zimbabwe: A 
Study of Finance, Development and Underdevelopment" by Africa World 
Press; and if you ask me offlist (pbond at mail.ngo.za) I can email out a 
large .doc file of the pre-edited galleys.

Cheers,
Patrick

***

December 03, 2004

Crunch time for US capitalism?

By Patrick Bond

If you are like many aggrieved people I know, the prospect of the US 
economic empire stumbling, tripping, and maybe even crashing is welcome 
indeed.

So cheer up, it seems like comeuppance season has dawned. Former Federal 
Reserve governor Paul Volcker warned earlier this year of a '75% chance 
of a financial crisis hitting the US in the next five years, if it does 
not change its policies.'

As Volcker told the Financial Times a month ago, 'I think the problem 
now is that there isn't a sense of crisis. Sure, you can talk about the 
budget deficit in America if you think it is a problem - and I think it 
is a big problem - but there is no sense of crisis, so no one wants to 
listen.'

That may have just changed. Volcker's successor, Alan Greenspan, scared 
the financial markets into a mini-seizure last week by admitting, 'It 
seems persuasive that, given the size of the U.S. current account 
deficit, a diminished appetite for adding to dollar balances must occur 
at some point.'

Former US Labor secretary Robert Reich predicted in September: 'The 
mainstream view is that the budget deficit is going to get larger. 
Simultaneously, the mainstream view is that there is no reason to 
believe that the trade deficit is going to shrink any time soon. In 
fact, I see the dollar continuing to decline and I see at some point a 
tipping point… because at some point it becomes a lousy investment.'

A week after the election, former Treasury secretary Robert Rubin 
accused Bush of 'playing with fire' for allowing the dollar to weaken 
alongside continuing federal deficit spending, a combination which would 
generate 'serious disruptions in our financial markets.'

Added C. Fred Bergsten, director of the Institute for International 
Economics in Washington (a voice of pure orthodoxy), 'Everyone in the 
market knows the dollar has to come down a lot. People are starting to 
run for the exits.'

That run for the exit could be extremely costly for China, for example, 
with former Treasury official Nouriel Roubini telling Reuters that about 
8% of its GDP - or half a trillion $US - would be lost in the event the 
Chinese currency was allowed to find its real value, and the dollar 
crashed a further 20%.

Of course, this isn't about merely tracking the volatility of the 
dollar's price against other countries, which will dip and dive and 
strengthen for erratic short-term reasons. Deeper, structural analysis 
is required.

Yale-based anarchist David Graeber half-jokingly suggests 'a systematic 
division of labour in which Marxists critique the political economy, but 
stay out of organising, and anarchists handle the day-to-day organising, 
but defer to Marxists on questions of abstract theory; i.e., in which 
Marxists explain why the economic crash in Argentina occurred and the 
anarchists deal with what to do about it.'

Right, then, what do Marxists and other dissident economists have to 
say, what with mega-Argentine-scale financial problems looming?

To start with diagnoses of the situation, four critical schools of 
thought are worth citing because they have somewhat different - and 
often competing - ideas about what ails US and global capitalism:

1) Overly competitive corporations, which drive down the rate of profit;
2) Overconfidence within financial markets, which today act more like a 
casino than savings/investment mechanism;
3) Overproduction of commodities, as a persistent reflection of 
inadequate consumer buying power; and
4) Overaccumulation of capital more generally, a problem which cannot be 
displaced forever, but which one day must face more severe devaluation.

In the first case, the best example is UCLA historian Robert Brenner's 
2003 book *The Boom and the Bubble* and subsequent analysis in New Left 
Review, London Review of Books, Against the Current, and other journals.

In the second, followers of the late US financial economist Hyman Minsky 
- like David Felix of Washington University and Steve Keen of University 
of Western Sydney - argue that financial markets inexorably move from 
accommodating capitalism, to hosting speculative investments, to 
becoming a pure gamble, in the spirit of the old 'Ponzi'-style inverted 
pyramid schemes.

The third category draws on the legacy of John Maynard Keynes, whose 
solutions to 'underconsumption' typically involve loose credit and 
generous state subsidies, so as to boost consumer buying power. Many 
radical economists in the US have renewed this line of argument, perhaps 
because it is politically safer than calling for anti-capitalist 
revolution. (Reagan, Bush Sr and Bush Jr could be described as 'military 
Keynesians' thanks to their vast budget deficits and Pentagon-hedonism.)

Arguing the fourth case, eloquent classical Marxists like Ellen 
Meikskins Wood in her book *Empire of Capital* (2003) and David Harvey 
in *The New Imperialism* (2004) have updated important earlier accounts 
of overaccumulation by Simon Clarke (*Keynesianism, Monetarism and the 
Crisis of the State*, 1988), Harvey in *The Condition of Postmodernity* 
(1989), Harry Shutt (*The Trouble with Capitalism*, 1999) and Robert 
Biel (*The New Imperialism*, 2000).

Opposed to these is a Marxist position which respects the strength, 
resourcefulness and self-healing capacity within capitalism - and 
especially reflects upon the weakness of the system's main enemy: the 
working class. Those arguing that the system is *not* facing a systemic 
overaccumulation crisis include Leo Panitch, Sam Gindin and Chris Rude 
in the new *Socialist Register 2005: The Empire Reloaded*, Doug Henwood 
in *After the New Economy* (2003) and Giovanni Arrighi (criticizing 
Brenner) in *New Left Review* last year.

Some of these latter accounts stress a fifth school of Marxist theory: 
class struggle as determinant. And it is true, the world's working class 
and nearly all counterhegemonic national struggles have suffered 
persistent, debilitating defeats over the past three decades, which 
certainly helps explain capital's apparent recovery from 1970s woes.

Yet the internal contradictions continue bubbling up. Globalization has 
generated economic stagnation, not dynamism. According to even the World 
Bank, the increase in the world's annual GDP per person fell from 3.6% 
during the 1960s, to 2.1% during the 1970s, to 1.3% during the 1980s to 
1.1% during the 1990s and 1% during the early 2000s.

Moreover, GDP measures are notorious overestimates of social welfare, 
especially since environmental degradation became more extreme from the 
1970s. We must also factor in the extremely uneven character of 
accumulation across the world, with some sites - like Eastern Europe and 
Africa - suffering rapidly declining per capita GDP for much of the 
globalization epoch.

Or consider a classical symptom of capitalist crisis: the corporate rate 
of profit. At first glance, the after-tax US corporate profit rate - 
which fell precipitously from the mid-1960s - appeared to recover 
beginning in 1984, nearly reaching earlier post-war highs (although it 
must be said that tax rates were much lower in the recent period).

On the other hand, corporate interest payments remained at record high 
levels throughout the 1980s-90s. Subtracting interest expenses, we get a 
better sense of net revenue available to the firm for future investment 
and accumulation, which indeed remained far lower from the early 1980s- 
present, than during earlier periods, according to French Marxists 
Gérard Duménil and Dominique Lévy (http://www.cepremap.ens.fr).

Duménil and Lévy also deconstruct the ways that US corporations 
responded to declining manufacturing-sector accumulation. Manufacturing 
revenues were responsible for roughly half of total (before-tax) 
corporate profits during the quarter-century post-war 'Golden Age', but 
fell to below 20% by the early 2000s.

In contrast, profits in the financial sector rose from the 10-20% range 
during the 1950s-60s, to above 30% by 2000. Financiers doubled their 
asset base in relation to non-financial peers during the 1980s-90s.

What does this mean?

According to Harvey, the contradictions of capitalism were 'displaced' 
instead of resolved: they were moved across time and space, especially 
via hyperactive financial markets. Time is accounted for in the vast 
credit bubble, which lets you pay now, on the basis of debt, and hope to 
earn future revenues to cover your loan repayments.

And capitalism's use of 'space' - geographic crisis displacement - is 
really what globalization has been about: allowing corporations facing 
falling profits to seek relief in sites where raw materials and labor 
are cheaper, where regulations are fewer, and where new markets for 
products might emerge. Hence corporate profits drawn from global 
operations rose from a range of 4 to 8% during the 1950s-60s to above 
20% by 2000.

To be sure, some of the problems faced by capitalism have not been 
simply stalled and shifted around. Some vicious hits - asset 
devaluations - have occurred in different sites over the past 30 years.

These included the Third World debt crisis (early 1980s for commercial 
lenders, but still going on for most of the world's states and 
societies); energy finance shocks (mid 1980s); crashes of international 
stock (1987) and property (1991-93) markets; crises in nearly all the 
large emerging market countries (1995-2002); and even huge individual 
bankruptcies which had powerful international ripples.

Late-1990s examples of financial-speculative gambles gone very sour in 
derivatives, exotic stock market positions, currency trading, and bad 
bets on commodity futures and interest rate futures include Long-Term 
Capital Management ($3.5 billion)(1998), Sumitomo/London Metal Exchange 
(,1.6 billion)(1996), I.G.Metallgessellschaft ($2.2 billion)(1994), 
Kashima Oil ($1.57 billion)(1994), Orange County, California ($1.5 
billion)(1994), Barings Bank (,900 million)(1995), the Belgian 
government ($1 billion)(1997), and Union Bank of Switzerland ($690 
million)(1998).

 From 2000, subsequent US firm bankruptcies on an even larger scales - 
e.g., Enron, Anderson Accounting, World Com, Tyco - had more to do with 
corruption, but were also symptoms of financial gambling in immature 
markets.

Most importantly, the US stock market was the site of an enormous 'New 
Economy' bubble until 2000, perhaps culminating in the Dot Com crash 
which wiped $8.5 trillion of paper wealth off the books from peak to 
trough (in the US alone) - but on the other hand, seemingly reinflating 
in 2003-04 thanks to the return of household investors and mutual fund 
flows, and possibly rising further in future years if Bush begins social 
security privatisation.

There were crashes not only in New York, but also 1/3 declines during 
2002 in Finland, Germany, Greece, Ireland, Netherlands,and Sweden, and 
other less severe falls in most other stock markets.

David Harvey provides a further idea to interpret how the system 
responds to overaccumulation and financial overhang. Inspired by Rosa 
Luxemburg's ruminations a century ago over the relations between 
capitalism and non- capitalist spheres of life, he describes new systems 
of 'accumulation by dispossession', which means, essentially, the 
looting of the commons and use of extra-economic power to gain profits.

The systems of dispossession today also more explicitly attack the 
sphere of 'reproduction', where exploitation occurs especially through 
unequal gender power relations. This reflects the 'reprivatization' of 
life, as York University political scientists Isabella Bakker and 
Stephen Gill argue in their 2003 book *Power, Production and Social 
Reproduction*.

Together, these concepts allow Marxists to explain why 'capitalist 
crisis' doesn't automatically generate the sorts of payments-system 
breakdowns and mass core-capitalist unemployment problems witnessed 
during the main previous conjuncture of overaccumulation, the Great 
Depression.

According to a careful analysis by York University's Greg Albo in last 
year's *Socialist Register 2004: The New Imperial Challenge*, 'The 
economic slowdown and neoliberalism led to a significant 
financialization of the economy from the 1970s onwards.' Today, 'The 
deflation of the asset bubble adds another tension between the US and 
other zones that complicates any path of adjustment in the world market.'

That's all I seem to have room for in this installment: some teaser 
quotes, a dash of Marxist theory, and preliminary evidence. In the next 
column, I'll unpack the statistics that indicate a new round of profound 
economic vulnerability, not to mention very serious 'tension between the 
US and other zones'. And there are, as well, some profound political 
lessons to learn, if we're not to be taken for a ride on the 
roller-coaster this time, as we were during the late 1990s.


(Patrick - pbond at sn.apc.org - teaches political economy at the 
University of KwaZulu-Natal and directs the Centre for Civil Society - 
http://www.ukzn.ac.za/ccs)



***

December 26, 2004

World Financial Volatility

By Patrick Bond

World financial volatility

Patrick Bond

Addis Ababa - When an Indian-based network of dissident economists - the 
International Development Economics Associates 
(http://www.networkideas.org) - recruited critical African intellectuals 
for two dozen seminar sessions last week, the stability of world 
capitalism naturally came up for debate. The Council for the Development 
of Social Science Research in Africa and the Ethiopian Economics 
Association mainly lamented the structural conditions in world markets 
which have left African cash-crop exporters ever poorer and more 
vulnerable.

Is a different, inward-oriented strategy appropriate? I think so, but 
perhaps a prior question is whether the world financial power center, in 
Washington, might weaken sufficiently to make a progressive approach 
more politically attractive, technically feasible and economically 
rewarding.

To answer affirmatively requires adding more meat to the bones of my 
last column, 'Crunch time for U.S. capitalism' (ZNet Commentary, 
December 4). I argued that the economic slowdown since the 1970s 
generated falling corporate profit rates and speculative investment 
bubbles. But the 'displacement' not resolution of these problems meant 
they actually get worse: through, for example, volatile financial 
markets, ineffectual Third World structural adjustment imposed by the 
World Bank and IMF, and more desperate, brutal imperialist looting methods.

It is a good time to think outside the neoliberal box, these economists 
agreed, since the Washington Consensus universally failed the masses of 
Ethiopians and billions of other Third World people. In addition, 
financial volatility has been evident not just in the dollar price, but 
in other markets across the world, even after the dust settled in East 
Asia following the 1997-98 meltdown. While the Clinton Treasury 
Department managed to pass the costs of these problems elsewhere, the 
chickens have recently been coming home to roost in the U.S. itself.

The main organizer of our gathering, Jayati Ghosh of Nehru University in 
New Delhi, is one of the sharpest critics of bourgeois macroeconomics, 
combining robust anti-imperialism with a Keynesian concern for 
consumption and equity: 'Financial liberalization that successfully 
attracts capital flows increases vulnerability and limits the policy 
space of the government. Unfortunately, the dominance of finance 
globally has meant that such debilitating flows occur even when 
individual developing countries or developing countries as a group have 
no need for such flows to finance their balance of payments or augment 
their savings.'

Concludes Ghosh, 'The real benefit of such flows is derived by the U.S. 
government, which, being the home of the reserve currency, can resort to 
large scale deficit financing which it opposes in developing countries.'

This isn't merely a government dilemma. Consumer credit is also 
expanding the bubble, as U.S. household debt (as a percentage of 
disposable income) ratcheted up from below 70% prior to 1985, to above 
100% fifteen years later.

To be sure, on the one hand, financial product innovations and advanced 
technology permit a somewhat greater debt load without necessarily 
endangering consumer finances. On the other hand, during the same 
period, U.S. individual savings rates fell from a range of 7-12% of 
income to below 3%.

Moreover, household assets are mainly in real estate, in the wake of the 
2000-02 stock market crash. But the property market began inflating out 
of proportion to underlying values following the 1998 drop in interest 
rates (the Fed's response to the Asian crisis), which spurred a dramatic 
increase in mortgage refinancings.

As a result of the huge rise in property prices that followed, the 
difference between the real cost of owning and of renting soared to 
unprecedented levels, according to the left's guru on this issue, Dean 
Baker of the Center for Economic and Policy Research in Washington. With 
the housing sector contributing roughly a third of U.S. economic growth 
since the late 1990s, this bubble is particularly important. Overpriced 
property is also a severe threat in cities in nearly every country.

Yet another speculative investment route has opened up in financial 
instruments called 'derivatives' (because they are not direct claims on 
underlying property - instead, gambles on price movements). Interest 
rate futures and options are especially hot trades, soaring by 41% in 
dollar activity last year.

Likewise, energy-related derivatives are a popular Wall Street gamble, 
resulting in huge price fluctuations in immature markets such as 
electricity, gas and oil. Thanks to U.S. dependence on imported oil, 
which has increased in price from $12/barrel in 1999 to more than 
$50/barrel a few weeks ago, such speculation-driven price swings have 
exacerbated Washington's trade deficit, already vast at 5% of GDP.

The point, as Ghosh reminds us, is that U.S. financiers can place these 
sorts of bets in new markets because they receive vast loans from East 
Asia, money otherwise unavailable to the rest of the world for 
investment. This is especially unfair, given that Washington was the 
main beneficiary of the region's currency crash in 1997-98. Massive 
capital flows entered the U.S. banking system, and imports from East 
Asia were acquired at much lower prices by U.S. consumers, in turn 
lowering what might otherwise have been credit-fuelled inflation.

Still, more than $2 billion of overseas money is required by the U.S. 
each work day to cover imports and international debt repayments. As a 
result, foreign ownership of all outstanding Treasury bills has soared 
from 20% to 40% over the course of the past decade. Warns Ghosh, 'The 
problem now is that the willingness of private investors and governments 
to hold more dollar denominated assets is waning. If that continues, a 
crisis at the metropolitan centre of global capitalism is a possibility.'

The U.S. dollar's value is in the midst of a deep plunge, from a peak of 
$0.87 to the euro in 2001 to below $1.30/euro. But it may need to fall 
to as low as $1.56/euro in the short term before equilibrium is reached, 
according to some experts, with 10% annual declines thereafter.

Hence, perhaps aside from China, Japan and Taiwan - whose exporters need 
to keep liquidity flowing to U.S. buyers of their goods - it is sensible 
for most international investors to ditch the dollar. Not surprisingly, 
new international debt securities issued in dollars have been 
substantially lower than those denominated in euros since 2001.

The world financial system has been operating in favour of the U.S. and 
European players, and to the detriment not only of the poorest 
countries, but also roughly two dozen 'emerging markets' (in addition to 
Japan) which are suffering from severe capital outflows. These larger, 
relatively wealthier Third World countries had received more 
international investments than they repaid in profit repatriation and 
other outflows until 1999. But from 2000-03, a massive $550 billion 
flooded away.

Some countries - China, India and Malaysia - maintained stronger 
exchange controls and hence did far better during this period. But given 
the outflow, most large Third World economies were hit by extreme stock 
market and currency crashes, especially Argentina, Brazil, South Africa 
and Turkey. (Their subsequent recoveries have to be put into context of 
how far they fell from 1998-2003.)

Other risky countries - Nigeria, Bulgaria, Ecuador, Panama, Peru, Russia 
and Venezuela - are today paying extremely high rates of interest to 
attract foreign funds and also local finance, while the required returns 
are stratospheric in Argentina, Uruguay, the Ivory Coast and the 
Dominican Republic.

Worse, because of banking deregulation mainly imposed by the World Bank 
and IMF, these countries' own domestic financial markets can be easily 
upset. The rating agency Moody's lists the world's dozen most fragile 
banking systems: Argentina, Uruguay, Bolivia, Venezuela, Indonesia, 
Pakistan, China, Japan, Thailand, the Philippines, South Korea and Ukraine.

Naturally, China's impressive economic growth dominates the data and 
complicates matters. In spite of attracting - uniquely in the Third 
World - $40-50 billion in new foreign investments each year, the Chinese 
banking system is in such bad shape that, like Japan since the early 
1990s, enormous amounts of worthless loans must be very gingerly written 
off.

Indeed, Central Bank deputy governor Li Ruogu resisted Washington's 
pressure to upwardly revalue the Chinese currency a few weeks ago, 
arguing that 'What we are trying to do is create the conditions for a 
market-based exchange rate… China needs to reform its banking sector 
first before it can change its exchange rate policy… How long it will 
take to get there, I don't know.'

Adding to all these problems is Third World foreign debt, which rose 
from $580 billion in 1980 to more than $2.5 trillion today. Most of it 
remains simply unrepayable. Moreover, who can disagree with the activist 
network Jubilee South that in many different ways, including the North's 
ecological debt to the South, it has already been repaid. In 2002 alone, 
the Third World lost a net outflow of $340 billion to service foreign 
debt, compared to measly overseas development aid of $37 billion.

Instead of repaying the foreign debt - which in so many cases was 
borrowed by odious, undemocratic regimes from corrupt commercial bankers 
without any input by (and benefit for) the citizenry - is there a 
default option? Here in Addis at a meeting of African presidents a few 
months ago, even the orthodox Columbia University economist Jeffrey 
Sachs recommended debt repudiation, and redirection of resources to 
health and education. The response was a frightened silence.

Tellingly, in three prior epochs of financial globalization - the 1830, 
1880s and 1930s - similar conditions of international volatility and 
Third World overindebtedness led to defaults by at least a third of all 
countries.

The situation today is different mainly because of centralised creditor 
power. By rescheduling the debt and writing off a tiny trickle of it, 
the World Bank and IMF now make sovereign defaults against individual 
lenders or investors more difficult, unlike in the earlier epochs when 
the creditors were not so well cartelized, and less able to call on 
imperial military power to collect the collateral.

This is the story, in short, of amplified uneven development, reflected 
most starkly in these divergent patterns of financial volatility. It is 
also crucial to bear in mind the imperialist agenda, which today mainly 
links petro-military interests in the White House to those of Wall 
Street and its fraternal financial centers, via the Treasury, Fed and 
U.S. Trade Representative, with codification by the main multilateral 
agencies.

But the situation is not entirely dire. With capitalist vulnerability 
comes the potential for countervailing progressive strength, as the 
Argentine comrades have shown through sustained pressure against 
structural adjustment.

There is also renewed campaigning to urgently limit the power of - and 
indeed defund and decommission - the World Bank and IMF. The World Bank 
Bonds Boycott continues to be a pain in the neck to outgoing president 
James Wolfensohn. If, as rumoured, he is soon replaced by the thoroughly 
nasty U.S. Trade Representative, Robert Zoellick, the Bank's legitimacy 
will deteriorate yet further.

Indeed, without Wolfensohn's disingenuous charm, ventures like the 
Bank/NGO 'Joint Facilitation Committee' - a gimmick heartily condemned 
during a debate between activists and the Civicus NGO leadership in 
Lusaka at the Africa Social Forum last week - will be harder for even 
opportunistic civil society groups to endorse (as discussed by Michael 
Dorsey and myself in this space on September 11).

The Bank is trying now to bounce back from attacks by principled 
eco-social movements and NGO allies. Its International Finance 
Corporation private investment subsidiary was systematically boycotted 
in a series of scheduled October-November consultative meetings in Rio, 
Washington, Berlin, Manila, Tokyo, Nairobi, Paris and London because 
'the whole process is a sham,' as a Friends of the Earth staffer put it.

Yet more encouragingly, last week the Bank was also defeated by an 
Indonesian labor-consumer initiative to prevent electricity 
privatization. In spite of arm-twisting and an added loan offer by the 
Bank's Jakarta representative, the country's supreme court was convinced 
by international evidence that the dangers outweighed alleged benefits, 
and it struck down Bank-promoted privatization legislation.

These are very good signs, but moving from defensive to offensive 
measures will be crucial in coming years. Meantime, you readers will be 
encouraged about the feisty tone of the Africa Social Forum, in 
preparation for next month's Porto Alegre gathering. More on that, next 
time.