No subject

Our argument in a nutshell is that both the financial explosion in recent d=
ecades and the financial implosion now taking place are to be explained mai=
nly in reference to stagnation tendencies within the underlying economy. A =
number of other explanations for the current crisis (most of them focusing =
on the proximate causes) have been given by economists and media pundits. T=
hese include the lessening of regulations on the financial system; the very=
 low interest rates introduced by the Fed to counter the effects of the 200=
0 crash of the =E2=80=9CNew Economy=E2=80=9D stock bubble, leading to the h=
ousing bubble; and the selling of large amounts of =E2=80=9Csub-prime=E2=80=
=9D mortgages to many people that could not afford to purchase a house and/=
or did not fully understand the terms of the mortgages.=20



Much attention has rightly been paid to the techniques whereby mortgages we=
re packaged together and then =E2=80=9Csliced and diced=E2=80=9D and sold t=
o institutional investors around the world. Outright fraud may also have be=
en involved in some of the financial shenanigans. The falling home values f=
ollowing the bursting of the housing bubble and the inability of many sub-p=
rime mortgage holders to continue to make their monthly payments, together =
with the resulting foreclosures, was certainly the straw that broke the cam=
el=E2=80=99s back, leading to this catastrophic system failure. And few wou=
ld doubt today that it was all made worse by the deregulation fervor avidly=
 promoted by the financial firms, which left them with fewer defenses when =
things went wrong.=20



Nevertheless, the root problem went much deeper, and was to be found in a r=
eal economy experiencing slower growth, giving rise to financial explosion =
as capital sought to =E2=80=9Cleverage=E2=80=9D its way out of the problem =
by expanding debt and gaining speculative profits. The extent to which debt=
 has shot up in relation to GDP over the last four decades can be seen in t=
able 1. As these figures suggest, the most remarkable feature in the develo=
pment of capitalism during this period has been the ballooning of debt.=20



Table 1. Domestic debt* and GDP (trillions of dollars)=20



Table 1. Domestic debt* and GDP (trillions of dollars)



* The federal part of local, state, and federal debt includes only that por=
tion held by the public. The total debt in 2007 when the federal debt held =
by federal agencies is added is $51.5 trillion.=20



Sources: Flow of Funds Accounts of the United States, Table L.1 Credit Mark=
et Debt Outstanding, Federal Reserve and Table B-1, Gross domestic product,=
 1959-2007, Economic Report of the President, 2008.=20



This phenomenon is further illustrated in chart 1 showing the skyrocketing =
of private debt relative to national income from the 1960s to the present. =
Financial sector debt as a percentage of GDP first lifted off the ground in=
 the 1960s and 1970s, accelerated beginning in the 1980s, and rocketed up a=
fter the mid 1990s. Household debt as a percentage of GDP rose strongly beg=
inning in the 1980s and then increased even faster in the late 1990s. Nonfi=
nancial business debt in relation to national income also climbed over the =
period, if less spectacularly. The overall effect has been a massive increa=
se in private debt relative to national income. The problem is further comp=
ounded if government debt (local, state, and federal) is added in. When all=
 sectors are included, the total debt as a percentage of GDP rose from 151 =
percent in 1959 to an astronomical 373 percent in 2007!=20



This rise in the cumulative debt load as a percentage of GDP greatly stimul=
ated the economy, particularly in the financial sector, feeding enormous fi=
nancial profits and marking the growing financialization of capitalism (the=
 shift in gravity from production to finance within the economy as a whole)=
. The profit picture, associated with this accelerating financialization, i=
s shown in chart 2, which provides a time series index (1970 =3D 100) of U.=
S. financial versus nonfinancial profits and the GDP. Beginning in 1970, fi=
nancial and nonfinancial profits tended to increase at the same rate as the=
 GDP. However, in the late 1990s, finance seemed to take on a life of its o=
wn with the profits of U.S. financial corporations (and to a lesser extent =
nonfinancial corporate profits too) heading off into the stratosphere, seem=
ingly unrelated to growth of national income, which was relatively stagnant=
. Corporations playing in what had become a giant casino took on more and m=
ore leveraging=E2=80=94that is, they often bet thirty or more borrowed doll=
ars for every dollar of their own that was used. This helps to explain the =
extraordinarily high profits they were able to earn as long as their bets w=
ere successful. The growth of finance was of course not restricted simply t=
o the United States but was a global phenomenon with speculative claims to =
wealth far overshadowing global production, and the same essential contradi=
ction cutting across the entire advanced capitalist world and =E2=80=9Cemer=
ging=E2=80=9D economies.=20



Chart 1. Private debt as percentage of GDP=20



Chart 1. Private debt as percentage of GDP



Sources: Same as table 1.=20



Chart 2. Growth of financial and nonfinancial profits relative to GDP (1970=
 =3D 100)=20



Chart 2. Growth of financial and nonfinancial profits relative to GDP (1970=
 =3D 100)



Sources: Calculated from Table B=E2=80=9391=E2=80=94Corporate profits by in=
dustry, 1959=E2=80=932007. Ta-ble B=E2=80=931=E2=80=94Gross domestic produc=
t, 1959=E2=80=932007, Economic Report of the President, 2008.=20



Already by the late 1980s the seriousness of the situation was becoming cle=
ar to those not wedded to established ways of thinking. Looking at this con=
dition in 1988 on the anniversary of the 1987 stock market crash, Monthly R=
eview editors Harry Magdoff and Paul Sweezy, contended that sooner or later=
=E2=80=94no one could predict when or exactly how=E2=80=94a major crisis of=
 the financial system that overpowered the lender of last resort function w=
as likely to occur. This was simply because the whole precarious financial =
superstructure would have by then grown to such a scale that the means of g=
overnmental authorities, though massive, would no longer be sufficient to k=
eep back the avalanche, especially if they failed to act quickly and decisi=
vely enough. As they put it, the next time around it was quite possible tha=
t the rescue effort would =E2=80=9Csucceed in the same ambiguous sense that=
 it did after the 1987 stock market crash. If so, we will have the whole pr=
ocess to go through again on a more elevated and precarious level. But soon=
er or later, next time or further down the road, it will not succeed,=E2=80=
=9D generating a severe crisis of the economy.=20



As an example of a financial avalanche waiting to happen, they pointed to t=
he =E2=80=9Chigh flying Tokyo stock market,=E2=80=9D as a possible prelude =
to a major financial implosion and a deep stagnation to follow=E2=80=94a re=
ality that was to materialize soon after, resulting in Japan=E2=80=99s fina=
ncial crisis and =E2=80=9CGreat Stagnation=E2=80=9D of the 1990s. Asset val=
ues (both in the stock market and real estate) fell by an amount equivalent=
 to more than two years of GDP. As interest rates zeroed-out and debt-defla=
tion took over, Japan was stuck in a classic liquidity trap with no ready w=
ay of restarting an economy already deeply mired in overcapacity in the pro=
ductive economy. 24=20



=E2=80=9CIn today=E2=80=99s world ruled by finance,=E2=80=9D Magdoff and Sw=
eezy had written in 1987 in the immediate aftermath of the U.S. stock marke=
t crash:=20



the underlying growth of surplus value falls increasingly short of the rate=
 of accumulation of money capital. In the absence of a base in surplus valu=
e, the money capital amassed becomes more and more nominal, indeed fictitio=
us. It comes from the sale and purchase of paper assets, and is based on th=
e assumption that asset values will be continuously inflated. What we have,=
 in other words, is ongoing speculation grounded in the belief that, despit=
e fluctuations in price, asset values will forever go only one way=E2=80=94=
upward! Against this background, the October [1987] stock market crash assu=
mes a far-reaching significance. By demonstrating the fallacy of an unendin=
g upward movement in asset values, it exposes the irrational kernel of toda=
y=E2=80=99s economy. 25=20



These contradictions, associated with speculative bubbles, have of course t=
o some extent been endemic to capitalism throughout its history. However, i=
n the post-Second World War era, as Magdoff and Sweezy, in line with Minsky=
, argued, the debt overhang became larger and larger, pointing to the growt=
h of a problem that was cumulative and increasingly dangerous. In The End o=
f Prosperity Magdoff and Sweezy wrote: =E2=80=9CIn the absence of a severe =
depression during which debts are forcefully wiped out or drastically reduc=
ed, government rescue measures to prevent collapse of the financial system =
merely lay the groundwork for still more layers of debt and additional stra=
ins during the next economic advance.=E2=80=9D As Minsky put it, =E2=80=9CW=
ithout a crisis and a debt-deflation process to offset beliefs in the succe=
ss of speculative ventures, both an upward bias to prices and ever-higher f=
inancial layering are induced.=E2=80=9D 26=20



To the extent that mainstream economists and business analysts themselves w=
ere momentarily drawn to such inconvenient questions, they were quickly cas=
t aside. Although the spectacular growth of finance could not help but crea=
te jitters from time to time=E2=80=94for example, Alan Greenspan=E2=80=99s =
famous reference to =E2=80=9Cirrational exuberance=E2=80=9D=E2=80=94the pre=
vailing assumption, promoted by Greenspan himself, was that the growth of d=
ebt and speculation represented a new era of financial market innovation, i=
.e., a sustainable structural change in the business model associated with =
revolutionary new risk management techniques. Greenspan was so enamored of =
the =E2=80=9CNew Economy=E2=80=9D made possible by financialization that he=
 noted in 2004: =E2=80=9CNot only have individual financial institutions be=
come less vulnerable to shocks from underlying risk factors, but also the f=
inancial system as a whole has become more resilient.=E2=80=9D 27=20



It was only with the onset of the financial crisis in 2007 and its persiste=
nce into 2008, that we find financial analysts in surprising places openly =
taking on the contrary view. Thus as Manas Chakravarty, an economic columni=
st for India=E2=80=99s investor Web site, Livemint.com (partnered with the =
Wall Street Journal ), observed on September 17, 2008, in the context of th=
e Wall Street meltdown,=20



American economist Paul Sweezy pointed out long ago that stagnation and eno=
rmous financial speculation emerged as symbiotic aspects of the same deep-s=
eated, irreversible economic impasse. He said the stagnation of the underly=
ing economy meant that business was increasingly dependent on the growth of=
 finance to preserve and enlarge its money capital and that the financial s=
uperstructure of the economy could not expand entirely independently of its=
 base in the underlying productive economy. With remarkable prescience, Swe=
ezy said the bursting of speculative bubbles would, therefore, be a recurri=
ng and growing problem. 28=20



Of course, Paul Baran and Sweezy in Monopoly Capital, and later on Magdoff =
and Sweezy in Monthly Review, had pointed to other forms of absorption of s=
urplus such as government spending (particularly military spending), the sa=
les effort, the stimulus provided by new innovations, etc. 29 But all of th=
ese, although important, had proven insufficient to maintain the economy at=
 anything like full employment, and by the 1970s the system was mired in de=
epening stagnation (or stagflation). It was financialization=E2=80=94and th=
e growth of debt that it actively promoted=E2=80=94which was to emerge as t=
he quantitatively most important stimulus to demand. But it pointed unavoid=
ably to a day of financial reckoning and cascading defaults.=20



Indeed, some mainstream analysts, under the pressure of events, were forced=
 to acknowledge by summer 2008 that a massive devaluation of the system mig=
ht prove inevitable. Jim Reid, the Deutsche Bank=E2=80=99s head of credit r=
esearch, examining the kind of relationship between financial profits and G=
DP exhibited in chart 2, issued an analysis called =E2=80=9CA Trillion-Doll=
ar Mean Reversion?,=E2=80=9D in which he argued that:=20



U.S. financial profits have deviated from the mean over the past decade on =
a cumulative basis=E2=80=A6 The U.S. Financial sector has made around 1.2 T=
rillion ($1,200bn) of =E2=80=98excess=E2=80=99 profits in the last decade r=
elative to nominal GDP=E2=80=A6 So mean reversion [the theory that returns =
in financial markets over time =E2=80=9Crevert=E2=80=9D to a long-term mean=
 projection, or trend-line] would suggest that $1.2 trillion of profits nee=
d to be wiped out before the U.S. financial sector can be cleansed of the e=
xcesses of the last decade=E2=80=A6 Given that...Bloomberg reports that $18=
4bn has been written down by U.S. financials so far in this crisis, if one =
believes that the size of the financial sector should shrink to levels seen=
 a decade ago then one could come to the conclusion that there is another t=
rillion dollars of value destruction to go in the sector before we=E2=80=99=
re back to the long-run trend in financial profits. A scary thought and one=
 that if correct will lead to a long period of constant intervention by the=
 authorities in an attempt to arrest this potential destruction. Finding th=
e appropriate size of the financial sector in the =E2=80=9Cnew world=E2=80=
=9D will be key to how much profit destruction there needs to be in the sec=
tor going forward.=20



The idea of a mean reversion of financial profits to their long-term trend-=
line in the economy as a whole was merely meant to be suggestive of the ext=
ent of the impending change, since Reid accepted the possibility that struc=
tural =E2=80=9Creal world=E2=80=9D reasons exist to explain the relative we=
ight of finance=E2=80=94though none he was yet ready to accept. As he ackno=
wledged, =E2=80=9Ccalculating the =E2=80=98natural=E2=80=99 appropriate siz=
e for the financial sector relative to the rest of the economy is a phenome=
nally difficult conundrum.=E2=80=9D Indeed, it was to be doubted that a =E2=
=80=9Cnatural=E2=80=9D level actually existed. But the point that a massive=
 =E2=80=9Cprofit destruction=E2=80=9D was likely to occur before the system=
 could get going again and that this explained the =E2=80=9Clong period of =
constant intervention by the authorities in an attempt to arrest this poten=
tial destruction,=E2=80=9D highlighted the fact that the crisis was far mor=
e severe than then widely supposed=E2=80=94something that became apparent s=
oon after. 30=20



What such thinking suggested, in line with what Magdoff and Sweezy had argu=
ed in the closing decades of the twentieth century, was that the autonomy o=
f finance from the underlying economy, associated with the financialization=
 process, was more relative than absolute, and that ultimately a major econ=
omic downturn=E2=80=94more than the mere bursting of one bubble and the inf=
lating of another=E2=80=94was necessary. This was likely to be more devasta=
ting the longer the system put it off. In the meantime, as Magdoff and Swee=
zy had pointed out, financialization might go on for quite a while. And ind=
eed there was no other answer for the system.=20



Back to the Real Economy: The Stagnation Problem=20



Paul Baran, Paul Sweezy, and Harry Magdoff argued indefatigably from the 19=
60s to the 1990s (most notably in Monopoly Capital ) that stagnation was th=
e normal state of the monopoly-capitalist economy, barring special historic=
al factors. The prosperity that characterized the economy in the 1950s and =
=E2=80=9960s, they insisted, was attributable to such temporary historical =
factors as: (1) the buildup of consumer savings during the war; (2) a secon=
d great wave of automobilization in the United States (including the expans=
ion of the glass, steel, and rubber industries, the construction of the int=
erstate highway system, and the development of suburbia); (3) the rebuildin=
g of the European and the Japanese economies devastated by the war; (4) the=
 Cold War arms race (and two regional wars in Asia); (5) the growth of the =
sales effort marked by the rise of Madison Avenue; (6) the expansion of FIR=
E (finance, insurance, and real estate); and (7) the preeminence of the dol=
lar as the hegemonic currency. Once the extraordinary stimulus from these f=
actors waned, the economy began to subside back into stagnation: slow growt=
h and rising excess capacity and unemployment/underemployment. In the end, =
it was military spending and the explosion of debt and speculation that con=
stituted the main stimuli keeping the economy out of the doldrums. These we=
re not sufficient, however, to prevent the reappearance of stagnation tende=
ncies altogether, and the problem got worse with time. 31=20



The reality of creeping stagnation can be seen in table 2, which shows the =
real growth rates of the economy decade by decade over the last eight decad=
es. The low growth rate in the 1930s reflected the deep stagnation of the G=
reat Depression. This was followed by the extraordinary rise of the U.S. ec=
onomy in the 1940s under the impact of the Second World War. During the yea=
rs 1950=E2=80=9369, now often referred to as an economic =E2=80=9CGolden Ag=
e,=E2=80=9D the economy, propelled by the set of special historical factors=
 referred to above, was able to achieve strong economic growth in a =E2=80=
=9Cpeacetime=E2=80=9D economy. This, however, proved to be all too temporar=
y. The sharp drop off in growth rates in the 1970s and thereafter points to=
 a persistent tendency toward slower expansion in the economy, as the main =
forces pushing up growth rates in the 1950s and =E2=80=9960s waned, prevent=
ing the economy from returning to its former prosperity. In subsequent deca=
des, rather than recovering its former trend-rate of growth, the economy sl=
owly subsided.=20



Table 2. Growth in real GDP 1930=E2=80=932007=20



Table 2. Growth in real GDP 1930=E2=80=932007



Source: National Income and Products Accounts Table 1.1.1. Percent Change f=
rom Preceding Period in Real Gross Domestic Product, Bureau of Economic Ana=
lysis.=20



It was the reality of economic stagnation beginning in the 1970s, as hetero=
dox economists Riccardo Bellofiore and Joseph Halevi have recently emphasiz=
ed, that led to the emergence of =E2=80=9Cthe new financialized capitalist =
regime,=E2=80=9D a kind of =E2=80=9Cparadoxical financial Keynesianism =E2=
=80=9D whereby demand in the economy was stimulated primarily =E2=80=9Cthan=
ks to asset-bubbles.=E2=80=9D Moreover, it was the leading role of the Unit=
ed States in generating such bubbles=E2=80=94despite (and also because of) =
the weakening of capital accumulation proper=E2=80=94together with the doll=
ar=E2=80=99s reserve currency status, that made U.S. monopoly-finance capit=
al the =E2=80=9Ccatalyst of world effective demand,=E2=80=9D beginning in t=
he 1980s. 32 But such a financialized growth pattern was unable to produce =
rapid economic advance for any length of time, and was unsustainable, leadi=
ng to bigger bubbles that periodically burst, bringing stagnation more and =
more to the surface.=20



A key element in explaining this whole dynamic is to be found in the fallin=
g ratio of wages and salaries as a percentage of national income in the Uni=
ted States. Stagnation in the 1970s led capital to launch an accelerated cl=
ass war against workers to raise profits by pushing labor costs down. The r=
esult was decades of increasing inequality. 33 Chart 3 shows a sharp declin=
e in the share of wages and salaries in GDP between the late 1960s and the =
present. This reflected the fact that real wages of private nonagricultural=
 workers in the United States (in 1982 dollars) peaked in 1972 at $8.99 per=
 hour, and by 2006 had fallen to $8.24 (equivalent to the real hourly wage =
rate in 1967), despite the enormous growth in productivity and profits over=
 the past few decades. 34=20



Chart 3. Wage and salary disbursements as a percent-age of GDP=20



Chart 3. Wage and salary disbursements as a percent-age of GDP



Sources: Economic Report of the President, 2008, Table B-1 (GDP), Table B=
=E2=80=9329=E2=80=94Sources of personal income, 1959=E2=80=932007.=20



This was part of a massive redistribution of income and wealth to the top. =
Over the years 1950 to 1970, for each additional dollar made by those in th=
e bottom 90 percent of income earners, those in the top 0.01 percent receiv=
ed an additional $162. In contrast, from 1990 to 2002, for each added dolla=
r made by those in the bottom 90 percent, those in the uppermost 0.01 perce=
nt (today around 14,000 households) made an additional $18,000. In the Unit=
ed States the top 1 percent of wealth holders in 2001 together owned more t=
han twice as much as the bottom 80 percent of the population. If this were =
measured simply in terms of financial wealth, i.e., excluding equity in own=
er-occupied housing, the top 1 percent owned more than four times the botto=
m 80 percent. Between 1983 and 2001, the top 1 percent grabbed 28 percent o=
f the rise in national income, 33 percent of the total gain in net worth, a=
nd 52 percent of the overall growth in financial worth. 35=20



The truly remarkable fact under these circumstances was that household cons=
umption continued to rise from a little over 60 percent of GDP in the early=
 1960s to around 70 percent in 2007. This was only possible because of more=
 two-earner households (as women entered the labor force in greater numbers=
), people working longer hours and filling multiple jobs, and a constant ra=
tcheting up of consumer debt. Household debt was spurred, particularly in t=
he later stages of the housing bubble, by a dramatic rise in housing prices=
, allowing consumers to borrow more against their increased equity (the so-=
called housing =E2=80=9Cwealth effect=E2=80=9D)=E2=80=94a process that came=
 to a sudden end when the bubble popped, and housing prices started to fall=
. As chart 1 shows, household debt increased from about 40 percent of GDP i=
n 1960 to 100 percent of GDP in 2007, with an especially sharp increase sta=
rting in the late 1990s. 36=20



This growth of consumption, based in the expansion of household debt, was t=
o prove to be the Achilles heel of the economy. The housing bubble was base=
d on a sharp increase in household mortgage-based debt, while real wages ha=
d been essentially frozen for decades. The resulting defaults among margina=
l new owners led to a fall in house prices. This led to an ever increasing =
number of owners owing more on their houses than they were worth, creating =
more defaults and a further fall in house prices. Banks seeking to bolster =
their balance sheets began to hold back on new extensions of credit card de=
bt. Consumption fell, jobs were lost, capital spending was put off, and a d=
ownward spiral of unknown duration began.=20



During the last thirty or so years the economic surplus controlled by corpo=
rations, and in the hands of institutional investors, such as insurance com=
panies and pension funds, has poured in an ever increasing flow into an exo=
tic array of financial instruments. Little of the vast economic surplus was=
 used to expand investment, which remained in a state of simple reproductio=
n, geared to mere replacement (albeit with new, enhanced technology), as op=
posed to expanded reproduction. With corporations unable to find the demand=
 for their output=E2=80=94a reality reflected in the long-run decline of ca=
pacity utilization in industry (see chart 4)=E2=80=94and therefore confront=
ed with a dearth of profitable investment opportunities, the process of net=
 capital formation became more and more problematic.=20



Chart 4. Percent utilization of industrial capacity=20



Article Chart 4



Source: Economic Report of the President, 2008, Table B=E2=80=9354=E2=80=94=
Capacity utilization rates, 1959=E2=80=932007.=20



Hence, profits were increasingly directed away from investment in the expan=
sion of productive capacity and toward financial speculation, while the fin=
ancial sector seemed to generate unlimited types of financial products desi=
gned to make use of this money capital. (The same phenomenon existed global=
ly, causing Bernanke to refer in 2005 to a =E2=80=9Cglobal savings glut,=E2=
=80=9D with enormous amounts of investment-seeking capital circling the wor=
ld and increasingly drawn to the United States because of its leading role =
in financialization.) 37 The consequences of this can be seen in chart 5, s=
howing the dramatic decoupling of profits from net investment as percentage=
s of GDP in recent years, with net private nonresidential fixed investment =
as a share of national income falling significantly over the period, even w=
hile profits as a share of GDP approached a level not seen since the late 1=
960s/early 1970s. This marked, in Marx=E2=80=99s terms, a shift from the =
=E2=80=9Cgeneral formula for capital=E2=80=9D M(oney)-C(commodity)=E2=80=93=
M=C2=A2 (original money plus surplus value), in which commodities were cent=
ral to the production of profits=E2=80=94to a system increasingly geared to=
 the circuit of money capital alone, M=E2=80=93M=C2=A2, in which money simp=
ly begets more money with no relation to production.=20



Chart 5. Profits and net investment as percentage of GDP 1960 to present=20



Chart 5. Profits and net investment as percentage of GDP 1960 to present



Sources: Bureau of Economic Analysis, National Income and Product Accounts,=
 Table 5.2.5. Gross and Net Domestic Investment by Major Type, (Billions of=
 dollars). Table B-1 (GDP) and Table B-91 (Domestic industry profits), Econ=
omic Report of the President, 2008.=20



Since financialization can be viewed as the response of capital to the stag=
nation tendency in the real economy, a crisis of financialization inevitabl=
y means a resurfacing of the underlying stagnation endemic to the advanced =
capitalist economy. The deleveraging of the enormous debt built up during r=
ecent decades is now contributing to a deep crisis. Moreover, with financia=
lization arrested there is no other visible way out for monopoly-finance ca=
pital. The prognosis then is that the economy, even after the immediate dev=
aluation crisis is stabilized, will at best be characterized for some time =
by minimal growth, and by high unemployment, underemployment, and excess ca=
pacity.=20



The fact that U.S. consumption (facilitated by the enormous U.S. current ac=
count deficit) has provided crucial effective demand for the production of =
other countries means that the slowdown in the United States is already hav=
ing disastrous effects abroad, with financial liquidation now in high gear =
globally. =E2=80=9CEmerging=E2=80=9D and underdeveloped economies are caugh=
t in a bewildering set of problems. This includes falling exports, declinin=
g commodity prices, and the repercussions of high levels of financializatio=
n on top of an unstable and highly exploitative economic base=E2=80=94while=
 being subjected to renewed imperial pressures from the center states.=20



The center states are themselves in trouble. Iceland, which has been compar=
ed to the canary in the coal mine, has experienced a complete financial mel=
tdown, requiring rescue from outside, and possibly a massive raiding of the=
 pension funds of the citizenry. For more than seventeen years Iceland has =
had a right-wing government led by the ultra-conservative Independence Part=
y in coalition with the centrist social democratic parties. Under this lead=
ership Iceland adopted neoliberal financialization and speculation to the h=
ilt and saw an excessive growth of its banking and finance sectors with tot=
al assets of its banks growing from 96 percent of its GDP at the end of 200=
0 to nine times its GDP in 2006. Now Icelandic taxpayers, who were not resp=
onsible for these actions, are being asked to carry the burden of the overs=
eas speculative debts of their banks, resulting in a drastic decline in the=
 standard of living. 38=20



A Political Economy=20



Economics in its classical stage, which encompassed the work of both posses=
sive-individualists, like Adam Smith, David Ricardo, Thomas Malthus, and Jo=
hn Stuart Mill, and socialist thinkers such as Karl Marx, was called politi=
cal economy. The name was significant because it pointed to the class basis=
 of the economy and the role of the state. 39 To be sure, Adam Smith introd=
uced the notion of the =E2=80=9Cinvisible hand=E2=80=9D of the market in re=
placing the former visible hand of the monarch. But, the political-class co=
ntext of economics was nevertheless omnipresent for Smith and all the other=
 classical economists. In the 1820s, as Marx observed, there were =E2=80=9C=
splendid tournaments=E2=80=9D between political economists representing dif=
ferent classes (and class fractions) of society.=20



However, from the 1830s and =E2=80=9940s on, as the working class arose as =
a force in society, and as the industrial bourgeoisie gained firm control o=
f the state, displacing landed interests (most notably with the repeal of t=
he Corn Laws), economics shifted from its previous questioning form to the =
=E2=80=9Cbad conscience and evil intent of the apologetics.=E2=80=9D 40 Inc=
reasingly the circular flow of economic life was reconceptualized as a proc=
ess involving only individuals, consuming, producing, and profiting on the =
margin. The concept of class thus disappeared in economics, but was embrace=
d by the rising field of sociology (in ways increasingly abstracted from fu=
ndamental economic relationships). The state also was said to have nothing =
directly to do with economics and was taken up by the new field of politica=
l science. 41 Economics was thus =E2=80=9Cpurified=E2=80=9D of all class an=
d political elements, and increasingly presented as a =E2=80=9Cneutral=E2=
=80=9D science, addressing universal/transhistorical principles of capital =
and market relations.=20



Having lost any meaningful roots in society, orthodox neoclassical economic=
s, which presented itself as a single paradigm, became a discipline dominat=
ed by largely meaningless abstractions, mechanical models, formal methodolo=
gies, and mathematical language, divorced from historical developments. It =
was anything but a science of the real world; rather its chief importance l=
ay in its role as a self-confirming ideology. Meanwhile, actual business pr=
oceeded along its own lines largely oblivious (sometimes intentionally so) =
of orthodox economic theories. The failure of received economics to learn t=
he lessons of the Great Depression, i.e., the inherent flaws of a system of=
 class-based accumulation in its monopoly stage, included a tendency to ign=
ore the fact that the real problem lay in the real economy, rather than in =
the monetary-financial economy.=20



Today nothing looks more myopic than Bernanke=E2=80=99s quick dismissal of =
traditional theories of the Great Depression that traced the underlying cau=
ses to the buildup of overcapacity and weak demand=E2=80=94inviting a simil=
ar dismissal of such factors today. Like his mentor Milton Friedman, Bernan=
ke has stood for the dominant, neoliberal economic view of the last few dec=
ades, with its insistence that by holding back =E2=80=9Cthe rock that start=
s a landslide=E2=80=9D it was possible to prevent a financial avalanche of =
=E2=80=9Cmajor proportions=E2=80=9D indefinitely. 42 That the state of the =
ground above was shifting, and that this was due to real, time-related proc=
esses, was of no genuine concern. Ironically, Bernanke, the academic expert=
 on the Great Depression, adopted what had been described by Ethan Harris, =
chief U.S. economist for Barclays Capital, as a =E2=80=9Csee no evil, hear =
no evil, speak no evil=E2=80=9D policy with respect to asset bubbles. 43=20



It is therefore to the contrary view, emphasizing the socioeconomic contrad=
ictions of the system, to which it is now necessary to turn. For a time in =
response to the Great Depression of the 1930s, in the work of John Maynard =
Keynes, and various other thinkers associated with the Keynesian, instituti=
onalist, and Marxist traditions=E2=80=94the most important of which was the=
 Polish economist Michael Kalecki=E2=80=94there was something of a revival =
of political-economic perspectives. But following the Second World War Keyn=
esianism was increasingly reabsorbed into the system. This occurred partly =
through what was called the =E2=80=9Cneoclassical-Keynesian synthesis=E2=80=
=9D=E2=80=94which, as Joan Robinson, one of Keynes=E2=80=99s younger collea=
gues claimed, had the effect of bastardizing Keynes=E2=80=94and partly thro=
ugh the closely related growth of military Keynesianism. 44 Eventually, mon=
etarism emerged as the ruling response to the stagflation crisis of the 197=
0s, along with the rise of other conservative free-market ideologies, such =
as supply-side theory, rational expectations, and the new classical economi=
cs (summed up as neoliberal orthodoxy). Economics lost its explicit politic=
al-economic cast, and the world was led back once again to the mythology of=
 self-regulating, self-equilibrating markets free of issues of class and po=
wer. Anyone who questioned this, was characterized as political rather than=
 economic, and thus largely excluded from the mainstream economic discussio=
n. 45=20



Needless to say, economics never ceased to be political; rather the politic=
s that was promoted was so closely intertwined with the system of economic =
power as to be nearly invisible. Adam Smith=E2=80=99s visible hand of the m=
onarch had been transformed into the invisible hand, not of the market, but=
 of the capitalist class, which was concealed behind the veil of the market=
 and competition. Yet, with every major economic crisis that veil has been =
partly torn aside and the reality of class power exposed.=20



Treasury Secretary Paulson=E2=80=99s request to Congress in September 2008,=
 for $700 billion with which to bail out the financial system may constitut=
e a turning point in the popular recognition of, and outrage over, the econ=
omic problem, raising for the first time in many years the issue of a polit=
ical economy. It immediately became apparent to the entire population that =
the critical question in the financial crisis and in the deep economic stag=
nation that was emerging was: Who will pay ? The answer of the capitalist s=
ystem, left to its own devices, was the same as always: the costs would be =
borne disproportionately by those at the bottom. The old game of privatizat=
ion of profits and socialization of losses would be replayed for the umptee=
nth time. The population would be called upon to =E2=80=9Ctighten their bel=
ts=E2=80=9D to =E2=80=9Cfoot the bill=E2=80=9D for the entire system. The c=
apacity of the larger public to see through this deception in the months an=
d years ahead will of course depend on an enormous amount of education by t=
rade union and social movement activists, and the degree to which the empir=
e of capital is stripped naked by the crisis.=20



There is no doubt that the present growing economic bankruptcy and politica=
l outrage have produced a fundamental break in the continuity of the histor=
ical process. How should progressive forces approach this crisis? First of =
all, it is important to discount any attempts to present the serious econom=
ic problems that now face us as a kind of =E2=80=9Cnatural disaster.=E2=80=
=9D They have a cause, and it lies in the system itself. And although those=
 at the top of the economy certainly did not welcome the crisis, they nonet=
heless have been the main beneficiaries of the system, shamelessly enrichin=
g themselves at the expense of the rest of the population, and should be he=
ld responsible for the main burdens now imposed on society. It is the well-=
to-do who should foot the bill=E2=80=94not only for reasons of elementary j=
ustice, but also because they collectively and their system constitute the =
reason that things are as bad as they are; and because the best way to help=
 both the economy and those at the bottom is to address the needs of the la=
tter directly. There should be no golden parachutes for the capitalist clas=
s paid for at taxpayer expense.=20



But capitalism takes advantage of social inertia, using its power to rob ou=
tright when it can=E2=80=99t simply rely on =E2=80=9Cnormal=E2=80=9D exploi=
tation. Without a revolt from below the burden will simply be imposed on th=
ose at the bottom. All of this requires a mass social and economic upsurge,=
 such as in the latter half of the 1930s, including the revival of unions a=
nd mass social movements of all kinds=E2=80=94using the power for change gr=
anted to the people in the Constitution; even going so far as to threaten t=
he current duopoly of the two-party system.=20



What should such a radical movement from below, if it were to emerge, seek =
to do under these circumstances? Here we hesitate to say, not because there=
 is any lack of needed actions to take, but because a radicalized political=
 movement determined to sweep away decades of exploitation, waste, and irra=
tionality will, if it surfaces, be like a raging storm, opening whole new v=
istas for change. Anything we suggest at this point runs the double risk of=
 appearing far too radical now and far too timid later on.=20



Some liberal economists and commentators argue that, given the present econ=
omic crisis, nothing short of a major public works program aimed at promoti=
ng employment, a kind of new New Deal, will do. Robert Kuttner has argued i=
n Obama=E2=80=99s Challenge that =E2=80=9Can economic recovery will require=
 more like $700 billion a year in new public outlay, or $600 billion counti=
ng offsetting cuts in military spending. Why? Because there is no other pla=
usible strategy for both achieving a general economic recovery and restorin=
g balance to the economy.=E2=80=9D 46 This, however, will be more difficult=
 than it sounds. There are reasons to believe that the dominant economic in=
terests would block an increase in civilian government spending on such a s=
cale, even in a crisis, as interfering with the private market. The truth i=
s that civilian government purchases were at 13.3 percent of GNP in 1939 =
=E2=80=94 what Baran and Sweezy in 1966 theorized as approximating their =
=E2=80=9Couter limits=E2=80=9D=E2=80=94and they have barely budged since th=
en, with civilian government consumption and investment expenditures from 1=
960 to the present averaging 13.7 percent of GNP (13.8 percent of GDP). 47 =
The class forces blocking a major increase in nondefense governmental spend=
ing even in a severe stagnation should therefore not be underestimated. Any=
 major advances in this direction will require a massive class struggle.=20



Still, there can be no doubt that change should be directed first and forem=
ost to meeting the basic needs of people for food, housing, employment, hea=
lth, education, a sustainable environment, etc. Will the government assume =
the responsibility for providing useful work to all those who desire and ne=
ed it? Will housing be made available (free from crushing mortgages) to eve=
ryone, extending as well to the homeless and the poorly housed? Will a sing=
le-payer national health system be introduced to cover the needs of the ent=
ire population, replacing the worst and most expensive health care system i=
n the advanced capitalist world? Will military spending be cut back drastic=
ally, dispensing with global imperial domination? Will the rich be heavily =
taxed and income and wealth be redistributed? Will the environment, both gl=
obal and local, be protected? Will the right to organize be made a reality?=
=20



If such elementary prerequisites of any decent future look impossible under=
 the present system, then the people should take it into their own hands to=
 create a new society that will deliver these genuine goods . Above all it =
is necessary =E2=80=9Cto insist that morality and economics alike support t=
he intuitive sense of the masses that society=E2=80=99s human and natural r=
esources can and should be used for all the people and not for a privileged=
 minority.=E2=80=9D 48=20



In the 1930s Keynes decried the growing dominance of financial capital, whi=
ch threatened to reduce the real economy to =E2=80=9Ca bubble on a whirlpoo=
l of speculation,=E2=80=9D and recommended the =E2=80=9Ceuthanasia of the r=
entier.=E2=80=9D However, financialization is so essential to the monopoly-=
finance capital of today, that such a =E2=80=9Ceuthanasia of the rentier=E2=
=80=9D cannot be achieved=E2=80=94in contravention of Keynes=E2=80=99s drea=
m of a more rational capitalism=E2=80=94without moving beyond the system it=
self. In this sense we are clearly at a global turning point, where the wor=
ld will perhaps finally be ready to take the step, as Keynes also envisione=
d, of repudiating an alienated moral code of =E2=80=9Cfair is foul and foul=
 is fair=E2=80=9D=E2=80=94used to justify the greed and exploitation necess=
ary for the accumulation of capital=E2=80=94turning it inside-out to create=
 a more rational social order. 49 To do this, though, it is necessary for t=
he population to seize control of their political economy, replacing the pr=
esent system of capitalism with something amounting to a real political and=
 economic democracy; what the present rulers of the world fear and decry mo=
st=E2=80=94as =E2=80=9Csocialism.=E2=80=9D 50=20



October 25, 2008=20



Notes=20





    1. Harry Magdoff and Paul M. Sweezy, The Irreversible Crisis (New York:=
 Monthly Review Press, 1988), 76. Back to Article=20
    2. James K. Galbraith, The Predator State (New York: The Free Press, 20=
08), 48. Back to Article=20
    3. =E2=80=9CCongressional Leaders Were Stunned by Warnings,=E2=80=9D Ne=
w York Times , September 19, 2008. Back to Article=20
    4. Manas Chakravarty and Mobis Philipose, =E2=80=9CLiquidity Trap: Fear=
 of Failure,=E2=80=9D Livemint.com, October 11, 2008; John Maynard Keynes, =
The General Theory of Employment, Interest and Money (London: Macmillan, 19=
73), 174. Back to Article=20

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