Can Marxism explain the financial crash?

EVERYONE NOW recognizes that we are in the most severe crisis to hit the capitalist system in generations. The chief of the International Monetary Fund, Dominique Strauss-Kahn, recently declared that we are already in a depression. The so-called "maestro" of markets, former Federal Reserve Chair Alan Greenspan, warns that we have been hit by a "once-in-a-century credit tsunami."

While mainstream economists and policymakers are reeling, Marxists have been vindicated in their prediction that a host of problems in the system--overproduction, declining rates of profit, class inequality and speculative bubbles--would inevitably produce a serious global recession.

The independent Marxist journal Monthly Review has been tracking the development of the crisis through a series of articles over the last several years. John Bellamy Foster and Fred Magdoff have collected these together in a new book, The Great Financial Crisis, that attempts to explain the roots, nature and trajectory of the crisis.

Foster and Magdoff argue that since the development of capitalist monopolies in the U.S. at the end of 19th century, there has been a systematic tendency toward stagnation in the economy. Monopolies, they argue, have squeezed out competition, set prices to ensure their profits, but do not invest in expanded reproduction (new factories, new technology, new machinery), and therefore the economy tends to face a problem of low growth.

Paul Sweezy and Paul Baran originally developed this theory in their 1966 book, Monopoly Capital, and it has ever since shaped the economic analysis of Monthly Review.

ONE OF the problems the theory had to address is the reality of the booms in the period of monopoly capitalism, especially the large post-war expansion of the 1950s and 1960s.

For Baran and Sweezy, the capitalist state played a decisive role in overcoming the tendency toward stagnation. They argued that Keynesian measures--named for the liberal British economist John Maynard Keynes--actually failed to overcome the Great Depression. However, they contended the state's massive military spending during the Second World War and the Cold War increased effective demand, and thereby sustained the boom.

Foster and Magdoff update this analysis by including other temporary factors that helped sustain growth up to the early 1970s. In their view, this includes consumer savings, the mass production of automobiles, the rebuilding of Europe and Japan, expansion of advertising and finance, and investment in real estate. These developments also helped overcome the tendency toward stagnation, they argue.

However, Foster and Magdoff contend that "once the extraordinary stimulus from these factors waned, the economy began to subside back into stagnation: slow growth and rising excess capacity and unemployment/underemployment." Since the 1970s then, they argue that the U.S. economy has been mired in slow growth in the real economy.

To escape this stagnation, Foster and Magdoff argue that U.S. capital turned to neoliberalism, globalization and the financialization of the economy. Of these, they contend that financialization has been the key to sustaining growth, and they go so far as to say we have entered a whole new era of monopoly-finance capitalism.

Indeed, they argue that finance--in the form of stocks and investment banking, as well as the rise of financial wings at traditional corporations like GE and GM--have taken center stage in the U.S. economy.

Much of this financial activity is based on borrowed money from investment banks. Financial corporations secured loans to invest in everything from stocks to futures and real estate, creating giant bouts of speculation such as the dot-com mania of the late 1990s and the bubble in housing that popped in 2006.

Foster and Magdoff argue that this financialization of the economy was also capital's solution to the problem of what they see as underconsumption by workers. Certainly, capitalists have held workers wages and benefits down for the last three decades in the U.S. But, with workers' wages stagnant, capitalists have a problem of generating effective demand for their products.

Therefore, the capitalist state and corporations themselves turned to policies that encouraged workers to meet their needs based on credit. Consumers thus have relied on credit cards, car loans and, most importantly, home equity loans to maintain their standard of living. As a result, the financialization of the economy has led to unprecedented consumer debt.

Foster and Magdoff argue that this new phase of monopoly capital is prone to financial crises that throw the world economy into crisis. But instead of ending the financialization to stabilize the system, the U.S. state has stepped in as the lender of last resort. In bailing out the system, as it did with the savings and loan crisis as well as the Asian financial crisis, the U.S. state has enabled yet more rounds of financialization, based on government, corporate and consumer debt, and ensured the eruption of the current crisis.

When Foster and Magdoff suggest solutions, they support various Keynesian measures--a new New Deal--like state-sponsored investment, jobs programs and social welfare spending. But they do not think that such a program could either prevail over capital's resistance to such proposals. Nor do they think such measures could overcome the long-term tendency toward stagnation in the system.

Thus, Foster and Magdoff conclude with a call to build the working-class movement for socialism. They argue for "the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most--as 'socialism.'"

FOSTER AND Magdoff's book is important for developing a Marxist account of the crisis. Its strongest points lie in its description of financialization--specifically, how finance capital, not workers and homeowners "living beyond their means," is responsible for the current global recession.

It was corporations that drove down our wages, pushed us into loans of all sorts, trapped us in debt, and then speculated with that debt, building an international financial structure that has now collapsed like a house of cards.

But Foster and Magdoff's analysis is not without its problems. They themselves recognize difficulties with their theory, stating that "there is no existing economic theory that adequately explains the phase of monopoly-finance capital." Some of the problems with their analysis are theoretical, while others are historical and empirical.

First, the authors' account of monopoly capital's tendency toward stagnation is debatable. To begin with, during the phase of monopoly capital, which they date to the late 19th century in the U.S., the capitalist system has not been stagnant, but has been characterized by booms that expanded the real economy, as well as periodic slumps. Indeed, the world economy has expanded on a massive scale precisely during the period of monopoly capitalism.

This expansion was driven by capitalist competition, both within the advanced capitalist economies as well as between them for dominance in the world system. On the face of it, therefore, it's odd to argue that the normal state of monopoly capitalism is stagnation.

Moreover, when Foster and Magdoff, as Baran and Sweezy did before them, attempt to account for these booms, they argue that they are the result of capitalists' luxury spending, investment in unproductive things like advertising, or wasteful spending like the military, none of which create new value.

Even more importantly, they argue that epoch-making technological innovations like the railroad in the 19th century and the automobile in the 20th century provided "external stimuli" that enabled the system to overcome its supposed tendency toward stagnation. But it's hard to understand how such innovations could be counted as "external" to the system, given capital's compulsion to "revolutionize the means of production," as Karl Marx put it.

A more convincing explanation for boom-and-bust cycle of the system can be found in the classical Marxist tradition. Marx's analysis of capitalism offers a superior account of both the real expansion of the system throughout the 20th century as well as its periodic crises.

Of course, Monthly Review's theory of stagnation under monopoly capitalism takes Marx's work as its starting point. However, Baran and Sweezy developed their theory of monopoly capitalism on the basis that much of Marx's original analysis no longer applied to the system today.

Moreover, a look at Marx's basic theory points to conclusions that differ substantially from those of Foster and Magdoff. Marx shows how capitalist expansion carries with it the seed of crisis. He argues that capitalists, in order to out-compete their rivals, invest in plant, machinery and technology to increase their workers' productivity to make more products they can sell at a cheaper price. This generates a boom for a period of time, but soon, rivals catch up.

Even worse, since they are investing more in technology than in living labor, which is the source of profit, their rate of profit goes down. Crises then erupt. Corporations have built too many factories, producing too much stuff that they cannot sell at high enough rates of return. Thus, a crisis of overproduction hits the system.

Crises can only be overcome when capital can rid itself of some of the over-accumulated capital, cheapen the cost of plant and machinery and drive down the cost of living labor and renew the cycle again. Many Marxists in the International Socialist tradition such as Michael Kidron, Tony Cliff, Chris Harman and Joel Geier have used this theory to develop a different analysis of how capitalism developed after the Second World War.

In their view, Cold War rivalry between Russia and the U.S. led to a permanent arms economy. The U.S. and Russia took investment that would have otherwise been plowed into factories, technology, and consumer products and diverted it into weapons production. By siphoning off so much production out of the economy, the permanent arms economy counteracted the tendency of the rate of profit to fall, as well as chronic crises of overproduction.

As a result, global economy was spared from serious crisis and experienced a long boom dominated by the U.S. up to the end of the 1960s. But the rise of new competitors in Germany and Japan brought that era to an end--and by the early 1970s, a new period of sharper booms and slumps began. This argument better describes the postwar boom and then the return of period crisis than does the Baran-Sweezy/Foster-Magdoff stagnation thesis.

SECOND, FOSTER and Magdoff's depiction of the world economy over the last 30 years is one-sided. They point to slower growth rates in U.S. compared to the long postwar boom. However, it is wrong to say that the U.S. economy has been stagnant. Joel Geier has argued through a series of articles in the International Socialist Review that the 1990s saw a strong economic revival in the U.S. against its rivals in the world system.

Foster and Magdoff's depiction of the world system is also one-sided. While emphasizing recent stagnation and financialization in the U.S., they fail to account for the massive expansion during the boom from 2001 to 2007, especially in Brazil, Russia, India and China. In China and India, in particular, there was genuine expanded reproduction of new industries that exported to the U.S. and the rest of the world.

In fact, the financialization of the U.S. economy was closely bound up with expanded reproduction in these newly emerging capitalist powers. U.S. workers became consumers of last resort for the entire world economy after the 1997 Asian crisis--U.S. debt-financed consumer spending, one of the main elements of financialization, pulled the rest of the world economy out of that crisis.

Third, when Foster and Magdoff do talk about the world economy, they depart from the classical Marxist theory of imperialism that emphasizes competition between rival economic powers. Instead, they tend to depict the U.S. imperialism or the advanced countries as simply plundering the third world.

While no Marxist would deny that the U.S. and economic powers do loot the developing countries--often with the willing participation of their local ruling classes-- such piracy is only a small part of the world economy. The bulk of investment and trade occurs between the advanced capitalist countries and a handful of other capitalist nations that make up the G20. Much of the rest of the world, especially sub-Saharan Africa, is simply left out.

This is important to understand, because the reality of the world economy is not decreasing competition, as the monopoly capitalism thesis suggests, but the opposite. We are witnessing more and more conflicts between the advanced economies like the U.S., Japan and Europe, and rising capitalist powers like Brazil, Russia, India and China.

Finally, Foster and Magdoff draw on a left Keynesian tradition that emphasizes the central problem of monopoly capitalism is generating enough effective demand from consumers.

Capital does face a problem when it has so driven down workers' wages that it cannot sell them its products. But as the foregoing brief summary of Marx's position demonstrates, the problem lies deeper, in the process of production itself. That's why Keynesian efforts to use government spending to increase consumer demand cannot, in the end, tame the tendency towards crisis that's inherent to the capitalist system.

These reservations aside, Foster and Magdoff have made a critical contribution to the discussion about the roots of the current world recession. Their analysis and the debate over it are part of revitalizing Marxism to arm a new generation of radicals with ideas to lead a fight for a new democratically planned economy--socialism--that puts human need before profit.