Capitalism’s global slump

IN LATE 2008, our rulers panicked. With the spectacular crash of the investment bank Lehman Brothers, they were seized with the fear of the possible collapse of the global financial system. As George W. Bush's Treasury Secretary Hank Paulson confessed, "I'm worried about the world falling apart."

But today, the bankers and capitalists seem to have recovered their gravity-defying hubris. Wall Street firms handed out record bonuses at the start of the year--and big business cheerleader-in-chief Barak Obama boasted in his State of the Union Address, "We are poised for progress. Two years after the worst recession most of us have ever know, the stock market has come roaring back. Corporate profits are up. The economy is growing again."

Don't believe the hype. The crisis has not ended, but mutated. The governments of the world spent trillions of dollars to bail out banks and corporations, essentially transferring their bad debts and losses onto government ledgers. In some countries, this caused a sovereign debt crisis that could lead to defaulting on their debt.

To get themselves out of this trap and balance their budgets, governments everywhere have launched massive austerity programs. They are slashing public workers' wages and benefits, gutting social programs, raising the retirement age to lower the cost of social security, and scapegoating the oppressed to divide and conquer any opposition. The only success story among the world's major economies, China, is plagued with overcapacity, speculative bubbles on the stock market, and rampant inflation.

Canadian socialist David McNally's new book Global Slump: The Economics and Politics of Crisis and Resistance, brilliantly explains the roots and nature of this new epoch of crisis, capitalist austerity and working-class resistance.

In an accessible and witty style, he uses Karl Marx's theory of crisis to explain the arc of world capitalism from the long boom after the Second World War to today's slump. He also develops a perspective that can guide the revolutionary socialist left to build forces in the thick of emerging struggles for reform and eventual revolution.

McNALLY ARGUES that booms and crises are rooted in the dynamics of competitive exploitation at the heart of the system. Capitalists, in order to out-compete their rivals, invest in plant, machinery and technology to increase productivity so workers make more products that can be sold at a cheaper price. This generates a boom for a period of time, but soon, rivals catch up. 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 break out. Corporations have built too many factories, producing too many products that they can't be sold at a high enough rate of return. Such crises of overproduction and declining profit rates can only be overcome when capital can rid itself of some of the overaccumulation--by cheapening the cost of plant and machinery and driving down the cost of living labor. When that's accomplished, the cycle repeats again.

In ageing capitalism, however, crises take on a different character. To restore growth, the actions taken during crises must be more destructive to clear out space for renewed expansion. For example, it took the Second World War to restore growth after the Great Depression.

But fearful of the gravity of such deep crises, national states now step in to protect companies from failing, thus preventing the destruction of overaccumulated capital. "The result," McNally argues, "is a stretching out of the crisis--by making it longer, if less severe. In short, by inhibiting the destruction of capital, recessions are made less brutal--but also less effective."

Based on this theory, McNally explains how the postwar boom turned into crisis in the 1970s. The Second World War had laid waste to Germany and Japan, as well as large parts of Europe. Therefore, capitalism was able to sustain a prolonged boom from the end of the war up to the early 1970s. By then, the rise of Japan and Germany as economic rivals to the U.S. triggered another crisis of overproduction and declining rates of profit.

All the governments responded with policies known as Keynesian that typically revolve around increased government spending to stimulate demand and investment. Keynesians, according to McNally, wrongly think that crises are rooted in capitalist's psychological fear of inadequate returns. If state investment is substituted for them, then it can trigger another expansion in the economy.

The Keynesians are wrong theoretically--crises are rooted in the system itself, not in the bosses' mindset. The proof was in what happened in the 1970s--state spending merely triggered an inflationary spiral and poor growth rates, described at the time as "stagflation."

To get out of a massive global crisis, the ruling classes, especially in the U.S., turned to quite different policies, which came to be known by the term "neoliberalism." This meant letting the free market rip, by implementing deregulation and privatization, and shredding social welfare system. The face of neoliberalism on a world scale was globalization, where more powerful countries battered their way into markets in the less developed world.

McNally argues that ruling classes used three strategies to cheapen capital and labor in this era. First, they shut down factories and turned to lean production techniques that lowered the cost of plant and machinery. Second, they smashed unions in the advanced capitalist world. Third, carrying out what Marx called "primitive accumulation," they dispossessed peasants in the developing world, driving them into the cities as cheap labor.

As a result of these measures, McNally argues, the capitalist class was able to overcome the crisis of the 1970s and trigger a period of expansion from the early 1980s until 2007 in the advanced capitalist world and sections of developing world, especially around China in Northeast Asia. The neoliberal boom tripled the size of the world economy.

McNally's argument is an important correction to Robert Brenner, Alex Callinicos and the late Chris Harman, who have claimed that the world economy has suffered a long downturn since the 1970s. These authors argue that capitalism in the neoliberal period pales in comparison to the robustness of the postwar boom.

But as McNally shows, the postwar expansion was exceptional in the history of capitalism, and when you instead compare the neoliberal period to other periods of capitalist expansion, it matches their rates of growth and profitability.

McNally also counters other radicals who suggest that the neoliberal expansion was merely the product of speculative bubbles or the casino economy on Wall Street created by what economics call financialization. He also rejects Marxists like Gerard Dumenil and Dominique Levy, who believe that finance capital effectively carried out a coup to take control of the state and thus deregulate the free market in its interests.

The problem with such conceptions is that they can lead their supporters to tail Keynesianism, with its case that there is no systemic cause of capitalist crisis, and that financial regulation can solve the current crisis.

Instead, McNally shows how financialization is rooted in the problems of the system itself. It was an unintended consequence of the 1970s crisis, it enabled the neoliberal expansion and it then exacerbated the crisis.

How? From 1946 to 1971, countries backed their currencies with gold. But as the U.S. increasingly imported products from abroad, its competitors built up enormous dollar reserves that the U.S. could no longer back with its own gold. Nixon therefore abandoned the gold standard, allowing currencies to change in value, or "float," against one another. From this point on, finance capital found ways to speculate on currency movements. Deregulation of financial markets in the 1980s and '90s was a matter of government policy catching up to reality, rather than policy causing the speculation.

As a result, finance capital became the predominant section of American capital, garnering 41 percent of U.S. profits in 2007. By then, these profits were no longer underpinned by growth in the real economy.

THE NEOLIBERAL boom came with enormous social costs. The capitalist class impoverished workers in the advanced capitalist world. "In the U.S.," McNally writes, "real wages were 15 percent lower by 1993 than they had been in 1978."

McNally pays particular attention to racist dynamics of this class war on workers. In the U.S., he tracks how, as the U.S. cut social programs, it turned to prisons to jail its racialized "surplus" population. Finance capital turned to what he calls "predatory inclusion" by pushing credit cards not only on workers as a whole, but particularly on impoverished people of color. Banks abandoned racist practices of redlining and entrapped people of color in sub-prime loans.

In the Global South, the predatory nature of the neoliberal boom has been even more dramatic. McNally shows how the U.S., through the IMF, imposed structural adjustment policies on indebted countries, privatizing state industry, gutting the welfare state and opening them up to multinational capital. Neoliberal agricultural policies opened countries to imperialist agribusiness, whose subsidized products undercut local agriculture, driving peasants off the land to become a source of cheap labor in their own countries, or abroad as migrant workers, where they suffer from xenophobia and racial oppression.

The neoliberal boom fell prey to the classic contradictions of capitalism and turned into a bust in 2007. By the mid-1990s, the boom had produced overcapacity and an orgy of speculation centered in one of the new areas of growth--Asia. The crisis in Asia starting in 1997 was a sign that the neoliberal boom was coming to an end.

Since then, McNally argues, the advanced capitalist world engaged in increased financial speculation, first in high-tech and then real estate. Growth in the real economy was restricted to China, Northeast Asia and countries like Brazil, which mainly supplied commodities to the Asian boom.

But financial speculation could only delay the day of reckoning until 2007, when the combination of overproduction and declining rates of profits popped the mortgage bubble and threatened to bring down the world banking system.

While national states have been able to bail out the financial system and prevent collapse, they have not been able to restore growth. Instead, because they saved the "too-big-to-fail" corporations and banks, they have been unable to clear out the overaccumulated capital and restore the rate of profit.

The world economy is thus mired in what McNally calls a slump. "Rather than describing a single crisis," he writes, "the term is meant to capture a whole period of interconnected crises--the bursting of a real estate bubble; a wave of bank collapses; a series of sovereign debt crises; relapses into recession--that goes on for years without a sustained economic recovery."

Until capital is able rid itself of the overaccumulation, cheapen the cost of capital goods again, and drive down the cost of labor even further, it won't be able to generate another boom.

McNally argues that capital and their states are determined to find a way out of the slump through austerity. "Our rulers," he writes, "hope to soften us up for 'a decade of pain'--a period of high unemployment, falling incomes and huge cuts to health care, education and social welfare programs." What little recovery we have now is a result of this class war. As McNally reformulates a quip by Lawrence Summers, "We have statistical recovery because we have a human recession."

AT THE same time, however, the crisis is producing the hope of resistance. McNally recounts some of the highlights of class fightback, from the Republic Windows and Doors factory occupation in Chicago, to the U.S. immigrant rights movement, to the heroic struggles in Bolivia, to the teachers' revolt in Oaxaca, Mexico, the victorious general strike in Guadeloupe and Martinique, and the wave of strikes in Europe.

To this, we can now add the revolutions that have erupted in North Africa and the Middle East against U.S.-backed tyrants and their neoliberal policies that have impoverished the working class and dispossessed the peasantry. And now, in the U.S. itself, the uprising against union-busting and austerity in Wisconsin, and its echoes in protests around the country.

McNally calls for socialists to throw themselves into these struggles. He emphasizes how neoliberalism has undermined, in a term adopted from Canadian socialist Alan Sears, "organized structures of dissent." The ruling class has smashed up unions and broken apart mass organizations of the oppressed, while benefiting from the NGO-ization of much of the left.

The task of socialists therefore is to help build struggles for reform, forge new organizations to sustain resistance and--in the middle of that process--organize new revolutionary socialist parties that fight for a whole new society that ends the reign of capital and establishes workers' democracy.

One significant missing element in this otherwise brilliant book is the question of the relation of the economy to world imperialism--the competition between capitalist states for the division and redivision of the world system. This absence weakens McNally's explanation of the postwar boom. He argues that the great boom was largely the result of the destruction wrought by the Second World War. That of course was a factor, but is insufficient to explain the persistence and length of the boom.

A host of Marxists, including British socialists Tony Cliff, Michael Kidron and Chris Harman, developed an explanation--the permanent arms economy--that showed how military competition between the U.S. and state capitalist Russia was at the root of the boom.

During the Cold War, both states diverted surplus into arms production that would have otherwise been ploughed back into investment in plant and machinery for producing capital and consumer goods. As a result, the world system averted the problem of overaccumulation and the tendency of the rate of profit to fall up until the early 1970s. By then, states like Germany and Japan, which were under the umbrella of the U.S. and did not spend much on military production, had caught up with the U.S. by investing in plant and machinery, generating a classic crisis of overaccumulation and declining profit rates.

McNally also doesn't take the impact of the slump on the dynamics of imperialism in the current period. He does refer to increased competition between countries as they attempt to export their way out of the crisis, but never develops the point. Other Marxists like Alex Callinicos and Joel Geier have pointed out that the crisis is likely to sharpen the antagonisms between the world's capitalist states--most obviously, the U.S. and its main rising competitor China.

Some authors like Dilip Hiro contend we are witnessing an emerging multipolar world order. We have already seen the failure of the main capitalist states to coordinate economic policy as they have turned to beggar-thy-neighbor policies to protect their own capital. Add to this increasing competition over resources, especially oil, and we can see the prospects of increased inter-imperial conflict in the system.

Besides this missing discussion of imperialism, McNally has written an invaluable book for a new generation of radicals and Marxists looking to understand the system, why it doesn't work and how we can transform it. Everyone should buy, read, and discuss this book as part of rebuilding a fighting socialist left around the world today.