
Below is a talk I wrote for a public forum on the current economic crisis. It explains the real origins of the crisis in capitalist production, what’s happening now, and what we can do about it.
All great imperial societies at one time or another appear invincible, irremovable, permanent. So it was with many a Chinese dynasty; so it was with ancient Greece and Rome. And so it has been the past half-century with the American-dominated world capitalist system. Merely a year ago, even as some economists were warning of the eventual consequences of the mortgage investment frenzy, most were either silent or openly predicted that capitalism could never again suffer a setback as severe as the depression of the 1930’s. Go further back to the early 1990’s, after the fall of the Soviet Union, and the expansion of capitalism at the time was being called the “end of history” by economist Francis Fukuyama, a system so great it represented the ultimate and final achievement of humanity.
How delusional we find these fantasies looking back on them from the autumn of 2008, as the world’s markets come crashing down around us like the giant house of cards they have been built upon. Today capitalism faces a worldwide economic crisis the scope of which has never before been experienced, and the severity of which is approaching and could greatly surpass the wreckage of the 1930’s. The main victims of the crisis will be the working class, who face massive unemployment, dispossession of their homes, and massive cuts in the already-pitiful social safety net.
How did capitalism get us here? And what can we do about it? The first question requires a little bit of economic theory and a review of history to answer. A Marxist assessment of the nature of the capitalist beast leads into the solution for working people, which includes building a just, sustainable world free of massive inequality and periodic, devastating economic crises.
Economic crises are nothing new—they are almost as old as the capitalist system itself. Capitalism was formally “invented” by the philosopher Adam Smith in 1776, the same year America’s British colonies declared their independence. The United States had its first major recession in 1807, and the first worldwide depression occurred between 1873 and 1897.
The systematic nature of the periodic boom and bust cycles in capitalism was first explained by Karl Marx in his masterwork Capital ten years before this Long Depression. Since the industrial revolution, capitalist markets have experienced small boom-bust cycles on the order of every 5-7 years. These occur within longer cycles of growth and decline, which can occur over several decades. It is these longer periods of decline that end with the great cataclysms and reorganization of markets before growth can be renewed.
Why do these cycles occur? It is competition for resources and markets that drive this cycling. Profit is the ultimate motive of capitalism, and competition for profit leads to constant economic expansion. Producers need to grow, making more and more and more goods or services, to keep from being undersold by their competitors. Likewise, capitalists need to continually open up new markets for their products and services, creating new consumption to match the increased level of production. If they can’t do this, the system falls into recession.
From a capitalist perspective, growth is good—it provides jobs for workers (nevermind job quality for now) and makes factory owners rich. A higher GDP equals greater overall wealth, although it also means greater inequality, as workers are pressed to produce more value for less pay, and that value is transferred to the owning class of society.
The trouble for the system comes as production eventually and inevitably outstrips the available markets. Economist Walden Bello places the nature of the current financial crisis in these terms:
“[W]hat we are seeing is the intensification of one of the central crises or contradictions of global capitalism which is the crisis of overproduction, also known as overaccumulation or overcapacity. This is the tendency for capitalism to build up tremendous productive capacity that outruns the population’s capacity to consume owing to social inequalities that limit popular purchasing power, thus eroding profitability.”
In other words, capitalism makes too much, too fast, and people can’t afford to consume enough to keep up with it.
Bello outlines three “escape routes” that capitalism has used to delay the oncoming meltdown: “neoliberal restructuring, globalization, and financialization.” These mirror the processes described by Marxists, including Russian revolutionary Vladimir Lenin. Lenin termed this kind of capitalism “Imperialism,” which he called the “highest stage of capitalism.”
Lenin and others demonstrated that the epoch of Imperialism began in the early years of the 20th Century. World War I represented a final conquest and division of the colonial world among the great capitalist powers of the day. The period immediately following the war was one of growth, for as Lenin wrote:
“It would be a mistake to believe that this tendency to decay precludes the rapid growth of capitalism. It does not. On the whole, capitalism is growing far more rapidly than before; but this growth is not only becoming more and more uneven in general, its unevenness also manifests itself, in particular, in the decay of the countries which are richest in capital.”
Ultimately, the financialization of these “richest” countries led to the global collapse and depression of the 1930’s, as market speculation could not for long hide the real crises of overproduction and underconsumption.
About such crises, Karl Marx wrote in the Communist Manifesto:
“In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity—the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, too much industry, too much commerce…. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises and by diminishing the means whereby crises are prevented.”
And thus capitalism ultimately dealt with the worldwide crisis of the 1930’s by the massive annihilation of productive capacity that was World War II. After the war, the great industrial centers of Europe lay in shambles; the only industrialized economy left standing, and left standing in improved condition at that, was the United States.
The demand for U.S. products, combined with the massive injection of government funds through military spending and financing for rebuilding Europe and Japan, let to boom times. The United States quickly became the world’s foremost creditor nation. For the next few decades, jobs were plentiful, and the capitalist owners were able to provide a generally decent standard of living to their workers. Most companies found it more tolerable at this time to make peaceful deals with labor unions than to wage open class war.
By the early 1970’s, however, the other imperialist powers of Western Europe and Japan had recovered from the war, and inter-imperialist competition once again began heating up. At the same time, according to Marxist economist Ernest Mandel, the boom had led to increased monetary inflation, which made further investments in new industrial projects unappetizing to capitalist financiers.
Thus, the American financial system, now the capitalist world’s dominant financial system, began again to turn in on itself. In order to recoup the value of their investments, capitalists began looking for ways to cut production costs and boost falling profit margins.
Returning to the responses to this long-cycle downturn outlined by Walden Bello, the first response was what Bello terms neoliberal restructuring or neoliberalism. This process entailed gutting government regulation that limited and stabilized growth, privatization and cutbacks of government services, and measures to redistribute wealth upward to the capitalist class. The neoliberalism pioneered by economist Milton Friedman and enacted by the Reagan and Thatcher administrations was designed to boost investment and profit margins. But while “Reaganism” worked to increase the buying power of the rich, it also resulted in the stagnation and decline of real wages for the working class, which form the backbone of the economy.
To provide opportunities for investment, neoliberalism was combined with economic globalization. Bello defines globalization as “the rapid integration of semi-capitalist, non-capitalist, or precapitalist areas into the global market economy.” Especially from the 1990s on, there has been a race to force so-called “underdeveloped” nations, the suppliers of cheap labor and raw material for capitalism, to reduce tariffs that keep production local, and thus open themselves to the world market. This is done in the false name of “free trade.” In fact agreements such as NAFTA are very one-sided, designed to benefit Western-based multinational capitalists. Their ultimate purpose is to provide access to new markets for multinationals to both sell their products and buy cheaper labor to decrease costs and shore up their profit margins.
Because of the nature of capitalist competition, the bottom-line advantage companies derive from moving their production to cut costs lasts a very short time. To compete with each other, companies must maximize production. Since products can now be made cheaper, production capacity grows, exacerbating the crisis of overproduction.
This leads to the third “escape route,” the ultimate symptom of runaway Imperialism, financialization. But as we see with the current crisis, this is really no escape route at all—it is a speeding train headed for a great big cliff.
On one level, because the real wages of the working class are in decline, personal debt is encouraged and utilized to a greater and greater extent to keep consumption rising. The average American now holds $9,200 of credit card debt; factor in home, school and car loans, and total personal debt averages $79,000. At these levels, most working people will never be able to pay off their debt. As the financial crisis leads to credit becoming less available, the decent standard of living American workers rely on credit to provide will rapidly evaporate.
This mirrors the situation of the national debt. Over the past 30 years, the U.S. has exported much of its industrial capacity, the “real economy” on which value rests. The Treasury has had to rely on increasing levels of debt to continue growth under neoliberalism, going from the world’s foremost creditor to the world’s foremost debtor. The U.S. Government now owes roughly $10 trillion, with dozens of trillions more in unsecured financial obligations.
Up to this time, foreign banks have been happy to buy U.S. debt on the basis of the strength of the dollar. Thus what is essentially an American-made financial crisis has turned into a world crisis. As Americans default on loans owed to banks worldwide, the financial solvency of foreign banks, as well as domestic ones, is under threat.
At the same time, financial speculation in monopoly corporations runs rampant. Easy fake money has become more appealing as companies have become less able to further increase the real production value on which their wealth is based. In the words of Lenin:
“The development of capitalism has arrived at a stage when, although commodity production still “reigns” and continues to be regarded as the basis of economic life, it has in reality been undermined and the bulk of the profits go to the “geniuses” of financial manipulation. At the basis of these manipulations and swindles lies socialized production; but the immense progress of mankind, which achieved this socialization, goes to benefit… the speculators.”
The increase in market speculation takes the form of various investment “bubbles.” A bubble exists when speculation in a certain type of commodity causes the price of that commodity to artificially inflate, causing more speculation, etc. Speculation snowballs until the reality comes to bear that the real value being produced is nowhere near what the price would suggest, and the market for that commodity collapses. Thus it was with the tech stock mania of the late 1990s which resulted in the dot-com collapse of 2000.
Most recently, speculation has run rampant in the housing market. The median price of a house rose from $141,500 in 1995 to $267,000 in 2005. This is the most insidious kind of bubble because it involves a basic necessity of life, housing, and thus has drawn in millions of ordinary working people in a much greater way that any highfalutin stock trading could.
Many working families were convinced by banking spinsters that that they could live the “American Dream” of owning a home and ride the housing market to financial high times. Homebuyers were given the impression that their initial mortgage would be more than paid back by the increase in the value of their house over the life of the mortgage. Those living in homes without mortgages were offered substantial lines of credit, the ability to put their house in hoc to the bank in exchange for basically free money; the interest would be cancelled out by the gain in the home’s value over the same period of time.
The most vulnerable, those who couldn’t close to afford the inflated housing prices with their incomes, were given the “special treatment” of so-called sub-prime or adjustable-rate mortgages. The interest rate on these loans starts low but ramps up over time. The justification for this is that homebuyers were borrowing on their future incomes and the future value of their house, both of which it was assumed would grow faster than the interest rate.
But in the reality of a decaying capitalist economy, the opposite scenario proved all too true. Under the weight of a housing glut, the market began to buckle and then collapse. With little or no growth in prices after 2005, it became all too apparent that many working people would not be able to afford to make the increasing payments on their home loans. As adjustable interest rates began to ramp up in earnest, so did foreclosures. Now these “toxic” mortgages have snowballed into a crisis for bankers who are panicked about being able to recoup their outlays.
When a bank gives a loan, the unspoken assumption is that the money they lend is backed up by something real. This is simply not the case. Banks don’t keep gold or precious metals lying around in vaults to sell every time they give a loan. The ratio of debt to amount of cash kept on hand by investment banks used to be about 12 to 1 (12 dollars of debt for every 1 dollar of cash on hand); it increased to 30 to 1 after the SEC loosened its regulations on lending four years ago. Thus, if the loans banks give out cannot be recouped, the bank has two options: borrow more to prop itself up, or fold.
As banks’ bond ratings plummet due to faulty mortgages, financial speculation has erupted on the scene like a bad acne zit. At least $45 trillion of fake money has been created by the unregulated market in derivatives. An example of a derivatives are credit default swaps, which are essentially insurance policies traded on a company bond. Because they are unregulated, anyone with some financial capital can claim to back up the value of a bond, then sell their security to someone else at a profit. The security gets sold and resold in what amounts to a giant pyramid scheme, to the point that there is no way to know what the total “value” of securities are on even a single bond of a single company, let alone the tens of thousands of bonds that exist. If the original company goes belly-up and its bonds become worthless, the whole paper tower comes crashing down, taking investors such as AIG with it.
Several economists have pointed toward banking deregulation under former president Bill Clinton and former Fed Chairman Alan Greenspan as culprits for the crisis. In particular, Clinton repealed the Glass-Steagall Act of 1933, which had curtailed the ability of commercial banks to invest in speculation. While deregulation allowed for greater concentration of wealth in the banking sector and greater levels of speculation, it was part and parcel of the neoliberal policies of the Clinton era. Deregulation was thus merely a symptom of the onrushing crisis of capitalism, designed to create artificial growth in the banking sector to shore up falling profit margins.
The “free market” banking industry has responded to the collapse of their artificial wealth by running to the government for rescue. Elected officials, bought and paid for by the capitalist ruling class, have swiftly obliged—first with the Bear Stearns bailout, then with AIG and the so-called nationalizations of Fannie Mae and Freddie Mac, both deeply imbedded in the home loan industry.
These “nationalizations” really entail the giveaway to banks with little real oversight of hundreds of billions of taxpayer dollars. This giveaway is, of course, not in the form of hard cash, but rather as added government debt on top of the existing $10 trillion. The justification provided by ruling class spokesmen is that federal money is needed to prevent a freeze in lending by injecting “liquidity” (like you would inject sagging eyelids with botox). Bankers have made the most of the government’s free monopoly money, saddling departing executives with $40 million + bonuses as retribution for their reckless greed.
The most transparent money grab came in late September, when Treasury Secretary Henry Paulson demanded an initial $700 billion in government bailout money, its use dictated by and only by him. The money would be used to buy worthless securities from investors at or near pre-crash prices.
Faced with the threat of a failing finance system, how quickly the illusion of political partisanship falls away! The rulers were shocked when a majority of their lower-order elected employees—more Republicans than Democrats, it should be noted—balked at the first Paulson plan under fear of reprisal from voters. The plebian masses put the lie to the notion of their ignorance and apathy by crashing the Congressional phone and e-mail systems with universal howls of protest. The rebellion was short-lived, however, as the rulers’ more senior servants from both parties lined up to browbeat their underlings and teach them what to do when the lords of capital say “jump.”
With Presidential candidates Obama and McCain literally sharing a microphone to urge acceptance of the largest one-time transfer of wealth in history, there was little resistance the second go-around. The plan was tinkered with slightly to make it as saleable as possible to the population. The changes amounted to a liberal cap on executive salaries, an increase in deposit insurance limits, and the government taking an ownership stake in the banks it bails out. The essential nature of the bailout—a humongous tax giveaway to private corporations—did not change.
Faced with similar scenarios the world over, the world capitalist class has been united in their response. Following emergency meetings of financial leaders from dozens of countries, nearly identical bailout plans have been instituted by virtually all countries with significant banking sectors. With the world’s capitalists lining up to feed at the trough of socialism for the rich only, economists are now flatly informing naieve free-market buffs that “Reaganomics is dead.”
But this is hardly a progressive death, nor will it likely be able to save capitalism from itself. It does nothing to address the real problem, the crisis of overproduction. The initial $700 billion is likely to balloon into the trillions. However, the amount of bad debt in the system is so exponentially vast that nothing the governments of the world could provide will plug the hole. The idea that the government will somehow eventually recoup taxpayers’ money or even make a profit for taxpayers is pure fantasy. The disappearance of government funds down the rabbit hole of worthless mortgages and securities on this scale will likely mean a falling value for the dollar for years to come, reducing the position of the U.S. in the world economy and driving up domestic prices.
How do the two major-party candidates, vying for the position of supreme caretaker of U.S. Imperialism for the ruling class, propose to deal with the crisis? Each has indicated their complete willingness to go along with whatever policy is deemed appropriate by the ruling class, but there are subtle differences in their public rhetoric. John McCain has chosen to simply deny reality by claiming to oppose any and all regulation. He supports maximum privatization and tax breaks for the wealthy, and absurdly suggests that Obama’s positions are somehow “socialist.”
Far from a socialist, Barack Obama has likewise declared his preference for laissez-faire policies. Declaring that, “the market is the best mechanism ever invented for efficiently allocating resources to maximize production,” he supports “incremental, market-based solutions.” An example is his proposal to replace employer-provided pensions with automatic paycheck withdrawals to 401k accounts. While the majority of home foreclosures are now precipitated by unaffordable medical bills, Obama proposes tweaking regulation of private health insurance and a tax credit as solutions to the health care crisis. His plan would ultimately strengthen predatory insurance companies, not provide affordable health care for all.
Similarly, Obama’s tax philosophy entails increasing corporate welfare to companies with any U.S.-based workforce, and tax rebates that would only benefit those in a middle-class or higher tax bracket. He also promises to “fight to open up foreign markets to support good American jobs,” more of the neoliberalism that has already created so much misery in the underdeveloped world and helped precipitate the crisis of overproduction.
One good thing must be said for Obama: he has been honest in admitting over the past few weeks that the new and increasing bank bailouts mean that the money for even the paltry social spending he has proposed probably won’t be there, and he’d likely end up cutting federal spending on social programs if elected to office.
Absent from either candidate’s plan is major investment in the country’s crumbling infrastructure or domestic reindustrialization to build the base of the economy. As homelessness and unemployment rise, neither candidate proposes a moratorium on home foreclosures, medical debt relief, an increased social safety net, or any measure to guarantee employment at living wages.
In contrast to the capitalist parties, Socialist Action calls for immediate action to transform the economy to a worker-run, equitable, sustainable system.
We say, not one cent to bail out the bankers! Nationalize the banks and merge them into one central bank without compensation to the banking elite for their worthless investments. The Federal Reserve should be abolished and replaced with a workers’ council to oversee the central bank. All banking records should be rendered 100% transparent and public.
We demand an immediate moratorium on evictions and home foreclosures! Tens of thousands of houses sit unoccupied; we could end homelessness in a day by redistributing them to be used by the now-homeless. All sub-prime mortgages should be renegotiated at 0% interest, and payments set according to debtors’ ability to pay.
We call for full employment at union wages! This can be accomplished by a massive public works program to rebuild our industrial and energy infrastructure employing the most advanced environmental and carbon-reduction technologies. We need a Marshall Plan to tackle global warming. We can revitalize mass transit, and reinvigorate the crumbling inner cities. Reducing the work week to 30 hours with no cut in pay and cutting the retirement age to 55 would help provide jobs for all. All pensions should be guaranteed and Social Security improved to pay pensions at union wages.
Workers should take control of basic industries such as manufacturing, mining, energy and transportation, and run them based on elected workers’ councils. These should be nationalized and any profits turned back into creating more jobs and higher wages. Redundancy and energy waste must be curtailed as steps to save the Earth’s climate.
Agribusiness should be nationalized and farmers paid a fair price for their products. Provide interest-free credit for seeds and machinery, and donate excess produce to feed the world’s hungry through a non-market ration system.
We must eliminate all spending on making war to control foreign resources and prop up the military industry. Bring all U.S. troops home from overseas now!
We need free, universal, public health care for all. Private medical insurance should be eliminated and a fully-socialized medical system established.
The government should organize bottom-up committees in every workplace and community to address the effects of the crisis locally and determine what transformative steps must be taken in the short, middle and long terms.
These measures are what a new, socialist society could look like. We are not under any illusions that any of these measures will be willingly granted by the capitalist ruling class. The bipartisan consensus for using workers’ money to bail out the ruling rich demonstrates that there are no good alternatives within the framework of the capitalist two-party system. This is why we place no confidence in Barack Obama or the Democratic Party as any kind of a progressive force. They are just as committed as the Republicans to maintaining the status quo and deepening attacks on working people’s standard of living.
Instead, we call for the formation of a labor party based on a fighting union movement. Unions must be reshaped so they are not controlled by privileged bureaucrats but by the oppressed and exploited workforce. We need to step up our discussions with neighbors and co-workers, educate ourselves about the roots of the economic crisis, organize our co-workers and communities, and agitate for radical labor action.
This is not a question of who has a better plan for maintaining capitalism. It is a question of capitalism or survival, and at this time the ruling class is incapable of choosing the latter. Only the working class has the power to end the cyclical crises of capitalism once and for all.
Selected Resources
Bello, Walden. “A Primer on the Wall Street Meltdown.” September 25, 2008. Transnational Institute. Online <http://www.tni.org/detail_page.phtml?&&act_id=18716>
Mandel, Ernest. “World Monetary Crisis.” International. Vol. 7, No. 6, Nov-Dec 1982. Published online by Marxist Internet Archive. <http://www.marxists.org/archive/mandel/1982/xx/moncrisis.html>
Myers, Allen, ed. Marxist Economics: A Handbook of Basic Definitions. Chippendale, UK: Resistance Books, 1998. Online: <http://links.org.au/files/Marxist%20Economics.pdf>
“Glass-Steagall Act.” Wikipedia. Accessed October 26, 2008. Online <http://en.wikipedia.org/wiki/Glass-Steagall_Act#First_Glass-Steagall_Act>
Wolff, Rick. “Capitalist Crisis, Marx’s Shadow.” Monthly Review, September 26, 2008. Online <http://www.monthlyreview.org/mrzine/wolff260908.html>
Blumberg, Alex and Adam Davidson. “Another Frightening Show About the Economy.” This American Life, Show 365. October 3, 2008. Online audio <http://www.thislife.org/Radio_Episode.aspx?sched=1263>
Pollack, Andrew. “U.S. to prop up Wall St. with billions of workers’ dollars.” Socialist Action, Vol. 26, No. 10. October 2008. Online: <http://www.socialistaction.org/pollack45.htm>
Pollack, Andrew. “Obama prefers ‘market-based’ solutions for U.S. economic woes.” Socialist Action, Vol. 26, No. 10. October 2008. Online: <http://www.socialistaction.org/pollack49.htm>
Mackler, Jeff. “A ruling-class affair.” Socialist Action, Vol. 26, No. 10. October 2008. Online: <http://www.socialistaction.org/mackler28.htm>
Pollack, Andrew. “A Workers’ Action Program to Meet the Economic Crisis. Socialist Action. September 2008. Online <http://www.socialistaction.org/pollack43.htm>
Lenin, V.I. “Did Vladimir Lenin Predict the Banking Disaster of 2008?” Excerpts from Imperialism: The Highest Stage of Capitalism. LCW Vol. 22. Posted on Information Clearinghouse. <http://www.informationclearinghouse.info/article20946.htm>