According to a quotation by Jim Reid that you and Fred Magdoff included in your article entitled “Financial Implosion and Stagnation” (Monthly Review, December 2008), the U.S. financial sector has made around $1.2 trillion of “excess” profits in the last decade relative to nominal GDP. How has the structure of the capital economy contributed to the ease with which such excess profits were obtained by the banks and lending institutions?
Jim Reid in London is the Deutsche Bank's chief credit strategist. He made the observation you refer to in July 2008 when the financial implosion was already a year old, but a couple of months before the serious bank crisis that followed the failure of Lehman Brothers in mid-September, leading to a deepening of the financial crisis. In the piece by Reid that Fred Magdoff and I referred to in our article, he provided a chart showing that financial profits and profits in general had been skyrocketing on top of a sluggish U.S. economy. Based on the notion of a "mean reversion," whereby growth of profits would have to revert to the average growth rate of GDP, he concluded that there were $1.2 trillion in excess profits over the last decade, suggesting that a massive devalorizaton of capital, much more than had then occurred was due. This was similar to arguments that we had been making for some time in Monthly Review.
The quotation from Reid goes on to indicate that despite the $184 billion written down by financials in this crisis there is still another trillion dollars of value destruction to go in the sector before we're back to the long-run trend in financial profits. Does this mean that we are merely at the beginning of an economic depression? How much longer do you foresee the crisis lasting?
The actual numbers that Reid provided are not that important because how much in the way of financial losses has to occur before the economy begins to recover is at this point anyone's guess—there is no clear functional relationship, and it all depends on innumerable factors that come into play. In fact, what we have is a very severe crisis now in what economists call the "real economy," no longer simply in speculative finance. There is no way of accurately determining where the bottom is. Given the severity of this crisis, which is on a depression―not recession―scale, it will most likely continue well into 2010 and quite possibly beyond. In fact, none other than former president George W. Bush, in prepared remarks for a November 2008 summit of the central bank governors and finance ministers of the G-20 economies, said if governments do not act decisively enough we could be facing "a depression greater than the Great Depression's." What is absolutely clear at this point is that we are confronted with the likelihood of a long period of slow or nil growth, beyond the mere business cycle, since the main means of combating the deeply entrenched stagnation tendencies of monopoly-finance capital (i.e., financialization, or the ballooning of debt) appears to have reached its limits at present. The crisis of fiancialization thus spells a weak economy for a long time to come. Economists have a euphemism they sometimes use for this situation; they call it an "L-shaped" recovery.
Do you think that the emphasis of the U.S. government on neoliberal economic theory, while ignoring, as you say in your article, the class basis of the economy that characterized classical political economy, is a contributor to the failure of the government to address the problem of financialization sooner?
Neoliberal economic theory and policy was no accident but was the way in which the system responded to growing stagnation tendencies that first began to surface with the economic slowdown of the 1970s, and which were manifested in such factors as rising excess capacity and unemployment/underemployment and weakening net investment. With the economic pie growing more slowly, capital reacted by promoting economic restructuring with the aim of increasing profit margins at the expense of workers' wages (average real wages for non-agricultural workers in the United States peaked in 1972 and today are at the same level as in 1967), cutting back on social welfare spending, squeezing underdeveloped countries with the help of the International Monetary Fund, and more. At the same time, capital, driven to maintain and enlarge its profits despite weak investment opportunities, turned to financial speculation, setting off the long-term financialization process that became the main means of countering the decline in the secular growth rate in the underlying economy. Ever-increasing inequality was a necessary part of providing the cash flow to feed the successive financial bubbles. Eventually, however, speculation based on home mortgages ran afoul of the worsening income and increased debt load of households. As defaults spread, the housing bubble popped and the entire financial superstructure began to deleverage, creating cascading defaults and deflation. Since the fundamentals of the economy were extremely weak, once the financial balloon began to deflate, the whole economy started to fall, with the end not yet in sight.
I think it is best to see this as a whole phase of capitalist development, which we could call monopoly-finance capital, with neoliberalism as its main legitimating ideology. Of course, this period generated extraordinarily bad economics: monetarism, supply-side economics, rational expectations theory, new classical economics, and so on. Even the name of the system was changed from capitalism to a vague and essentially meaningless ideological designation of the "free market." John Kenneth Galbraith in the title of his last book called all of this The Economics of Innocent Fraud. Like orthodox economics in general (not excluding the bastard Keynesianism of the Cold War era), it was a means of control and a way of justifying what capital found necessary.
Orthodox economics is not innocent of class analysis; rather the class position that it represents requires the ideological concealment of class relations (class does not exist as a category in neoclassical economics). This, however, does not prevent them from constructing concepts (e.g., the "natural rate of unemployment") which are means of maintaining class power. In contrast, 19th-century classical political economy was explicit about not only class but also the political nature of economics. As Marx explained in Capital, only when the bourgeoisie had conquered the state in the 1830s and 1940s did scientific political economy turn into vulgar political economy. The new orthodoxy of marginalist or neoclassical economics (Marx’s “vulgar political economy”) was based on a class-analytic perspective that could no longer be openly confessed. Its interests were no longer revolutionary, as in the early stages of bourgeois economics, but had given way to the “bad conscience and evil intent of apologetics.” It is no coincidence that this happened as soon as the working class began to become a conscious force and thus a threat to the status quo. Eventually, political economy was renamed economics. The latter was seen as “scientific” because of its non-normative and non-political character (i.e., it succeeded ideologically in concealing its class character within its analytical frame). In order to struggle effectively today, we need, for starters, to change economics back into political economy, making the economy a political/public issue once again. Capitalism works by way of an “invisible hand”: It needs to be made visible.
You talk about the costs of the economic crisis being borne disproportionately by those at the bottom of the class system. As a way to end the current crisis, you seem to call for an economic revolution of sorts. How would this come about? How would you restructure the current economy to function in an equitable way?
In the United States at the beginning of this decade, the top 1 percent of wealth holders combined owned twice the wealth of the bottom 80 percent of the population. If this is viewed in terms of financial wealth (which excludes owner-occupied houses), the top 1 percent taken together had four times the wealth of the bottom 80 percent of the population. Income inequality is at extreme levels. When productivity and economic growth go up, we are told in economics textbooks that this pulls up real wages. Yet, real wages in the United States are the same as they were when Lyndon Johnson was president. This situation of stagnant or declining real wages is actually a product of a long class struggle waged by those at the top against the rest of the society. And it is this growth of inequality—the highest since the Stock Market Crash of 1929 just before the Great Depression—that is at the root of the present economic problem. Needless to say, inequality is far greater still if we look at matters from a global standpoint. In 2006 Bill Gates’ wealth was equal to that of the combined GDP of Ethiopia, Niger, the Congo, Burundi, Sierra Leone, Liberia, the Central African Republic, Namibia, Lesotho, Malawi, and Tanzania in Africa—226 million people.
The immediate issue right now in the United States is the question of a new New (New2) Deal. Will there be a launching of work relief programs and other measures that substantially improve the conditions of the majority of the population on a level with the later 1930s? Will there be a resurrection of the Works Progress Administration, the most radical employment program the United States ever witnessed? The answer to these questions is that a genuine New2 Deal will not come about, despite the election of a Democratic administration under Obama, unless there is a revolt from below on the scale of the 1930s. Here I recommend David Milton's book The Politics of U.S. Labor on the New Deal era. One of the things that Milton demonstrated was that the revolt from below in the 1930s was led by radical syndicalists and communists, who were often ahead of the mass of the workers in terms of making radical demands, but whose militant and far-seeing leadership was crucial to the threat that labor then represented. It was this mass rise of working people inspired by socialist and syndicalist leaders that made some of the more radical reforms of the New Deal era possible. There is no lack of changes to be made in the United States if a class/social movement revolt from below is set in motion. Civilian government spending (government consumption and investment) in the United States is a much smaller share of GDP than in the other advanced capitalist states. This mainly has to do with what Marx called "the respective power of the combatants" in U.S. society. So the only answer is a class-based revolt. Fred Magdoff and I coauthored a book The Great Financial Crisis, just published, that addresses the economic crisis and the question of a New2 Deal. The latter issue is also taken up in an article that Robert McChesney and I have written on a possible New2 Deal under Obama for the February Monthly Review—where we provide a long list of the things that could be fought for in the present-day U.S. political economy with a sufficient groundswell from below.
Nevertheless, a New2 Deal, even if it were to materialize, would not eliminate the deep contradictions of capitalist society or create an egalitarian order. For that, a more revolutionary change in society, transcending capitalism, will be necessary. If this seems extreme, think of the extreme conditions we are living in, both in the United States and the world at large. World capitalism is in its worst crisis in 80 years. Billions of people in the world are suffering from hunger in the world food crisis that has emerged over the last couple of years (prior to the present Great Financial Crisis). Science tells us that if we continue with "business as usual" for a decade or two we will be facing irrevocable climate change. This could lead eventually to the elimination of most higher species and the destruction of civilization—even endangering the survival of humanity itself. Meanwhile, war preparation is expanding in an age of nuclear proliferation and preemptive warfare, associated with declining U.S. hegemony. In these circumstances, revolutionary change simply means struggling for the sustainable development of humanity and the Earth. My own view is that the only way that humanity can save itself and move forward is a socialism for the 21st century. A lot has been written recently on this new idea of socialism. I would strongly recommend in this respect Harry and Fred Magdoff’s article “Approaching Socialism” in the July-August 2005 issue of Monthly Review and István Mészaros’s new book, The Challenge and Burden of Historical Time. Would it work? We don't know, because it is something that we would have to create through our collective struggles. But as Brecht explained in his “Buddha’s Example of a Burning House,” it is irrational to cling hopelessly to a burning house, as the flames lick its walls and singe our brows, in sheer terror of stepping into the world beyond. Capitalism is such a burning house.
You have talked about how war spending contributes to an upturn in the economy. How are the two related? What are the benefits to the economy when the government spends on the military? How does this relate to U.S. imperialism?
Officially (using the figures of the Office of Management and the Budget, or OMB), the United States spent about $550 billion on the military in 2007, about equal to the entire rest of the world put together. Actual U.S. military spending, however, as Hannah Holleman, Robert McChesney, and I showed in the October 2008 issue of Monthly Review, was $1 trillion in 2007. Historically, one of the ways in which the United States and other capitalist states have gotten out of the economic doldrums is by government spending on the military, which serves the imperial purposes of capital and does not meet the same resistance from the ruling class forces as does civilian government spending (which is seen as interfering with the private domain). However, military spending has become increasingly capital-intensive and technology-intensive, employing relatively little labor for the sums expended. In addition, much of the money is spent abroad. So it is less effective dollar for dollar as a stimulus compared to many other forms of spending. Moreover, if the United States were to greatly increase its military spending, which already equals the rest of the world (even by acknowledged OMB figures), it could well set off a world arms race and point to unlimited destruction. It is worth recalling that the Second World War was how the U.S. economy escaped the Great Depression. Today the magnitude of the risk of heading in this direction is beyond all measurement. What is needed in the United States is not more but less military spending, to be replaced by greatly expanded civilian government spending, directed at people's most pressing needs. None of this is to suggest that military spending is primarily about economics, pure and simple. The main reason for U.S. military spending is to keep revolutions from occurring (and to defeat them when they do) throughout the world. It is a means of limiting human freedom globally. All real solutions to the world's problems therefore require the dismantling of Washington’s military machine. If today there seems to be an increasing trend toward war, it is only because capitalism as a whole has lost its former creative role and is tending toward exterminism in every sense: economic, ecological, and military/imperial. Our slogan today should no longer be simply Rosa Luxemburg’s “Socialism or Barbarism” but “Socialism or Exterminism.” Resistance to war is resistance to an entire system of destruction.
John Bellamy Foster is the editor of Monthly Review, a professor of sociology at the University of Oregon, and the author of Critique of Intelligent Design (with Brett Clark and Richard York), Naked Imperialism, Ecology Against Capitalism, Marx’s Ecology, The Vulnerable Planet, and The Theory of Monopoly Capitalism.
Jenessa Stark is the Freeman Intern at WRL. She worked for a community newspaper in Minneapolis and as a freelance writer while traveling through Central and South America in 2007 and 2008.