The crisis of capitalism

Beyond regulation and greed

CLAUDIO KATZ is professor of economics at the University of Buenos Aires, as well as a researcher with CONICET (National Council for Science and Technology, Argentina) and a member of Economists of the Left. His Web site is This is a slightly shortened version of the original in Spanish—“Codicia, Regulación, o Capitalismo,” written in December 2008—and was translated for the ISR by TODD CHRETIEN.

A system out of control
WHEN THE banks began to collapse, the neoliberals were left speechless and could do nothing other than demand state protection. They argued that society should shower the private banks with whatever money necessary, that they should be saved with public funds.1

But if the very heart of capitalism requires this support, then all the praise for risk and competition as pillars of the system in a new era lacks any sense at all. The soundness of these concepts as foundations should be tested at the most critical moments. If privatization and deregulation are only good during times of prosperity, then they fail that test.

The neoliberals refused to recognize all the warnings of the coming explosion. They ignored out-of-control debt, leveraging, and banking collapses registered in numerous countries. When it became obvious that these events would lead to a storm at the very center of the system, they reinforced their mercantile superstitions. They dismissed these problems as passing difficulties and attributed their eruption to a “populist culture.” Their blindness expressed the interests of an elite that competed with one another to hoard financial profits.

Orthodox economists have suddenly detected the adverse consequences of financial risk-taking. In deference to business conservatism, they forget all the praises they offered for this approach. At the height of the boom, they touted the virtues of venture capital, and now during the crisis they highlight the advantages of caution. However, they always remain ignorant of the fact that the great financial storms do not follow from individual conduct.

What determines the upward or downward trajectory of accumulation are the system’s own contradictions and not the psychological inclinations of individual capitalists. All the protagonists in this regime are forced to get value from their investments by means that affect their competitors, and they cannot prevent the systematic imbalances that are generated by their activity.

Today’s crisis is burying the myth that the bankers (and their mathematicians) have the ability to perceive and profitably manage the signs of risk transmitted by the market. In reality, these administrators undervalued the threats of collapse because they took part in a game where one is always obliged to raise the bet. The rule of increasing benefits impedes their ability to evaluate the risks involved in making the loans they manage. And when these mistakes are manifested, they pass on the traumatic consequences to the rest of society.

Lack of confidence
Some neoliberals attribute the immediate cause of the tsunami to the errors of monetary policies. They argue that the reduction of interest rates by the Federal Reserve forced banking institutions to inflate loan offerings.2 This line of reasoning excuses the bankers for the real estate bubble. But in reality, the interest rate reductions to which they object did reactivate the economy and allowed the wave of borrowing to enrich the financiers. Because of this, at the time, they did not question a monetary policy that, at any rate, in no way obliged them to make loans of any specific nature.

On the other hand, the capricious division of responsibility between the government officials and bankers overlooked the close links that both groups maintain. The people who end up in charge of the Fed or the Treasury first make their careers in the big banks and usually return to these posts after they retire from government service.

When confronted with the lack of credible explanations, the neoliberals retreat to long-held beliefs. They have converted confidence into a magical term that explains the worsening, continuity, or overcoming of crisis. They suppose that the financial mess erupted because of the loss of this quality, and that it will evaporate with its return. The business owners’ state of mind is seen as the linchpin to the economic cycle. But the truth is that both processes are connected by an inverse coincidence. The capitalists invest when they see a profit and retract capital when they do not. Because of this, so long as the crisis continues to decrease profits, no amount of exhortation will overcome their lack of optimism.

The most experienced financial spokesmen recognize that “capitalism will remain trapped” by the seriousness of the disaster. At the same time, they are betting on a short and manageable crisis that will be crowned with the reestablishment of the “market economy.”3 But this expectation contradicts their own somber diagnoses, and clashes with the disappearance of the neoliberal consensus among the dominant classes. There is a lot of wishful thinking and very little realism in the hope that the current crisis is a benign tremor or one that causes no lasting damage.4

Speculation and deregulation
The Keynesians have displaced their adversaries in the media. They now bask in the glow of having foreseen the crisis and of having raised repeated questions about the merits of financial deregulation. But, in their majority, they share the priorities of the banking elite, and have only put forward their objections in the last few years.

When the establishment was applauding the social outrages inaugurated by Reagan and Thatcher, Joseph Stiglitz presided over the World Bank, George Soros was enriching himself by speculating on European currencies, and Jeffrey Sachs was implementing structural adjustment programs in the underdeveloped economies. This same changing of sides is going on now. Alan Greenspan is moderating neoliberal fervor and Martin Feldstein is promoting public spending. But this ability to know which way the wind is blowing is not the same as having the clarity to define the crisis.

One explanation that the two trends of mainstream economics share is associating the current collapse with the “exaggerated executive bonuses.”5 This speculative prize is condemned with the same vigor with which the frauds committed by people like Bernard Madoff are questioned. These instances are invariably presented as exceptions and not as expressions of normal prevailing banking practices. In the neoliberal environment of impunity over the last years, all sorts of frauds have been committed. Their chief architects were the bankers and construction businesses that drove the real estate bubble.

This generalized reign of fraud should not hide the fact that capitalism itself periodically generates waves of speculation in order to extend credit. This expansion requires financiers who have the ability to invent sophisticated debt instruments. And as these individuals gain profits proportional to the number of merry-go-rounds they can ride, they always tend to break the rules in force at the time.

Some Keynesians—like Paul Krugman and Paul Samuelson—attribute the speculative excess to the lack of regulation and hope to mend this with stricter norms.6 But these rules abound in the legislative jungle managed by different banking lobbies in the halls of power. This structure, and not the abstract lack of regulation, has precipitated the crisis. Some policies have tended to delegate to the bankers the responsibility to consensually manage themselves (the Basilea accords), while others have given an incentive to work more closely with the authorities (through the independence of the central banks). But these institutions never operate in a vacuum.

The fantasy of avoiding a repetition of the financial crunch with new legal measures has regained force. But these commotions are inherent to capitalism and there is no way to stop their reemergence. The system itself periodically generates pressures to increase the value of capital and it creates antibodies to sterilize the regulations in force. This phenomena, for instance, can be verified with the debut of neoliberalism itself and will return anew when capitalism needs to restore the rate of profit.

If all the chaos in play now stems from a lack of supervision, there wouldn’t be so much fear about the future of finance. There is already a sufficient consensus to modify banking functions, verify stock exchange operations, and to delimit the scope of the most dangerous activities. But it is obvious that these initiatives only introduce minor correctives.

The Keynesians idealize those regulations that capitalist states establish to bring order to the functioning of the financial markets. They suppose that these norms will define the dynamic of the banking business, leaving out that it is essential to guarantee the support of the public power (the state) for the different forms of paper in circulation. What permits the commercialization of these notes is the perceived strength of the government’s backing. This backing allows money to flow, introduces public bonds, and allows the exchange of private commercial paper. When these guarantees are missing, regulation loses all relevance and the crisis assumes a seriousness that we see today.

The heterodox economists remain completely unaware of this problem. As they are enthusiasts of capitalism and of the state, they suppose that it is enough to establish optimal regulations to favor the common good. The rescue of the banks has categorically refuted this assumption. But, more than this, it has opened a crisis that has put in doubt the capacity of the state to protect all the financial instruments in circulation. This vulnerability does not rest on this or that regulation, but on the severity and evolution of the financial crash itself.

But the most noteworthy fact over the last few months has been the reverential fear that all the Keynesians exhibit when confronted by the financiers. Krugman and Stiglitz have promoted the banking rescue without demanding compensation or penalties. They affirm the “lack of liquidity” line that the banks propagate, and even when the banks get government aid and still don’t reactivate credit, they do not demand any corrective.

The current superstars of economic thought take note of the scant impact that the cuts in interest rates have had on investment and consumption. They know that the banks are taking advantage of the cheapening of available funds to make good on their losses, restructure their operations, or acquire other institutions. This blockade could be met with expropriation, but the new darlings of the establishment have shelved any strategy for euthanizing the profiteers.

Coordination and reactivation
Many Keynsesians attribute the spread of the global crisis to the “lack of governmental coordination.” Krugman and Stiglitz especially stress this fault.7 They warn against uncoordinated expansion of public spending, devaluations without consultation, and commercial protectionism.

Their support for synchronization reflects the international character of the crisis. As the tremor hits the most important economy on the planet, the contagion’s spread to Europe and Japan has accelerated, and along with it the downfall of the idea of the emergent nations decoupling from the crisis. Not even Switzerland and the Persian Gulf nations have been able to avoid the financial tsunami, which is now putting the brakes on the locomotive of the Chinese economy and threatening to reproduce the sufferings of Latin America and Southeast Asia.

The worldwide reach of the crisis has induced the heterodox economists to seek remedies in coordination. For this reason, they objected to the rescues that hurt neighboring economies at the beginning of the crisis. Especially in Europe, the brutal dispute among various countries to preserve their banking deposits led to a collective slump.

All the Keynesians now applaud the general adoption of the English model of capitalization of the banks as a corrective to the crisis. The different means of applying this policy that separate the French (state management of the boards of directors) and the Americans (no interference in bank management) and the Anglo-American pressure to maintain the free movement of capital in New York and London does not alter this search for a common response to the financial crash.

Designing a “new Bretton Woods,” as suggested by Stiglitz, is more ambitious, but it remains without substance.8 Defining a new international lender of last resort and establishing criteria for other currencies (basic goods basket, multilateralism, Bancor) all require a certain stabilization of the financial storm. And this commitment also supposes a resolution of the power relations between the great powers that would appear more likely to come at the end, and not the beginning, of the crisis.

The flux of the dollar and the euro is a clear symptom of the initial character of the tremor. The American dollar was spontaneously transformed into the refuge of all the world’s ruling classes. But the extraordinary fiscal and trade deficits put the stability of this situation in doubt.

The euro has also offered protection for investors who have abandoned the most threatened European nations (Poland, Denmark, Switzerland, and Iceland). But no one knows how this phenomena will respond to the unraveling of the Maastricht budget agreements. Even more dangerous is the surging indebtedness registered by several countries of Old Europe (Italy, Greece, and Spain).

All the angelic convocations of “international coordination” disguise the hard rules of realpolitik that prevail in the official meetings. At the summit last November that brought together twenty presidents, the United States demanded a general commitment for its financial rescue. It attempted to specifically guarantee the continued flow of funds accumulated in the Asian and oil-producing nations to the North.

With this end in mind, the Group of 7 was expanded to include China, Russia, Brazil, India, and Saudi Arabia. The presence of other nations is a diplomatic formality since Argentina, Indonesia, Mexico, and Turkey are all on the injured list and not among those countries providing money. In the next summits, Obama will attempt to continue this policy of attracting capital to the United States.

All the Keynesian calls to “reform the IMF” with a “new financial architecture” remain subordinate to the priority of rebuilding the battered banks. With the aim of relaunching the Fund as the administrator for this aid, concessions to the new contributors are already being discussed. These initiatives could also be linked with the selling of shares in the most troubled banks to their supporters in Asia or the Arab world. But in any case, the IMF will continue to act as the representative of the debt collectors against the people of the underdeveloped world.

This role, which bothers neither Stiglitz nor Krugman, unmasks the fantasies that some Latin American presidents hold for a benevolent turn by the IMF. The expectations for “loans without conditions for the neediest” have remained unfulfilled in light of the most recent credits granted to the Ukraine and Hungary (and negotiated with Pakistan and Iceland). The accords include all the demands of neoliberal adjustments.

The Keynesians are seeing their policies applied. They suppose that this confirms the superiority of their program. But this turn only illustrates the affinity that they maintain with their adversaries. The IMF and all the conservative governments have embraced their proposals for reactivation because in the crisis the dominant classes turn to public spending to slow down the recession.

Obama is ready to launch the largest infrastructure plan in fifty years with $136 billion. This same type of package is being proposed by the neoliberal presidents of Europe (170 billion euros) and the ruling right-wing government in Japan ($255 billion). The common purpose of these initiatives is to help bankers and industrialists affected by the financial debacle. The Keynesians applaud this aid but warn against its eventual failure if these decisions are not made in a timely manner or with inadequate instruments in insufficient doses.

But the severity of the crisis is leading the popes of heterodoxy to also ask for higher taxes on the wealthy and lower military spending (Stiglitz) or the direct pumping of more government money into the economy, bypassing the banks (Krugman).

All the Keynesians hope for a resurgence in capitalism based on anticyclical measures. They fail to see the limits in these proposals and their restricted impact outside of certain conditions. To understand what is happening it is necessary to turn to other theories.

The depth of the crisis has revived an interest in a Marxist interpretation, one that postulates the intrinsic character of capitalist disequilibrium. This view rejects the psychological or naturalist interpretations and underlines the importance of profit rivalry in the current crash. Basing ourselves on this principle, we are left with two basic causes to the current tremors (over-accumulation and overproduction) and one detonator (price increases in raw materials).9

The crisis of over-accumulation grew alongside the tremendous mass of liquidity that flooded into the financial sphere. These funds remained disconnected to productive accumulation and were transformed into fictitious capital without any counterpart in the real economy. The yield that financial activity offered, in time, pushed forward an atrophy that led to the disintegration of the banks.10

This process of over-accumulation has three specific features. In the first place, it includes sophisticated securitization and leveraging mechanisms. Combining bonds with other bonds, the bankers covered the planet with vulnerable commercial paper. They perpetrated the transfer of risk by fragmenting the riskiest bonds into different packages. The United States, in this way, exported the majority of its toxic debt, most often placing it in credit-default swaps and collateralized debt obligations (sophisticated financial securities combinations). Municipalities, universities, and pension funds all acquired these instruments, lured by their high yield – they should now have to answer to their own investors for these operations.

The internationalization of financial imbalances constitutes the second feature in the over-accumulation crisis. Since the 1980s, surplus capital has been dumped into various markets, provoking the savings and loan collapse in the United States, tremors in the European monetary system, and the troubles in Japanese banks. Most recently, it has precipitated the Southeast Asian storm (1994–95) and the global earthquake that led to the collapse of the Long-Term Capital Management fund linked to investments in Russia (1998). Already in these examples, the lack of control over derivatives had a big role in these flare-ups, presaging the current mess.

The expansion of personal debt constitutes the third trait of the recent financialization. This scheme brought in additional profits by tapping into workers’ earnings by means of overflowing offers of credit to maintain living standards and to pay for education and current consumption. In this way, workers were transformed into clients suffocated by unsustainable fees. The crisis exploded around a variant of this type of credit given to people with irregular or very low income.

This type of business grew up within conditions that provided a certain political and social stability generated by capital’s neoliberal offensive. The current crisis was forged during this period, which consecrated the hegemony of the bankers. This fact is not insignificant and it did not begin with the dawn of the twenty-first century. It was consummated with the support of the other sectors of the ruling classes who conceded a slice of profits in order to promote the offensive against social gains and put the financial squeeze on society as a whole.

This plan restored the rate of exploitation by means of granting management the power to discipline their workforces and aiming their activity at gaining short-term yields from the stock market. The exhaustion of this course now threatens the very privileges obtained by the bankers.11

The crisis of over-accumulation has already provoked an unusual clearing out of surplus capital that was circulating in the stock markets. Although this collapse deals with fictitious capital and not real buying power, the thirty trillion dollars that have gone up in smoke in the last twelve months are an indication of the purge in motion. In this same period, stocks have fallen 30 to 40 percent in the United States and Europe and between 44 and 70 percent in the remaining markets. These percentages are getting closer to the 75 percent losses that were registered between 1929 and 1932.12

The automotive test
The collapse of financial capital is not completely autonomous from the productive sector. It also expresses a generalized surplus of commodities. This overproduction is the principal cause of the current crisis. In the last instance, all the commercial paper represents a promise made against profits generated in industrial or service activity.

The surplus of goods expresses the increase in production (and of productivity) that exceeds the capacity to buy those goods. Overproduction first erupted in construction with the proliferation of housing units out of the reach of their potential buyers. This problem is now accentuated by large numbers of evictions and foreclosures that leave houses unoccupied. The process was greased with high-risk credits, but followed an inherent tendency within capitalism to overproduce.13

The real estate bubble has reproduced the euphoria that accompanied tech stocks during the flurry of investment in chips and computers at the beginning of the 1990s. In reality, since the railroad crash in the middle of the nineteenth century, all speculative waves of any significance have been based on growing profits that centered around a particular industry.

But the capitalists never pay the price for these swings of fortune. The American real estate bubble will turn 7.3 million property owners into people deeply in debt and leave another 4.3 million people without their homes. To date, there is no plan to stop foreclosures.

The saturation of goods extends to all sectors, but it is hitting the auto industry especially hard. As the fall in sales has created an excess in stock, General Motors, Ford, and Chrysler find themselves at the edge of bankruptcy. This sector directly employs 2.2 million workers and provides indirect employment for a similar number of employees.

This dramatic social impact did not alter Bush’s caution when it came time to help these corporations. His inaction contrasted sharply with the aid received by the banks. This difference was in line with the preeminence of the bankers and the demand by all parts of the establishment to squeeze the working class.

Legislators have explicitly demanded reduction of salaries, layoffs, and labor flexibility as a precondition for state aid. Negotiations with the UAW demanded an immediate reduction of salaries in the Big Three to the inferior levels current in other companies (Nissan, Toyota). The objective is to reduce wages to the international average and, through cutbacks, begin reducing benefit and retirement costs. If this bosses’ attack succeeds, its effects will be extended to other areas. The automotive test was previewed in the reorganization carried out in the aviation industry and is the surgery being prepared for all American industry.

Global overproduction
The same overproduction that is affecting overseas General Motors, Ford, and Chrysler plants (especially in Canada and England) is hitting the balance sheets at Toyota, Suzuki, and Nissan, and will soon hit the European automakers. This impact demonstrates the international character of the excess of commodities. In order to modernize their production, the carmakers drastically reorganized their production methods during the past decade. Adjusting these costs has actually contributed to the current surplus of vehicles.

The automotive sector is based on a global model of competition that has seen a fall in salaries brought on by the entrance of the Asian manufacturers. At the end of several years of being inundated by cheap products, every corner of the globe finds itself stuffed with commodities. Overproduction is a direct consequence of the shift of manufacturing investment by transnational corporations into China, and their taking advantage of the revolution in transportation and communications to profit from China’s immiserated workforce.

The excess of goods can already be observed in other areas (textiles, home electronics) and tends to provoke a significant fall in prices. This fall began to insinuate itself in the industrial orbit starting with the Asian crisis (1997), put remained initially obscured by the rapid inflation in fuel and food prices. As the crisis matures, the deflationary spiral has a tendency to consolidate itself.14

Derisory interest rates will not stop this descending spiral since the lowered cost of money has little impact on the level of economic activity. Out of all the measures of the severity of the recession (interbank interest rates, fall in housing prices, contraction of consumer spending), the most critical variable is deflation. If the decline in prices isn’t contained, it could open the path to a depression.

Current overproduction presents significant differences with its antecedents in the 1960s. Then, the resurgence of the Japanese and German economies cheapened products in the global market, precipitating the end of the postwar Fordist arrangement.

But that crisis was followed by the neoliberal reorganization that allowed transnational corporations to produce consumer products in Asia for sale in the West. This process devalued the old commodity surpluses, reordered the markets, penalized certain capitalists, and generated new additional products that crammed the world market.

The role of prime materials
Another trigger of the current crisis was the price increase in basic consumables over the last six years. This rally unleashed cost increases and generated inflationary pressures that affected profits. Businesses accustomed to competition by lowering prices had trouble adapting to ascending petroleum, metal, and food prices.

The prices of prime materials climbed higher over the last few years because of pressure by speculators who tried to make up for the fall in the stock markets by their acquisition of basic goods. This wave of buying severed the prices of consumables from their genuine supply and demand. Investment funds bet on a short crisis that would keep prices high, but the financial meltdown ended up affecting their own game. Grain prices fell by half and OPEC was unable to prevent oil prices from returning to the previous years’ floor.

It turned out to be equally hard to predict changes in these markets. The novel impact of the deteriorating environment on the price cycles of these products increased the difficulty in determining prices. Capitalist destruction of nature could provoke a structural shortage of nonrenewable resources, whose substitution will require large-scale investment, something not necessarily available in the midst of a crisis. The continuing priority that the Pentagon sets for the wars to control the supply of these prime materials is another factor in this uncertainty.

At this level, the main conflict turns around replacing crude oil for nonpolluting energy sources. The influential oil-military lobby pushed Bush to reinforce dependency on imported fuels, even though there was a shortage of new discoveries, an increase in the costs of extraction, and ongoing bloody battles in the most important regions of Africa, the Middle East, and Central Asia. Obama has promised to take the opposite path, but the new scenario of economic stagnation and the fall in oil prices conspires against his plans.15

Price fluctuations affect the underdeveloped nations that invariably suffer from the descending trends; those countries, meanwhile, were never able to take advantage of the ascending prices to reduce their dependency on the export of prime materials. This misfortune is being repeated in the current crisis, but it is exacerbating the subdivision between the group of semi-underdeveloped emerging nations and the bulk of the impoverished Third World.

Polarized global consumption
The current crisis can also be explained by the contraction of demand. By expanding social inequality, neoliberalism promoted a direct reduction in buying power (by cutting salaries) as well as an indirect reduction (employment instability, labor flexibility, and the loss of job security). Overproduction generated during this period can be seen as a realization crisis that obstructed the actualization of market values as a result of limited consumer purchasing power.

This obstacle follows from the overall fall in the percentage constituted by salaries in the total income of the advanced economies. Growing unemployment led to replacing the model of wage increases based on productivity gains with a scheme of wage freezes. The explosion in subprime lending was another reflection of the social fracture that separated the 90 percent of impoverished debtors from the 10 percent of opulent creditors.16

The excess of products and the limitations of consumption constituted two sides of the same coin, but the importance of each process is conceptually unequal. While overproduction constitutes the guiding force of the disruptions that are shaking capitalism, restrictions in demand are a secondary effect. The periodic surplus of goods is the main contradiction of a system governed by rivalries among competitors, one that prevents the production of the quantity and type of socially necessary goods. This imbalance distinguishes chronic capitalist overproduction from all preceding economic regimes.

Competition to manufacture with the highest productivity and the lowest costs are more important factors in creating the crisis than any obstacles in the consumption of commodities. While capitalism retains many instruments to counteract this latter imbalance, tools are very scarce to soften the desperate struggle for profit. The economic imbalances that lead to overproduction are responsible for the imbalances that accompany realization crisis.

In this area, the most important thing has not been the contraction of purchasing power, but the fracturing of global demand. The economic scheme based on high American consumption (financed by the rest of the world) of Asian goods necessitated a continuing rise in American consumption. This increase was maintained by an out-of-control expansion of debt. Private debt increased in the United States from 47 percent of personal income in 1959 to 117 percent in 2007, while it rose from 25 percent to 98 percent of the GDP.17

This model of polarized international consumption has been severely damaged by the crisis. The hope of correcting it with growing Asian demand combined with Western austerity has dimmed along with the infeasibility of “uncoupling.” While the total volume of annual purchases by 1.3 billion Chinese equates to $1.2 trillion, 300 million Americans spend $9.7 trillion. Obviously, any change in these proportions will be a long and traumatic process.

The rapid fall of American and European consumption will not tend to improve buying power in the underdeveloped world. On the contrary, 40 million more people experienced hunger in 2008 (raising the total to 963 million) and this is just a preview of the coming suffering in the Third World. A large part of the consumer goods that the underdeveloped world is missing are squandered in the advanced economies, aggravating the breach that separates the regions left behind from those that hold a concentration of the world’s riches.

The scarcity of demand is an important contradiction but it is secondary to overproduction. It is important to establish this hierarchy and the convergence of both imbalances in order to analyze the varying contradictions affecting contemporary capitalism.18

What kind of fall in the rate of profit?
The fall in the rate of profit is another categorical indicator of the magnitude of the crisis. This decline was anticipated and reinforced by the disintegration of Wall Street and will be confirmed by corporate balance sheets. This fall reverses the significant restoration in profits that were gained beginning in the 1980s, based on capital’s offensive against labor. Several Marxist theoreticians have estimated this recovery in their studies of the tendency of the rate of profit to fall.19

The theory of the tendency of the rate of profit to fall posits that the level of profits obtained by the capitalists tends to fall together with an increase in investment that reduces the proportion of living labor (directly carried out by wage laborers) compared to dead labor (labor already incorporated into machines or raw materials). As surplus value, which forms the basis of profit, is generated by living labor, increasing capitalization leads to a contraction in the percentage of profit.

In what way does the current crisis confirm this postulate? It has been indirectly corroborated by accumulation’s dependency on the direct exploitation of wage labor. The large corporations’ strategic turn toward the Asian continent put them in contact with the greatest supply of cheap labor on the planet. This turn would not have happened if the corporations’ profits were nourished primarily from mechanization or from skilled labor.

However, the explanation for the current crisis, resulting from the deterioration in the rate of profit generated by increasing productivity, is very controversial. To hold this view, it is necessary to suppose that this fall in profit rates began a long time ago, ignoring the fact that profit rates recuperated under neoliberalism. Not recognizing this fact, or arguing that profits remained below their postwar average, leads to a forced interpretation of Marx’s law.20

This law does not posit a permanent fall in the rate of profit, because this would make the continuation of capitalism impossible. The law of the tendency of the rate of profit to fall does not operate in a linear way, nor does it explain every swing in the process of accumulation. It only constitutes one factor in determining the crisis with varying degrees of importance in each specific convulsion suffered by the system. Its utility in explaining the depression in the 1930s or the contraction in the middle of the 1970s does not grant it absolute first place in the hierarchy when characterizing the current crisis.

The rate of profit increased after the Second World War, fell during the 1970s, recovered marginally in the subsequent decades, and has recently begun to collapse. During the periods of contraction of profits, Marx’s law operates fully, and in the stages of recovery of those profits, the factors that counteract it prevail. Starting in the mid-1980s until the current crisis, the latter situation predominated, based on the reinforcement of exploitation, reduction in wages, and the cheapening of certain inputs.

If interpretive primacy is granted to the law to analyze today’s period, it is necessary to assign an equally important relevance to the processes of investment that determine the contraction in percentage terms of profit. This characterization would posit that neoliberalism was preceded or defined by large machine expenditures and industrial modernization. It is difficult to sustain this diagnosis.

Perhaps the biggest problem faced when trying to apply the law of the tendency of the rate of profit to fall to the current context comes from the recent segmentation of centers of profitability that has been observed between different capitals’ domestic and international operations. These divisions are very important in the American case. While American corporations with international operations have been very profitable, those with exclusively domestic ones have seen profits lag.

The reduction in the percentage of living labor—that provides the direct source of profit—suffocates the rate of profit. But this contradiction can only be unwrapped by the gestation, maturation, and outbreak of overproduction. The study of this connection is an unresolved matter in Marxist economics.

Chronology and significance
What is the chronology of the present crisis? When did the process of the unleashing of the current tsunami begin? It is obvious that it started before the unraveling of the stock markets and the insolvency of the subprime borrowers. Only the most narrow orthodoxy could explain the long-brewing financial crisis by such superficial factors.

Some theorists correctly locate its origins in the consolidation of neoliberalism. As the workers’ movement ebbed in the advanced countries, the dominant classes ended the 1970s crisis and forged the accumulation paradigm, which has now been shipwrecked. The present tremor is the result of the social transformations and the economic contradictions that this model generated.21

Another way to look at the current disaster is as a new rung on the ladder of the prolonged crisis that began in the late 1960s. This view argues that this long relapse has been postponed through artificial methods and indebtedness, which has, nonetheless, not succeeded in preventing the continuation of a chronic regression.22

The problem with this second point of view lies in the imprecise connection that it establishes between the current crisis and the changes that have taken place in the system over the past two decades. It doesn’t explain how the liberalization of finance, the internationalization of production, and the expansion of transnational corporations created the imbalances that triggered today’s global tsunami. Neither does it shine a light on how competition to manufacture more products with declining wages unleashed overproduction nor how the securitization of loans provoked the over-accumulation of capital.

If the crisis goes back four decades, then the economic changes wrought by neoliberalism lose their relevance in explaining the current mess. Such a prolonged lethargy is, in another way, hardly compatible with the convulsive functioning of capitalism. This system is always corroded by its own frenetic dynamism.

Neoliberalism wasn’t a sign of stagnation. If there is overproduction, it is because of the intensity of industrial activity. Two decades of powerful competition between transnational corporations refute the erroneous image of monopolies as institutions that impede innovation or agree to an organized sharing out of markets among themselves.

Another controversy among Marxists focuses on the significance of the current shock. Some authors locate this explosion in a stage of declining capitalism, counterposing it to some booming stage in the past. They use the theory of a life cycle to posit a rigid demarcation between periods of growth and decay for social regimes.23

But the utility of this reasoning is very doubtful. Capitalism emerged by pillaging the periphery, it forcibly impoverished the peasantry and consolidated itself by exploiting workers. Later it carried out inter-imperialist wars that annihilated millions and today it is devastating the environment. The system’s own evolution generates these types of catastrophes and it is pointless to try to rank which of these is the worst cataclysm.

Certainly, the limits of capitalism may be approached with its expansion. But these barriers are qualitative or social and not geographic or numerical. Neither the exhaustion of the frontier (as Rosa Luxemburg believed) nor the volume of the extraction of surplus value (as Henryk Grossman thought) represent absolute obstacles for accumulation. Capitalism counteracts this type of asphyxiation by opening new areas to exploit (restoration in the ex-“socialist bloc”) and new sectors for investment (privatization).

The barbarities generated by this system are more than sufficient to condemn it. The daily torments of capitalism require no additional adjectives. It is false to suppose that the regime was kinder to the exploited in the past. It is enough to remember slavery, plunder, and the demographic massacre (deaths at birth), or child labor and the sixteen-hour day during the Industrial Revolution (during its takeoff). For the workers, there has never been a golden age under the yoke of capital.

For these reasons, the only relevant distinction is that which allows us to differentiate between the periods of popular gains and those of social defeat. These stages have varied widely and always depend more on the intensity of the struggle (or the threat of revolution) than on the stagnation or expansion of the forces of production. After the Second World War (that is to say when the system was mature), more social gains were won than in all the previous history of capitalism.

In any case, a fatalistic view of history derails socialist political action that aims to win gains in order to eliminate capitalism. Experience has shown that both objectives can be won under a wide variety of circumstances. Capitalism will not extinguish itself by its own internal corrosion. It will be eradicated through political action if the exploited find a way to forge a socialist alternative.

Three scenarios
Different theoretical characterizations will be put to the test in the months to come as the crisis worsens. The rate of global economic growth in 2009 will be low (1.9 percent) and zero or negative in the advanced economies. In the United States, investment is falling, private investors’ losses are multiplying (which contribute half of the value of the stock market), consumption is falling, and the hope of exports as a solution to the crisis are dissipating. As soon as this scenario is confirmed in Europe, a drastic retreat will be affecting half the world’s economy.

The banks will continue to receive billions of dollars in government aid. Citibank, for example, was offered a sum greater than that spent on AIG, Fannie Mae, Freddie Mac, and Washington Mutual combined. But these institutions will keep using public money to pay for losses or to acquire other businesses. They will not mobilize credit, nor will they even explain where the money the state is giving them is going. This impunity has allowed the gigantic Morgan Stanley to absorb its regional competitors and, in a matter of months, convert itself into a commercial bank.

Unlike many postwar nationalizations, the current rescue excludes any controls over the money offered to the banks. The hope of modifying this upon the arrival of Obama seems faint given the appointments he has named. He chose the cream of high finance (Volcker, Rubin, Geithner, Summers) to send a message of continuity to the bankers. This decision casts a shadow over all the reformist projects of raising taxes on the wealthy, providing universal health insurance, or lowering the costs of education.

Faced with the vertical collapse of economic activity, Obama decided to increase his mega plan for public works. He will try to re-create the four million jobs that are going to be lost in the coming months. But no one knows how to reconcile this spending with continued help for the banks. Even though the establishment will ratify large-scale public spending, sooner or later, there will be a question of funding.

The re-creation of the New Deal faces several obstacles. The American economy has lost the self-centered character that allowed it to implement reactivation policies that had a certain effect. The advance of internationalization will force it to orient on a global level. Specifically, its dependence on foreign financing will limit the ability to attain solvency exclusively through internal taxation.

Neither is a reenactment of the war economy that put an end to the Depression in the 1930s likely. The absence of inter-imperialist collisions and the development of military technology constrain the creation of jobs arising from militarist activity.

In this context, three scenarios are visible. The most optimistic hypothesis calculates that the Keynesian plans will have their optimal impact and the recession will only last one year. The IMF is placing its bet on the prognosis of recovery in 2010. If, on the other hand, the counter-cyclical measures have only a minor effect (or if they generate ephemeral effects followed by new falls), then the world will be trapped in a deflationary paralysis, like the one that affected Japan in the 1990s. The third option is for a replay of the 1930s Great Depression.

The last possibility implies a drastic worsening of the current picture. The American recession has lasted a year so far, already surpassing the eight months of recession between 1990 and 2001 and the approximately sixteen months between 1973 and 1981. The dramatic leap to the forty-three months of decline that began in 1929 is still only a threat.

The same is happening with GDP. The fall of between 0.8 percent and 1.2 percent in 2008, and an estimated fall of 0.5 percent in 2009 differs radically from the collapse of 33 percent that took place between 1929 and 1933 (including a 55 percent decline in industrial production and an 88 percent decline in investment). On the social level, a repeat of the Great Depression would mean a poverty rate of 50 percent and an unemployment rate of 30 percent in the industrialized nations, similar to the collapse that Argentina suffered in 2001–02.

It is impossible to predict if the recession will unleash a similar dismantling, but for the first time in decades, this specter is haunting the global economy.

The beginning of resistance
Mass unemployment is the greatest threat closing in on workers. The International Labor Organization calculates that 20 million new layoffs will occur across the world, which would mean the worst level of joblessness since the 1980s. The most frightening thing is the speed of job destruction.

It has been decades since the United States saw the elimination of 533,000 jobs in a single month (November 2008). For the thirty most developed countries, the Organization for Economic Cooperation and Development anticipates an unemployment rate of 5.6 percent (2008), 6.9 percent (2009), and 7.2 percent (2010). In the United States, the rate is already 6.7 percent and it is 7.7 percent in the euro zone. Other economists consider double-digit unemployment possible.

This dark prognosis does not stop many analysts from arguing that “capitalism has the capacity to survive the crisis.”24 These formulations—seen through rose-colored glasses—suffer from a schizophrenic disassociation between diagnosis and prognosis. They rant about the system, denounce the aid to the banks, and decry attacks on workers. But they rule out the potential for popular resistance that could end up openly confronting capitalism. They always stress that, “the conditions don’t exist” for “one to confront the system.”

Supposing that “another model” of the same system will inevitably win out in order to amend the excesses of neoliberalism is the tranquilizing belief propagated by the dominant ideology. Reproducing this idea without criticism accepts as given the victory of the rulers. In reality, no battle is lost beforehand. There is only the guarantee of suffering if one abandons the fight.

Until now, bewilderment has prevailed. The financial collapse has shaken the population in the advanced economies where they are accustomed to seeing these debacles play out in the Third World. The arrival of the tsunami in the center of global capitalism has created an unease that has begun to be translated into social protests.

The first important rebellion has broken out in Greece and has a kind of kinship with France 1968. This revolt could mark the first step in a new period. The student reaction against police repression by a right-wing government unleashed strikes and massive marches that had a tremendous impact on the entire continent. Likewise, in Spain and Italy there are marches for education that tend to converge with workers’ struggles.

The combativity of the youth—who suffer the highest unemployment and the most precarious jobs—could be the barometer of the battle in its infancy. At a much more embryonic level in the United States, workers who occupied the factory at Republic Windows in defense of their income registered a symbolic victory. Are these early indicators of a change in the level of popular action?

For the first time in decades, capitalism has gone into crisis in the very heart of the system and it will put a new generation of workers to the test. Their reaction is the most important unknown in a period that will be defined by turbulence, twists, and improvisations.

  1. Martin Wolf, “E hora de um regate abrangente no Mercado,” Financial Times—Folha de Sao Paulo, October 2008.
  2. Daniel Marx, “La crisis terminó: vendrán más ajustes,” Ámbito Financiero, March 19, 2008.
  3. The Economist—La Nación, “El capitalism está acorralado, pero aún sirve,” October 18, 2008.
  4. The theories of the Right send this tranquilizing message, affirming that “a chapter is closing... but the thesis that another world is possible along with the end of imperialism or capitalism are stupidities,” Jorge Cantañeda, La Nación, December 24, 2008.
  5. Edmund Phelps, “Los bancos deberán buscar un nuevo rol,” Clarín, November 23, 2008.
  6. “There was a parallel financial system without traditional regulations,” as stated by Paul Krugman, “El gobierno argentino está haciendo un poco mejor las cosas,” Clarín, December 16, 2008; “No llores por mi, Estados Unidos,” New York Times—La República, October 18, 2008; “Bancos: iliquidez or insolvencia,” New York Times—Clarín, December 29, 2007; “Planes de estímulo debiles y con serios errores, “New York Times—Clarín, January 31, 2008; “La economía real también necesita una gran rescate,” New York Times—La Nación, October 18, 2008; Paul Samuelson, “Mercado no es iqual a capitalism sin regulation,” Clarín, November 23, 2008.
  7. Paul Krugman, “La riesgosa negative de Alemania,” New York Times—La Nación, December 17, 2008. Joseph Stiglitz, “Ahora todos somos keynesianos, incluso la derecha,” October 12, 2008.
  8. Joseph Stiglitz, “El dólar ya no sirve como reserva,” Clarín, November 23, 2008.
  9. Claudio Katz, “Lección acelerada de capitalism,” May 10, 2008,
  10. The characteristics of this process are described, among others, by Christopher Rude, “El rol de la disciplina en la estrategia imperial.” El imperial Recargado (CLACSO, Buenos Aires, 2005); Bryan Dick, “The inventiveness of capital,” July 13, 2008,; and Chesnais Francois, “Alcance y rumbo de la crisis financiera”, January 25, 2008,
  11. This model has been developed in Claudio Katz, “Enigmas contemporáneos de las finanzas y la moneda,” Revista Ciclos, no. 23, September 1, 2002.
  12. Clarín, November 11, 2008.
  13. See Orlando Cauto Leiva, “La economíâ mundial: la crisis inmobiliaria de Estado Unido,” Seminario Taller del Ministerio del Poder Popular para la Planificación y el Desarrollo con Economistas Inernacionales, Caracas, March 27–31, 2008.
  14. Michel Aglietta and Laurent Berrebi illustrate this process. Introduction, Desordres dans le caitalisme mondial (Jacob Odile, Paris, 2007).
  15. Amin describes these militarist tendencies and Klare the complexity of the oil dilemma. Samir Amin, “Financial collapse, systemic crisis?” World Forum of Alternatives, Caracas, 2008; Michael Klare, “Mauvaises nouvelles a la pompe,” Imprecor 537-537, March–April 2008.
  16. As a whole for the G7, salaries as a percentage of national income fell from 66.5 percent in 1982 to 57.2 percent in 2006. Husson Michel, “La lignes de fracture,” Politis n 990, February 21, 2008.
  17. Clarín, September 12, 2008.
  18. The disturbances in motion today should be seen as an amplified reproduction of all the contradictions intrinsic to the system. This methodological focus was suggested by Bukharin and developed by Mandel. Nikolai Bukharin, Imperialism and Capitalist Accumulation (Buenos Aires: De Tiempo Contemporáneo, 1973); Ernest Mandel, ch.1, Late Capitalism (México, ERA, 1978).
  19. These have been collected and analyzed in Claudio Katz, “Una interpretación contemporánea de la ley de la tendencia decreciente de la tasa de ganancia,” Herramiento 13, Summer 2008.This is the problem with the characterization made by José Castillo in “Crisis económica mundial en el marco de 40 años de crisis crónica del capitalism,” Aporrea, July 11, 2008,
  20. Leo Panitch and Sam Gindin, “Global Capitalism and American Imperialism,” The New Imperial Challenge, Socialist Register (Buenos Aires: CLACSO, 2005); “Superintending Global Capital,” New Left Review 35, September–October 2005.
  21. Robert Brenner, “A Devastating Crisis,” Against the Current 132, January–February 2008.
  22. Esteban Mercadante and Noda Marín develop this concept in “Gradualism y catastrofismo,” Lucha de Clases 7, October 2007.
  23. Carlos Vilas, “Confusiones y auto-engaños,” Página 12, November 11, 2008. Along the same lines, different authors calculate that “the global system will continue being capitalist and there will be no possibility of bringing it down,” Tumini Humberto, “Capitalismo mundial: derrumbe o nueva etapa,”, February 2, 2008.

Issue #101

Summer 2016

Socialism in the Air

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