Interpretations of the economic crisis

IN THE two years since the economic crisis began, explanations of what happened continue to be dominated by a point/counterpoint between neoliberals and Keynesians. Orthodox economists question the audacity of bankers, the miscalculations of governments, and the irresponsibility of borrowers. Heterodox economists object to the lack of control, the tolerance for speculation, and the absence of financial regulations. In the face of these arguments a space has begun to open for another interpretation with Marxist roots, which attributes the upheaval to the inherent imbalances of capitalism.

Appetites and obstacles
Neoliberals (Gary Becker and Alan Greenspan) repeat their timeworn script as if nothing has happened. They present the crisis as a passing accident that should not alter the reign of financiers. They acknowledge that the financial earthquake requires reconsidering official supervision for banks, but they are opposed to eliminating the deregulation measures of the past years.

What they cannot explain is their fervent support for state aid that these entities received. It’s evident that this aid contradicts every sermon in favor of competition and risk. At times they argue that financial institutions should supply money to all of society and they should be maintained with public funds.

But if they require this support, all their praise of private enterprise loses validity. Banks are the backbone of a system that neoliberals consider both virtuous and self-sufficient. With such qualities they should be able to face situations of crisis without any external aid. It is in these situations, and not during the normal business cycles, that capitalism’s consistency is put to the test.

Orthodox economists exempt the banking industry from all liability. They attribute the crisis to the effects of government policy of cheaper credit, which stimulated giving loans to insolvent customers. But in the context of low interest rates, financiers could have directed their placement of funds to other purposes. They did not build up the housing bubble because of official pressure; it was the promise of high returns in this market. They only recognized the existence of a problem when late payments on these loans triggered the collapse of banks.

Now they turn those guilty for the crash into the victims. Small debtors facing eviction from their homes are accused of irresponsible behavior. The neoliberals cover up the bankers’ fraud, but question impoverished families who took out loans out of the simple need for shelter.

This indictment is consistent with their restricted analysis of the crisis as a function of individual behavior. Using that parameter, they consider the banking industry to have acted with excessive confidence, of being dragged down by greed. They don’t consider the absurdity of demanding moderation in one of the most competitive activities of capitalism. The rules of the game that govern this sector habitually reward the adventurous and punish the cautious. The very dynamic of competition in the market’s most profitable niche pushed financiers to take risks that provoked the collapse. Neoliberals praised the gamblers during the high point of the market, and now they rant and rave against their excesses.

In their characterization of the crisis, neoliberals focus all odds on the psychological inclination of financiers to take risks without assessing the consequences. Yet they ignore the objective conditioning of this attitude, imposed by the norms of the up-and-down business cycle. As they follow these fluctuations, bankers are forced to enhance their investment with initiatives that sooner or later will result in a general crash.

These neoliberal explanations fall victim to numerous contradictions. They claim that the warning signs were not heard during the irrational euphoria of the last years, and believe that a timely withdrawal might have avoided disaster. But this truism forgets that the economic collapse was not an arbitrary or avoidable event. These crashes are part of the periodic reorganization governing capitalism.

Orthodox economists lament that they were dazzled by brokerage firms’ sophisticated tools for evaluating financial risk. First they commended the reliability of these mechanisms; yet now they estimate that these swaps, derivatives, and collateralized debt obligations turned credit management into an unmanageable labyrinth.

Clearly these programs—designed on Wall Street by mathematics experts—did not allow effective risk assessment, and became indecipherable for the bankers themselves. But the problem is not lack of transparency of information provided by these tools. It is the decisions financiers adopted within a framework of relentless competition. Even if the banking industry perceived signs of risk, it could not have evaluated them properly as financiers were immersed in fierce battle for control of profitable portfolios.

The law of rising profits prevented them from adopting a conservative attitude in the proper moment, an attitude everyone applauds after the fact. What seems rational after the explosion is discarded beforehand so as to not lose opportunities for profit.

However, the worst is not the recognition of these errors, but the decision to unload all the traumatic consequences of this current disaster on workers and the unemployed. The main role of the neoliberal sermon is to justify transferring the cost of the crisis to the defenseless and homeless. Their theories only aim to protect the privileges of the economic elite.

Fraud and supervision
Keynesians (Paul Krugman, Joseph Stiglitz, George Soros, and Nouriel Roubini) have taken the place of their opponents in the media. They believe they foretold the crisis and warned of the negative consequences of banking deregulation. Yet these warning messages did not lead to seriously confronting the banking elite, nor to requiring penalties for financial misconduct.

They now share in the collective indignation aroused by the lewd bonuses of financiers. But they endorse relief for the banking industry by spreading the establishment’s same arguments. Instead of calling for nationalization of the banking system, they accept the socialization of losses, which increases the public debt and requires perpetual adjustment of social spending.

Keynesians denounce the fraud committed with leverage and misleading accounting. They also criticize the dubious business transactions committed with equity of the very entities that should have supported lending. Yet they portray these scams as personal sins of the speculators, ignoring that capitalism itself periodically encourages different types of embezzlement to extend the scope of credit. In the boom cycles skilled financiers that can invent new forms of debt are in high demand. These operations break the current rules to brew bubbles that yield enormous profits.

Keynesians attribute these excesses to the lack of regulations and propose solving the problem with stricter rules. They believe that bankers tend to lose their caution, forcing the state to exercise stricter supervision. They note that such action is essential to counteract financiers’ inclination toward imprudent management.

But the banking system does not lack rules. On the contrary, there are rules and monitoring mechanisms in abundance. As the bankers themselves maintain an indirect control over these provisions, audits do not ultimately reduce uncertainty or limit risk. By various types of lobbying, the banking industry often negotiates this legislative maze from the backrooms of power. With a wave of the hand they cripple any controls and forestall the ability to neutralize the outbreak of a crash.

The close familiarity between officials and bankers became more pronounced in recent decades, through privatization and norms of independence for central banks. But this association is not something new. It has accompanied capitalism since its inception and has been essential for the continuation of this mode of production. Keynesians question only the excesses of that relationship. It is important to note that it has been this structure of regulation, and not its absence, that precipitated the recent crisis. Institutions do not suffer a periodic erosion of effectiveness because of loopholes, but because of the impact of competition. The compulsion to increase profits makes regulations inherited from previous periods self-destruct.

The hope of avoiding a financial crunch with new laws recreates old illusions in producing magical instruments to prevent the crisis. These tools never existed, nor will they be created, while the pressure to increase the value of outstanding capital still exists. This compulsion eroded postwar regulations and again undermined the rules introduced in recent years. Surely the current neoliberal disorder will be amended with stricter supervision. But another round of further deregulation will arise when capitalism needs to reconstitute the rate of profit.

Keynesians idealize the regulations that states establish to place some order in the operation of markets. They assume that these rules define the dynamics of the banking business, forgetting that these provisions essentially provide a state guarantee for shares in circulation. The application of one rule or another only makes that operation viable. What permits the existence of debt and currency is backing from a solvent state that appears able to repay. Understanding this process means accepting that the state is not an entity that serves the common good but is an organ of protection of the ruling class. Since the heterodox economists do not accept this principle, they imagine that you can correct all the system’s defects with simple adjustments to regulations.

The aid the banks received during the crisis should put an end to these fantasies, since it has been quite visible how financiers handle the levers of the state in critical situations. Yet this lesson will not be assimilated by those who believe capitalism is a perfect and eternal system.

Volatility and deregulation
There is another trend among post–Keynesian theorists (Philip Arestis and Gerald Epstein) that emphasizes more sharply the responsibility of neoliberalism. They believe economic liberalization promoted uncertainty, made the movement of funds more volatile, and encouraged the acceleration of uninsured financial operations. They think that this stimulated an unbridled race to expand immediate gains, favored the introduction of rules maximizing stock portfolios, and ended up destabilizing the banks themselves.

This diagnosis portrays the impact of a transformation that helped promote the breakdown of institutions. But this line of questioning ignores the thread of continuity linking the Keynesian era to the neoliberal period. Deregulation was implemented by preserving a pattern of state intervention into the financial system, to be managed by select and stable groups of experts.

It is true that more bubbles have burst than in the past, but the old guidelines are in place to transfer the reins of the system to that elite when banks stumble. The persistence of this command unit demonstrates how mistaken the absolute contrast between Keynesian regulation and liberal flexibility is. The two methods differ in the day-to-day management of business, but reunite at times of potential collapse.

Economists who contrast bankers to the rest of the capitalist class do not see this relation. Because they ignore the existing association between the two groups, they have been puzzled by the recent conversion of financiers becoming advocates of state action. With similar surprise, they contemplate the limited inclination industrialists show toward making changes in the neoliberal model.

The post–Keynesians have taken up again the old moral questioning of unproductive activity. They denounce the gall of Wall Street, the cheating of depositors, and the blackmail of rating agencies against the indebted countries. But they forget that speculation is a fundamental activity of capitalism, not an optional one.

Banks are not a separate world. They operate as a complement to investment and they profit by carrying out an activity required by their peers in commerce and production. An entirely productive capitalism such as what the heterodox economists imagine never existed. The system is reproduced with forms of credit that inevitably revive speculation.

To look at the tyranny of evil financiers as divorced from the process of accumulation also forgets the strategic place that bankers have held in the general reorganization of neoliberal capitalism. That shift helped in imposing the increase in the overall rate of exploitation that the entire ruling class demanded. Through their control of credit, bankers now define the course of adjustment that all capitalists demand, and they mandate the drastic surgery to social spending that the system requires to regenerate itself. Far from introducing a distortion into contemporary capitalism, they have acted according to the needs of this mode of production.

The reduction in demand
Other heterodox interpretations, more in line with the tradition of regulation theory, underscore the tensions created by neoliberalism in the realm of demand (Michel Aglietta, Robert Boyer, and Thomas Palley). They emphasize that the current model contracted wages, increased unemployment, and broadened social inequality, ultimately causing serious deterioration in purchasing power. This reduction affects demand and fosters recessions. Starting from this characterization, they call for increased stimulus for mass consumption, with measures to expand public spending and for some redistribution of income.

Such an approach also highlights the impact of new inherent features that consumption by upper and middle sectors presents. Since part of these sectors’ wealth has been turned into stock options and bonuses, consumption trends depend more on the vicissitudes of financial wealth than on the performance of income. For this reason, the cycle of stock market and housing market appraisals drive demand, and periods of loss precipitate a decline in acquisitions. The factors that determine “consumer confidence” have been linked to financial ups and downs like never before.

This vulnerability in consumption has escalated, moreover, because of the growing dependence on household debt. While during the postwar period consumer demand was dictated by the increase in wages, in the last two decades it has been directly connected to the evolution of loans. Faced with an increasingly deteriorating labor market, workers have resorted to credit assistance to sustain their living standards. Only the astronomical volume of these liabilities has maintained the buying cycle in a context of decreased savings. The concern regarding “overspending” by American families depicts this divorce between increasing purchases and meager financial reinsurances/second insurances.

But this apt description of these imbalances misses the fact that neoliberalism only upgraded a contradiction of contemporary capitalism. This system encourages large-scale consumption without providing a counterpart of higher, more stable incomes. On the one hand it promotes acquisition as a barometer of individual achievement and identification of success with money. On the other hand it blocks attaining these goals because it weakens income through labor competition and the downgrading of work.

Today’s capitalism fosters hedonistic consumerism and individualistic utilitarianism, yet it makes it impossible to enjoy such habits because of widespread uncertainty about jobs. These types of contradictions surfaced first in the United States, but are now established in all advanced countries.

Heterodox economists portray these imbalances as disturbances in demand, which could be overcome by expanding consumption. They forget that capitalism has no substantive remedies for the problems that arise with purchasing power. Within its own development capitalism encourages conflicting goals, promoting an increase in sales and profits gained by lowered wage costs. Both goals are incompatible, since the pursuit of profits through lowering wages undermines the possibility of broadening markets. Ultimately, this contradiction—which regularly erupts—originates from the divorce between the condition of increasing values (rate of exploitation) and the condition of sales (volume of sales) of capital.

By ignoring this tension, the heterodox economists assume that neoliberal adjustment can be avoided with increased demand and growth. Yet these proposals are filed away when it comes time to govern. In those moments, the reformist recipe is replaced by actions the establishment requires. Obama demonstrated this by using public funds to aid the banks at the expense of social improvements.

The behavior of the Social Democrat presidents of Greece, Spain, or Portugal has been more blatant. They launched brutal layoffs and wage cuts, which are the complete antithesis to an upturn in demand. Such a contrast between discourse and reality illustrates the obstacles that heterodox economists’ pronouncements face in the concrete.

During the crisis what surfaced was the ruling class’s minimal interest in implementing measures to return to the welfare state. All capitalists hope to continue to enjoy the advantages they gained with the employers’ offensive. The powerful even look to take advantage of the panic created by unemployment, so as to test out a new wave of Thatcherism that wipes out all remnants of social gains. This is the course favored by the entire class of oppressors, not just the Wall Street financiers. The revival of popular consumption with social gains can only become reality through popular struggle.

The crisis confirms that the operation of capitalism is located far from the heterodox economists’ imagination. Every illusion of a trajectory of equity within this system is belied by the course of events. These beliefs presuppose that employers act in the service of society and that the state regulates the equitable distribution of resources. The latest adjustment refutes this view and demonstrates how a social system run by bankers and businessmen develops.

These failures of Keynesian ideas lead us to seek explanations in the approaches Marxism posits.

Shortage of consumption
Marx’s followers emphasize the responsibility of capitalism for the outbreak of the crisis. They believe these convulsive shocks are inherent to the system and will continue to break out as long as this social system lasts. But within a shared conceptual framework, proponents of this view pose different interpretations of the most recent outbreak. These differences revolve around the major imbalances in the system. They are discrepancies that take up longstanding disputes over the determining mechanisms of crisis.

One side argues that the obstruction of demand provoked by neoliberal aggression is contemporary capitalism’s main contradiction (Michel Husson and Alain Bhir). They attribute the weakening of purchasing power to accumulation itself, which disconnects the course of production from the dynamics of consumption. They stress that such a break cannot be remedied with simple economic policy changes.

This view emphasizes that the weakening of unions, the fragmentation of work, and labor flexibilization have made the structures of demand, forged during the period of the welfare state, more vulnerable. The old norms of stable consumption have been replaced by more unpredictable purchasing patterns. This instability blocks the absorption of a contemporary basket of goods, which no longer has the uniformity of mass production. The behavior of demand has lost predictability in the face of proliferating job flexibility, uncertain wages, and changing work positions.

This approach allows us to note how the increase in productivity, the computerization of the production process, and the accelerating pace of manufacturing all highlight the vulnerability of consumption. Cutthroat competition demands shortening the life cycle of products and launching new designs before investments can be completely repaid. Such rapid obsolescence of goods imposes dizzying forms of consumption that is disconnected from the lifespan of these items. The compulsion to change cell phones, televisions, or cars leads to the disposal of these goods before they are fully utilized.

This outlook conceptualizes correctly the obstacles faced in demand, such as destabilization in the profitable sale of goods. Goods manufactured in the process of surplus extraction must be sold to consummate the expropriation, yet the absence of solvent buyers makes carrying out this process difficult. The same system that motivates capitalists to produce goods for profit undermines purchasing power.

Such an approach describes how the neoliberal assault has created a vicious cycle of contraction in demand that blocks accumulation. This view also stresses that a reconstitution of the welfare state is unlikely to attenuate these pitfalls. These economists seek to recover lost social benefits through popular struggle. They call for economists to engage with social struggles.

This explanation demonstrates that competition multiplies disparities in all models of capitalism. In any of these schemas, businesses find themselves forced to lower employee income, thus affecting the sale of products that need placement on the market. This contradiction follows an intrinsic duality of capitalism that encourages unlimited production of use values, while at the same time restricting the absorption of commercial goods. This imbalance ultimately derives from purchasing power that is circumscribed by unequal income distribution.

Division of society into wealthy and poor classes not only translates into different forms of consumption; it also severely restricts the digestion of manufactured goods. Class stratification regularly obstructs the realization of value by blocking the sale of goods at prices compatible with expected gains.

By highlighting how contemporary capitalism expands the demand without creating its counterpart of higher incomes, this approach clarifies a determinant in the crisis at hand. But the actual weight of this imbalance and its degree of maturity are controversial. One indication of the limited scope presented by this contradiction is the outbreak of crisis in the economy of greatest overconsumption on the planet (U.S.), and its subsequent extension to other regions of high demand (Europe and Japan).

Such a finding indicates the absence of a general scenario of under-consumption. It is more the case that a variety of different situations prevail. In the First World, the dominant model is a context of fragile and extended sales; in intermediate economies, acquisitions are highly polarized; and in the periphery, sales are clearly insufficient.

It should also be remembered that capitalism has traditionally balanced out bottlenecks in demand with the expansion of the sector of equipment and specialized goods. These balances continue to operate and avoid the appearance of absolute limits to accumulation. The increase in wages compared to productivity or benefits has been completely left behind, but this gap translates into higher income inequality rather than an absolute contraction in consumption.

Overproduction of commodities
Another Marxist thesis includes explanations of the crisis that emphasize the surplus in unsold products. This type of oversupply emerged first in housing in the United States and later expanded to several branches of the global economy (automobiles, steel, and textiles). The form such destabilization takes has been thoroughly exposed by some theorists (Robert Brenner). This approach considers capitalism to be under structural deterioration for the last four decades. It stresses that the increasing rivalry among large firms has generated a level of surplus that plagues the world market.

The effect contrasts with the tolerable impact of the same competition in the postwar years. While initially the global economy could shelter the simultaneous increase in production and trade, later there was not enough room for everyone. Germany and Japan undermined the industrial and commercial supremacy of the United States, and the three opponents were locked in a stifling competition. The entry of China into global capitalism highlights such tensions and introduces an additional mass of goods to the plethora of products.

This view highlights how overproduction corrodes capitalism by competitive contests that generate surplus. Competition imposes a rate of manufacturing that makes the bulk of goods manufactured disproportionate to the levels of purchase. Businesses are driven to increase their productivity, while competition prevents them from assessing the potential for placement in the market. Since this same competition obstructs coordination among firms, the pockets of surpluses reappear again and again. Capitalists are aware of these consequences, but they cannot mold total production to consumer needs.

The main merit of this characterization is its focus on the current impact of a longstanding imbalance. It shows that uncertain markets, dubious demand, and unsure profits do not deter competitive activity. The battle to lower costs and displace competitors continues in full swing. This fight pushes the economy toward precipices both undesirable and unrelenting.

This view does not attribute the crisis to economic policy errors, to miscalculations with interest rates, or to inconsistencies in calculating investments. It illustrates how the collapse of economic activity is a result of this competitive compulsion. Rivalry prevents coordinating actions among various firms, and pushes all participants to bear the growth of surplus goods. By highlighting these imbalances, they show how capitalism is undermined by its own inbuilt dynamism. There is a surplus of goods because competition, investment, and productivity are expanded. The crisis confirms that the system does not suffer from stagnation, but from unpredictable levels of activity.

Such a perspective also allows us to note the limited impact that monopolies have in blocking uncontrolled competition. The deflationary features of the current crisis support this observation. Unlike the 1970s, the adjustments in competition between companies are not currently processed within a framework of inflation. There have even been some signs of absolute decreases in prices. These price reductions would be impossible if monopolies could count on sufficient force to agree on joint management of the economy. In that case firms would negotiate the redistribution of markets while maintaining their profits and price levels.
But is the concept of overproduction enough to account for the crisis today? Isn’t it simply mixed up in the foundation of other more determinant mechanisms in the outbreak of crisis? These questions open up the debate. Particularly controversial is how the current model of overproduction is characterized. There are many indications that this imbalance is not dragged in from the pre-liberal period, but is an effect of reorganization imposed by neoliberal globalization.

There is a new surplus generated because global competition develops in a manner that is disconnected from local production. It is incorrect to assume that there is no devaluation of capital. A surplus cannot be accumulated without impairing capital, because capitalism cannot stop the purging process that is intrinsic to the system.

The very functioning of the system forces it to pass through successive cycles of capital appreciation and purging of capital. What is new is the weight the state carries in these processes. Officials take charge of rescuing bankrupt companies in order to then privatize them, using measures that allow a short-term drain in overproduction and that facilitate the development of new waves of surplus.

Decline in the rate of profit
Another theoretical tendency explains the current crisis by highlighting the behavior of the rate of profit. This tendency argues that the decline in this variable structurally undermines capitalism, damaging the system’s primary goal of profitability (Andrew Kliman, Chris Harman, and Guglielmo Carchedi).

With this characterization these theorists return to a principle expounded by Marx to explain how the average of profits tends to shrink with the development of accumulation. The expansion of investment provokes this decline in the rate of profitability by reducing the ratio of new living labor embodied in goods in relation to dead labor previously objectified in raw materials and machinery. Changing the relationship between these two variables (the organic composition of capital) produces a retraction in the rate of profit. The average profit obtained in proportion to invested capital falls due to this relative reduction in direct labor by employees.

This movement is subject to certain checks and balances that allow continued accumulation. It is clear that a sharp decline in the rate of profit would preclude capitalism’s continuity. Certain countervailing forces moderate the decline, such as incentives to increase the exploitation of workers and to cheapen constant and variable capital. But given the great inclination towards investment in plants and machinery, none of these mitigating tendencies manage to slow the decrease in the rate of profit over the long term.

Some believe that this process pushes capitalism to a languid survival. The structural decline of profit rates blocks the dynamism of the system, causing the traumatic upheavals that have surfaced in the current commotion.

Other interpretations of the same principle observe this impact with greater caution. They estimate that the rate of profit has not experienced a steady decline, but one tempered by the relative recovery of profit in the last two decades. They attribute this respite to the increase in the rate of exploitation imposed under neoliberalism. Yet their assessment is that this restructuring has been insufficient to restore postwar averages and to ensure a significant resurgence in accumulation.

In both the diagnosis of persistent decline and the focus on insufficient restructuring of the rate of profit, these theorists believe this process develops while preserving obsolete enterprises and artificially revalued capital. The lack of restructuring props up nonviable productive sectors whose existence perpetuates the crisis and obstructs the reorganization of capitalism.

This approach concludes that state intervention to help banks (and their debtor companies) blocks commercial “cannibalization” that the system requires to achieve its periodic recovery. They believe capitalism works as a vampire: it needs to regenerate itself with doses of surplus that it cannot get.

The importance of this interpretation lies in remembering that the system is undermined by its own evolution. If the profit rate contracts along with expanded accumulation, increased investment, or the drive of competition, this confirms that the limit of capital is capital itself. The fall in the rate of profit that surrounds every crisis is not due to mistakes in business, natural fluctuations of the economy, or an inordinate appetite for profit, but to an endogenous imbalance in the mode of production.

Following this reasoning, it is possible to observe how the neoliberal scenario has included a series of increased investments, which expanded the leverage of machinery to the point of affecting profit percentages. Evidence of this dynamic is proved in the significance of transnational companies that are leading industrialization in Asia as well as in the general computerization of the production process. Another symptom of this same trend is the destruction of jobs by capital-intensive technological changes.

But an analysis of the crisis based exclusively on this conception contains several controversial elements. There is much evidence of a restructuring of the rate of profit in the last two decades. This restoration was accomplished not only through the increased rate of exploitation, but also through an initial reduction in cost of raw materials and a certain fine-tuning of businesses.

Such information is omitted when one postulates the existence of an ongoing crisis due to low profit rates. We should not forget the counterbalances that capitalism itself unfolds when facing the deterioration of the rate of profit. It is important to note the fluctuating dynamics that follow Marx’s law at various stages of capitalism.

Moreover, comparisons with the postwar period demand we consider the new behaviors at the level of benefits in the most globalized transnational corporations. Yet what is essential to note is that neoliberalism—via gutting of companies and purges of capital—introduced a reorganization of capitalism.

Finally, there is a current of Marxist theorists who analyze the crisis in terms of financial hypertrophy (Francois Chesnais and John Bellamy Foster). They emphasize the dominance of overaccumulated capital, which crowded the market in amounts higher than the average of bank circulation. This overspending is often exemplified by the astronomical figures surrounding speculative transactions (financialization).

This impact is attributed to several contemporary transformations. Since the 1970s, an objective benchmark for measuring the value of each currency disappeared (inconvertibility of the dollar). The elimination of fixed exchange rates opened a faucet to banking and securities overspending, which stimulated the tendency to create bubbles.

Such corrosion was later boosted by the privatization of finance, which reduced the guarantees provided by states for the development of credit. Loans grew at an explosive pace, and protections contracted at an equally alarming rate. Finally, the securitization of bonds consummated a general transfer of risk to multiple creditors throughout the world. The expansion of pension funds and institutional portfolios spread new speculative models for managing savings to an international level.

Another school of thinkers (Costas Lapavitsas, Alfredo Saad Filho and Drick Bryan) look at financialization from a different angle. They present this imbalance as a result of the very dynamism of neoliberal restructuring. They believe that during this period banks faced the loss of their traditional market of large companies, which now were self-financing. So they resorted to extending mortgage and consumer credit. But this shift led to placing loans among wageworkers that were already indebted and traumatized by insecurity.

Financialization also turned families with debts into economic units that must self-manage their expenses by choosing payment systems, interest rates, or other types of credit. A whole new literature has been disseminated to guide these decisions so that each individual is responsible for the success or failure of his or her choices. These mechanisms not only promote the commercialization of everyday life and consumer alienation; as employees manage their own risk with declining and vulnerable income, they end up trapped in bankruptcy, which gets transferred to banks and affects the whole economy.

The main merit of the theory of financialization lies in the connection it establishes between financial turmoil and the structural imbalances of capitalism. Tensions in the banking system are not attributed to the malice of speculators, but to the multiplicity of obstacles capital faces for its own reproduction.

Moreover, this characterization questions the usual portrayal of the financial structure as a system of savings skillfully channeled toward production or perversely squandered in brokerages. The money that fuels these processes is accurately conceptualized as a right of appropriation of surplus value, which workers generate and employers confiscate.

In this way the social content that governs currency and credit is illuminated, thus overcoming the financial fetishism that blinds conventional economics. With this perspective, the privileges of class that maintain capital circulation are made clear. Only from this view can we avoid the superficial depiction of the current crisis as simply an error of officials, an act of banking irresponsibility, or the effect of speculative hunger.

But with such accuracies exist several problems. It is vital to lay out the relationships linking the financial crisis to its determinants in production in order to explain the roots of today’s financial turmoil. We must not forget that the main contradictions of capitalism are still located in the sphere of production. It is there that the underlying tensions that destabilize currency and credit are processed.

Financialization approaches that recognize the dynamism of the neoliberal period permit us to come closest to this understanding, as it records new imbalances created by expansion in the banking field. This clarification is obfuscated in views that posit the primacy of a stagnant stage, a hegemony of parasitic financiers, or the pure primacy of stock-holding activities.

With this latest view it is difficult to note the close partnership of the ongoing crisis with capitalism’s expansion into various sectors globally during recent decades. Bankers’ leadership has allowed for the completion of a reorganization, which does not substitute the logic of accumulation for the dynamics of looting.

Theory and politics
The controversies regarding the crisis are changing the environment of economic thought. After two decades of silence we can glimpse the beginning of rehabilitating the socialist approach. Once again, readings of Capital emerge and contemporary disciples/followers of that text reappear. If this trend is successful, the Marxist framework will recover political and intellectual authority. This rectification is essential to challenge the intellectual hegemony that neoliberals share with Keynesians.

But reconquering that space requires updating as well the different traditions of a current that contests capitalism, that questions exploitation, and that favors the creation of egalitarian societies. This reconstruction will develop through connecting economic thought to political practice and avoiding both technical terms and abstract reasoning. The Marxist tradition is highly critical of academic specialization distanced from social struggle and diametrically opposed to any fragmentation between economists (who provide diagnoses) and political scientists (who assess the implications of these scenarios).

Among Marxists, today’s divergent theories about the origin of the crisis are processed within this framework of common criteria. These are misunderstandings and disagreements within a shared worldview that emphasizes the primacy of various imbalances in determining the crisis. That these contradictions may be located in the sphere of consumption, production, profits, or finance does not alter the central characterization of the current upheaval—a systemic crisis of capitalism.

It is important to remember this basic agreement to achieve a fruitful development of debate. It is also vital to note that these conceptual disagreements do not have direct political correlates. One can extract divergent politics from a common interpretation of the economic imbalances, and the reverse process is also possible. The existence of such mixtures refutes many simplifications. No socialist theory of the crisis in itself leads to reformist moderation or to revolutionary radicalization.

Taking up the legacy of a century of theoretical reflections may bring into being a new combination of scientific analysis, critique of capitalism, and socialist practice. This search has already begun and the first results are very encouraging.


This article was translated by Bridget Broderick.


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Issue #71

May 2010

The education shock doctrine

Issue contents

Top story



Critical Thinking


  • The next debt bubble

    Petrino DiLeo reviews The Buyout of America: How Private Equity will Cause the Next Great Credit Crisis by Josh Kosman
  • Eyewitness to revolution

    Dennis Kosuth reviews The Year that Changed the World: The Untold Story Behind the Fall of the Berlin Wall by Michael Meyer
  • Women in the American gulag

    Lee Wengraf reviews Interrupted Life: Experiences of Incarcerated Women in the United States edited by Rickie Solinger, Paula Johnson, Martha Raimon, Tina Reynolds and Ruby Tapia
  • Real data on same-sex marriage

    Ragina Johnson reviews When Gay People Get Married: What Happens When Societies Legalize Same-sex Marriage by M. V. Lee Badgett