The Endless Crisis

How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China

John Bellamy Foster, Robert W. McChesney

• Publisher: Monthly Review Press
• Year: 2012
• ISBN:
  9781583673140
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftstheorie

The days of boom and bubble are over, and the time has come to understand the long-term economic reality. Although the Great Recession officially ended in June 2009, hopes for a new phase of rapid economic expansion were quickly dashed. Instead, growth has been slow, unemployment has remained high, wages and benefits have seen little improvement, poverty has increased, and the trend toward more inequality of incomes and wealth has continued. It appears that the Great Recession has given way to a period of long-term anemic growth, which Foster and McChesney aptly term the Great Stagnation. This incisive and timely book traces the origins of economic stagnation and explains what it means for a clear understanding of our current situation. The authors point out that increasing monopolization of the economy—when a handful of large firms dominate one or several industries—leads to an over-abundance of capital and too few profitable investment opportunities, with economic stagnation as the result. Absent powerful stimuli to investment, such as historic innovations like the automobile or major government spending, modern capitalist economies have become increasingly dependent on the financial sector to realize profits. And while financialization may have provided a temporary respite from stagnation, it is a solution that cannot last indefinitely, as instability in financial markets over the last half-decade has made clear.

CHAPTER 1

Monopoly-Finance Capital and the Crisis

Ironically, the eightieth anniversary of the 1929 Stock Market Crash that precipitated the Great Depression came at the very moment that the capitalist system was celebrating having narrowly escaped falling into a similar abyss. The financial crash and the decline in output, following the collapse of Lehman Brothers in September 2008, was as steep as at the beginning of the Great Depression. “For a while,” Paul Krugman wrote in the New York Times in August 2009, “key economic indicators—world trade, world industrial production, even stock prices—were falling as fast or faster than they did in 1929–30. But in the 1930s the trend lines kept heading down. This time, the plunge appears to be ending after just one terrible year.”¹ Big government, through the federal bailout and stimulus, as well as the shock-absorber effects of the continued payouts of unemployment and Social Security benefits, Medicare, etc., slowed the descent and helped the economy to level off, albeit at a point well below previous output.

Yet if the Great Recession leveled off before plunging into the depths of a second Great Depression, it nonetheless left the U.S. and world economies in shambles. Official U.S. unemployment rose to over 9 percent in 2009, while real unemployment, taking into account all of those wanting jobs plus part-timers desiring full-time work, was close to twice that. Capacity utilization in industry in the United States was at its lowest level since the 1930s. Investment in new plant and equipment faltered. The financial system was a shadow of what it was the year before. The recovery stage of the business cycle was destined to be sluggish.

Indeed, what economists most feared at that point and still continue to fear today was protracted economic stagnation or a long period of slow growth. “Though the economy may stabilize,” Thomas Palley wrote for the New America Foundation, “it will likely be unable to escape the pull of stagnation. That is because stagnation is the logical next stage of the existing [economic] paradigm.”² Judging by the actions of the economic authorities themselves, there seems to be no way out of the present economic malaise that is acceptable to the vested interests, but to restart the financialization process, i.e., the shift in the center of gravity of the economy from production to finance—meaning further financial bubbles. Yet, rather than overcoming the stagnation problem, this renewed financialization will only serve at best to put off the problem, while piling on further contradictions, setting the stage for even bigger shocks in the future.

This paradox of accumulation under today’s monopoly-finance capital was captured in a column by Larry Elliott, economics editor of the London-based Guardian. He contrasted the Keynesian approach to the crisis, emphasizing fiscal stimulation and financial regulation, to the more conservative approach favored by British Chancellor of the Exchequer Alistair Darling, which sees the revival of a finance-driven economy as crucial. In Elliott’s view, the support for the restoration of unfettered finance on the part of leading governmental authorities, such as Darling, may reflect the assessment (shared, ironically, with Marxian economics) that financialization is capital’s primary recourse today in countering a basically stagnant economy. As Elliott himself puts it:

Darling’s more cautious approach [in contrast to Keynesian regulatory proposals] is, strangely perhaps, more in tune with the Marxist analysis of the crisis. This argues that it is not the financialisation of Western economies that explains the sluggish growth of recent decades; rather, it is the sluggish growth and the lack of investment opportunities for capital that explains financialisation. From this perspective, the only way capitalists could increase their wealth was through the expansion of a finance sector which, divorced from the real economy, became ever more prone to asset bubbles. Calling time on the casino economy does not mean balanced growth, it just means lower growth.

Those interested in the Marxist perspective should get hold of The Great Financial Crisis, written by John Bellamy Foster and Fred Magdoff, published by Monthly Review Press in New York. It is a fascinating read. Whether Darling has read it, I don’t know. I suspect, however, that Treasury caution when it comes to reining in big finance has less to do with Marx and rather more to do with institutional capture.³

There are two key points here: (1) the determination of the economic authorities to reinstall the old regime of essentially unregulated financial markets may be due to a perception that the root problem is one of a stagnant real economy, leaving the casino economy as the only practical means of stimulating growth; (2) this attempt to restart financialization may also reflect “institutional capture,” i.e., the growing power of financial interests within the capitalist state. These are not contradictory, as (1) invariably leads to (2), as in the case of military spending.

The extreme irrationality of such a solution is not lost on the Guardian’s economics editor, who presents the following dismal, but realistic, scenario: “After a short period in which bankers are chastened by their egregious folly there is a return to business as usual. This is the most worrying of all the [various] scenarios [arising from the crash], since it will mean that few—if any—of the underlying problems that caused the crisis have been solved. As a result, we can now start counting down the days to an even bigger financial crisis down the road.”⁴

All of this underscores the stagnation-financialization trap of contemporary accumulation, from which it is now increasingly clear there is no easy or complete escape within the system. Such an irrational economic condition and its long-term significance cannot be explained by standard economic models, but only in terms of its historic evolution.

STAGES OF ACCUMULATION

There has long been a fairly widespread agreement among Marxian political economists and economic historians that the history of capitalism up through the twentieth century can be divided into three stages.⁵ The first of these stages is mercantilism, beginning in the sixteenth century and running into the eighteenth. In terms of the labor process and the development of productive forces, Marx defined this as the period of “manufacture” (meaning the age of handicraft production prior to the rise of what he called “machinofacture”). Nascent factories were typified by the increasingly detailed division of labor described by Adam Smith in his Wealth of Nations. Accumulation took place primarily in commerce, agriculture, and mining. What Marx called Department I (producing means of production) remained small in both absolute and relative terms in this stage, while Department II (producing commodities for consumption) was limited by its handicraft character.

The second stage is an outgrowth of the industrial revolution in Britain, centered at first in the textile trade and then spreading to industry generally. Viewed from the standpoint of the present, this is often conceived of as competitive capitalism and as the original age of liberalism. Here the focus of accumulation shifted sharply toward modern industry, and particularly the building up of Department I. This included not only factories themselves, but also a huge infrastructure of transportation and communications (railroads, telegraphs, ports, canals, steamships). This is a period of intense competition among capitals and a boom-and-bust cycle, with price competition playing a central role in governing economic activity.

The third stage, which is usually called monopoly capitalism or corporate capitalism, began in the last quarter of the nineteenth century and was consolidated in the twentieth century. It is marked by the spiraling concentration and centralization of capital, and the rise to dominance of the corporate form of business organization, along with the creation of a market for industrial securities. Industries increasingly come under the rule of a few (oligopolistic) firms that, in Joseph Schumpeter’s terms, operate “corespectively” rather than competitively with respect to price, output, and investment decisions at both the national and increasingly global levels.⁶ In this stage, Department I continues to expand, including not just factories but a much wider infrastructure in transportation and communications (automobiles, aircraft, telecommunications, computers, etc.). But its continued expansion becomes more dependent on the expansion of Department II, which becomes increasingly developed in this stage—in an attempt to utilize the enormous productive capacity unleashed by the growth of Department I. The economic structure can thus be described as “mature” in the sense that both departments of production are now fully developed and capable of rapid expansion in response to demand. The entire system, however, increasingly operates on a short string, with growing problems of effective demand. Technological innovation has been systematized and made routine, as has scientific management of the labor process and even of consumption through modern marketing. The role of price competition in regulating the system is far reduced.

A further crucial aspect of capitalist development, occurring during all three stages, is the geographical expansion of the system, which, over the course of its first three centuries, developed from a small corner in Western Europe into a world system. However, it was only in the nineteenth century that this globalization tendency went beyond one predominantly confined to coastal regions and islands and penetrated into the interior of continents. And it was only in the twentieth century that we see the emergence of monopoly capital at a high level of globalization—reflecting the growing dominance of multinational (or transnational) corporations.

From the age of colonialism, lasting well into the twentieth century, to the present phase of multinational-corporate domination, this globalizing process has operated imperialistically, in the sense of dividing the world into a complex hierarchy of countries, variously described as: developed and underdeveloped, center and periphery, rich and poor, North and South (with further divisions within both core and periphery). As in any complex hierarchy, there is some shifting over time in those that occupy the top and bottom (and in-between) tiers. Nevertheless, the overall level of social and economic inequality between countries at the world level has risen dramatically over the centuries. There is no real “flattening” of the world economy, as presumed by some ideologues of globalization such as Thomas Friedman.⁷ Although industrialization has expanded in the periphery, it has generally been along lines determined by global corporations centered in the advanced capitalist countries, and therefore has tended to be directed to the demands of the center (as well as to the wants of the small, internal oligarchies in peripheral countries). Both departments of production in the periphery are thus heavily subject to imperialist influences.

With this thumbnail sketch of capitalism’s historical development before us, it is possible to turn to some of the changes in the nature of accumulation and crisis, focusing in particular on transformations occurring at the core of the system. Capitalism, throughout its history, is characterized by an incessant drive to accumulate, leading to what Mark Blaug referred to as the “paradox of accumulation,” identified with Marx’s critique of capitalist economics. Since profits grow primarily by increasing the rate of exploitation of labor power, i.e., rise by restraining the growth of wages in relation to productivity, this ultimately places limits on the expansion of capital itself. This paradox of accumulation is reflected in what Paul Sweezy called the “tendency to overaccumulation” of capital.⁸ Those on the receiving end of the economic surplus (surplus value) generated in production are constantly seeking to enlarge their profits and wealth through new investment and further augmentation of their capital (society’s productive capacity). But this inevitably runs up against the relative deprivation of the underlying population, which is the inverse of this growing surplus. Hence, the system is confronted with insufficient effective demand—with barriers to consumption leading eventually to barriers to investment. Growing excess capacity serves to shut off new capital formation, since corporations are not eager to invest in new plant and equipment when substantial portions of their existing capacity are idle. This tendency to overaccumulation becomes increasingly dominant in mature, monopolistic capitalism, slowing the trend-rate of growth around which business cycle fluctuations occur, and thus raising the specter of long-term economic stagnation.

Competitive capitalism in the nineteenth century was dynamic at its core, since the tendency to overaccumulation was held at bay by favorable historical factors. In this period, capital was still being built up virtually from scratch. Department I, in particular, emerged to become a major part of the economy (Department II grew also, of course, but less dramatically). In the maturing capitalism of these years, the demand for new capital formation was essentially unlimited. The investment boom that typically occurred in the business cycle upswing did not generate lasting overaccumulation and overproduction. In these conditions it almost seemed possible, as U.S. economist J. B. Clark declared, to “build more mills that should make more mills for ever.”⁹ At the same time, the freely competitive nature of the system meant that prices, output, and investment levels were largely determined by market forces independent of individual firms. Many of the rigidities later introduced by giant corporations were therefore absent in the nineteenth-century era of free competition.

Although favorable to system-wide accumulation, the repeated boom-and-bust crises of competitive capitalism bankrupted firms, from small to large, throughout the economy. Bankruptcies hit firms even at the center of global financial power (Overend, Gurney in 1866; Jay Cooke in 1873; Baring’s in 1890). In contrast, under the mature economy of monopoly capitalism, the dominant U.S. financial firms of 1909 are all still at the center of things a century later: J.P. Morgan, Goldman Sachs, National City Bank—or in one notable case 99 years later—Lehman Brothers. But offsetting this increased stability at the center of wealth and power was the disappearance of many of the circumstances favorable for system-wide accumulation.

Once industry had been built up and existing productive capacity was capable of expanding output rapidly at a moment’s notice (with whatever investment taking place capable of being financed through depreciation funds set aside to replace worn-out plant and equipment), the demand for new net investment for the rapid expansion of Department I was called into question. Hence, in the monopoly stage, capital saturation—the problem of too much capacity, too much production—becomes an ever-present threat. The system tends at all times to generate more surplus than can be easily absorbed by investment (and capitalist consumption). Under these circumstances, as Sweezy put it,

The sustainable growth rate of Department I comes to depend essentially on its being geared to the growth of Department II…. If capitalists persist in trying to increase their capital (society’s productive power) more rapidly than is warranted by society’s consuming power… the result will be a build-up of excess capacity. As excess capacity grows, profit rates decline and the accumulation process slows down until a sustainable proportionality between the two Departments is again established. This will occur with the economy operating at substantially less than its full potential. In the absence of new stimuli (war, opening of new territories, significant technological or product innovations), this stagnant condition will persist: there is nothing in the logic of the reproduction process [of capital] to push the economy off dead center and initiate a new period of expansion.¹⁰

Such a tendency toward maturity and stagnation does not, of course, mean that the normal ups and downs of the business cycle cease—nor does it point to economic collapse. Rather, it simply suggests that the economy tends toward underemployment equilibrium with recoveries typically aborting short of full employment. The classic case is the Great Depression itself during which a full business cycle occurred in the midst of a long-term stagnation, with unemployment fluctuating over the entire period between 14 and 25 percent. The 1929 Stock Market Crash was followed by a recession until 1933, a recovery from 1933 to 1937, and a further recession in 1937–1938 (with full recovery only beginning in 1939 under the massive stimulus of the Second World War).

If, as Paul Baran and Paul Sweezy declared in Monopoly Capital, “the normal state of the monopoly capitalist economy is stagnation,” this is due, however, not merely to the condi...