Marxism In The Age Of Financial Crises: Why Conventional Economics Can’t Explain the Great Recession
The crash and rescue of the banking system and the surge of unemployment, foreclosure, and sweeping cuts in social services over the past five years have set off a wide-ranging struggle over class relations not seen since the 1970s. As politicians and activists from Occupy Wall Street to the Tea Party denounce “crony capitalism,” and as leading economists and journalists join in criticizing the harsher, finance-driven capitalist regime ushered in by Ronald Reagan and Margaret Thatcher, radical critiques of capitalism itself are gaining a new hearing.
The Marxist tradition, born in the early years of industrial capitalism in the nineteenth century, appears as vital as ever for comprehending the roots of the current crisis. Right-wing ascendance in recent decades has stripped capitalism of much of the cover provided by European social democracy and the U.S. welfare state, which had combined with anti-communism to marginalize Marxist thought after the Great Depression. The greatest crisis of capitalism since the Depression has laid bare the system’s underlying instability and brutality, renewing interest in Marxist alternatives to the limits of mainstream debate.
Conventional analyses rely on stark distinctions between supposedly normal times when markets efficiently match buyers and sellers and crises when markets break down, between Wall Street and Main Street, or between the public and private sectors. Resisting such dichotomies, recent books and articles by Marxist authors view with skepticism efforts to restore a stable balance between supply and demand, between speculative finance and productive investment, or between the regulatory state and big business. They contend, by contrast, that capitalist growth actually requires recurrent crises, that capitalist industry and commerce inevitably entail escalating financial speculation, and that capitalism is founded on the union of public authority and private profit, the basis of class rule. Yet Marxist writers find cause for hope, if not optimism, in the crisis-prone connec- tions between government, banking, and the market economy. The increasing political and economic centrality of finance, which limits the possibilities for piecemeal reform, offers a means of radically transforming capitalism by bringing the system of credit, savings, and investment under public, democratic control.
Capitalism and Crisis
Capitalism has long been characterized by the ups and downs of the and occasional deeper depressions. But its latest phase has been punctuated by an accelerating succession of booms, bubbles, and busts. From the perspective of conventional economics, crises are supposed to be temporary departures from the usual tendency of the market economy toward equilibrium, automatically adjusting prices so that the supply of commodities corresponds to the demand for them. Marxist observers, however, view the economic turbulence of our times as a manifestation of a propensity for crisis within capitalist development from the start.
Writing 150 years ago, Karl Marx identified the peculiar paradox of capitalist crises, which result from a breakdown not in the system’s capacity to produce enough wealth, but in its capacity to generate enough profit. They stem not from scarcity, but from surplus. The great depression of the late nineteenth century, at the end of Marx’s life, coincided with a wondrous advance in agricultural and manufacturing productivity. The problem Marx perceived was that the very labor-saving improvements making it possible to produce more coal, cotton, wheat, and steel than ever before—creating great riches for individual capitalists—were undermining the ultimate source of profits for the capitalist class as a whole in the exploitation of labor. As productivity rose, profit rates fell, increasingly leading capitalists to save their money or spend it unproductively instead of reinvesting it in further economic growth. Meanwhile, the yawning gap between rich and poor made it harder and harder for capitalists to sell the growing surplus that workers produced. The overaccumulation of capital and the overpro- duction of commodities led inexorably to crisis. But the devastating depression ironically saved the system from self-destruction. Like a fire in an overgrown forest, the crisis consumed much of the surplus that had kindled it, clearing the way for a new round of growth.
A new structure of corporate capitalism arose, based on giant railroad, mining, refining, and manufacturing trusts designed to control and coordinate costs, prices, and investments in major industries, preventing a recurrence of crisis. Yet by the late 1920’s, workers were producing more automobiles, home appliances, and other consumer goods than they could afford to buy. Capitalists were saving more than they could profitably invest in new production, and they were speculating on real estate or the stock market instead. Once again, the growing contradiction between material abundance and class inequality sowed the seeds of crisis. Much as it had earlier, the demolition of business and savings during the Great Depression and World War II created the conditions for a golden age of growth and prosperity in the decades to come.
The postwar boom was predicated on relatively generous private and public provisions like higher education, health insurance, decent wages, and single-family homes for large segments of the growing workforce. Leaders in business and government intended the rising structure of welfare capitalism to sustain consumer demand and alleviate, if not eliminate, the violent vicissitudes of the business cycle. By the late 1960s, however, the prodigious growth of productive capacity led by Germany and Japan, along with the escalating costs of workers’ wages and “social wages” such as public education in the United States and Europe, squeezed profits across the industrial world. Employers shuttered plants and laid off workers while governments desperately tried to make up for faltering private demand by ramping up public spending. The result was a perfect storm of spiraling inflation, swelling unemployment, and stalling growth.
In response, capitalists launched a regime- changing political and economic offensive. They crippled or crushed unions, slashed wages and benefits, and downsized and sped up production. They demanded drastic reductions in taxes on corporations and the rich, and in social services for everyone else in the advanced industrial countries. They militarily defeated socialistic movements in places like Chile and Nicaragua, and built integrated “supply chains” based on low-wage labor throughout the Global South. It worked. Profit rates began rising again in the early 1980’s, as workers in the capitalist heartland were compelled to labor harder and longer for less pay, joined by legions of new recruits to the working class in the hinterlands from northern Mexico to Eastern Europe to southern China. But the “neoliberal” order proved far shakier than its predecessor, beginning with a sharp recession, stock market crash, and savings and loan debacle in the 1980s. By the late 1990s, the early tremors of a systemic crisis were toppling the “emerging markets” of Asia and Russia. The global upheaval struck ten years later, emanating from the epicenters of New York and London.
While many liberal critics pine for the greater stability of the post-World War II era, recent Marxist writers highlight the inherent volatility of capitalism throughout its profit- driven, crisis-ridden history. But they also seek to explain what distinguishes the present structure of accumulation and its continuing crisis—above all, the supercharged power of finance.
Finance and “Fictitious Capital”
Banks make a business out of debt, specializing in borrowing and lending money for profit. The rise of capitalism made that business central to agriculture, industry, and commerce, which came to depend on the currency and credit that banks controlled. That is why struggles over capitalism have so often focused on the “money power” of bankers and other professional financiers, who were the first to be called (by their critics) “capitalists.” Rarely has that power loomed larger than in the past twenty-five years.
Debt has become a big business in its own right, making finance arguably the leading “industry” of twenty-first-century capitalism. As the overall level of debt in the U.S. has grown much faster than the production of commodities since the 1970’s, bankers and bondholders have gained unprecedented economic power. ll but the richest households have struggled to make up for stagnant or declining real incomes by racking up credit cards, car loans, student loans, and home loans. Leveraged buyouts and hostile takeovers have likewise loaded major corporations with mounting debt burdens, while declining tax revenues have driven local, state, and national governments into the arms of the bond markets as well. By far the biggest borrowers, however, have been the banks and other financial institutions that are also the leading lenders, leaving behind their tame traditional roles as brokers and agents to engage in high-stakes trading on their own behalf. As the new master rather than servant of the business world, the financial sector has claimed the lion’s share of the profits made under its direction, trading places with manufacturing to become the most profitable segment of the U.S. economy.
The financial collapse of 2007-2008 therefore threatened to bring down the whole structure of capitalist accumulation built up over the previous quarter-century. As in past crises that spread from the banking sector, reformers across the political spectrum have sought to quarantine the contagion, redrawing the imagined boundary between “parasitical” financial chicanery and the “real economy” of production, exchange, and consumption on which it seems to prey. Denouncing the excesses of Wall Street in the name of Main Street, they aim to rescue honest industry from the gamblers and swindlers who apparently have hijacked it.
Such populist protests in the face of financial panics were familiar in Marx’s day as well. Marx contended, however, that financial speculation was intrinsic to capitalist industry, not parasitic upon it. What appeared on the surface as a conflict between dealers in material goods and services, on the one hand, and dealers in financial promises and claims, on the other, really reflected a contradiction at the core of an economy in which money formed the ends as well as the means of market relations. Finance allowed capitalists to borrow the money they needed to buy labor, raw material, and equipment with which to produce commodities to sell for more money. It redistributed the proceeds from those with more than they could profitably reinvest to those with less. By permitting a widening separation in time and space between the purchase of inputs and the sale of outputs, the credit system facilitated long-term investment and long-distance commerce. Yet in fostering the dual development of the material means of production and the capitalist market, the banking system accelerated the growing conflict between the two. Since it provided the conduit for capital accumulation in general, the financial sector formed the crucible of crisis—but not its ultimate cause, as recent Marxist authors have emphasized.
Marx wrote on the eve of a major transformation in the mode of finance, the rise of the modern stock market and the corporate consolidation it brought into being. By legally separating the ownership of capital from the management of industry, Wall Street created the publicly traded, multi-functional business corporation that came to dominate the advanced capitalist economies around the turn of the century. Along with the commodities exchange, which arose in the same era, the stock market enabled capitalists to invest in industrial and agricultural securities that could be traded like cash without taking on the liability and responsibility of operating factories and farms. It concentrated control over production in the hands of directors and managers, while it concentrated control over capital in the hands of brokers and bankers. Rather than represent- ing a separate interest unto itself, Wall Street constituted a unified capitalist class capable of ruling the market instead of being ruled by it.
At the same time, as Marx recognized, the division of management from ownership gave a new form to the fundamental contradiction within capitalist enterprise between the forces of industrial production and pecuniary profit. Financial markets make it possible for the claims of absentee owners to take on a life of their own, detached from the businesses on which they are based. Corporate shares do not represent legal titles to existing resources, machinery, or merchandise, which do not change hands when stocks are sold. Rather, they represent claims to future profits in the form of dividends, more like lottery tickets than property deeds. Unlike employers’ profits, their value derives only indirectly from the surplus value produced by past labor, to the extent that past performance influences stock prices. They are commonly traded with only a loose relation to corporate earnings, as simply wagers on rising or falling prices. As such, Marx called them “fictitious capital” whose “values can rise or fall quite independently of the movement in value of the actual capital” of roads, mines, and mills.3 Their innately speculative character makes such free-floating assets liable to feverish booms and busts, especially because they are managed by professional traders who regard the corporate enterprises to which they lay claim like race horses at a betting track.
Since the mid-1970s, Wall Street has remade much of the market economy in its own image. As the bond between banking and business has intensified, so has the tension between the imperatives of making money and producing wealth. Mergers and acquisitions, corporate raiders, and “shareholder activism”
have compelled even the biggest corporations to meet the high benchmarks of short-term profit set by financial gurus or be chopped into interchangeable bundles of assets and liabilities to be packaged, sold, and reassembled at the whim of the capital markets. Deregulation has permitted Wall Street to take over many areas formerly off-limits, such as commercial and consumer lending within the U.S. and investment in foreign currencies and industries. The volume and variety of financial securities have exponentially increased, boosted by high- speed computerized trading, as has the level of leverage (buying with borrowed money), magnifying the risk of systemic breakdown.
Beyond observing the vast expansion of Wall Street’s domain, recent Marxist writers underline two sets of qualitative changes in the business of finance. The first comprises the innovation of fantastic new forms of fictitious capital that further emancipate financial securi- ties from physical assets, fueling the height- ened turmoil of the markets. “Securitization” decouples debts from the original borrowers and lenders (and the collaterals for their loans), as when investment funds buy up mortgages issued by banks to homeowners and bundle them into bonds. Investors who purchase shares in such mortgage-backed securities and other “collateralized debt obligations” neither know nor care about the real property on which they trade. The wild growth of unregulated markets in exotic financial derivatives such as futures, options, and swaps means that bondholders are basically betting on the prices of companies and commodities in which they hold no real stake. The slender strings of absentee ownership have been further attenuated by the rising dominance of institutional investors like hedge funds and private equity groups mobilizing hundreds of billions of dollars amassed from shareholders who hardly know where their savings are going.
The fact that the nominal beneficiaries include many workers, whose pension funds began actively investing in corporate securities in the 1970’s, points to the second keynote of the new finance capitalism in Marxist accounts. Though the proliferation of fictitious assets does not directly derive from the past employ- ment of labor, it represents a powerful claim over workers’ present and future labor. While Wall Street has off-loaded capitalists’ responsibility for the consequences of their investments, it has multiplied their class power. In part, financial institutions have allied with employers in reviving profits by repressing wages. “Vulture capitalists” specialize in stripping employees’ health and pension benefits, often by forcing companies into bankruptcy or threatening to do so. “Shareholder activism” extracts greater value for investors by requiring more work by fewer workers for less money. Bondholders demand deep reductions in public employment and social provisions.
Debt also forms the fulcrum of what the economist Costas Lapavitsas calls increasing “financial expropriation,” operating in tandem with the industrial exploitation of labor. High finance has been hitched, as never before, to the deepening debt of poor and working-class people. It has alleviated at once the converse problems of surplus capital at the top and lack of buying power at the bottom of the social scale. It has bound workers to Wall Street through both their consumer debts, such as the flood of securitized “subprime” loans to low-income homeowners between 2001 and 2007, and their savings in pensions and health insurance. So, too, financial markets in the U.S., Germany, Japan, and China have found a ready outlet for surplus capital in the great growth of cross-border lending to their poorer neighbors. The cascading debt crisis in the developing world since the 1980s has brought draconian programs of “structural adjustment,” resulting in the wholesale dispossession of land, resources, and formerly state-owned enterprises by foreign investors. High finance has been hitched, as never before, to the deepening debt of poor and working- class people.
Fictitious capital and financial expropria- tion thus form twin pillars of the class structure, supporting the whole capitalist economy, both domestically and internationally. A lesson of Marxist work on the current crisis is that Main Street is deeply indebted to Wall Street. But the combination of power without responsibility that characterizes the neoliberal regime is epitomized in its renewed bond between finance and government.
Government and Banking
The largest-ever public bailout of the private sector has called into question, once again, the long-contested relationship of governmental authority to business enterprise. Liberals deplore the deregulation of financial markets and call for more stringent oversight, while conservatives blame the crisis on a corrupt alliance of state and market. But as Marxist authors contend, the union of sovereignty and capital—like the partnership of finance and industry—is, in fact, essential to capitalist class rule. Inaugurated by the royal marriage of government and banking in the English financial revolution three hundred years ago, the merger was integral to the later advent of corporate capitalism, with the semi-public, semi-private Federal Reserve System at its helm.
If capitalism, as the historian Michael Merrill has written, means “a market economy ruled by, or in the interests of, capitalists,” then the clearest sign of that dominion lies in the recent renewal of vows between Washington and Wall Street. Though Wall Street ideology exalts the “free market,” the financialization of recent decades has entailed an increasing, rather than diminishing, role for government. The more leveraged the financial system grows, the more frequent its bubbles and busts, and the more it relies on government as the guarantor of credit and property and the “lender of last resort.”
The crisis since 2007 has comprised three successive phases: a housing and mortgage crisis, a banking crisis, and a public debt crisis engulfing virtually every state and municipality in the U.S., along with a host of national gov- ernments in Europe. The third phase resulted from a massive transfer of debt from the private sector to the public sector, as state treasuries and central banks flooded failing institutions with cash and bought up their “toxic assets.” Governments borrowed heavily in the bond markets to pay for the bailouts. Bondholders then demanded that governments balance their books, largely on the backs of public employees and recipients of public services such as education, infrastructure, and welfare programs.
More than a valuable lesson in class rule, the bank bailout represents for Marxists a golden missed opportunity and a sign of how real change might yet be achieved. It demon- strates that the financial sector is not simply in need of greater governmental regulation, such as capital controls, public accounting, and a financial transactions tax. The banking system is, in fact, already governing the capitalist economy and deeply dependent on government support. Its partial socialization of ownership through the system of publicly traded stocks, and its centralization of managerial control over savings and investment as well as means of production, represent what Marx called “the abolition of capital as private property within the confines of the capitalist mode of production itself.” By heightening the contradiction between social wealth and private profit, modern finance hastens the dynamic of over-accumulation and crisis, offering repeated occasions for radical action to transform the system instead of simply saving it.
Marxist critics urge that governments should finally bring banking under the control of working people instead of plutocrats, ending the autocracy of finance. They find partial precedents in the much closer governmental control over the banks in postwar Japan and the United Kingdom, and in China and Germany more recently; in short-lived New Deal experiments such as the Reconstruction Finance Corporation and the Home Owners’ Loan Corporation; in the National Health Service in England and the Social Security System in the U.S.; and in publicly controlled “sovereign wealth funds” in Australia, Norway, Singapore, and South Korea, among other countries. Since the financial sector has already assumed quasi-sovereign control over industry, commerce, and property, a takeover of banking could offer the opportunity for a broader democratization of economic decision-making. “The credit system has a dual character immanent in it,” as Marx wrote. “On the one hand it develops the motive of capitalist production . . . into the purest and most colossal system of gambling and swindling . . . on the other hand, however, it constitutes the form of transition towards a new mode of production.”