The global crisis has undermined the neo-liberalist phase of capitalism that dominated the last 30 years of the world economy. It has likewise challenged the hegemony of neo-classical economics as the theoretical rationale of neo-liberalism’s celebration of private enterprise and markets. The form this challenge takes is a revival of Keynesian economics. As the crisis requires states everywhere again to intervene in the “private” economy — and massively this time — Keynesian economics provides much of the rationale and many of the prescriptions of what the state should do.
In your new book, The ABCs of the Economic Crisis: What Working People Need to Know, you allude to right-wing think tanks, like the Heritage Foundation and the American Enterprise Institute, which promote a ‘free market’ ideology. How successful have these organizations been in shaping public opinion about capitalism? Do you think that attitudes are beginning to change now that people understand the role that Wall Street and the big banks played in creating the crisis?
The severity of the current crisis and the failure of conventional economics to anticipate or account for it draw attention to what radical economist Duncan Foley has called “Adam’s Fallacy.” Named for Adam Smith, Adam’s Fallacy is “the idea that it is possible to separate an economic sphere of life, in which the pursuit of self-interest is guided by objective laws to a socially beneficent outcome, from the rest of social life, in which the pursuit of self-interest is morally problematic and has to be weighed against other ends.”2 Adam’s Fallacy is thus both an intellectual and moral fallacy — the notion that the economy can, in Polanyi’s terms, be disembedded from the rest of social reality, and that a market system based on individual acquisitiveness can meet the moral needs of society.
Crises in capitalism (depressions, recessions, cyclical downturns, etc.) are neither new nor unusual. Because capitalism works that way, its supporters came to label the more severe or protracted down periods crises because they feared that capitalism’s victims would turn against it and seek basic social change. Capitalism’s defenders eventually developed a set of policies to manage its inherent economic instability.
The story that the media should be telling is how today’s post-bubble economy has turned the concept of saving on its head. The accounting concept underlying balance sheets is that a negation of a negation is positive. Paying down debt liabilities is counted as “saving” because one owes less.
The mythology propagated by capitalism is that the unfettered functioning of the system gives rise to a state of full employment where the resources are efficiently allocated. This myth of course cannot be sustained, since even the most die-hard believer in the ideology of capitalism cannot deny the real-life existence of periodic Depressions and the virtually perennial state of demand-constraint that afflict the system.
It is not the subprime lending, nor the housing bubble. It is not Wall Street greed, nor the investment managers’ feckless innovations, nor even the reckless borrowing that has characterized almost all sectors of the economy. These factors have all played a role, but they are at best proximate causes.
For Foster and Magdoff, the route from stagnation to speculation is logical. US corporate profits declined due to stagnation tendencies, but picked up after 1983. However, a vast part of the increase was due to financial profits, which amounted to 17% of total profits in the mid-1980s, and around 40% two decades later
The IMF could have been given even 3 trillion dollars; a larger sum would have made no difference to the issue of fighting the collapse in world demand. Those 3 trillions would have still represented only endowments for lending to governments in crisis
Talk of a systemic breakdown now entered the language of the ruling establishment itself. Even as a defensive George Bush asserted at the G-20 summit that ‘The crisis was not a failure of the free market system’, his French and German counterparts were acid in their retorts.
Keynes famously argued that even completely unproductive expenditure ”hiring men to dig holes and fill them up again” would serve the required purpose of reviving demand in a situation of excess capacity and unutilised resources.
Keynes advocated expansive fiscal policy and deficit financing in a depression, and all governments are now seeking to put such expansive policies in place to some degree — although generally not on a big enough scale.
With world economies collapsing, stocks are still overvalued by every metric – dividends, price to book, sales, free cash flow, or earnings based on GAAP (Generally Accepted Accounting Principals) or “reported” earnings, not “operating” ones, easily manipulated to exclude “write-offs.”
As the financial crisis that erupted in 2007 unfolds in an economic cataclysm which, it is now clear, is unprecedented in the history of capitalism, world leaders without exception reveal themselves as politically and ideologically bankrupt in their efforts to bring it under control.
What is needed in the United States today, we argue in The Great Financial Crisis, is a renewal of the classic concept of political economy (with its class perspective), whereby it comes to be understood that the economy is subject to public control, and should be wrested from the domination of the ruling class.
Keynes, as an explicit defender of the capitalist system, believed that a decline in investment, driving a recession, could be halted by indirect means — reduction in interest rates, government spending etc. It was not necessary for the state to directly control investment.
One important question, of course, is how decisive and definitive the break with neoliberalism will be. Other questions, however, go to the heart of capitalism itself. Will government ownership, intervention, and control be exercised simply to stabilize capitalism, after which control will be given back to the corporate elites?
But as the current crisis goes to show, we are far indeed from the end of history. Capitalism is full of surprises. And, for that matter, so is socialism – which is very likely to be soon heard from again as a serious democratic political force. When the logic of capitalist markets goes haywire, people can see the point, and the possibility, of new systemic alternatives to it.
“Just imagine saying, “production for use leads to stagnation; production for death leads to exchange value and profits.” Now don’t jump on me! Wait, I have to go into capital expansion and its being “the breath of capitalism” and, as yet, no forseeable future opportunities for capital reproduction to the magnitude needed for its expansion.”
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Our experience of the last half-century has shown that capitalism at its core was able to avoid stagnation only by vast military expenditures and, when that proved insufficient, by an enormous inflation of asset values and speculation, i.e. ‘financialization.’
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