It's taken a while, but the extraordinary dimensions of the economic crisis have begun to deflate the deeply-ingrained faith in US capitalism. Predictably, the pundits, academic economists, and the bourgeois politicians are jumping into the fray with sermons and finger-pointing. Fourteen months ago, when we were projecting a severe downturn in the economy, there were few forecasting anything other than sunny economic weather marred, perhaps, by an occasional shower. Today, the weather report calls for storms and dreary skies for the foreseeable future.
Without an alternative vision, the mainstream media resorts to the blame game - who or what is at fault for the sorry state of the economy? Every demon is conjured: Renegade speculators, crooked mortgage brokers, irresponsible bankers, commodity traders, oil producers, the Chinese, the Indians, military adventures, de-regulation or regulation, and so on. No doubt many of these explanations offer some insight, but together offer little deep understanding of the serious illness afflicting the US economy.
As Marxists, we dare to speak the unspoken: the capitalist system is seriously unstable, teetering on a historic precipice. The late twentieth century expansion was fool's-gold, generating the destruction of trillions of dollars of fictitious capital in the high–tech collapse beginning in 2001. The full impact of this crisis was averted by fiscal manipulation executed by the Federal Reserve under the leadership of Alan Greenspan. Excessively low interest rates opened the floodgates of speculation, encouraging irresponsible investment in both the housing market and in shadowy financial instruments designed to further expand the vast reservoir of ephemeral capital overflowing the financial markets. For the Wall Street elites, the US economy became an enormous gaming table with unlimited chips available upon demand, a gaming table with no losers thanks to painless credit.
The result of this insanity is upon us. Daily, the fictitious capital – the cost-free chips – mysteriously disappears. Savings – the reservoir of wealth accumulated by foregoing consumption - shrinks. Incomes purchase less thanks to a raging inflation of the price of commodities. As fictitious "commodities" disappear, real commodities – useful things – are in greater demand and command higher prices. Reality returns.
The resulting reality is not a pretty sight. Gone are the "middle-class" illusions. Gone is the conceit of finding individual success, becoming a "winner". Gone are the media-induced dreams of stepping past neighbors and colleagues to join the privileged and wealthy. In their place is fear – fear of an uncertain future anchored to the fate of an injured capitalism.
Fifteen years ago, the academic and media establishment smugly announced the TINA doctrine: There Is No Alternative to "free market" capitalism. Today, they can only hope that an alternative can be found. In less than a decade, the fundamentalist faith in the doctrine has run the world economy aground with the full effects of this catastrophe falling largely on the working classes and the poor.
Regrettably, capitalist triumphalism has demoralized the left, leading many of our colleagues to retreat from both a Marxist understanding of world developments and a commitment to socialism. The "defeat" of Communism shattered the confidence of many formerly identified with the movement for revolutionary change. Frankly, many lacked either the dedication or the courage to rebuild the vanguard of the working class movement. The moment was lost, but the need remains even more urgent. We are confident that working class leadership will emerge, embracing the revolutionary road to socialism.
Constructing a response to the raging crisis requires a deeper understanding, an understanding beyond the gossip and speculation offered by bourgeois commentators. We offer simple answers, Marxist answers: The problem is caused by capitalism. The solution is socialism.
We do not blame capitalism for the current crisis because of some quasi-religious zeal or because of dogmatic adherence to Marxism. Nor do we embrace a simplistic answer in the face of an incredibly complex and inter-related global economy. Rather, we blame capitalism because we are convinced that a full explanation of the crisis must locate the disorder deep within the economic mechanism. Regardless of whether we study the youthful, competitive industrial capitalism of early nineteenth century England, the robust, expansive capitalism of the late nineteenth century US, the monopoly capitalism prior to World War One, social democratic capitalism, Asian capitalism, or the state-monopoly capitalism of our era, we see a recurring rendezvous with economic disruption. Despite the promises of the system's apologists, capitalism invariable runs aground. On the one hand, economists proclaim the unrelenting stability of the system; on the other hand, history shows an inherent unsteadiness. Heavily invested in the capitalist system, the intellectual hirelings of academia and the popular media simply ignore this pattern in a mass act of self-delusion. Instead, when confronted with economic chaos, they blame factors omnipresent in the capitalist system: speculation, greed, political intervention, and natural misfortune – none of which account for the periodic arrival of economic illness.
At its root, capitalism generates crisis precisely because it inevitably attains a concentration of wealth that serves to choke off its continued smooth development. The fundamental mechanism of capitalist production requires the private appropriation of wealth to insure its continued function and growth, a mechanism that, unless met with determined resistance, deprives the working class of a larger share of the social product and accumulates more of it in the hands of a small class of capitalists.
Some time ago, on this website, we wrote of a crisis of liquidity: a surplus of capital and a shortage of profit generating investment opportunities. Wealth had grown so concentrated that its continued growth was threatened by a lack of places to profitably direct it. Accumulation was seriously threatening the rate of profit – an instantiation of what Marx described as the "tendency of the rate of profit to fall".
Wall Street was fully aware of this problem, though it was little noted by the popular media. Under normal circumstances, capital can always find greater return by taking on greater risk. But at this point, there were few existing high profit opportunities even with high risk. The Federal Reserve's decision to extend nearly free credit only amplified the drive for high profit investment. Opportunities were constructed: hedge strategies, credit vehicles, etc. One inviting area – home mortgages – was particularly attractive and proved to be the beginning of the unraveling of this obsessive drive to reinvigorate profitable investment. It is important to note that this was not merely a product of greed or unregulated speculation, but an imperative of a system that lives on maintaining and growing profitability. It is also important to recognize that if it hadn't unraveled with the home mortgage bubble, it would have struck somewhere else, perhaps later, perhaps even more intensely.
Reformists are busy searching for bad actors, institutional weaknesses, and other factors that allowed the mortgage bubble to swell, but what they fail to recognize is the underlying logic of the capitalist system that encouraged the bubble. We find interesting confirmation of this deeper problem in an interview with well-regarded financier, Theodore J. Forstmann, in the July 5-6, 2008 Wall Street Journal. Forstmann's fame grew from his prescient prediction of the collapse of the junk bond market in the late eighties. Forstmann tells what he calls his "little children's story," an interesting, colorful fable meant to describe the current financial crisis:
Once upon a time... the bank opened at 9:00 a.m. and closed at 5:00 p.m. For eight hours a day, bankers made loans and took deposits, and then they went home... Now they [the banks] have all this excess money. And they open at nine, and from nine to noon or so, they're doing all the same kind of basically legitimate things with it that they did before... But at noon, they have tons of money left. They have all this supply, and the... 'legitimate' demand – it's probably not a good word, but where risk and reward are in balance – has been satisfied. But they're still open until five. And around 3:30 in the afternoon they get to such things as subprime mortgages, OK? And what you guys haven't seen yet is what happened between noon and 3:30."
Forstmann adds 'That's why my little bank story for the kids is a fun way to put it. The money just kept coming and coming and coming and coming. What are you going to do with it? IBM only needs so much. The guy who can really pay his mortgage only needs so much." As for the future, "I think we're in about the second inning of this... Things are going to fall. Enterprises are going to fail. The economy is going to slow."
While Forstmann is no Marxist, he comes far closer than jost to a genuine understanding of the current economic crisis. It is neither aberrant moments of excessive greed nor remote accidents of nature that spawn economic crises, but the capitalist system itself. To return to his "little bank story", it is the job of the bank to accumulate money, but when it gets large sums of money, it unfailingly screws up the system with its determination to get even more.
The commodity inflation plaguing the world economy is only indirectly related to the current finance-induced crisis. However, severe commodity price increases seriously harm the working class and diminish the prospects for a quick recovery. As mentioned above, the flight from exotica – complex, arcane financial instruments – has directed investors back to the real world, the world of commodities. A clear consequence of this redirection is an increasing demand for that which is "solid and real" as opposed to the fictitious and virtual values of the financial world. This demand necessarily results in higher prices for agricultural products as well as raw materials. Under normal conditions, increased production would, in time, lower prices of basic commodities, particularly when labor costs remain absurdly low. But these are not normal times; one commodity defies such a simply approach: oil (and, to a lesser degree, other hydrocarbons). And the escalating price of oil influences the production and marketing costs of all other commodities.
Two factors afford oil a central and critical role in the evolution of the current world economic crisis:
- 1.Market behavior vs. Hoarding. Many people believe that increasing demand and higher prices will produce new discoveries and new technologies that will invariably lower prices and make energy costs stable and reasonable. Certainly this has been the history of the hydrocarbon industry. "Eco-Marxists," i.e., self-styled "ecological" Marxists remind us that hydrocarbon resources are finite and, like extreme food consumption, productive of negative consequences. Whether we have reached a point where the remaining supply of hydrocarbon resources is simply inadequate to meet future needs or not, the fact is that markets seem to perceive that we have arrived at such a critical juncture. In other words, ordinary market behavior has been overtaken with hoarding hysteria. Market players (yes, and speculators) see a critical resource diminishing. They choose to hoard it at today's high prices because they are confident that they will always get a higher price as supply diminishes further. Hoarding behavior is seldom encountered in a dynamic capitalist economy, but then capitalism rarely encounters a critical resource neither reusable nor abundant. The legislative uproar about speculation and profit-taking, while welcome, fails to acknowledge this unique feature of the current escalation of oil prices. Hoarding is an economic trait only corrected by placing collective interests ahead of individual advantage. Hoarding requires a response that allocates scarce resources rationally and fairly, in a planned fashion. Markets fail to do so.
- 2.Imperialism. In an era of aggressive imperialism, oil plays a unique role in shaping world politics. Petroleum deposits are unequally and unevenly distributed around the world advantaging countries that could otherwise offer no resistance to imperial designs. Since they are the lifeblood of a modern economy, they are nonetheless coveted by imperial powers. Given the intensity of current imperial rivalries, oil-bearing countries, through organization (OPEC) and strategic alliances, re-shape the balance of forces in the twenty-first century. In short, they enjoy advantages that counter the influence and military might of the leading imperialist powers. Oil prices, to some extent, reflect this power.
But the imperialist powers continually and actively seek to dominate these oil resources by force or economic influence. The US, the leading imperialist country, has sought to aggressively control oil supplies through military muscle and political intrigue. Its efforts to force oil-rich Iraq, Venezuela, and Iran into its pocket have failed, actually de-stabilizing the oil markets and adding to the price of oil. Currency deflation, a tool for creating an uneven playing field in the world economy, has rebounded badly on US policy makers. The oil-producing countries, with their resource leverage, have raised prices in step with the declining dollar. Other countries, with stronger currencies, have been somewhat buffered from these increases. The full shock of oil price increases has fallen heaviest upon the US economy. Calls for energy "independence" merely mask these imperialist intrigues and serve as phony populist motivation for further aggressive and desperate action.
The shock of economic crisis comes at a time when mainstream, liberal and even jost left thought is ill-equipped to deal with its full meaning. The long period of neo-liberal dominance has created a stifling conformity and rigid vision in its wake. Few can imagine answers beyond the conventional: regulatory actions, tax policies, market stimulation, central bank intervention, etc. As the crisis deepens, these answers appear more and more inadequate. Fundamentally, we need to escape the crippling thinking that all solutions must strengthen the capitalist system. We must understand that there is a difference between a profit-centered economy and a peoples' economy, an economy beneficial to the majority. With this understanding come new policy tools: public ownership, wealth redistribution, de-militarization, international cooperation and expanded social security. Of course, the economic system that embodies all of these features and more is socialism.