For our latest pamphlet, on the subject of the current economic crisis, we interviewed Andrew Kliman (author of Reclaiming Marx’s Capital) on the crisis of global capitalism, prospects and alternatives. The text is reproduced below. Email email@example.com if you would like to order a hard copy of the pamphlet (£1).
Q. Descriptions of today’s crisis have included headlines proclaiming the “collapse” of the system. How would you characterise the current crisis?
A: There hasn’t been a collapse yet. If there were one, you’d know it. But there’s indeed a danger of collapse-of the financial system, and thus of the capitalist system as a whole. That danger was most acute and severe in mid-to-late September, prior to the U.S. Treasury’s $700 billion-plus bailout measures, but it persists even now [November 2].
The crisis is a crisis of “confidence.” “Confidence” here isn’t some general optimism about the future of capitalism, but lenders’ confidence that the monies owed them will in fact be repaid. When that kind of confidence is shaken, as it has been, lending dries up. But production and trade depend crucially on lending–not only loans to build factories, malls, and offices, and to buy additional equipment–but also loans just to get from today to tomorrow, to pay workers, buy supplies and inventories, etc. So any “credit crunch” has an effect on the so-called real economy. If confidence were to be severely shaken, such that there’s outright panic in the credit markets-we were evidently rather close to that point in September, and the threat of such panic persists-there would be almost no new lending to speak of. The “real” economy would grind to a halt in fairly short order. That’s a collapse.
Q: The Australian Prime Minister has branded the crisis a “comprehensive failure of extreme capitalism.” Do you agree?
A: Well, bubbles and the bursting of these bubbles are recurrent features of capitalism-not just “extreme” capitalism, but capitalism as such. The main immediate cause of the crisis was of course the bursting of the bubble in the housing sector in the US, the sharp drop in home prices. Since the end of the postwar boom in the mid-1970s, in particular, a massive amount of debt has been created in order to prop up spending artificially and thereby alleviate some of the effects of the relative slump. But the explosion of debt has led again and again to bubbles-for instance, to the “dot com” stock market bubble of a decade ago-and then to the inevitable bursting of the bubbles. Increasing debt faster than the new value that’s actually generated in production is just not a sustainable way to “grow the economy” in the long run.
The subtext of the phrase “extreme capitalism” is that regulated capitalism will supposedly be more successful than free-market capitalism. But consider the savings and loan (building society) crisis in the US of two decades ago. Thousands of S&Ls collapsed, and the government eventually had to spend hundreds of billions of dollars to make good on depositors’ losses. This crisis was a failure precisely of regulated capitalism. The S&Ls were very heavily regulated; both the interest rates that the S&Ls paid depositors and the rates they charged on mortgage loans were fixed by the government. But when inflation took off in the mid- and late-1970s-and note that regulation and Keynesian policies were unable to prevent this spiralling inflation-interest rates outside the depository system shot up. This caused depositors to flee the S&Ls, and so the S&Ls were forced to bring in funds by paying higher interest rates than the rates they were getting on their mortgage loans. That meant that they were continually losing money. So Congress was then forced to loosen the regulations, in part by letting the S&Ls charge higher rates for loans. But to get interest rates high enough to keep them solvent, they had to make riskier and riskier loans. A lot of these loans never paid off, and in the end the industry essentially collapsed.
The basic problem with the notion that regulated capitalism is somehow better than free-market capitalism is the simple fact that, in the end, capitalism can’t be regulated. This was acknowledged recently by Joseph Stiglitz, the Nobel Laureate and former World Bank chief economist. In mid-September, he wrote an article that proposed a whole slew of new regulations and laws. But he ended by conceding, “These reforms will not guarantee that we will not have another crisis. The ingenuity of those in the financial markets is impressive. Eventually, they will figure out how to circumvent whatever regulations are imposed.” I think this is exactly right.
Stiglitz did go on to say, “But these reforms will make another crisis of this kind less likely, and, should it occur, make it less severe than it otherwise would be.” That doesn’t make sense, however. If the financial markets will eventually circumvent whatever regulations are imposed, then, once they do, the next financial crisis will be just as likely and just as severe as it would have been otherwise. The best that can be said for new laws and regulations is that they can delay the next crisis, while the markets in the process of finding ways to circumvent the regulators. And a delay of the crisis means more artificial expansion through excessive borrowing in the meantime, so that the contraction will be more severe when the bubble does finally burst.
Q. You and some other Marxists like Istvan Meszaros have argued capitalism never really recovered from the crisis of the 1970s. This contrasts to New Labour, for example, who say we have just been through unprecedented “economic growth”, even an “end to boom and bust”. If it was not an upturn what was it?
A: I don’t see how it can be denied that capitalism has failed fully to recover from the crisis of the 1970s, in the sense that there hasn’t been a new boom such as the one that followed the Great Depression and World War II. From the early 1950s through 1973, worldwide gross domestic product per person increased by right around 3% per year on average. That growth rate was basically stable throughout the whole period. But from 1974 through 2003-the latest year in the data set I looked at, the authoritative data set compiled by Angus Maddison- worldwide gross domestic product per person increased by only slightly more than half that rate, and only slightly more than one-third that rate if you exclude China. Again, there’s no trend here, just a long-term cut in per capita growth to about one-half or one-third of the growth rate that we had during the post-World War II boom.
I recently put the decade-by-decade computations on my website, http://akliman.squarespace.com/crisis-intervention, since the long-term slump in GDP growth isn’t all that well known. It certainly deserves to be better known.
During the period since 1974, there have of course been some shorter cyclical upturns. Some of these have been called booms, such as the “Clinton boom” of the 1990s in the US. But that’s another name for the “dot-com” boom, which was a bubble that burst. None of these cyclical upturns have reversed the long-term decline in GDP growth. That’s quite clear from the figures I just cited. They haven’t led to an era of stronger growth that’s sustainable over the long haul. Yes, it’s always possible to live well on borrowed money-but only for a time, until the day of reckoning arrives. And it always arrives. In the end, growth under capitalism is determined and limited by the growth of new value from production. Ultimately, it cannot be greater than that.
As for the notion that the cycles of “boom and bust” have been put behind us, well, that’s just preposterous. If what we’re going through now isn’t a massive bust, what is it, chopped liver?
Q. The governments have intervened to preserve the position of the banks; Gordon Brown’s semi-nationalisations being acclaimed as an international model. Will these actions be enough?
A: I don’t know. I don’t know that anyone knows. Several times during the crisis, since the summer of last year, we’ve seen governmental interventions that have succeeded in subduing the crisis of confidence, but only temporarily, until the next big shock of bad news. Standard and Poor’s, one of the major credit-rating agencies, came out with a statement a few weeks ago that said that the $700 billion-plus bailout plan should succeed, now that the money is being used directly to “recapitalize” the banks-in other words, to give them a cushion against losses and allow them to increase their lending. The Federal Reserve has also begun to lend, in the commercial paper market, as a way to circumvent the lack of short-term business lending on the part of banks and other financial institutions.
These and related interventions are short-term emergency measures. They’re intended to subdue the crisis of confidence and thereby prevent a complete “freezing” of short-term lending that could well cause the financial system to collapse and bring the “real” economy down with it. They’re not intended to, and they won’t, prevent the US economy or the world economy from going into recession. I doubt that they can make the recession shorter or less severe.
The basic problem in the financial sector is that financial institutions in the US and elsewhere are holding a massive amount of bad debt. The new infusions of money into the financial system can probably prevent it from collapsing, and they can maybe help paper over the underlying losses for a while. But ultimately, huge losses will have to be “recognised”, and the excessive run-up of borrowing will have to go into reverse. The financial sector’s ability to expand by means of borrowed funds depends on the flow of repayments it can expect on the loans it makes. It uses the repayments to pay interest on the funds it borrows. So when a massive amount of debt goes bad, the financial sector has to “delever”, reduce its borrowing.
Q. With regard to capitalist crisis Marx wrote of the tendency for the rate of profit to fall, indeed there is evidence it was falling sharply in the UK prior to the financial crisis. However, some consider this aspect of Marx to have no relevance to this crisis. Do you agree?
I couldn’t disagree more. Part of the problem is that some Marxist economists rely on profit measures as reported in national accounts, and these measures ignore write-downs against losses. If a business invests $10 million in a project that’s now only worth $4 million, that lowers its profit by $6 million when it “recognises” the loss, if profit is measured in the usual way. But the national accounts disregard this. We’re certainly seeing a huge decline in the rate of profit right now-if we measure profit in the usual way. I realise that you said “prior to the financial crisis”, whereas I’m saying “right now”, but in there’s no contradiction here. The losses were already there, the assets were actually worth less than they were before, before the losses were “recognised” on the books, and perhaps before the markets lowered the assets’ prices to reflect their underlying values.
And this is where Marx’s theory of the tendential fall in the rate of profit comes into play. The values of commodities tend to fall systematically because of technological progress; it makes them cheaper to produce. This in turn tends to tends to cause their prices, or at least the rate of increase in their prices, to fall. So, at the level of the economy as a whole, the flow of new value tends to falls in relationship to the flow of new production in physical terms. It is true that government spending and easy-credit policies on the part of central banks can prop up the nominal flow of new value for a time, but this forced expansion of the system creates bubbles such as the dot-com and housing-market bubbles. Because the expansion of spending exceeds the underlying flow of new value, it’s not sustainable in the long run, so the bubbles ultimately burst. For instance, in the US, home mortgage lending more than doubled between the start of 2000 and the end of 2005, while income, which is just another name for the new value produced, rose by less than 35%. So obviously there wasn’t enough income to pay off the mortgages, and therefore a mountain of mortgage loans and mortgage-backed securities based on these mortgages ultimately suffered huge drops in their prices.
Now a lot of Marx’s critics, including mainstream Marxist economists, will tell you at this point that capital assets decline in value, also because of technological progress, and that this boosts profitability. So, supposedly, technological progress raises the rate of profit instead of tending to reduce it. They want us to think that, if a business invested $10 million in a project that’s now worth only $4 million, and it rakes in $1 million in profit from the project each year, that its rate of profit is $1 million/$4 million or 25%, not $1 million/$10 million or 10%. But what’s done is done. Yes, the values of the assets decline, but the sum of value that was actually invested in the past does not and can not decline.
These economists have either never understood this simple fact or they pretend not to understand it. And because they mismeasure the sums of value invested, using the reduced values of the assets rather than the sums of value actually invested in the past, they declare that Marx’s law of the tendential fall in the rate of profit has been proved internally inconsistent and therefore false! I suspect that the notion that Marx’s law has “no relevance” to the present crisis stems, in part or in whole, from this myth of internal inconsistency. In their view, in other words, it’s not relevant to the present case because it’s necessarily wrong and therefore never “relevant.”
I realize that this issue is a bit complex. I’ve tried to address it briefly here as well as I can. In my book, Reclaiming Marx’s “Capital”: A refutation of the myth of inconsistency, I discuss it in much more detail and, hopefully, in a clearer and more satisfactory way.
Q. What had began as a crisis of the financial system is now described as a “recession” in the “real economy”. Some workers feel they are paying for “bailing out the bankers”. Is this true or is there another explanation?
A: In one sense, this is true. There are shareholders in banks and other financial institutions who would have suffered huge losses without these bailouts. Now, if the bailouts succeed, their investments will be more or less protected. However, there are some major things wrong with the notion that workers are paying for “bailing out the bankers”. First, the bailout money isn’t really tax money; the US and other governments are borrowing the money, just like they normally borrow to cover budget deficits. So workers will pay for the bailout, not by means of higher taxes, but because the extra borrowing will boost interest rates, which in turn will tend of depress businesses’ investment spending. And this will tend to reduce economic growth, job creation, and wages.
More important is the fact that the purpose of the bailout and the other government interventions isn’t to make the rich richer, or to protect owners of capital. We can see this in the case of the Federal Reserve forcing Bear Stearns to be sold off at a fire-sale price back in March. The owners of Bear Stearns took huge losses; they were forced by the Fed to sell their shares for a fraction of their market price. Or consider the US government’s takeover of Fannie Mae and Freddie Mac, the huge mortgage lenders, in September. Here again, the owners, the shareholders in these firms, received nothing from the bailout.
The purpose of all of these interventions is instead to try to save capitalism, the system itself, not the wealth of the wealthy. The US Treasury, the Fed, and other governments are bailing out the financial sector, not because they care about enriching the rich, but because a collapse of financial institutions that are “too big to fail” could well trigger such panic as to cause lending to stop, bringing the financial sector-and with it, the “real” economy-crashing down. They have been crystal-clear about this throughout the crisis. I suspect that when they let Lehman Brothers, a big Wall Street firm, go under in mid-September, we were seeing the start of such a panic, and that this is why the authorities then rushed in, in emergency fashion. In the next several days, the US government bought AIG, the big insurance firm, it announced a system-wide $700 billion bailout, and so forth.
Q. Some have said we are facing a depression on the scale of the Great Depression, do you agree?
A: I don’t know. Some economists are in the business of making long-term predictions, but only because there’s good money to be made doing so. There’s certainly nothing in the whole body of economic theory that gives anyone the ability to forecast the future beyond a few months, maybe a year or so. Theory can allow us to speak knowledgeably about trends, but not about something like whether the downturn will be as bad as the Great Depression.
That said, the current recession will surely be a severe one, and probably a long one. The longest recessions in the US since World War II have been the 16-month recessions of 1973-1975 and 1981-1982. A lot of forecasters are suggesting that the current slump will last throughout 2009. Depending on when the current recession is officially said to have begun (this hasn’t yet been announced), it might be longer than those.
The current slump could actually end up being even worse than the Great Depression, largely because people’s lives are linked to the world of finance to a far greater extent than they were back in the 1930s. Nowadays, any financial disturbance has a far greater impact on many more people now.
How bad the recession gets depends a lot on how much further home prices in the US fall. According to the Case-Schiller 20-city home price index, home prices fell, between mid-2006 and August of this year, by 20.3%. Some forecasters predict that they’ll eventually fall by a total of 30% or even 40%. A 40% drop would be disastrous. Things wouldn’t be only twice as bad as they are now, but far worse.
Here’s why. The share of homeowners with “negative equity” wouldn’t just double; it would skyrocket. Imagine that a homeowner still owes $161,000 on a $200,000 home. She has $39,000 of home equity. But if the price of the home falls by 20%, to $160,000, she now has negative equity of $1000. Now she can no longer use the home as collateral to get a new loan. This problem is already leading to lower consumer spending and more foreclosures, since a major way that working people have managed to make their mortgage payments has been by borrowing against their equity in their homes. But now imagine that home prices plummet by a total of 40%. Even someone who only owes $121,000 on a $200,000 home that’s currently worth only $120,000 now has negative equity of $1000. The share of people in this category is many, many times greater-not just double-the share that has negative equity when home prices fall by 20%. So keep your eyes glued to the home-price data.
All of this assumes that the bailout and similar measures will indeed prevent a complete “freezing” of the credit markets and the economic collapse that would result from that. I’m not sure it’s safe to assume that yet.
Q. There is a general feeling we just seen the end of a phase of history; neo-liberalism is being declared dead. What do you think this historical turning point represents?
A: On the ideological level, free-market capitalism has taken a big hit, at least for a while. When Alan Greenspan, a long-time devotee of Ayn Rand, says that he’s shocked, but financial markets don’t work-competition doesn’t lead to investors getting the information they need in order to make wise investments-that’s big news. It’s the economic equivalent of the Pope admitting that Mary and Joseph did have a fling nine months before baby Jesus was born.
But there’s nothing inherently progressive about the shift away from the “free market” and toward greater government intervention and regulation. Liberals and leftists often make this mistake because of what took place during the New Deal. Along with the intervention and regulation, there were progressive social welfare policies. But that’s because there was a gigantic mobilization of working people forcing concessions from the system. It was only because of that movement from below that the US government gave those concessions, in order to save the capitalist system. If it can save the system without giving such concessions, and that will be the case if there’s no comparable mobilization this time, increased intervention and regulation will be just that-intervention and regulation, full stop. We’ve already seen that the bailout money isn’t there to make our lives better.
I think the turn to intervention, regulation, and some measure of state ownership is a new manifestation of state-capitalism, in the sense in which Raya Dunayevskaya used the term to refer to a new global stage of capitalism, characterised by permanent state intervention, that arose in the 1930s with the New Deal and similar policy regimes. It’s an essentially non-ideological shift. Henry Paulson, the US Treasury secretary, is certainly no champion of government regulation, much less nationalization. But at this moment of acute systemic crisis, ideological scruples simply have to be set aside. Saving the capitalist system by any means necessary is what matters.
I would characterize this new manifestation of state-capitalism as the latest phase of what Marx called “the abolition of the capitalist mode of production within the capitalist mode of production itself”. There is nothing private about the system any more except the titles to property. As I’ve noted, the authorities aren’t even intervening on behalf of private interests. They’re intervening on behalf of the system itself. Such total alienation of an economic system from human interests of any sort is a clear sign that it needs to perish and make way for a higher social order.
Q. One feature of the crisis has been a renewed interest in Keynes; the Financial Times called him ‘the man in the news’ but warned against a return to Keynesianism. Is there a return to Keynesianism and are those on the left who welcome this development, such as Eric Hobsbawm, right?
A: Keynesianism is basically concerned with measures to stimulate production and employment, to head off, get out of, or lessen the severity of economic slumps. That’s not what has been taking place thus far, in part perhaps because the slump is not yet very long or severe. The recent interventions are instead intended to restore “confidence” and get credit flowing, in order to prevent economic collapse. The goal is very different and the measures being taken are, accordingly, very different.
There’s an ideological return to Keynesianism, there has been for some time, among some on the left. They’ve given up on the possibility of socialism, so they desperately cling to the quasi-Keynesian notion of a “rising tide that lifts all boats” as something that can make people’s lives better within capitalism. I think the historical record speaks clearly here. Welfare-state capitalism failed miserably. Its supposed gains were unsustainable once the postwar boom ended. The failure of Keynesian policies to deal with the simultaneous inflation and stagnation of the 1970s-stagflation-basically put an end to Keynesianism as theory, except among ideologues desperate for a progressive alternative to socialism. The quasi-Keynesian notion that, by raising wages, governments can stimulate spending and create such prosperity that even the capitalists will be pleased with the results-rather than triggering a flight of capital to the Third World and other low-wage regions-has been disproved in practice. It’s also far-fetched theoretically. Capitalists make more profit when they pay lower wages, not when they pay higher wages. To the extent that Keynesian policies were ever able to work at all, if they did indeed ever work, it is because, as Keynes himself recognized, we had “closed economies” shielded from international competition and international financial markets. But we live in different times.
In any case, Keynesianism was meant to deal with economic slumps, to get out of them and to avoid them. Keynesian “pump-priming” was never intended as, and it cannot successfully be used as, a way of stimulating economic growth in the long run. The pump is primed with borrowed funds. But in the long-run, borrowed funds must be repaid.
Q. One response of the left to the greater state intervention has been to call for more, fuller nationalisation; do you think this an adequate response to the crisis?
A: No. I don’t see how or why it matters who holds the titles to property. If the issue is regulation, I don’t think that capitalism can successfully be regulated in the long run, as I said earlier. And events like the savings and loan crisis, the failure of Keynesianism to deal with stagflation, and the failure of welfare-state capitalism everywhere certainly don’t suggest that regulated capitalism is more successful than deregulated capitalism. If the issue is planning, I don’t think a capitalist economy can really be planned. The economy of the ex-USSR was certainly no success. The law of value asserts itself, it calls the shots, and policymakers adapt to it. To call that “planning” is a rather nice euphemism.
Q. How do you think the labour movement should respond to such issues as job cuts, rising inflation, repossessions etc?
A: Working people need to mobilise in order to protect themselves as well as they can. They need to look to themselves, not to the government. As I noted, there’s nothing inherently progressive about government intervention and regulation. What will take place will be shaped, as it was in the 1930s, by the trajectory of working people’s struggles on their own behalf. Working people need to make demands on the governments of their countries and see to it that these demands are met.
By getting these demands met, they help themselves in the short run. They are getting concessions from the system, not putting it on a new path forward, and not “solving the economic crisis”. They should steer clear of those who tell them that the concessions they win are a new set of progressive policies that will lead to a prosperous and stable economy. The rollback of the gains made in the 1930s shows that, when push comes to shove, working people’s gains are not compatible with the continued functioning of the capitalist system.
There is no solution to this dilemma within the confines of the capitalist system. Working people need to be provided with the theories and concepts that will enable them to understand how the system works and why it cannot work for the benefit of the vast majority of people. Not slogans-genuine theories and concepts that provide real understanding. Working people have minds as well as bodies.
For this theoretical renewal to happen in a serious and sustained manner, monies are needed, and space in educational institutions must be claimed or created. I think a return to Marx’s critique of capitalism is vital. But for such a return to take place, the persistent claims-perpetuated even by Marxist and other radical economists and other intellectuals, that his theories of value and economic crisis are internally inconsistent, and therefore false-must be exposed as mythical. As Dunayevskaya put it, we need to have such appreciation of the movements from below that we never again let activity be separated from theory.
Q. Can we develop such a response of global labour on an international level?
A: I don’t know. The technological means are there as they’ve never been before. International communication and travel are cheaper than they’ve ever been. But there’s not much of a response yet even on the national level, is there?
Q. The Commune argues the need to revive the cause of workers’ self-management; we think that self-management is a necessity to uprooting capital and replacing it with a free society. Do you think this is relevant to our response to the crisis?
A: Yes and no. Certainly a free, socialist society must be self-managed, down to the level of what takes place daily in the workplace, and up to the level of the running of society as a whole. Otherwise the society isn’t really a free socialist society, but another form of capitalism.
But I don’t think much of attempts to have a capitalist society that’s “managed” by workers. It’s still a capitalist society, and still one controlled by the economic laws of capitalism. For instance, workers might wish to pay themselves well, keep their fellow workers from becoming unemployed, and produce things that people need, like health care. But if they’re managing themselves within capitalism, they have to compete, and that requires that they keep costs low. (Otherwise their enterprise will go under, and there won’t be any wages or employment at all.) So they have to keep wages low, let go of fellow workers who aren’t needed or who can’t keep up. And if wages are low and lots of folks are unemployed, there’s not a lot of demand-monetary demand-for healthcare.
That said, I certainly welcome efforts, such as those by workers in Argentina, to take over plants and try to do the best that present circumstances allow, in order to protect their jobs and income. From what I know, the workers understand that they’re involved in a defensive measure. The ones who portray “self-management” with capitalism as a solution always seem to be intellectuals.