Saturday, February 7, 2009

World Financial Crisis - Where to from here?

Origins of the crisis

Now, as the world teeters on the brink of what might turn out to be the most profound economic crisis since the depression of 1929, a reappraisal is necessary in the face of neo-liberal shibboleths.

Around the world massive stimulatory packages and financial guarantees, even nationalisations, are in the process of implementation, to buoy consumer confidence and demand and also to encourage liquidity and fortify investor confidence.

Amongst Keynesians, and the Marxist and radical Left, there is an aura of vindication.

Most immediately, the crisis has been traced to the sub-prime mortgage debacle in the United States.

To summarise, overly-complex financial instruments were devised with the aim of minimising risk. According to John Bellamy Foster, writing for The Monthly Review, the idea was:

… that geographical and sector dispersion of the loan portfolio and the “slicing and dicing” of risk would convert all but the very lowest of the tranches of these investment vehicles into safe bets.

The efficacy of such instruments, however, proved to be illusory.

Those most vulnerable - including millions of working class Americans - were encouraged into the market through a variety of mechanisms regardless of their credit history, income or wealth. Such “mechanisms” included low interest rates as well as “teaser” rates which were only temporary. Other devices included low reserve requirements.

This sector of the mortgage market became known as the “sub-prime”.

In a scenario which should be familiar to Australians, these circumstances led to an extraordinary “housing bubble”: a process which has been referred to as “speculative mania” and “hyper-speculation”.

According to Australian blogger, Sean Carmody, between 2004 and 2006 more than 20 per cent of new US mortgages were taken out by “sub-prime” borrowers. Enormous amounts of money were diverted into the housing sector, in wave after wave, under the assumption that asset appreciation would somehow continue forever.

In Australia, a housing bubble had the effect of enriching existing home owners on paper, while making home ownership impossible for many younger investors. Efforts to help first-home-buyers in Australia were simply exploited and fed into the vicious logic of the property bubble. The appreciative effect was particularly great under Australia’s specific circumstances of undersupply. Regardless of low interest rates, the Australian housing bubble ensured that “over the past 10 years” houses became “nearly twice as expensive relative to income”.

Correction in the housing market especially has become necessary but such is the nature of the system that it will inevitably be painful.

In the US, the property bubble was burst with an increase in interest rates, and as upward speculation in the market was reaching its limits.

In the aftermath, Glenn Dyer, writing for Crikey supposes that foreclosures will surpass 2 million by the end of the year 2008: hundreds of thousands driven from their homes with nowhere to turn. And the flow-on effect of defaults on credit has led to despair and uncertainty.

The natural consequence of these events, then, was a crisis of consumer and investor confidence. Following a surge in bad debts, the gears of liquidity for the world financial system threatened seizure. This in turn is leading to global recession. World finance centres were exposed in their relations with US finance; and looming recession in the US has spread worldwide.

Neither Australia, nor Europe nor China are immune. Such are integrated markets in the age of “globalisation”.

Other symptoms of the crisis

Many economic commentators believe that current economic circumstances are symptomatic of a deeper crisis in the broader capitalist world economic system. For others it is merely capitalism’s “neo-liberal variant”.

Most immediately, the initial reaction to the crisis for some is to return to Keynes. In reality, both the Marxist and Keynesian traditions have much to say on the current crisis: and there is no need to pursue one line of criticism to the exclusion of the other. Keynesian policies of demand management and counter-cyclical expenditure have now found their way back into the economic policies of governments all over the world.

Thirty years of crude Thatcherite neo-liberal ideology have been “put on hold” in an astounding display of practical thinking. Counter-cyclical expenditure and socialisation of failing financial interests deemed “too important to fail” seem to be the best world governments have at their disposal to limit the decline in investor and consumer confidence.

And without public intervention in the broader credit system: the alternative is collapse.

In Australia particularly, there is a clear need to invest in education and training and in infrastructure which will overcome “capacity constraints”. Rudd Labor is intent on stimulating the Australian economy even, in the process, bringing the Budget into deficit.

The recessionary spiral must be cut short - lest it know no end.

But not all aspects of the Keynesian compromise would sit well with today’s dominant economic elite.

To begin with, the legacy of the Keynesian “golden age” is associated with a period characterised by a rising wage share of the economy for labour, full employment and an expansion of the social wage. Powerful elements of the economic elite, however, could be accused of preferring the disciplinary effects of a maintaining a “reserve army of labour”. And among this elite, there are those who view the social wage as “crowding out” private sector investment.

Indeed, the Keynesian project may well have found its “historical moment” has come once again. But a full and sustainable return to an effective social democratic settlement will require ongoing mobilisation by the forces of social reform.

Rarely is any significant progressive social reform gained without demand “from below”.

Briefly: growth of the finance sector - decoupled from “the real economy”

Financial markets need to be restructured to relate to the real economy, and provide for real human need.

Ramas Vasudevan notes in Dollars and Sense that “The profits of the financial sector” (in the US) grew from “14 per cent of total corporate profits in 1981” to “nearly 50 per cent” in 2001-02.

The finance sector, here, is increasingly decoupled from the “real economy”. Investment decisions, many leading to job losses, are made to maximise share value: not in pursuit of human need. Instead “players” in the finance markets pursue short term return, often through speculation.

And importantly, because of the dominance of financial markets, “renters” - as Vasudevan refers to them - have become the dominant socio-economic force.

The massive relocation of power, here, provides the economic elite with the leverage they need to apply constant pressure to reforge policy in its favour.

In Australia we need only look at the preference for Public Private Partnerships: dubious finance methods that channel money from the public purse to the socio-economic elite.

While these developments cannot simply be “undone”, development of public pension funds or “Meidner style” wage earner funds could provide a strong measure of democratic input. Providing a new national public bank; fully regulated and providing financial services to vulnerable Australians “at or below cost”, could also aid in warding away collusion and instability over the long term.

The aim must be to democratise the sector; minimise risk exposure for the economically vulnerable; set higher prudential standards in the loan market; harness capital for human need; and make it socially accountable.

Is Marxism relevant?

Even assuming a renaissance in Keynesian ideas, most associate Marxism with an unbearable connotation of oppression. It is an unfair assumption, though, which ignores the instance of Marxists, and those who draw eclectically from Marx, who also wed their analysis with ideas of the liberal and democratic Left.

Today we need discussion of radical ideas more than ever. The Keynesian golden age might never have happened without the radical culture of working class “demand from below” emerging after World War II. Furthermore, the Marxist tradition, and other related traditions of critical theory, still have much to offer, even if in opposition to their historic Stalinist variants.

The time is ripe for a pluralist “reinvention” of the socialist and social-democratic movements. Criticising the dynamics of 19th Century capitalism, Marx identified several tendencies which remain today. We will consider two:

The rate of profit

A most important tendency of capitalism is that of the rate of profit to fall. As technology improves the productivity of labour, the “constant” component of capital rises in relation to its “variable” component.

Put otherwise, there is a rising “organic composition” of capital, comprising “the value of the materials and fixed costs”. 

This stands in contrast to the “variable” component, comprising of wage labour. Because any expropriated surplus comes from the exploitation of labour, the relative decrease of capital’s “variable” component causes the rate of profit fall. This dynamic is overcome by increasing the rate of exploitation- either directly or indirectly.

Wages can be cut as a proportion of GDP (Gross Domestic Product); or workers can provide for corporate welfare - taking collectively upon themselves the costs of education and infrastructure.

Similarly, social programs and welfare can be cut to provide scope for further corporate subsidy.


Another tendency noted by Marx is that of systemic overproduction: supply beyond demand. Here, the capitalist system is seen to be constantly expanding the boundaries of its markets: to maximise the realisation of surplus value.

Production is for profit: it is distributed in keeping with market dynamics - not directly in response to human need. But this process inevitably involves waste.

Despite production beyond the scope of realised market relations, the poor and needy go without - even while in relative terms there is “plenty”.

For a renewed social democracy

There are many lessons, here, for social democracy.

Importantly, falling wage share - in response to the “falling rate of profit” -contributes to lower consumer confidence, and a contraction of local markets.

As we have seen, many in advanced capitalist economies have responded to this crisis with a turn to credit. Credit can expand a market beyond its usual confines. And debt finance can be well justified when leading to increased production over the long term, and the sustainable provision for human need. But beyond sustainable means, reliance on debt cannot be depended upon forever. Indeed, it can provide a “financial prison” for the needy: a vicious cycle of indebtedness.

Welfare and social programs, including public housing, education and health, and also progressive taxation and labour market regulation must free people from the desperate circumstances that lead to the unsustainable, downward spiral of credit-dependence.

And over the long term, through democratic and industrial struggle, citizens and workers must achieve a much more even spread of wealth and economic power. Lifting incomes and living standards at the lower end of the spectrum, here, can assist the broader economy: boosting consumer confidence while providing social justice at the same time.

Within the confines of capitalism, though, the falling rate of profit continues to erode the wage share of the economy, and also the social wage: as hyper-exploitation is entrenched. Even as real wages fall in relative terms, though, improved productivity can lower the cost of consumables; while new technology can greatly improve the quality of human life.

And in cases of overproduction, surely it is not impossible for government to intervene to redistribute goods not traded through “the market”.

Take, for instance, the provision of free information technology goods from the developed to the under-developed world. Or consider the free provision of pharmaceutical technology to under-developed countries.

Further, unoccupied housing could be nationalised to provide for the poor and homeless. As Ken Davidson writes: “about 11 to 12 million houses throughout the US are empty and about 20 per cent of people live in streets where houses are simply boarded up.”

Even in a social democratic society there must be a role for innovative and responsive markets that can provide qualitative improvements in material living standards. Any alternative economic model must be both mixed and democratic.

But in response to hyper-exploitation it is also reasonable for workers to fight for “a greater share” of the economic pie. Even while maintaining profitability, this could be achieved through subsidy and support of co-operatives, and winning of collective capital share through pension funds, wage-earner funds, or other such vehicles.

And until workers and citizens are so organised as to make a greater process of redistribution viable, then wealthier workers ought stand in solidarity with the most poor and vulnerable. (Again - through the tax transfer system, and social wage.)

In the wake of the current disaster, we are not “locked into” the neo-liberal model ever more. Assuming civic mobilisation, and the alignment of organised labour with social movements - including environmental movements - we have the potential to win real change.


  1. Tristan

    An interesting argument. There is much I agree with, and some that I disagree with. Some minor perhaps picky points first, and then maybe tomorrow some more thought out responses. Maybe.

    You say:

    'The rate of profit

    'A most important tendency of capitalism is that of the rate of profit to fall. As technology improves the productivity of labour, the “constant” component of capital rises in relation to its “variable” component.

    'Put otherwise, there is a rising “organic composition” of capital, comprising “the value of the materials and fixed costs”.

    'This stands in contrast to the “variable” component, comprising of wage labour. Because any expropriated surplus comes from the exploitation of labour, the relative decrease of capital’s “variable” component causes the rate of profit fall. This dynamic is overcome by increasing the rate of exploitation- either directly or indirectly.

    'Wages can be cut as a proportion of GDP (Gross Domestic Product); or workers can provide for corporate welfare - taking collectively upon themselves the costs of education and infrastructure.

    'Similarly, social programs and welfare can be cut to provide scope for further corporate subsidy.'

    Wages can increase in real terms while the rate of profit declines. For example since about 1983 (when the Accord started) wages as a percentage of national income have been falling and profits rising. The wages share is now at its lowest in over forty years; the profit share at its highest ever.

    Yet while real wages have increased generally over that time - in part becuase of trade offs and increased productivity, profit rates have fallen.

    Second,since there is a systemic fault in capitalism - the tendency of the rate of profit to fall - then it appears logical to me to say capitalism cannot be reformed. Rather only a society based on co-operation and democracy, in which production is democratically determined in order to satisfy human need, can be the way forward. And that won't come about through bourgeois parliaments; rather it will come about through workers themselves extending democracy into their workplaces and creating their own democratic organs of rule. Anyway, it is late and the guard is tired. (Bad joke.)

  2. Dear John,

    Thanks for the contribution. I tried authorising you to post entries on the main page... If you want to write a Marxist critique of the crisis - and more broadly of capitalism in general - you'd be welcome to post it here



  3. While I obviously agree generally with both Tristan and John I am not sure that "profit rates have fallen".

    The Fair Pay Commission's latest Monitoring Report shows that the shares of GDP between
    "Gross operating Surplus" and "Wages Salaries and supplements" has boosted GOS and cut WSS.

    There are other data in the Monitoring report that shows high levels of profits (with some declines within normal volatility).

    The point is that Australian capitalism has moved its exploitation of workers into offshore Third world countries and capitalism as a whole has availled itslef of "countervailing tendencies" which are now wearing thin (eg per capita credit expansion, population increase, real wages cuts).

    From now on, however, profits definitely will be declining, dividends will evapourate, and all the rest.

    I think the real Marxist "decline in profits" is yet to come.

  4. The Aust. Fin. Review at several places today seems to suggest that the worst is yet to come eg "The real deterioration has only just started" [p25]

  5. Anyone who hasn't read Immanuel Wallerstein' article in relation to the crisis should do so... I'm probably a bit more optimistic re: left social democracy's capability to limit the human damage...


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