The World Economic Crisis: A Marxist Analysis

By Nick Beams, 19-25 December 2008,

World Socialist Website

The following is a lecture delivered by Nick Beams, national secretary of the Socialist Equality Party (Australia) and a member of the International Editorial Board of the World Socialist Web Site, to audiences in Perth, Melbourne and Sydney in November and December, 2008.

It is now clear that the greatest financial According to official statistics, all the crisis since the Great Depression is on the major areas of the world economy are now in verge of becoming the deepest global slump recession: the United States, the eurozone, since the economic catastrophe of the 1930s. Britain and Japan. We could spend the entire time available for The growth estimates for China and the this lecture simply enumerating the myriad so-called emerging markets, which, once expressions of this crisis and examining their upon a time—and I use the fairy-tale form far-reaching implications. I propose here to advisedly—were supposed to provide a boost deal only with some of the most significant. to the world economy, are now being revised On November 24, Bloomberg News downwards virtually on a daily basis. reported that after the $306 billion bailout of Like the financial crisis that caused it, the the US bank Citigroup, organised at midnight economic slump is centred in the United the previous day, the US government had States. The number of private sector jobs has now committed itself to providing more than fallen for the past 11 months straight. Some $7.76 trillion to the financial institutions and 533,000 jobs were lost in November—the banks. This amount was the equivalent of half worst monthly decline since December the American gross domestic product (GDP), 1974—with predictions that losses in or $24,000 for every man, woman and child in December will be even greater. At least one the US. quarter of all US businesses plan to reduce Within 24 hours, however, the Bloomberg employment next year. The mayor of Chicago, estimate was outdated after the Treasury Richard Daley, recently warned of "huge" announced that a further $800 billion was layoffs in the rest of the year, comparing being deployed to support mortgage today's "frightening economy" to that of the companies Fannie Mae and Freddie Mac and Depression years of the 1930s. launch a new initiative to provide credit to With unemployment rising and home holders of student loans, auto loans and prices continuing to slide—some 12 million credit card loans. homes in the US are said to be "under water", One reads these figures and asks the that is, worth less than the mortgages on question: who is going to bail out the United them—consumer spending has dived. States? US consumption spending, which Stock markets around the world have comprises around 70 percent of gross tumbled, with an estimated $25-30 trillion domestic product, fell by 3 percent in the third wiped off the value of shares in the past six quarter. According to a survey of economists months. Around 38 percent of the value of conducted by Bloomberg, it will fall by a major companies has been erased. General further 2.9 percent in the fourth quarter and Motors, once the most powerful industrial 1.3 percent in the first quarter of 2009. concern in the world, teeters on the edge of Consumer spending has never declined for bankruptcy. 1 three quarters in a row during the entire post- have decreased since the deep recession of World War II period. 1982. Consumer prices in October fell by 1 On November 15, the leaders of the G20 percent, the biggest monthly drop since 1947. group of countries, whose economies But instead of lower inflation providing a account for about 90 percent of global output, boost to financial markets, it had the reverse met in Washington to discuss proposals to effect. Wall Street took a dive on fears that meet the economic and financial crisis. It deflation, which raises the real level of debt, might have been better if they had not. The could take hold. meeting demonstrated not only that the The Detroit "Big Three"—Chrysler, Ford leaders of world capitalism are bereft of any and General Motors—have been seeking a program to deal with the situation, but the $34 billion lifeline from the government in divisions among them are widening. order to avoid bankruptcy. It is estimated that On the eve of the meeting, Bush, anxious if one or more of the auto manufacturers were to repulse calls for greater regulation, to collapse, around 3 million jobs could be delivered a speech extolling the virtues of the wiped out across the US economy. "free enterprise" system. The summit, he The statistics on the global economy are insisted, had to be devoted, above all, to a as bad, if not worse. According to the reaffirmation that "free market principles offer International Labour Organization (ILO), the the surest path to lasting prosperity". It was financial crisis will lift world unemployment necessary to "move forward with the free- from 190 million in 2007 to 210 million next market principles that have delivered year. And the ILO has warned that the 20 prosperity and hope to people all across the million predicted increase could prove to be globe." One might have wondered whether an underestimation "if the effects of the the speech was actually being delivered by a current economic deterioration are not quickly satirist from "Saturday Night Live", following confronted." Tina Fey's success with Sarah Palin. Last week, in a desperate measure to try Three weeks before the summit, in a to combat the crisis, the Bank of England hearing before a US Congressional lowered its interest rate to 2 percent—equal Committee, the high priest of the free market, to the lowest level since its founding in 1694. Alan Greenspan, the former chairman of the In its latest global outlook report, the Federal Reserve Board, had been forced to World Bank has forecast a growth rate in acknowledge the bankruptcy of the entire 2009 of just 1 percent for the world economy system he had been instrumental in building, as a whole, and a contraction of 0.1 percent and over which he had presided for almost for the high-income countries. According to two decades. the Bank's chief economist, the world now "Those of us who have looked to the self- faces "the worst recession since the Great interest of lending institutions to protect Depression." shareholder's equity, myself included, are in a The OECD, which covers the world's state of shocked disbelief," he said. The risk major industrialised economies, has forecast management system, based on the use of contractions of 0.9 percent, 0.1 percent and financial derivatives, had not only got out of 0.5 percent for the US, Japan and the control but had helped exacerbate the crisis. eurozone respectively. "This modern risk-management paradigm One of the most significant statistics held sway for decades. The whole intellectual concerns world trade. For 2009, the World edifice, however, collapsed in the summer of Bank has forecast a decline of 2.5 percent in last year." The crisis had "turned out to be world trade volumes, compared with an much broader than anything I could have increase of 5.8 percent this year and a rise of imagined. It has morphed from one gripped almost 10 percent in 2006. This will be the by liquidity restraints to one in which fears of first time the actual volume of world trade will insolvency are now paramount." 2 Before the summit opened, the But to put such a system in place is economics commentator of the Financial impossible. The reasons lie in the very Times, Martin Wolf, explained why, in his structure of the world capitalist economy. All view, preventing a global slump had to be the markets are global in scope, but the world priority for governments and central banks. remains divided among capitalist powers— The idea that a quick recession could purge some greater, some lesser. Each section of the world of past excesses was "ridiculous." capital is in a continuous struggle against its "The danger is, instead, a slump, as a global rivals to maintain and advance its profit mountain of debt—in the US, equal to three share. Those that fail to do so go under or are times GDP—topples over into mass taken over by their more powerful rivals. In bankruptcy. The downward spiral would begin this struggle, each section of capital looks to with further decay of financial systems and its "own" national state as a political force proceed via pervasive mistrust, the vanishing through which it can advance its interests. of credit, closure of vast numbers of There exists a conflict of each against all. businesses, soaring unemployment, tumbling As the British magazine the Economist commodity prices, cascading declines in noted: "International finance cannot just be asset prices and soaring repossessions. ‘fixed', because the system is a tug-of-war Globalisation would spread the catastrophe between the global capital markets and everywhere. ... This would be a recipe not for national sovereignty. ... Governments broadly a revival of 19th century laissez-faire, but for welcome the benefits of global finance, yet xenophobia, nationalism and revolution. As it they are not prepared to set up either a global is, such outcomes are conceivable. ... financial regulator, which would interfere Everything possible must be done to prevent deep inside their national markets, or a global the inescapable recession from turning into lender of last resort." There is a fundamental something worse" [Financial Times, October dilemma, it concluded: "[I]nternational rules 29, 2008]. require enforcement, but nation-states In another pre-summit comment, the demand sovereignty." well-known international economist Barry All the participants at the G20 summit, Eichengreen warned it was far from clear that along with their numerous advisers and governments and central bankers were at all economists, agreed that the growth of prepared for the difficulties that would follow protectionism would have disastrous as the crisis spread from Wall Street. "There consequences for the world economy. It is an is no agreement on what to do about the intellectual given that the Smoot Hawley Act global economic downturn. Economically and of June 1930, which raised tariff barriers in financially there is a clear sense of things the US, played a decisive role in sparking the spiraling out of control again." series of retaliatory measures that contributed The problems confronting the leaders of to the disastrous two-thirds contraction in the G20 and global economic and financial world trade from 1929 to 1933. authorities are not simply of an intellectual However, not only did the commitment, in character. The inability to reach agreement the G20 summit communiqué, to eschew and the rise of economic conflicts and protectionist measures hang in the balance tensions among the major powers is, first and until the final hours, it was largely foremost, a product of objective meaningless. This was made clear in a rather contradictions rooted in the world capitalist caustic comment by the foreign editor of the system itself. British Daily Telegraph. Take the question of regulation. Any "With no evident irony, the statement analysis of the global financial system shows says; ‘We underscore the critical importance that some kind of international regulation is of rejecting protectionism and not turning needed for the "efficient" operation of markets inward in times of financial uncertainty. In this that are closely interconnected and integrated. regard, within the next 12 months, we will 3 refrain from raising new barriers to Commission that the German government investment or trade in goods and services.' should do more to try to stimulate its "What complete nonsense. Leave aside economy. the unilateral bailout of banks in nation after "We have a bidding war," he told nation that left, among other things, European Newsweek, "where everyone in politics Union competition policy in tatters. They were believes they have to top up every spending said to be essential. Where does it stop? program that's been put to discussion. I say "General Motors, Chrysler and Ford are we should be more honest to our citizens. about to be given billions of dollars, Policies can take some of the sharpness out presumably on the grounds that their failure of it, but no matter how much any would do as much damage to the American government does, the recession we are in economy as a failure of financial institutions. now is unavoidable. When I look at the If bailing them out is not a ‘new barrier ... to chaotic and volatile debate right now, both in trade in goods', I have absolutely no idea Germany and around the world, my what is. Someone needs to tell the Americans impression and concern is that the daily that signing a communiqué with fingers barrage of proposals and political statements crossed behind the back does not work is making markets and consumers even more outside the playground. nervous. Still, Brussels is pressing for a joint "And in case anyone thinks I am unfairly European approach. For a while the position singling out the Americans, the coming in Brussels and a few other places has been rescue of Detroit is just a convenient and ‘We're now very much for setting up large- huge example. I can assure you the same scale spending programs, but we're not really arguments are being prepared to help, for going to ask what the exact effects of those example, Alitalia in Italy and other large might be. And since the amounts are so high, companies elsewhere" [Comment by Adrian well, let's get the Germans to pay because Michaels, foreign editor of the Daily they can'." Telegraph, published in the Australian, By Nick Beams November 18, 2008]. 20 December 2008 The author of this comment may well The following is the second part of a consider that he has taken a stand on lecture delivered by Nick Beams, national principle. However it is significant that his secretary of the Socialist Equality Party position reflects precisely that of British (Australia) and a member of the International capital, which has little manufacturing Editorial Board of the World Socialist Web industry left to protect, but which is concerned Site, to audiences in Perth, Melbourne and that the financial operations of the City of Sydney in November and December, 2008. London should not be constricted in any way Part 1 was posted yesterday and parts 3, 4 by the new regulatory mechanisms proposed and 5 will be published next week. by Monsieur Sarkozy, the representative of The escalating antagonisms between the French capital and industry. major capitalist powers are the result not of Disagreements abound, not only on the intellectual deficiencies, or an incorrect issue of finance and trade, but on political program, or an inability to see the government intervention. The European dangers ahead. They arise from powers are deeply divided, as has been contradictions within the capitalist order made clear by the very public conflict over the itself—contradictions that will intensify as the size of any European Union stimulus package. global slump deepens and which, at a certain Consider Newsweek's extraordinary point, will become the basis for political and interview with German finance minister Peer military conflicts. Steinbrück, published in its December 6 The questions we need to probe are the edition. Steinbrück was responding to following: how has this financial crisis come criticisms from France and the EU about? How did problems involving $34 billion 4 in US subprime mortgages, which emerged housing and other necessities of life needed 18 months ago, morph into the catastrophe to sustain the worker and the workers' family. now engulfing the $57 trillion US financial But the value of these necessities (the system and financial markets the world over? worker's wage) is not the same as the value And furthermore, how is it that the lives added by the worker to the commodities of hundreds, no, thousands of millions of supplied by the capitalist in the course of the people around the globe are threatened by a production process. In other words, the crisis arising from a financial system in which worker's wage is less than the value he or they are not involved, over which they have she contributes in the production process. no control and about which they have little or This difference is the source of surplus value. no knowledge? How is it that highly complex Labour power is consumed in the production financial operations involving things such as process, but the commodities produced by it collateralised debt obligations, credit default have additional, or surplus, value embodied swaps, and asset-backed securities can have in them. They are then sold on the market to such a far-reaching impact on their daily lives? realise M', comprising the initial M plus an Why has this financial crisis led to a increment ΔM—the profit made by the breakdown in the global capitalist order, capitalist out of the production process. giving rise to the very real threat of The capitalist mode of production sets in depression and war? How has all this motion a vast accumulation of the forces of happened and, on the basis of our analysis, production. As Marx noted in the Communist what must now be done? These are the Manifesto, in contrast to all previous modes, issues with which we will be grappling in this capitalism involves the continuous lecture. revolutionising of the means of production. The ABCs of capitalism This is inherent in the system itself. In order to grasp the processes at work Accumulation depends on increasing the in the world of finance and their impact on the productivity of labour, and the key to so-called real economy, we need to consider increasing labour productivity is the some of the ABCs of the capitalist mode of development of the productive forces. The production. pressure of competition drives this process The driving force of capitalism is not forward. Every section of capital must strive production for use or need, or even to develop the productivity of labour on pain production for the market as such, but the of extinction. accumulation of capital—the making of profit. This ever-increasing scale of the In its simplest form, the process of production process induces changes in the accumulation begins with a mass of capital in financial structure of the capitalist economy. It the money form M, which is turned into a new means that the capital now required to set in and greater quantity of capital, M', that is, the motion the process of accumulation—the initial quantity of capital plus an increment, initial amount, M—far outgrows the capacity ∆M ("delta M"). of individual capitalists. It has to be drawn The source of this increment is the from the resources of society as a whole. surplus value extracted from the working Two great financial developments make this class in the process of production. Money, as possible: the rise of the credit and banking capital, is used to purchase the means of system, and the formation of joint-stock or production plus the labour power of workers. shareholding companies. This labour power, or capacity to work, is a Credit, made available from the pool of commodity available in the market, along with money gathered up in the hands of the banks other commodities. The value of this from all corners of society, provides the commodity—the labour power that the worker capitalist firm with resources on a scale far sells to the capitalist in the wage contract—is beyond the capacities of an individual or even determined by the value of the food, clothing, a group of individuals. The functioning 5 capitalist, Marx explains, becomes a mere This is an enchanted world, a world of illusion, manager of other people's money. Without because here it is possible to make money this money, Rupert Murdoch is an ordinary simply through the manipulation of money. citizen. But with the resources of numerous Money, through the payment of interest, banks placed at his disposal, he is a colossus, seems to accumulate as a natural function of invited to deliver the Boyer lectures on ABC its existence. Money begets money as Nature radio, explaining how we all should live. herself nurtures the growth of plants and In return for the provision of capital, the animals. How could labour possibly be the bank receives a portion of the surplus value source of all profit when clever manipulations extracted from the working class in the form and trades by financial operators can result in of interest payments. The loan agreement the accumulation of vast wealth? with the bank, or the issuing of a bond by the The enchanted world of finance not only company, entitles the creditor to regular engenders illusions in the minds of its interest payments. That is, the holder owns a inhabitants and those who profit from it, but title to income. also in the minds of those who would try and In the case of the joint stock company, abolish it. From the very earliest days, established through the issuing of shares, the financial markets have been denounced by shareholders, in return for supplying money those who would like to expunge or at least capital, receive a title to property. They do not control them, but without overturning the have a right to a portion of the company. As a capitalist economy as a whole. shareholder of a retail chain, you cannot go "Regulate the bad side of capitalism!" is into a store and claim some of the their catch-cry, so that the good—that is, merchandise, on the grounds that you are a capital in the productive form—might be able part owner of it. The merchandise is the to grow and society advance. Insofar as property of the incorporated person, the finance capital is necessary, ensure it works company. What you are entitled to is a for society as a whole! But, as Marx portion of the profit, in the form of a dividend. explained more than 150 years ago, such With the development of credit and efforts are based on an illusion. The "good" shareholding we have the creation of new cannot be separated from the "bad" and, in markets—financial markets—in which these fact, it turns out that the "bad" is often the titles to income, bonds and shares, are very driving force of historical development. bought and sold. And as the prices of these As the founder of scientific socialism financial assets rise and fall, so profits can be noted in relation to the joint stock company: made by buying and selling them. "The world would still be without railroads if it Here I want to emphasise that there are had to wait until accumulation had got a few not two forms of capital. The money that was individual capitals far enough to be adequate supplied, either as credit or through share for the construction of a railroad. subscription, has been deployed to purchase Centralisation, however, accomplished this in labour power and the means of production. It a twinkling of an eye, by means of joint-stock has become productive capital engaged in companies" [Marx, Capital Volume I, p. 780]. the process of extracting surplus value from Fictitious capital and the growth of the working class. It does not exist in the form debt of money as well. The shares and bonds are In the light of these ABCs let us now what Marx called "imaginary" capital, or probe the present financial crisis. Numerous fictitious capital. They are, in the final analysis, statistics demonstrate the growth of the titles to income, to a share of the surplus financial system over the past three decades. value extracted by productive capital. One of the most important indicators is the However, in the world of finance, of level of debt. fictitious capital, it is possible to make great In 1981 it is estimated that the US credit profits by buying and selling financial assets. market was 168 percent of GDP. By 2007 it 6 was 350 percent. Financial assets were five Involved here were not individual failings times larger than GDP in 1980, but over ten or a lack of intellect, but the very structure of times as large in 2007. Moreover this debt the financial market itself. So long as credit is has been increasingly used to finance cheap and asset prices are rising, every operations in the financial markets financial institution is forced to participate. If, themselves, rather than to expand productive say, a particular fund manager sees the capital. The debt taken on by banks and other writing on the wall and decides to opt out, his financial institutions rose from 63.8 percent of institution will lose out in the competitive US GDP in 1997 to 113.8 percent in 2007. struggle for profits. His clients will simply go Debt issued by US financial institutions nearly elsewhere, where bigger profits are on offer. doubled between 2000 and 2007. And this It does not matter that he is right, and a debt has balanced, ever more precariously, collapse will eventually take place. So long as on an ever-smaller capital base. In 2004, the collapse occurs across the market, no large investment banks had an asset to one involved loses their competitive position. equity ratio (a measure of the extent of debt As the CEO of Citigroup Chuck Prince leveraging) of 23. By 2007 this had risen to put it in July 2007, on the eve of the subprime 30. crisis: "When the music stops, in terms of Goldman Sachs, for example, used its liquidity, things will be complicated. But as $40 billion of equity as the foundation for long as the music is playing, you've got to get assets worth $1.1 trillion. Merrill Lynch's $1 up and dance. We're still dancing." trillion of assets rested on $30 billion of equity. Now the music has stopped. The reason for such large leveraging The subprime mortgage crisis was the ratios lay in the enhanced profit rates they trigger for the implosion that is now seeing provided. Consider the following simple the collapse of the mountain of debt scenario: If an asset purchased for $100 accumulated not just over the previous few million increases in value by 10 percent months, or even years, but for several during a year (worth $110 million at the end decades. of the year), and if the purchase of this asset To understand the mechanisms behind is financed by equity capital of $10 million this implosion, take the following simple and borrowings of $90 million, at an interest example. Suppose that an asset valued at rate of 5 percent, then the profit at the end of $100 million, which had an expected return of the year, after interest of $4.5 million (5 $10 million, or 10 percent, now only returns percent of $90 million) has been paid, will be $5 million or 5 percent, then the value of that $5.5 million. This means a profit of $5.5 asset will drop to $50 million. To put it million has been made on an initial outlay of another way, an investor seeking a rate of $10 million, giving a rate of return of 55 return of 10 percent would have been willing percent. to pay $100 million for the asset. Now he will The key to the process is the increase in only pay $50 million. The value of the asset in asset values, fueled by cheap credit. If money the market has halved. is cheap it will pour into asset markets, But suppose the asset has been bidding up prices, and providing large profits. purchased with borrowed funds, say $90 The market may be in stocks and shares, or million. Notwithstanding the fact that the in commodities, or in housing. market value of the asset has declined, the Of course, it does not take any great debt to the bank remains $90 million. The intellectual capacity to see that such Ponzi asset, however, is now worth less than the schemes, involving the creation of asset debt incurred to purchase it. How will the bubbles, must eventually collapse. Why then bank be repaid? Other assets may have to be did not at least some in financial circles call a sold to obtain cash. But to the extent that this halt? Why the herd mentality? takes place across the board, the value of

7 those particular assets will fall and the crisis forcible devaluations, an actual stagnation will worsen. and disruption in the reproduction process, We said earlier that fictitious capital is a and hence to an actual decline in claim on income, the source of which, in the reproduction" [Marx, Capital Volume III, p. final analysis, is the surplus value extracted 363]. In short, it takes place through a violent from the working class. But capital can grow economic contraction, whose severity far beyond the basis on which it ultimately depends on the extent of the initial over- rests. Financial market operations result in a accumulation of capital. In today's conditions, massive growth in fictitious capital. At a we are speaking of processes that have certain point, however, this expansion comes already led to the implosion of one economy, to a halt and a crisis erupts. Iceland, with even bigger ones, Ireland and The crisis is an expression of the even the UK, to follow. reassertion of the fundamental laws of the The violent economic contraction, to capitalist economy. Its source lies in the fact which Marx refers, was described in the that the claims of capital have vastly infamous advice provided to US President outgrown the available mass of surplus value. Herbert Hoover in 1931 by his Treasury Capital must seek to overcome the imbalance. Secretary Andrew Mellon: "Liquidate labour, How is this accomplished? Through two liquidate stocks, liquidate the farmers, interconnected processes: by intensifying the liquidate real estate. Purge the rottenness out exploitation of the working class in order to of the system. High costs of living and high expand the mass of surplus value and, above living will come down. People will work harder, all, by bankrupting and eliminating whole live a more moral life. Values will be adjusted, sections of capital, thereby wiping out their and enterprising people will pick up the claims to the available surplus value, and wrecks from less competent people." restoring the shares of those sections of Insofar as they have a theory of financial capital that remain. and monetary policy, US financial authorities In a recent speech Kevin Warsh, a have acted on the belief that they could avert governor of the US Federal Reserve System, the outcome advocated by Mellon through the noted that the issues in the current financial correct use of monetary policy. crisis went far beyond subprime mortgages Milton Friedman and Anna Schwartz in and pointed to the wider processes now their book A Monetary History of the United unfolding. States advanced the theory that the "great "If the challenges to the economy were contraction" was caused by the incorrect predominantly about the value of housing policies of the US Federal Reserve. In the stock, my focus today," he told his audience, years following the book's release this theory "would be narrower than the establishment of has become "conventional wisdom." a new financial architecture. So, what A vociferous advocate of the capitalist diagnosis, beyond housing weakness, is "free market", Friedman was motivated by the consistent with the unprecedented levels of desire to demonstrate that the 1930s volatility and dramatic financial market and Depression was not a consequence of its economic distress? I would advance the failings and contradictions but of following: We are witnessing a fundamental contractionary monetary policies. Had they reassessment of the value of virtually every not been implemented, there would have asset everywhere in the world" [Kevin Warsh, been a recession, but not the economic The Promise and Perils of the New Financial disaster that actually occurred. Architecture]. Acceptance of the Friedman hypothesis This "reassessment", however, does not has meant that whereas Mellon's advocated occur through some kind of accounting liquidation in response to a financial crisis, procedure. It takes place, as Marx drew out, the Fed's policy, under Alan Greenspan and through "violent and acute crises, sudden now Ben Bernanke, has been monetisation. 8 This began in 1987, when Greenspan, shortly TARP, Paulson announced he was after his appointment, reacted to the October abandoning this plan. Asked to explain why, stock market crash by opening up the Fed's he replied: "The situation worsened, the facts credit spigots. In every succeeding financial changed." crisis—the Asian crisis of 1997-98, the Paulson was impaled on the horns of a Russian default of 1998, the collapse of Long dilemma. If the government paid the true Term Capital Management through to the value for these near worthless assets, the collapse of the tech.com and share market banks that held them would be forced to take bubble in 2000, and the subprime crisis of massive losses. On the other hand, if the 2007—the same policy has been pursued. government paid the inflated values Interest rates have been cut and credit necessary to avoid these bank losses, the conditions eased. $700 billion would be but a drop in the bucket. Throughout his term, Greenspan insisted In other words, Paulson's change of mind the Fed's task was not to try to prevent the expressed his recognition that the crisis was formation of asset bubbles or to deflate them so large that the previous 20-year policy of when they emerged, but to clean up after pumping up asset values could no longer be they collapsed. In practice, this meant that continued. Whole sections of capital were the collapse of one bubble would be going to have to be liquidated. Thus the countered by the creation of another through TARP funds are being used to recapitalise the provision of cheap credit. banks and other financial institutions—at Bernanke shares Greenspan's outlook. least those deemed worthy of saving, or with He defined his position in September 2004 the closest connections and ties to the thus: "For the Fed to interfere with security administration—while others will be allowed speculation is neither desirable nor feasible. ... to go to the wall. [I]f a sudden correction in asset prices does In short, the attempt to evade the laws of occur, the Fed's first responsibility is ... to the capitalist economy through the use of provide ample liquidity until the crisis has monetary policy has come to an end. Those passed" [cited in Peter L. Bernstein, laws are now asserting themselves as they Introduction to Friedman and Schwartz, The did in the 1930s, in the same manner that, as Great Contraction, Princeton 2008]. Marx explained, the law of gravity asserts For the 20-year period following the stock itself when a house collapses about our ears. market collapse of 1987 this modus operandi Two fundamental contradictions appeared to be effective. Now it has broken Having pointed to the extent and down. In the 16 months since the current consequences of the massive devalorisation crisis first emerged, various attempts have of capital that has now begun, we now need been made to halt it through bailout to deal with the following questions. What are operations. Unlike the experiences of the the origins of this crisis? How did it develop to 1980s, the 1990s and the early years of the the extent that it now threatens the world's present decade, they have, however, failed. people with the kind of economic, social and In early October, the US Congress political disasters that characterised the granted Treasury Secretary Henry Paulson 1930s? $700 billion in bailout funds under the Is this a crisis of policy, of inherent greed, Troubled Asset Relief Program (TARP). a product of slack regulation by central The TARP's stated purpose was to buy bankers and governments? Are we perhaps up so-called "toxic assets" from the banks all to blame, as one rather ignorant academic and major financial institutions. In effect this wrote in his column published in the meant using the resources of the US Australian on Monday November 24, or does Treasury to maintain fictional asset values the crisis arise out of contradictions inherent across the board. But on November 12, in the foundations of the capitalist mode of barely a month after the passage of the production? 9 In order to provide answers, we need, fixed currency exchange rates, and a sharp once again, to consider some ABCs of fall in the rate of profit in every major Marxist political economy. capitalist country. This profit decline led to a Capitalist society is marked by a recession in 1974 followed by the onset of profound contradiction: between the material stagflation—high inflation combined with high development of the productive forces, which it unemployment—at the end of the decade. promotes, and the social relations within The Bretton Woods Agreement was one which this development takes place. of the pillars of the post-war economic order. If we study the economic history of the It fixed the value of national currencies in past 150 years this contradiction—between terms of the US dollar, which, in turn, was the material productive forces and the social tied to gold at the rate of $35 per ounce. The relations of production—has emerged in two agreement was put together after more than forms. The first is the contradiction between two years of sustained work in British and the global development of the productive American government circles to ensure the forces under capitalism, and the nation-state resumption of world trade, the fear being that system in which the political power of the if this were not done and there was a return bourgeoisie is grounded. That contradiction, to depression, revolution would erupt. as we discussed in relation to the recent G20 The agreement did its work, resulting in meeting, has once again assumed an acute an expansion of trade and then investment. form. However, this very expansion exposed the The second is the contradiction between contradiction lying at the heart of the Bretton the growth of the productive forces on the Woods system—between a global economic one hand and the social relations of capitalist expansion and currency systems still production, based on the private ownership of grounded on the national state. the means of production and the exploitation For a time, the overwhelming economic of the working class through the system of superiority of the United States was able to wage labour, on the other. This contradiction overcome this contradiction as the dollar, manifests itself in the tendency of the rate of backed by gold, functioned, in effect, as world profit to fall and the crises produced by it. money. But by the end of the 1960s a crisis The tendency of the rate of profit to fall was developing. It took the form of a dollar arises from the fact that while labour is the overhang—the dollars outside the United sole source of surplus value, and therefore States in world markets vastly exceeded the profit, expenditure on labour power comprises amount of gold held in Fort Knox that was an ever smaller portion of the total capital supposed to be backing them. outlaid by the capitalist. This is an expression Various figures indicate what was of the continuing growth of the productive underway. By 1968 the volume of dollars forces and increased productivity of labour. circulating outside the United States had But what it means is that to expand the total grown to $38.5 billion, from just $5 billion in capital at the same rate, the same amount of 1951. This amounted to $23 billion more than labour must produce an ever-increasing US gold reserves. amount of surplus value. Moreover, the money circulating outside Let us utilise these insights to assess the the US provided the basis for a new financial present crisis. The origins of the crisis lie in network, the so-called euro-dollar market. the crisis of capitalism that erupted at the Banks found dollar resources were available beginning of the 1970s—the end of the post- that were outside the control of national war boom—and the way it was overcome. authorities. Throughout the 1960s attempts The demise of the post-war boom was were made by the Kennedy, Johnson and marked by two major developments: the Nixon administrations as well as by British collapse of the Bretton Woods Agreement of authorities to control the international 1944, which had ushered in the system of movements of money and maintain the 10 stability of the Bretton Woods system. But from the working class, so boosting profits. their attempts were thwarted by the But after a quarter of a century, the process operations of the euro-dollar market. of catching up was coming to an end. With efforts to regulate being undermined In 1974-75, after a period of rapid at every turn, US President Nixon cut the inflation, the world economy entered a Gordian knot and removed the gold backing recession. Recessions had developed during from the US dollar on August 15, 1971. The the boom, but they had given way to periods alternatives, such as imposing a recession in of even greater economic growth. The curve the US to reduce the trade deficit, clamps on of capitalist development had continued to US foreign investment and a reduction in US move up. global military activities at the height of the That was not what occurred after the Vietnam War, aimed at reducing the outflow recession of 1974-75. Pre-recession of dollars, were simply not viable. conditions were not restored and world After August 1971 attempts to maintain a capitalism entered a period of much slower regulated currency system rapidly collapsed growth, marked by rising unemployment and and in 1973 the floating dollar regime began. inflation—a phenomenon dubbed "stagflation". In the final analysis, Bretton Woods Keynesian measures, based on government foundered because the very expansion of spending to boost the economy, proved to be world trade and world investment to which it of no avail. In fact, they only worsened the had given rise—a global expansion of situation by increasing the rate of inflation. capital—could not be contained within a Companies failed to respond to increases in system of national regulation. The effective demand by boosting production, as contradiction between world economy and Keynesian theory suggested they should, but the nation-state system had reasserted itself. sought instead to lift their depressed profit We now need to trace the development rates by increasing prices while looking, at of the other central contradiction. the same time, to cutting their workforce. Following the immediate post-war These great shifts in the economic base economic and political restabilisation, the of society, starting from the mid-1960s, gave ensuing boom seemed like a golden age, rise, as Marx had explained they would, to which would continue indefinitely. Now, it was far-reaching political shifts. The period from claimed, the seemingly intractable problems 1968, beginning with the May-June events in that had beset world capitalism after the France, to 1975, and the downfall of the right- eruption of World War I in 1914 could be wing Salazar dictatorship in Portugal, was overcome, or at least kept at bay. This would one of immense revolutionary upheavals. be done through the judicious use of so- In every case, however, the struggles of called Keynesian techniques of economic the working class were betrayed by its social management, based on the regulation of democratic and Stalinist leaderships, with the global capital flows on the one hand and the assistance of various radical tendencies. All use of demand-management techniques by of them promoted the illusion, in one way or national governments on the other. another, that the bureaucratic apparatuses However, the "golden age" lasted barely dominating the working class could be a generation. By the end of the 1960s the pressured to the left. rate of profit was beginning to fall. This The betrayal of the revolutionary strivings tendency had been temporarily overcome by of millions of workers around the world, and the extension of the Fordist system of the resultant restabilisation of capitalist rule, assembly-line production from the United did not signify that the economic States to the rest of the world. Assembly line contradictions lying at the base of this political production, through the enormous increases turbulence had been overcome. How they in productivity it effected, had increased the were temporarily alleviated, and the way the rate at which surplus value could be extracted measures that were adopted led to their 11 eruption once again, but in an even more of certainty could be brought into the explosive form, constitutes the history of the production process. world economy and the global financial Financial derivatives mark a new system from the 1970s to the present day. development. No longer do contracts relate to The collapse of the Bretton Woods physical commodities, but to money and Agreement in 1971 marked the end of the other financial assets. In 1972, the year after dollar's role as a stable anchor of the world the demise of the Bretton Woods Agreement, monetary system. More than that, it signified a market in currency futures was launched on that no national currency could take on that the Chicago Mercantile Exchange. This role. market enabled importers and exporters, as Many here will never have experienced well as financial institutions, to hedge against fixed exchange rates. But when I was a boy, currency fluctuations, under conditions where my grandfather would send me one British currency movements could effectively wipe pound every year for Christmas, and I could out profits from business deals overnight. exchange that pound, each year, for exactly The currency futures contract was only 25 Australian shillings. The rate never one of many new financial derivatives that changed. The same was true of every were to develop in the next period. currency. But in 1971 this certainty came to In 1973 a major development occurred an end. when two academics, Fischer Black and In the early 1970s, in the absence of a Myron Scholes, developed a formula for firm foundation for the international monetary pricing options. While a futures contract locks system, new mechanisms were developed to in participants to buying or selling, an option cover the risks arising from the new currency is a kind of insurance. In return for the movements. Consider an Australian importer payment of a premium, it gives the buyer the of a piece of machinery. A deal that would right to buy or sell an asset at a certain price have seemed very good, and potentially within a specified period. If prices do not highly profitable, when the machine was move in the way that was anticipated, then ordered from, say, the United States, could the option has no value and the buyer loses result in a major loss if the Australian dollar only the premium. In 1973 the Chicago had lost ground against the US dollar by the Options Exchange was established for time full payment became due, on delivery, trading, and in 1975 the Chicago Board of six months later. Trade introduced the first interest rates It is from this period that we can trace the futures contract. rise of financial derivatives. Options provided the means for making A derivative is defined as a financial big profits, as we can see from the following contract or financial instrument, the value of numerical example. A purchaser buys an which is derived from the value of something option to buy a share for $50 in six months else. time. The cost of the option is $5. The outlay Derivatives have existed for a long time. for an option on 100 shares will therefore be The most well known are futures contracts, in $500. Suppose that after six months the price which a contract is made to deliver a certain of the share has risen to $60. The purchaser quantity of a commodity at a certain price at a then exercises the option and makes a profit certain time. These contracts were developed of $5 on each share: $60 minus $50 minus in the markets for agricultural products to try the $5 per option. This brings a total profit of to eliminate the effect of movements in price $500 on an outlay of $500, that is, a profit between the time when a crop was sown and rate of 100 percent. when it was brought to market. If the price at Consider what would have happened if which the crops were to be sold could be the purchaser instead simply bought 100 fixed in a futures contract, then some degree shares for $50 each and held them for six months. The profit in that case would be 12 $1,000 (the $10 increase in the share price amount—the value of the underlying asset on multiplied by 100) on an outlay of $5,000, that which the derivative is based—for OTC is, at a rate of 20 percent. The use of the contracts was $683.7 trillion at the end of option has yielded a much higher rate of profit. June 2008. This is an amount equivalent to By the same token, if the shares had more than ten times world output. Thirty-five fallen to say $49, rather than risen to $60, years ago, in 1973, financial derivatives were then the option purchaser would have lost virtually non-existent. $500, a capital loss of 100 percent, whereas The daily turnover of global currency the share purchaser who held the shares for markets has increased 50-fold since 1980, six months would have only lost $100 or 2 and now stands at about $1.9 trillion per day. percent of his or her original investment of Of this, two thirds is transacted in derivatives $5,000. Options offer greater rewards and markets and three quarters of this derivative also greater risks. trade, that is, half the overall market, is With increased trading in options after foreign exchange swaps. 1973, other types of derivatives were The financialisation of the American developed, including the currency swap, in economy which buyers could swap bonds issued in one As we have seen, one impetus for the currency with bonds in another, depending on rise of derivatives came from the uncertainty their assessment of currency movements. generated by the collapse of the Bretton Then came the interest rate swap, in which Woods system and the increased risk posed fixed interest rate payments could be by currency fluctuations. swapped with variable rate payments and There is another, even more powerful vice versa. In the last decade, the credit force at work. This arose from changes in the default swap has emerged, in which the mode of accumulation over the past three holder can insure against the issuer of a bond decades, above all in the United States. defaulting on payment. These contracts can When Nixon removed the gold backing be made through an exchange, or, as has from the US dollar in 1971 his intention was increasingly been the case, in arrangements to maintain the financial dominance of between two parties in so-called over the American capitalism. But by the end of the counter (OTC) agreements. 1970s, that was far from assured. The value While their origins lie in the attempt to of the dollar fell sharply, profits were declining, protect against risk, derivatives become a the stock market was down and the US source of speculation, in which vast profits economy was in the grip of stagflation. can be made from correctly judging the In October 1979 Paul Volcker—who has movements of financial variables. Myriad recently been selected by President-elect statistics indicate the explosive growth of Obama to be one of his key economic these financial instruments over the past advisers—was appointed to the position of three decades. chairman of the US Federal Reserve Board. Foreign exchange transactions in the Volcker embarked on a program of interest world economy increased from $15 billion per rate hikes under the banner of anti-inflation. day in 1973 to $80 billion per day in 1980 and The "Volcker shock," as it became known, $1.26 trillion by 1995. In 1973 world trade in sent interest rates to record highs and led to goods and services constituted 15 percent of the deepest recession since the 1930s. It was these transactions. In 1995 it constituted just accompanied by an offensive against the 2 percent. This explosion in foreign currency working class, starting with the Chrysler dealings has been mainly the result of bailout in 1979 and the smashing of the air financial, not trade, transactions. traffic controllers strike in 1981 and The growth of derivatives has been even continuing right through the 1980s. Millions of more spectacular. According to the Bank for jobs were destroyed and whole sections of International Settlements, the notional industry wiped out. 13 The result was a transformation in the rates in the US without worrying about structure of American capitalism. From the inflation. end of the Civil War in 1865, American Cheaper credit fueled various asset capitalism's rise to power had been based on bubbles—the share market bubble, the its industrial prowess. American methods of dot.com bubble and the housing bubble—that production had proven to be the most efficient financed the debt, while helping to sustain US and the most profitable in the world. consumption levels in the absence of real That was no longer the case. Thus the wage increases. At the same time, Chinese essence of the Volcker measures was to put authorities invested their trade surpluses in in place a new regime of accumulation based US financial assets, in order to keep down on the expansion of finance capital. the value of the yuan against the dollar and The road to this new mode of ensure the maintenance of export markets. accumulation was by no means smooth. The This also helped keep US interest rates low recession of 1981-82 was followed by a slow and sustain the supply of cheap credit, which, recovery, and while the stock market started in turn, sustained the asset bubbles. to rise from 1982 onwards, it crashed in In 1982 the profits of finance companies October 1987. The decade finished with a amounted to 5 percent of total corporate crisis of the savings and loans banks, profits after tax. By 2007 their share had risen requiring a bailout of between $150 and $200 to 41 percent. This transformation—the billion, and the onset of another recession. financialisation of the American economy— The liquidation of the Soviet Union in has had vast implications for the process of 1991-92 and the decision by the Chinese capital accumulation and the growth of debt Stalinist regime to open the way for the in the US economy. integration of the Chinese economy, and In previous periods, debt was incurred by above all the multi-millioned Chinese working industry in order to finance its expansion. But class, into the circuit of global capital, marked with the growing importance of the finance a major turning point. It was these events that sector, debt has been increasingly incurred to made possible a mode of accumulation finance further financial activity. based on finance capital. The buying and selling of securities The opening up of China, with labour based on assets became the new road to costs one thirtieth of those in the US and wealth accumulation. In 1995 the dollar value other major capitalist countries, provided the of asset-backed securities stood at $108 basis for an expansion in the mass of surplus billion. By the year 2000, at the height of the value extracted by capital from the working share market bubble, it was $1.07 trillion. It class. In a recent speech hailing the virtues of reached $1.1 trillion in 2005 and $1.23 trillion globalisation, European Commissioner Peter in 2006. In other words, in the space of a Mandelson noted that a Chinese decade, the value of these securities had manufacturing firm producing an iPod increased ten-fold. receives only $4 for a device that retails for In other words, the financialisation of the $290 in the US. economy, that is, the appropriation of surplus Mandelson was pointing to a process in value rather than its extraction in the which surplus value extracted in China is then production process, became the other key distributed to other sections of capital in the factor in the explosive growth of derivatives. form of license fees, rents on shopping In their valuable study Capitalism and centres, and interest to banks and financial Derivatives, the authors, Dick Bryan and institutions. Michael Rafferty from the University of This relationship with China formed a Sydney, point to two essential functions kind of virtuous economic circle. Cheap performed by derivatives. manufactured goods kept down the rate of First, there is what they call a "binding" inflation, allowing the Fed to lower interest function, in which a derivative links assets in 14 the present to assets in the future. The rise of away with, or somehow curbed, then these derivatives was bound up with the economic and financial stability could be increased uncertainty and risk generated by restored. the demise of the fixed currency regime. Of course, like every other financial asset, Under Bretton Woods, the national state kept derivatives have certainly become a vehicle its currency fixed, providing stability for for speculation, with disastrous capital involved in international financial consequences. But simply to focus on this is transactions. When that was no longer the to ignore the fact that they arose as a means case, new mechanisms had to be developed to try to overcome objective contradictions in to provide certainty and overcome risks. the capitalist economy, caused by the Derivatives also have what these authors breakdown of the previous system of call a "blending" function. That is, they make regulation—to which the would-be reformers possible the commensuration of different of the capitalist system would now like to types of financial assets. For example, a return. contract may involve the swapping of shares The history of derivatives recalls for a company bond, or vice versa. This may comments made by Marx on the growth of or may not be exercised, depending on the credit, which likewise arose as an attempt to relative movement of interest rates in the overcome objective contradictions within the bond market and of the dividend paid in capitalist economy, but whose development shares. Shares and debt both represent served to impart to these contradictions an claims on future earnings, but interest and even more explosive form. dividends may move in different directions "In its first stages," Marx wrote, "this and, depending on that movement, the holder system [credit] furtively creeps in as the of one or other asset may be disadvantaged. humble assistant of accumulation ... but it That risk can be countered by using soon becomes a new and terrible weapon in derivatives. the battle of competition and is finally The blending function of derivatives transformed into an enormous social enables the holder of a financial asset to mechanism for the centralisation of capitals" hedge against adverse movements in one or [Marx, Capital Volume I pp. 777-778]. another financial variable, or to take If we were to adapt Marx's comments to advantage of such movements. The risk to the present day, we could say that derivatives finance capital is that once money is invested first entered the scene as the humble servant in a particular form of financial asset, any of finance capital, offering to protect it against adverse movement in financial markets can risk, but ended up creating the risk of the see this asset receive a lesser rate of return greatest financial disaster in history. than other financial assets, or even suffer a A turning point in the curve of loss. capitalist development The use of derivatives has the effect of There is another process we must giving one asset the characteristics of examine to round out our review of another. In other words, finance capital is not financialisation. That is the phenomenon of tied to any particular form, but can develop a securitisation, which has played such a more universal character. And this becomes crucial role in the mortgage crisis. vitally important in conditions where the In the days of national regulation, US appropriation of profit—the basis for the banks operated according to the so-called "3- accumulation of capital—is increasingly 6-3 model". Money borrowed at 3 percent dependent on financial market operations. was lent out at 6 percent, whereupon the Our examination of the rise of derivatives bank manager could go to the golf course at should dispel the notion that they were 3 o'clock. somehow developed purely as a vehicle for This model broke down under the impact speculation, and that if only they were done of the rapid interest rate hikes at the 15 beginning of the 1980s and the soon as the mortgage was finalised it would financialisation of the economy that followed. be sold off as part of a securitised package. Banks now had to compete with other The bank would receive income in fees from financial institutions for funds. But that was the sale, enabling it to finance new not possible on the basis of the old model, mortgages and repeat the process. Capital where loans were originated and then held by could be turned over many times faster than the bank, which then recouped the interest before, with a resultant rise in profits. payments. The originate-and-hold model Mortgages were increasingly financed meant that large amounts of capital were tied without regard to capacity to pay, because up for long periods of time. Banks and other the general assumption was that house financial institutions could increase their prices would continue to rise—not since the profits and remain competitive only to the 1930s had there been a uniform fall in home extent that they could turn over their capital at prices across the United States—so that a faster rate. mortgages could always be refinanced or, The way forward lay in transforming the failing that, the house could be sold for a financial assets they held into bonds, and profit. selling them off. This, though, presented We have now examined the various another problem because, unlike the bonds components of this crisis. What then are its issued by a company such as IBM or General historical implications? The first point is that it Motors, the underlying asset, in this case is not merely a product of massive losses. mortgages, are not uniform. How then could That would be one thing. But here we have the bank convert a pool of differentiated the collapse of a whole regime of mortgages into a security that could be traded accumulation, a regime that developed in like a bond, so that investors would only have response to the last crisis of accumulation in to examine the interest rate and the maturity the 1970s. date, without being concerned with the The banks and financial institutions can security of the underlying asset? no longer continue on the basis of the The solution was to create a pool of originate-and-distribute model. Nor can they mortgages and then issue a series of bonds return to the previous model. on which interest was paid out of the money We have arrived at a turning point in coming in from mortgage repayments. The what Leon Trotsky called the "curve of pool was divided up in a series of tranches, capitalist development". Following the crisis with interest rates paid according to the level of the 1970s and the downswing of the 1980s, of risk of each tranche, the least secure a new upswing began in the 1990s, based on paying the highest rates. Credit rating the integration of ultra-cheap labour into the agencies supplied the risk assessment. global circuits of capital. This facilitated a new These agencies developed various models of mode of accumulation—highly unstable as risk, on which they based the ratings. In many the financial crises of the past 20 years cases the investment banks issuing the reveal—but an upswing, nonetheless. It has bonds worked closely with the agencies to now come to a shattering end. ensure that the bonds were structured in such The vast changes that occurred in the a way as to receive the best rating. And global capitalist economy in the past three investment banks like Lehman Brothers could, decades failed to resolve the fundamental and did, sell these bonds around the world to contradictions that had erupted in the late German banks, British banks, or to Australian 1960s and early 1970s. These contradictions local councils seeking to boost their funds. were temporarily suppressed, only to re- The process of securitisation replaced emerge in an even more explosive form. the "originate-and-hold" model with "originate- To return to the ABCs of Marxism: the and-distribute". The originators had no need material productive forces have once again to undertake a risk assessment, because as come into conflict with the social relations of 16 production, giving rise to a new period of After denouncing the stock market for social revolution, in which the fate of the having the "temperament of an overindulged working class, and humanity as a whole, will 2-year-old", Klein writes: "One thing we know be decided. It is for precisely such a period for certain is that the market will react that we must now prepare. violently to any signal that there is a new Above all, this requires the development sheriff in town who will impose serious of a program and perspective—the program regulation, invest in people and cut off the of international socialism—on which the free money for corporations. In short, the working class must advance its own markets can be relied on to vote in precisely independent interests. It can only be the opposite way that Americans have just established and, most importantly, fought for, voted. ... There is no way to reconcile the through a clear differentiation from the public's vote for change with the market's policies advanced by the various "left" foot-stomping for more of the same. Any and reformers and radical tendencies. all moves to change course will be met with All of them, in one way or another, short-term market shocks. The good news is maintain a profound faith in the permanence that once it is clear that the new rules will be of the capitalist order, seeking to block the applied across the board and with fairness, political development of the working class. the market will stabilize." They do this either by downplaying the extent Not surprisingly, this call to put a bit of and significance of the global crisis, or by regulatory stick about the place is coupled insisting it can be overcome through a series with friendly advice to the incoming president. of reforms. Let us examine the positions of Klein politely raises that the shocks of the some of them. past three months provide him with the For would-be Keynesians, such as the opportunity to honour the wishes of the writer Naomi Klein, the source of the crisis is electorate and "do the hard stuff first". political. It lies in the decisions made to A common characteristic of many would- abolish the regulatory regime that operated in be "left" reformers is their refusal to draw any the post-war period. Any analysis that goes lessons from history or to critically examine further, that recognises that the collapse of the logic of their political perspectives. the post-war system of regulation was not a The British anti-debt campaigner Ann product of ideology, but of deep-seated Pettifor, writing in the Guardian of October 21, contradictions within the capitalist system calls for a "great transformation" to reverse itself, is dismissed by Ms Klein as the most pernicious elements of the failed "fundamentalism," on a par with the "globalisation" experiment. fundamentalism of free market ideology or of The financial markets, she insists, must Stalinism. be "tamed", the national state "upsized" so No doubt Klein genuinely holds such that governments can make effective views. But they serve very definite political decisions, and the single global market and class interests. Their role is to divert "downsized" and replaced with an those people who are being radicalised by international trading system based on the this crisis, especially young people, from concept of "appropriate scale". seeking a genuine revolutionary socialist Ms Pettifor's prescriptions recall nothing perspective. so clearly as the "left" policies of the right- According to Klein, tougher regulations wing and fascist movements of the 1930s, should be put in place and all will be well. including that led by Oswald Mosley in Britain, This is the theme of her article published in who spent an early part of his career as a the December 1 edition of the Nation entitled, Labour Party "left". Those movements "In Praise of a Rocky Transition"—in contrast likewise denounced the world market in with the incoming Obama administration's call favour of the national state and gave vent to for a "seamless" transition. 17 their hostility toward "globalisation," or some kind of economic "model," which most "cosmopolitanism" as it was then called. now be exchanged for a new one. Pettifor's call for the power of national In its statement on the economic crisis, governments to be strengthened may well the French-based organisation ATTAC, well take place as the logic of the bailout process known for advocating a turnover tax on all begins to unfold. The banking crisis has international financial transactions, called for already led to deep splits among the a new paradigm "where finance has to European governments, with each of them contribute to social justice, economic stability stepping forward to defend their "own" and sustainable development." The present institutions. And if the US administration does "model" had been completely discredited and bail out the auto companies, there could well clear consequences had to be drawn so that be similar moves by other governments to "political and economic decision-makers fully defend their own "national champions". turn around this unsustainable and un- In other words, while all national equitable financial system towards the needs governments proclaim their opposition to the of people, equity and sustainability". erection of the kind of tariff barriers that In recent years, organisations such as caused such devastation in the 1930s, an ATTAC that were involved in the so-called equally destructive form of protectionism may anti-globalisation movements advanced the develop as they each assume increased slogan "Another world is possible," creating powers to defend their "own" industries. And the illusion that, in some way, they might be Pettifor's call for an "appropriate scale" in for the ending of the capitalist system. In its international trading is reminiscent of the latest statement ATTAC has refurbished the trading blocs that formed in the wake of the slogan to read "Another finance system is collapse of the global market in the 1930s--a possible: Stability and solidarity before development that culminated in war. profits." The Keynesian "lefts" support the Its call for the setting up of an institution implementation of an economic stimulus under the auspices of the United Nations to package and anxiously await the coming to "strictly regulate and re-orient the financial power of the Obama administration on system" will prove no more successful than January 20. the attempts in the UN to prevent the United However, the accelerating economic States from launching its criminal invasion of crisis is developing well beyond the scope of Iraq in 2003. the president-elect's proposed measures. On One of the most prominent intellectuals November 22, Obama announced an of the Communist Party of India (Marxist), economic plan to create 2.5 million jobs in Prabhat Patnaik, gives a "left" slant to the 2009 and 2010. But it has already been Keynesian program of increased government rendered a dead letter by a statement issued spending. In a "Perspective on the Crisis" on November 7 from the Bureau of Labor published on October 13 he writes that the Statistics. need of the hour is not just the injection of According to the BLS: "Employment has liquidity into the world economy, but the fallen by 1.2 million in the first 10 months of injection of demand through increased 2008, over half of the decrease has occurred spending. in the past 3 months... Over the past 12 Moreover, he continues, "the general months, the number of unemployed persons objective of such spending must be the has increased by 2.8 million, and the reversal of the squeeze on the living unemployment rate has risen by 1.7 standards of the ordinary people everywhere percentage points." in the world that has been a feature of the The would-be reformers continually world economy in the last several years". The attempt to portray what they call the "new growth stimulus" must come not from "neoliberal" regime of the past 30 years as some new speculative bubble but from 18 "enlarged government expenditure that develop on the scale of the 1930s because directly improves the livelihoods of the people, "the state will intervene". both in the advanced and in the developing At an SWP-organised conference on countries". "Marxism and the Economic Crisis" last To advance the notion that governments month, long-time radical Robin Blackburn can somehow be pressured into lifting living insisted that all that was possible was a standards and that this would alleviate the series of reforms of a "state capitalist nature". crisis of the capitalist economy is to blind the The scepticism and outright cynicism working class and the oppressed masses as marking the outlook of the middle class to the real situation they confront. radical milieu was articulated most clearly in a At the heart of the crisis is the over- comment, entitled "Marxism and the accumulation of fictitious capital in relation to Economic Crisis," by Rohini Hensman, the surplus value extracted from the world posted on the website, Countercurrents.Org, working class. This means that any on October 30. improvement in living standards will "Some socialists," she wrote, "have exacerbate the crisis of profitability. That is suggested that this is the end of capitalism, why governments around the world, while but the notion that the divided, confused and handing out billions to the banks and financial demoralised workers of the world are ready to institutions, will seek to drive down further the take over and run the world economy sounds living standards of the working class, as the highly unrealistic. To adapt a metaphor used negotiations in the United States over the by Marx, that would be like performing a proposed bailout for the major car producers Caesarian section to deliver a 16-week-old clearly demonstrate. foetus: it simply would not survive. And until it The perspective offered by the various develops sufficiently to be able to do so, we radical tendencies is no different from that of have to ensure the health of the capitalist the left Keynesians. In Australia, the Socialist mother." Alliance is so confident of the capacity of the Ms Hensman is only summing up more state to deal with the global final crisis that a clearly and more openly the position of all the perspectives document prepared for its radicals: the working class is simply not recent sixth national conference made no capable of being won to, and advancing, the reference to it, until the omission was noted in fight for socialism. In the 19th century, Marx a letter to the group's national executive. developed his scientific socialist outlook in The Socialist Workers Party in Britain, constant struggle against the various forms of which tries to project itself as a "Marxist" utopian socialism that emerged at the dawn organisation, rejects any prospect of building of capitalist development. Today, as the profit an independent revolutionary party of the system enters its death agony, the radicals working class. According to a statement step forward with what can only be described issued by the International Socialist as a program of "utopian capitalism" to try to Tendency, to which the British SWP is block the development of a mass socialist affiliated, the task is to develop "a broader movement. radical left that can begin to present a The perspective of the International credible and principled alternative to Committee of the Fourth International capitalism". I have spent some time making a critique Such an alliance will undoubtedly contain of these positions because it helps illuminate Keynesian "lefts" and adherents of groups more clearly the perspective on which our such as ATTAC, all of whom are deeply movement, the International Committee of the hostile to socialism. In any case, there is no Fourth International, bases its struggle. great urgency since, according to SWP How is this crisis going to develop? This leader Chris Harman, the crisis will not question quite naturally springs to mind at the conclusion of a lecture such as this. In 19 considering it, I am reminded of a letter sent capitalist society, including in the first line the by Marx to his lifelong collaborator Frederick United States. We cannot postpone or modify Engels in which he outlined to Engels the objective conditions which don't depend on us. third volume of his monumental work, Capital. We cannot guarantee that the masses will At the end of the letter, after he had solve the crisis; but we must express the discussed the rate of profit, the equalisation situation as it is, and that is the task of the of profit, credit, interest, merchants' capital program." and the rate of surplus value, among other There is no question that there is great things, Marx wrote: "[W]e have the class political confusion in the working class. How struggle, as the conclusion in which the could there not be? For decades the working movement and disintegration of the whole class has been dominated by the social shit resolves itself." democratic, Stalinist and trade union I raise this rather blunt assessment in bureaucracies, all of which have waged a order to emphasise a very important point. continuous war, ideological and physical, We have reached a point in history where against socialism. once again the material forces of production Yes there is great confusion. But there is have come into violent conflict with the social a much more powerful factor: the greatest relations of capitalism within which they have financial crisis since the Great Depression, hitherto developed. Now begins an era of which is creating the material conditions to social revolution in which men become overcome that confusion. Our movement, and conscious of this conflict and fight it out. That the program for which it fights, can and must is the significance of the recent occupation of become a decisive factor in this process. That Republic Doors and Windows by workers in is our starting point. Chicago and the mass demonstrations in The task of the revolutionist, Trotsky Iceland. once wrote, is to extract from every given How, then, do we proceed? Do we have historical situation "the maximum that it is some crystal ball that will tell us exactly what capable of rendering toward the will happen and when? Of course not. And in advancement of the revolutionary class". Any any case, the situation will not be determined outlook that begins, not from the present simply by the relationship of abstract objective situation, but rather from the economic categories. These categories are confusions built up over previous decades, themselves only the expression of the necessarily becomes, in this period, a source movement of social classes. The class of further confusion and a political prop for struggle, for so long hidden and concealed, is the crumbling capitalist order. going to assume more open forms. Our perspective is grounded on an We begin our work, not from the present objective assessment of the historical crisis of level of consciousness of the working class, capitalism. In the first place, therefore, it but from the objective situation and the tasks seeks to rearm the working class with the that it poses. understanding that its task is the world Trotsky emphasised the importance of socialist revolution and that only on this basis this approach in preparing for the founding of can the interests of humanity as a whole be the Fourth International in 1938: "The advanced. program must express the objective tasks of It is painfully clear that there is no way the working class rather than the out of this crisis on a national basis. The backwardness of the workers. It must reflect notion that some areas of the world could society as it is, and not the backwardness of "decouple" from its effects lasted about five the working class. It is an instrument to minutes once it began to gather pace. The overcome and vanquish the backwardness. global financial and economic crisis can only That is why we must express in our program be resolved on an international scale. And the the whole acuteness of the social crises of 20 material and social forces to accomplish this own accordingly, e.g. lists of current prices, have already been forged by capitalism itself. rates of exchange, interconnections between Globalised production has created a those active in commerce through the mails, global working class whose material interests telegraphs etc. (the means of communication are determined by the struggle against global must grow at the same time.) This means that, capital. There is no road forward for the although the total supply and demand are American, Australian and European working independent of the actions of each individual, class outside its unification with the struggles everyone attempts to inform himself about of the working class in China, India, Asia and them, and this knowledge then reacts back in Africa. Likewise, there is no way forward in practice on the total supply and demand. these regions on the basis of any kind of Although on the given standpoint, alienation national development. is not overcome by these means, The program for the unification of the nevertheless relations and connections are working class is the world socialist revolution: introduced thereby which include the that is, the overthrow of the capitalist ruling possibility of suspending the old standpoint." class and the development of a planned Look through Marx's somewhat Hegelian world economy based on the democratic language and you can see that he is referring decision-making of the world's producers. No to precisely the kind of developments that longer will millions of people have their lives have now taken place, and pointing to their turned upside down, and the future of their role in establishing the conditions for a children destroyed, by the blind workings of socialist economy. the capitalist market and the drive for profit. The widening and deepening of They themselves will take part in the international financial markets, the result not organisation of economic life. least of derivatives trading, has created a The fulfilment of this perspective does system that provides virtually instantaneous not mean that the working class has to come information about global developments, which to power all at once and everywhere. What it then are factored into credit evaluations and does mean is that the political struggle of the funding decisions. working class in every country—the fight for a At the same time transnational workers' government and the establishment corporations, responsible for an ever- of an economy in which the banks, major increasing share of global production, plan financial institutions and key industries are their operations across continents and time publicly owned and democratically zones. And these vast operations are co- controlled—must be grounded on this global ordinated and organised by workers with all perspective. manner of skills and capacities. The problem An international economy in which the is not one of technology or information. It is market is replaced by the democratic political. These vast productive forces, decision-making of the world's people? How created and sustained by the physical and is that possible? What kind of complex intellectual labour of the world working class, infrastructure would have to be set in place to are subordinated to the irrational and realise such a goal? In fact, it has already destructive drives of the outmoded capitalist been established. profit system. They must be liberated so that One hundred and fifty years ago, Marx mankind can resume its historical progress. explained that as the market became That is the historical significance of this global increasing autonomous, standing like an alien economic crisis and of the international force over every individual, efforts inevitably program advanced by our movement to emerged to overcome that autonomy. resolve it. "[I]nstitutions emerge whereby each individual can acquire information about the activity of all others and attempt to adjust his 21