The global financial crisis of 2008 is truly a milestone event. No other since the crash of 1929, and subsequent great depression, has shown so clearly that the capitalist economy, despite its solid façade, can unravel very quickly and collapse. No other has illustrated so clearly the absurdity, the obsolescence, of letting the needs of capital accumulation determine humankind’s fate. The sudden panic of capital owners, the sudden disappearance of trillions of dollars, the great difficulties with which the governments of the world have wrestled to get a grip on the situation, cannot but have a great impact on the consciousness of the working population, which now will see its living conditions substantially deteriorate for no other reason than that human needs are subservient to the needs of capital.

Too much can be produced too cheaply so that massive layoffs, wage and benefit cuts, attacks on the environment in order to further reduce costs, etc., must be imposed so that capital, abstract value, can grow again; because that is the real, determinant, purpose of the capitalist economy.

Although a total collapse is unlikely in the short term, this event marks the beginning of a period of protracted crisis, from which there will be no escape. There will be temporary recoveries but not a new boom period. Either the crisis will run its course, which means allowing depression and war to destroy so much value that the conditions for profitable expansion can be purportedly restored, or a global revolution, and the abolition of value production will occur.

By the time you read this, you will have read or heard countless explanations of this crisis, most of which blame it on capitalist greed, bad management and Anglo-American “neo-liberalism.” Such “analyses” come mostly from the left of the capitalist spectrum. The right struggled to say anything coherent at all about the mess, and at times even parroted the left (as when John McCain railed against “Wall Street greed”). It’s clear that at times like this, the left becomes very important for capital. A critique of unfettered free market-capitalism and of the stupidity of giving tax cuts to billionaires is the only narrative left open, if blaming the capitalist system itself is to be avoided. It’s not capitalism but bad capitalists that have caused the problem, the left is essentially saying. The system can be saved through more regulation.

But while capitalist greed is permanent, capitalist crisis is not. While the bourgeois consensus has now nimbly shifted from “neo-liberalism” to “neo-Keynesianism” (in truth, Keynesianism, as it is commonly understood - state-intervention in the economy and deficit-spending - has never gone away) and yesterday’s guru Greenspan was heaped with scorn and left making mea culpas on TV for having kept interest rates kept too low for too long, thereby allowing the US housing bubble, and its extension to Europe and other parts of the world, to swell, it is conveniently forgotten that this housing bubble, and the consumption it fueled, played an essential role in keeping the global economy humming over the past two decades.

IP predicted this crisis, but we were far from the only ones. Even some bourgeois economists saw it coming from afar. You don’t have to be a Marxist to understand that, when financial assets appreciate at a breakneck pace while there is no corresponding growth of the underlying value created in production, the exchange value of these assets will fall. Its fictitious character will at some point be revealed. The current recession is not caused by the financial panic; rather, it was the other way around: the economic downturn burst the financial bubble. The question is why, despite today’s tremendous productivity, the growth of value fell so short of what the credit expansion required. Or, to turn this around, why this financial expansion occurred in seeming indifference to the much slower pace of real economic growth. To these questions, the best answer bourgeois commentators can come up with is “human failure”: greed, sloppiness, stupidity, shortsightedness…which with better leaders, and with more oversight and regulation, will be cured…It’s not the system that’s at fault… The system pays them well to say just that.

And they may well believe it. Only Marx’s analysis of the value form and its immanent tendencies, allows us to answer the above questions.

Globalization, made possible by information-technology and the restructuring of the world economy following the end of the cold war, did give capitalism a new lease on life after the post-World War II boom ended in the 1970’s. Some say that the impressive expansion of the world economy since then was only caused by an expansion of credit, by an accumulation of debt. If that were true, the crash would have come much sooner. The credit expansion was indeed disproportionate, but the fact that it could go on for so long needs to be explained. This would not have been possible without a real expansion of value creation; “of productivity,” some would say, “resulting from technological innovation.” But if that is all there was to it, why are we in such a deep crisis? They do not see that a general rise of productivity not only means that more goods are being created, but also that these goods are made with ever less labor and that, the more surplus labor is already taken from that labor, the more difficult it becomes to squeeze more out of it. An acceleration of the general rate of productivity growth resulting from technological innovation tends to make the value of what is produced fall below the value of the capital advanced for its production. That threatens the very purpose of the economy: capital accumulation.

The expansion of real value creation took place because the rate of exploitation of labor power increased. Globalization not only made the capitalist world market more unified and thus wider and more efficient, but it also restructured production on a global assembly line, shifting an ever growing part of industrial production to what used to be backward areas that had barely participated in the global market. In this way, capital not only could expand the exploitation of cheap labor power but also, because of its very mobility, discourage working class resistance to exploitation everywhere, despite the falling value (labour time) of wages.

Moreover, globalization accelerated a redistribution of value in the market place. In the global economy, the most developed capitals, with the fastest rate of technological innovation and productivity growth, have a competitive advantage that allows them to sell their goods at a price above their value. In other words, much of the value they realize, is not really in their products, they get it on the global market.

Globalization therefore created huge profits in the most developed parts of the world, which encouraged capitalization under the assumption that their growth would continue unabated. But, as technological innovation spreads and generalizes, the quantity of labor, and thus of surplus value, in commodities also falls. Globalization was eating away at the roots of the expansion of profits. What became decisive to obtain then, more than ever, was access to, and dominance of, markets. Many companies, from shoes to semi-conductors, began to spend more on marketing than on production.

It was the hope of capitalism’s apologists that globalization would generate its own expanding market. And indeed, to some extent it did just that, the multiplier effect enriched and expanded the size of middle-income strata in many parts of the world. That too, encouraged a credit-expansion on the assumption of its continuation. However, the limit to the expansion of the market, generated by globalization, was revealed in the Asian crisis ten years ago. It showed that much of the profit resulting from exploitation in low wage countries could not profitably be reinvested in those countries.

The same issue arises today. Some are saying that countries such as India and China have made a lot of money through globalization. At the same time, the needs are great there. Why don’t they invest their surpluses in the expansion of their domestic market, which could stimulate the whole world economy? Yes, there are huge amounts of capital in places like India and China, and there are hundreds of millions of small peasants and land workers, and unemployed there, who possess nothing. But they have nothing that Chinese and Indian capital owners want, not even their labor power, unless it can be used to make goods for another, foreign, market.

The Asian financial crisis, which spread to Latin America and Russia, showed that the expansion of the domestic market in the countries recently embraced by globalization is strictly dependent on the expansion of their foreign markets. It also showed that deflation increasingly becomes the hallmark of the economic picture. The implosion of financial bubbles, the sharp devaluations and falling prices during and after the Asian chain event announced the return to center stage of capitalism’s insurmountable economic contradictions. In a context in which just about everywhere both the labor force and the means can be available to make almost anything very cheaply, over-accumulation, and thus prices falling below their value, becomes inevitable. This touches the weakest competitors with the least access to the global market first. The twin, contradictions, each reinforcing the other, of capitalism’s incapacity to generate a market that keeps pace with the expansion of its productive capacity, and the tendency of the value of what it produces to fall, first attack their profits and wages. So owners of capital in the weaker countries, confronted by the limitations of reinvesting their profits at home and by the danger of devaluations, increasingly moved their savings to where they would be safer in a deflation wave. In 2004, according to the figures of the Morgan Stanley bank, 80 % of the net-savings of the world were flowing to the US.

And there, it was more than welcome. The US, through its foreign policy, the projection of its military power, but also through its stable political system, now adorned with the friendly face of Barack Obama, is cultivating its status as the safe haven for capital. Even the implosion of the dot-com bubble in 2000, with its trillions of evaporated fortunes, hardly interrupted the stream of capital. A pattern had developed: the US economy lived, every year a bit more, beyond its means, buying more than selling, paying by printing more dollars, backed by public debt notes bought by the countries who sell more to it than they buy from it. Neither side can withdraw from this relationship. A swing to protectionism would plunge the US in depression, but the loss of the American market would be equally devastating for China and Japan.

At the same time, the profits made in the developed countries sought a safe haven where they could maintain and expand their value. After the dot-com-implosion revealed that the value of high tech companies was wildly overrated and with many traditional sectors such as automakers suffering from overcapacity, where could they go? The combined demand of international capital for safety pushed up the price of all assets in the US, and to a lesser extent elsewhere, that are part of “the hoard”: the part of capital that is not directly engaged in creating new value, but that is kept in reserve to move in or out of the productive process, depending on the profits, and the promise of profits. The rising demand for them in turn pushed up their prices. Their fast rate of appreciation attracted more capital, which again raised their prices and so on. The fundamental reason why financial assets expanded so much faster than the real economy is that the demand for them is unlimited while the demand for all other commodities is not. In a context of global overcapacity and a growing deflationary tendency, the effective demand for cars, computers or any other commodity is severely limited, but the demand for financial capital is not, because while “ … all commodities are perishable money; losing their value if they are not sold, money is the imperishable commodity.” (1)

The financial sector in the US and beyond was all too happy to accommodate this thirst for assets in which value could be “safely” parked, through the creation of all sorts of new financial commodities. The appreciation resulting from the rising demand for them seemingly confirmed that they lived up to their safe haven promise. As in all pyramid schemes, it was essential to keep that demand rising. The policies of the US, under Democratic as well as Republican administrations, were aimed at just that. The feeding of the housing bubble played an essential role in this. The increased “equity” in property values was used to underpin the exponential rise in both consumer and business debt that kept up global demand and kept deflation at bay in the most developed parts of the world economy. But to keep the demand for property values rising, the financial sector had to take increasingly desperate measures, such as sub-prime loans to buyers without means. Although it was clear from the onset that such loans would never be paid back and would be subject to default in the first downturn, there was no alternative to feeding the bubble.

Globalization expanded value creation but value can only remain value if it continues to valorize. Capital that does not mobilize, directly or indirectly, productive forces for the creation of new value, is bound to devalorize. This crisis shows that there is too much value requiring valorization, that the value of assets in which profits sought refuge is fictitious. But if the illusion had not been there, where would these profits have found refuge? The housing bubble postponed the crisis, if only for a few years.

Tens of trillions of dollars, euros, and other currencies, have disappeared since this credit crisis began and it’s far from over. This is terrible for those who lost them, but for the conditions of accumulation of capital this is, in itself, beneficial: less capitals crowd each other out, some big ones enrich themselves by swallowing the smaller ones at a bargain price, costs (oil, wages) are falling. But this isn’t enough to stop the unraveling. It can only be stopped (temporarily) when a massive creation of new debt backed by the lender of the last resort -- the state – props up the debt-saddled financial system and interest rates are lowered. So the crisis of fictitious capital is “solved”… by the creation of new fictitious capital. To the trillions spent to save the financial system will be added trillions in spending to contain the recession and prevent deflation from spreading to the strongest countries. The approval of Fed-Chairman Bernanke to an Obama-type stimulus program shortly before the elections already indicated where we’re heading. The left will clamor for a new “New Deal,” but “stagflation” – the combination of stagnation and dangerously rising inflation that brought the world economy to the brink of collapse in the 1970’s -- would be its best possible outcome. However, there will be increasing public spending to fight deflation. There will be a more direct intervention of the state, more state capitalism. But in the end, nothing will have changed: more debt will be created to counter-act the devalorization of old debt.

This will move the problem from confidence in banks and other financial enterprises to confidence in the lender of last resort, the state. In many countries that are in the grip of deflation, this confidence is already shredded. But in stronger countries, with big financial reserves, such as Japan and the US, the anchor and guardian of the global system, it is strengthened, at least in the short term, as capital seeks refuge from the uncertainty of the financial storms in state-backed securities. Thus, the demand for US treasury notes rose, despite its low yield, and so did the dollar. But in the somewhat longer term, as state debts swell to ever more enormous proportions, this confidence will become increasingly fragile. The capacity of the concerted action of governments to stop a collective run for the exit and thus prevent a collapse will become more doubtful, as the quantity of debt-notes and other money sloshing around will increasingly dwarf their combined financial reserves. The crisis will return and will likely make the present one look like child’s play.

Sander November 6, 2008

1. Karl Marx, Grundrisse: Foundations of the Critique of Political Economy (Rough Draft), Penguin Books, p. 149.
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