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The crash of 2008 and its revolutionary implications

Nick Beams opening report to SEP summer school – January 2009, Sydney, Australia

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The crash of 2008 and its revolutionary implications was originally published on the World Socialist Web Site in four parts 4-7 February 2009

Nick Beams opening report to SEP summer school

The crash of 2008 and its revolutionary implications
By Nick Beams The following is the opening report delivered by Nick Beams, national secretary of the Socialist Equality Party (Australia) and a member of the International Editorial Board of the WSWS, to a summer school held by the SEP in January, 2009 in Sydney. In beginning this report, I would urge that close attention be paid to its title: The crash of 2008 and its revolutionary implications. The use of the term “revolutionary” is not some kind of rhetorical flourish to be simply passed over. It is aimed at drawing attention to the historical implications of the global economic crisis and the new tasks it poses for our party. There have been many references in the media to the Great Depression of the 1930s, and there is no question that what is now underway is the most serious economic crisis since that time. But if one is to make historical comparisons, then I think the reference should be to 1914 rather than 1929. The year 1914 saw the breakdown of the world capitalist order. It took

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the form of a war, but underlying the eruption of military conflict among the European powers was the collapse of the economic foundations on which the previous relative stability had rested. The capitalist breakdown of 1914 was to usher in an epoch of revolutionary struggles, although this was far from apparent at the time. The name of Lenin was known only to a relative handful of people when, in 1915, he examined the objective components of a revolutionary situation, insisting, against the betrayals of the social democrats who had lined up in support of their “own” ruling classes, that the war had placed socialist revolution on the historical agenda. A breakdown of capitalism is not simply an economic crisis. It signifies the opening of a new epoch, in which the fate of society is decided for decades to come. We have entered such a period. The year 1914 signaled the first great breakdown of the capitalist order. The year 2008 marks the second. The year 2009 has opened with a graphic demonstration of the political consequences of this breakdown. The Israeli onslaught on Gaza is not just a continuation of the more that 60-year war of repression against the Palestinian people, it is a warning about the character of international relations and politics in the coming period. The Zionist state is being driven forward not least by the explosive contradictions within Israeli society itself, which have assumed new force because of the global economic crisis. The recalling of the greatest crimes committed in the 1930s and the 1940s—Guernica and the liquidation of the Warsaw ghetto—as the Gaza onslaught proceeds is the surest sign of the character of the historical epoch into which we have now entered. And the response of all the so-called democracies to the onslaught recalls nothing so much as their attitude in the 1930s to the attack of the Italian fascist state on Abyssinia. Since the full force of the global financial crisis erupted in AugustSeptember, it has become apparent that the world capitalist economy is confronted not merely with a series of massive losses and a major recession, but a collapse of an entire mode of capital accumulation. In his departing interview with the Financial Times, US Treasury Secretary Henry Paulson said that since last August he had feared a collapse of the global financial system on three occasions. That danger has not passed. On December 21, the governor of Spain’s central bank Miguel Angel Fernandez Ordonez warned in a newspaper interview that the

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world faced a “total” financial meltdown, the like of which had not been seen since the Great Depression. “The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending. There is an almost total paralysis from which no-one is escaping.” Now there is news that the Bank of America needs more funds from the government to go ahead with its takeover of Merrill Lynch, amid fears that if it pulls out there will be a new round of financial collapses. Every piece of economic and financial news points to a deepening of the global crisis. So far the total financial losses in the US are estimated to be $4 trillion in housing and $9 trillion in the share markets. The Washington Post reported on January 3 that the US national debt was projected to jump by as much as $2 trillion this year alone, raising the question of how long foreign investors, who hold major portions of this debt, will continue to provide finance. At present there is strong global demand for US Treasury notes—itself an expression of the fear gripping world financial markets—but how long this will continue no one knows. According to one analyst cited in the report: “There’s a time bomb in there somewhere, but we don’t know exactly where on the calendar it’s planted.” According to the most recent figures, foreign investors hold about $3 trillion of the total US debt of $10.7 trillion. If significant portions of this capital flow out, it will spark a financial collapse. The recession in the US, which, according to the National Bureau of Economic Research, started in December 2007, has now lasted 12 months—longer than the post-war average. If it continues until April 2009, it will be longer than any recession in the post-war period. The total number of jobs lost in the year reached 2.6 million in December, making it the worst year for job losses since 1945. Most of these losses have occurred in the past four months: September 403,000, October 320,000, November 533,000 and December 524,000. Data on the manufacturing industry in the US and around the world point to the accelerating slump. In the US, the Institute for Supply Management reported that its index for December was down to 32.4 compared to the lowest-ever level of 30.3 in June 1980. New orders had fallen for 13 consecutive months and were now down to the lowest point since records began in 1948.

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In Europe a closely watched index hit 33.9 in December, down from 35.6 the previous month, with a figure of below 50 indicating contraction. The story is the same in Asia, with Japan and Korea both recording sharp contractions. Toyota, the benchmark for the car industry, is set to make its first ever loss in the year to April. China, which only a few months ago was supposedly going to prevent a slide into global recession, is experiencing the most serious downturn since so-called “market opening” was begun 30 years ago. The manufacturing sector has contracted for the third straight month and Chinese growth may have fallen to a rate of 5.5 percent, well below the level of 8-9 percent that the regime considers is the minimum necessary to maintain social stability. The latest report from JP Morgan Global Research begins: “We are in the midst of a deep global contraction, one that is likely to produce the sharpest four-quarter decline in global GDP in the post-World War II era.” It estimates that average growth in the G-3 is down 5 percent. As if to try to cheer itself up in the face of this gloomy situation, the Financial Times started the New Year with an editorial entitled “Drawing on the rich legacy of 1989.” “In a decade grimly dominated by Islamist terrorism, global warming and financial crisis, it is difficult to recall the heady days of 1989 when Communism collapsed in Europe and the world seemed set for a sunny future. “‘Bliss was it in that dawn to be alive,’ wrote Wordsworth of the French Revolution. His thoughts were echoed by millions who participated, 20 years ago, in the destruction of the Berlin Wall, the overthrow of Soviet rule in eastern Europe and the subsequent disintegration of the Soviet Union.” Of course, as the editorial was forced to acknowledge, “joy soon gave way to disillusion as economic restructuring tore through people’s lives.” Nevertheless there was still something to celebrate with the legacy of the destruction of the Soviet Union, which, the editorial continued, should provide inspiration for the times ahead. “Twenty years is more than a convenient anniversary. With the world economic crisis striking ex-Communist Europe hard, it is the end of an era. The eastward advance of the western alliance has reached, for now, its limits. Russia will resist, with force if necessary, any further gains. But governments will be preoccupied with the economic turmoil. As they struggle to chart their futures, they must seek to preserve the legacy of 1989-2009. Yes, times were often tough. But in most of the region there was a pervasive sense of progress. Would that this sense is not lost in the difficult years ahead.”

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The fact that the “legacy of 1989” is all that the FT has to offer its readers for the stormy times ahead is a sign of the lack of confidence and perspective, not to say considerable nervousness, with which the bourgeoisie confronts this global crisis. And with good reason, for the world economic crisis has not only cut a swathe through the vast economic structures that were built over the past two decades, it has shattered the free market dogma that formed the ideological foundation of governments around the world. The real legacy of 1989 is not where the FT seeks it. Rather it lies in the global financial and economic crisis itself. The end of the Cold War order, while providing a limited short-term boost to global capitalism, served, in the longer term, to unleash all the contradictions within it. The FT’s economics commentator Martin Wolf had a somewhat different slant in his first column for the year on January 7. “Welcome to 2009. This is a year in which the fate of the world economy will be determined, maybe for generations. Some entertain hopes that we can restore the globally unbalanced economic growth of the middle years of this decade. They are wrong. Our choice is over what will replace it. It is between a better balanced world economy and disintegration. That choice cannot be postponed. It must be made this year. “We are in the grip of the most significant global financial crisis for seven decades. As a result, the world has run out of creditworthy, largescale, willing private borrowers. The alternative of relying on vast US fiscal deficits and expansion of central bank credit is a temporary—albeit necessary expedient. But it will not deliver a durable return to growth. Fundamental changes are needed.” In other words, the problem confronting world capitalism is not that staggering losses have been incurred, but that an entire regime of accumulation has broken down. Wolf’s call for a “better balanced world economy”, however, cannot be delivered. The real imbalance is not between the so-called deficit countries and the surplus countries such as China. It is more fundamental than this. The imbalance goes to the very heart of the economic system itself: it is between the massive accumulation of fictitious capital throughout the global capitalist economy and the surplus value needed to sustain it. This imbalance can only be resolved by wiping out vast areas of capital, bringing economic devastation to the working class all over the world—from the US and Europe to China, India and the rest of the so-called “emerging” economies. In a recent discussion with the Financial Times, the chief executive of JP Morgan Chase, Jamie Dimon, warned not only of further trouble

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ahead but pointed to the more far-reaching implications of the collapse. “When we look back at industry excesses in areas such as highly leveraged lending and securitization, it is clear that some of these markets will never come back,” he said. But it was precisely these markets that played such a crucial role in the expansion of the US and world economy during the past 20 years. While the FT editorial writers cling to the rather tattered legacy of 1989 in the face of this situation, the events of the past two decades constitute a powerful vindication of the analysis of the International Committee of the Fourth International. It was our movement, and only our movement, which explained that, far from opening up new vistas for the development of capitalism, the collapse of the Stalinist regimes was but the initial expression of an historic crisis of the entire world capitalist order. I shall examine this in more detail somewhat later, but at this point let me underscore the fact that the events of the past year demonstrate the power of the method of Marxism. One year ago, at our meeting here in Sydney in January 2008, we discussed a document written by David North, “Notes on the political and economic crisis of the world capitalist system and the perspective and tasks of the Socialist Equality Party”, published on the World Socialist Web Site on January 11, 2008. The document began: “2008 will be characterized by a significant intensification of the economic and political crisis of the world capitalist system. The turbulence in world financial markets is the expression of not merely a conjunctural downturn, but rather a systemic disorder which is already destabilizing international politics. ... Sixteen years after the dissolution of the Soviet Union, an event which supposedly signaled the definitive and irreversible triumph of global capitalism, the world economy is in a shambles. The bursting of the housing market bubble in the United States, which had been fueled by uncontrolled speculative investments in sub-prime mortgages, has resulted in global losses of hundreds of billions of dollars for international banks and other financial institutions. ... The result is an international financial crisis which, in the words of one analyst, has called into question the viability and legitimacy of the Anglo-American system of capitalism.” In my report to that 2008 meeting, I noted that the financial crisis in the US, and the economic expansion of China and other less developed countries, were not separate events but different aspects of a single process. “To put it in a nutshell: The expanded growth of China (along with other

The crash of 2008 and its revolutionary implications
countries) would not have been possible without the massive growth of debt in the US. But this growth of debt, which has sustained the US economy as well as global demand, has now resulted in a crisis.”

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Of course, one could argue that by this time last year, the financial crisis had already emerged and it was therefore not so difficult to draw such conclusions. So let us go back further. In a report to a meeting on June 5, 2000 I made the following point about the implications of the growth of fictitious capital. “In the Christian religion, according to the priests, the soul takes leave of the body and ascends into heaven. The high priests of the market preach a similar doctrine, claiming that money can separate itself from the production process and enter a financial heaven where money endlessly begets money. “Is it possible for capital to realize its dream of turning money into more money indefinitely? Or are there inherent limits to this process? Share values can continue to rise and profits can be made on share transactions so long as more capital keeps pouring into the market. In other words, income and profit can be accumulated in the manner of a pyramid scheme, or a chain letter. “While it continually rises above and dwarfs productive capital, however, fictitious capital cannot escape its origins. At a certain point it is confronted with the fact that it is a claim on surplus, and this surplus value has to be extracted from the working class. ... [T]he structure of global capitalism increasingly takes the form of an inverted pyramid as the mass of fictitious capital claiming a portion grows by leaps and bounds in relation to the productive capital that must ultimately meet these demands.” The report went on to point to the financial crisis that, some eight years later, was to explode to the surface: “This inverted pyramidic structure of global capital is the source of its extreme instability. Hundreds of billions of dollars of capital, seeking to sustain its rate of return, surge through world markets in search of profit. “When the prices for property titles—stocks, bonds, real estate, etc.— are rising, capital pours in, seeking to make profit by buying cheap and selling dear. Everyone makes hay while the sun shines. But when the market falters, and it becomes apparent that capital values have been vastly inflated, the rush to exit assumes the form of a stampede and overnight capital values are destroyed—not only fictitious capital, but productive capital as well.”

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I began by pointing out that the real significance of the global financial crisis could only be grasped by placing it in its historical context. In other words, we have to lay bare the logic of the economic and historical processes out of which it has arisen. How then to approach this task? It is necessary to utilise the method of historical analysis developed by Karl Marx. Some of you, no doubt, have read or heard them many times before, but the passages from the Preface to the Critique of Political Economy in which Marx outlines the method of historical materialism bear repeating. “In the social production of their existence, men inevitably enter definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the material development of the productive forces. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. ... At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or—this merely expresses the same thing in legal terms—with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Thus begins an era of social revolution.” In the capitalist mode of production, the contradiction between the growth of the productive forces and the social relations of production develops in two interconnected forms. There is the conflict between the global development of the productive forces—the inherent tendency of capital to leap over borders, barriers, time zones, countries and continents—and the nation-state system in which the political power and property forms of the capitalist ruling class are historically rooted. That is, there is a contradiction between the global character of the productive forces as developed under capitalism and the division of the world into rival conflicting nation-states. Then there is the contradiction between the growth of the productive forces, as expressed in the increasing productivity of labour—which lies at the very foundation of the progress of civilisation—and the social relations of production based on wage labour. This contradiction manifests itself in the law of the tendency of the rate of profit to fall—a law characterised by Marx as the most important law of political economy, above all from an historical point of view. Our task is to trace the historical development of these contradictions.

The crash of 2008 and its revolutionary implications
Herein lies the importance of the method of analysis developed by Trotsky in his famous report to the Third Congress of the Communist International in June 1921, and outlined in his article The Curve of Capitalist Development and in other articles and speeches in the first half of the 1920s.

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Trotsky’s great contribution to the development of the historical materialist method was to distinguish two distinct features of capitalist development. The first was the operation of the business cycle—the ups and downs in economic activity—that would accompany capitalism from its birth until its death. The second were those longer term periods of history, extending over many years, even decades, that marked distinct phases in the capitalist system’s development. Looking back from the mid-1920s, one could discern such distinct phases. The period up to 1848 was marked by relatively slow growth, culminating in an economic crisis in 1847-48, which preceded the mass revolutionary upheavals of 1848. While these revolutionary struggles resulted in defeats for the newly emerging working class, they did nevertheless clear away the remaining feudal obstacles to the development of capitalism in Western Europe. A powerful period of capitalist expansion followed: railways were built, immeasurably broadening the scope of the capitalist market; Britain became the workshop of the world; shipping underwent a rapid growth and the world market expanded. This upswing in the curve of capitalist development continued for 25 years. A new period began in the aftermath of the financial crisis of 1873. While this crisis eventually passed, the conditions of the mid-Victorian boom did not return. The next two decades have gone down in economic history as the Great Depression of the nineteenth century. They were characterised above all by falling prices and profit rates. Not that this was a period of stagnation. On the contrary, the downward pressure on profit rates was the driving force behind major changes in the scale and scope of capitalist production, especially in the United States, and new forms of management that began to be developed there, as well as the growth of industry in Germany. Vast changes in the structure of the world economy were also underway. The last quarter of the nineteenth century saw the great scramble for colonies, as the European powers sought to secure markets and sources of minerals and other raw materials. Major developments in banking also took place with the emergence of international loans and other forms of financing. This period is sometimes described as the first wave of globalisation.

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The Great Depression lasted until the mid-1890s, whereupon the capitalist curve begins an upswing. Profits start to rise, markets expand and the bourgeoisie enters the new century with an air of confidence. The new conditions famously found their expression in the leadership of the Second International in the form of the revisionist theories of Eduard Bernstein, who concluded at this time that Marx’s theory of capitalist breakdown had been refuted by events. It was now necessary, he argued, for the party to abandon its revolutionary perspective. But far from providing a stable base for bourgeois rule, as its representatives imagined at the dawn of the twentieth century, the vast changes taking place in the structure of world capitalism were laying the basis for revolutionary convulsions. Leon Trotsky, the young Russian Marxist, was among the first to explain their significance. His analysis of this transformation formed the basis of his Theory of Permanent Revolution, elaborated in 1905. “Binding all countries together with its mode of production and commerce, capitalism has converted the whole world into a single economic and political organism. Just as modern credit binds thousands of undertakings by invisible ties and gives to capital an incredible mobility which prevents many small bankruptcies but at the same time is the cause of the unprecedented sweep of general economic crises, so the whole economic and political effort of capitalism, its world trade, its system of monstrous state debts, and the political groupings of nations which draw all the forces of reaction into a kind of world-wide jointstock company, has not only resisted all individual political crises, but also prepared the basis for a social crisis of unheard-of dimensions” (Leon Trotsky The Permanent Revolution and Results and Prospects, New Park, pp. 239-240). The crisis of “unheard-of dimensions” erupted in August 1914 with the outbreak of World War I. In his book War and the International Trotsky explained that, at the most fundamental level, the war was a revolt of the productive forces against the nation-state structure of world capitalism. The development of the world economy posed the necessity for a new political structure. But the way the various bourgeois governments proposed to resolve this problem was “not through the intelligent, organised cooperation of all of humanity’s producers, but through the exploitation of the world’s economic system by the capitalist class of the victorious country; which country is by this war to be transformed from a Great Power into the World Power.” The war proclaimed not only the downfall of the nation state, but also of

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the capitalist economy. It was the most colossal breakdown in history of an economic system destroyed by its own contradictions. “In these historical circumstances,” Trotsky concluded, “the working class, the proletariat, can have no interest in defending the outlived and antiquated national ‘fatherland’, which has become the main obstacle to economic development. ... The only way in which the proletariat can meet the imperialist perplexity of capitalism is by opposing to it as a practical program of the day the socialist organisation of the world economy. War is the method by which capitalism, at the climax of its development, seeks to solve its insoluble contradictions. To this method the proletariat must oppose its own method, the method of the social revolution.” In his work on perspectives in the early 1920s Trotsky returned to the relationship of World War I to the curve of capitalist development. The outbreak of war signified the end of the upswing that had started in the mid-1890s. It was not, however, that the war brought the upswing to a close, but rather that the upswing ended, resulting in the eruption of war. This is how Trotsky explained the relationship at a meeting in December 1922: “In the technological sense, Europe developed with unprecedented speed and power from 1894 to 1913, that is to say, Europe became economically enriched during the 20 years which preceded the imperialist war. Beginning with 1913—and we can say this positively—the development of capitalism, of its productive forces, came to a halt one year before the outbreak of the war because the productive forces ran up against the limits fixed for them by capitalist property and the capitalist form of appropriation. The market was split up, competition was brought to its intensest pitch, and henceforward capitalist countries could seek to eliminate one another from the market only by mechanical means. “It is not the war that put a stop to the development of productive forces in Europe, but rather the war itself arose from the impossibility of the productive forces to develop further in Europe under the conditions of capitalist development” (Trotsky, The First Five Years of the Comintern, Volume 2, New Park, p. 306). Europe’s economic trajectory in the 1920s verified Trotsky’s analysis. The war’s conclusion failed to bring about a return to pre-war economic conditions. The European economy as a whole struggled to return to the levels of production it had attained in 1913, only achieving that goal by 1925-26. And, after three years of growth, the German economy, Europe’s largest, started to move into recession by 1928-29.

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In the United States, the situation was very different. After a severe recession in 1920-21, the US economy experienced a burst of productivity, the like of which has probably not occurred since. In the period 1919 to 1929, while there was no increase in the manufacturing labour force, output rose by over 60 percent. In the late 1920s, US manufacturing accounted for just over 40 percent of the world’s total: with only 6 percent of the global population, the US produced 57 percent of the total world output of machinery. In the decade of the 1920s, manufacturing industry’s consumption of electricity doubled, while household consumption tripled. By contrast, in 1920 European manufacturing production was 23 percent below its 1913 level and, in 1923, still 18 percent below. Given this situation it might have appeared, at first sight, that the perspective on which the Bolsheviks launched the struggle for power in October 1917—the perspective of world socialist revolution—had been invalidated. While Europe was stagnating, the productive forces were advancing under American capitalism. But the problem with that appraisal was that it ignored the world economy, or, to put it perhaps more accurately, insofar as it considered the world economy, it did so not as a “mighty and independent reality”, to use Trotsky’s phrase, but as the sum of various national parts. (This mistake was repeated, by the way, last year in the myriad claims that so-called “decoupling” would somehow enable the rest of the world to escape the impact of the global financial crisis that erupted in the United States.) Viewed from a global—the only correct—perspective, the picture was very different. American capitalism in the 1920s certainly looked far stronger and more stable than European capitalism. Moreover, it was developing at Europe’s expense. But American capitalism was no longer self-contained. It had risen to global pre-eminence by exploiting its massive internal market, unencumbered by the kinds of restrictions that dominated the European nation-state system. That period had now, however, come to an end. American capitalism depended on the world market. That was, after all, the underlying reason for its intervention in World War I, when the doctrine that had prevailed since the foundation of the United States—that it should not become involved in European wars—was overthrown. And that was also why, in the aftermath of the war, American banks and financial authorities were so heavily involved in the 1924 Dawes Plan, which sought to resuscitate German capitalism, thereby providing an

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outlet for American investment capital. Europe certainly depended on America, but America was even more dependent on Europe.

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I want to emphasise the importance of a global approach, because without it one cannot understand anything about the origins and causes of the Great Depression. And these are not questions of mere historical interest. The Great Depression, in fact, has become something of a hot political issue as the Obama administration prepares its so-called stimulus package, and various Keynesian and “left” economists around the world take the field to argue that if only the measures they proposed were adopted with sufficient vigour, then the crisis now besetting the US and world capitalist economy could be overcome. John Maynard Keynes was very conscious of his political role when he sought to demonstrate that government intervention in the economy, based on increased spending, could overcome the problems of capitalist economy. His political aim was to prevent socialist revolution. As he explained in his open letter to President Roosevelt at the end of 1933: “You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.” In a lecture delivered at Colombia University in June 1934, Keynes insisted that the economic problem was no longer how each individual firm could produce more, but how sufficient effective demand could be ensured so that each firm produced what it was capable of producing. If this “new problem” were not solved then “the existing order of society will become so discredited that wild and foolish and destructive changes will become inevitable.” For Keynes, the crisis of capitalism did not stem from inherent processes within it, much less objective laws, but from incorrect ways of understanding it. In the introduction to his Essays in Persuasion, published in 1931, he summed up his position as “the profound conviction that the economic problem, as one may call it for short, the problem of want and poverty and the economic struggle between classes and nations, is nothing but a frightful muddle, a transitory and unnecessary muddle.” The cause of the crisis, Keynes maintained, lay in intellectual error. The cure, therefore, lay in correct reasoning. This, as his biographer Robert Skidelsky notes, was his answer to Marx. If the leaders of capitalism did not change course and stop screwing down the wages of workers in order to restore profits, then a class war could arise that would vindicate Marx. These issues have lost none of their relevance.

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Analyses of the Great Depression have always been profoundly political, because no single economic event—with its horrific consequences, mass unemployment, fascism and war—has demonstrated more clearly the historical bankruptcy of the capitalist mode of production. Political considerations certainly lay at the heart of the analysis advanced by Milton Friedman in his book A Monetary History of the United States, co-authored with Anna Schwartz and published in 1963. Friedman, one of the foremost advocates of the “free market”, was eager to demonstrate that there was no inherent problem within the capitalist economy that could have caused such a disaster. Hence he was anxious not only to refute the Marxists, but also the Keynesians, who ascribed the Depression to the lack of effective demand and called for government intervention in the capitalist economy. According to Friedman, the fundamental cause of the Depression was the contractionary monetary policy pursued by the Federal Reserve, which reduced liquidity, especially in the banking crisis of 1932, and turned what would have been a normal downturn in the business cycle into a catastrophe. In Friedman’s view, an expansion in the money supply could have prevented the collapse and would have been implemented if only different personalities had been in charge at the Fed. Why were they not? Friedman traced the problem back to the death of Benjamin Strong, the governor of the New York Federal Reserve in 1928. His departure altered the balance in the Federal Reserve and left it without effective leadership. This explanation fails to stand up to even the most preliminary examination. There is no evidence that even with Strong present, the policies of the Fed would have been any different. After all the Fed’s approach to the crisis of the 1930s was essentially the same as its response to the severe contraction of 1920-21. Its expectation was that the economy would revive, just as it did in the “roaring twenties”. Despite its intellectual poverty, the Friedman thesis has theoretically guided the US Federal Reserve. The present Fed chairman summed up his view in a speech in 2002, on the occasion of Friedman’s 90th birthday. Describing the Friedman and Schwartz analysis as a powerful case, he concluded: “Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” In the wake of the stock market crash of 1987, US financial authorities, first under the Fed chairmanship of Greenspan and then of Bernanke, followed the Friedman prescription. Every financial crisis or potential

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crisis has been met with a lowering of interest rates and an expansion of credit. And for almost 20 years these methods have appeared to work. Financial crises have erupted, but these have passed relatively quickly following the injection of liquidity into the financial system, which has created the conditions for a new boom. However, with the emergence of the so-called sub-prime mortgage crisis—itself a result of the financial bubble created in the wake of the share market bubble collapse of 2000-2001—these methods stopped working. The expansion of liquidity failed to halt the crisis, which only deepened as banks and other financial institutions stopped lending to each other. The collapse of the entire “free market” order has given a new lease of life to the Keynesians. They maintain that the crisis can only be resolved with a return to government intervention and stimulus packages. When one points out that the New Deal measures failed to end the Great Depression, they reply that the problem was that they were not pursued with sufficient vigour. To the argument that the nine-month decline from September 1937 to June 1938 was, in the words of one historian of these events, “without parallel in American economic history” and “the sharpest decline in any period for which there are statistical data” (Kenneth D. Roose “The Recession of 1937-38,” The Journal of Political Economy, June 1948) they insist that the downturn following the recovery of 1933-37 resulted from Roosevelt following bad advice when he lifted tax rates. Furthermore, the Keynesians maintain that the economic recovery that took place in the wake of government war spending proves their case. Government spending, they argue, will work provided it is sufficiently large. Capitalism can, indeed, be regulated to meet social needs. The present crisis is not, as the Marxists maintain, a product of the irreconcilable contradictions of the capitalist order, but stems from the abandonment of the wisdoms of the Keynesian program in favour of the nostrums of the “free market” agenda over the past 30 years. I shall deal with these issues by firstly examining them theoretically and then historically, with a review of the origins and resolution of the Great Depression. The basic theoretical fallacies of Keynesianism are rooted in its incorrect assessment of the nature of the capitalist economy. The driving force of the capitalist mode of production is not the production of use values or consumption, but the accumulation of capital through the

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extraction of surplus value. Thus the key question is: what impact do Keynesian measures—based on increased government spending—have on this process? What is their impact on profits? For the Keynesians the key problem is the lack of effective demand. If there is a lack of demand then the goods that have been produced cannot be sold. If the firms that have made them cannot sell them, they must cut production. This will lead to a reduction in demand for the goods that the firms themselves purchase, creating a further reduction of effective demand, and so on. The key issue, then, is to restore the level of effective demand so that the economy begins to expand again. Let us look at this more closely. What is effective demand? It consists of two components: the demand of workers for consumption goods and the demand of capitalist firms for production goods. Workers’ demand for consumption goods—a demand based on their wages—can never provide a sufficient market for capital to realise its profit, because the price of consumptions includes the profits going to capital. In other words, underconsumption by the working class always occurs. This flows from the nature of capitalist production itself. The value of labour power— the wage the worker receives—is always less than the value that worker adds in the production process. The difference is the source of surplus value and profit. The source of the crisis cannot, then, be the underconsumption of the workers, because this is a permanent condition of the capitalist mode of production. The level of effective demand must be determined by the other component, the demand of capitalist firms for production goods. And the level of this demand will be determined by the rate of profit. If profits are expanding, then investment spending will grow. If investment spending grows then more workers will be employed in the industries producing these goods. If more workers are employed then consumption spending will grow and the economy as a whole will expand. Keynes emphasised the decisive role of investment. He saw its decline as the outcome of pessimistic conclusions being drawn from the state of the market. But if the psychology of capitalist businessmen and their propensity to invest is determined by the state of the market, we are back to the same question: what determines the state of the market? There is no question that a crisis or depression takes the form, in the market, of a lack of effective demand. But that lack of demand is the appearance-form of a process that has its origins not in the market, but in the sphere of production. Let us look at this more closely. Every capitalist firm is confronted with

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the dictates of the market. It is through the market that each capitalist firm realises—turns back into money—the surplus value it has extracted from the working class, or, to put it more accurately, participates in the appropriation of the total surplus value that has been extracted from the working class as a whole. In order that the profitability of any particular section of capital can increase, the market as a whole must expand. This expansion occurs through the increased extraction of surplus value by other sections of capital. As Marx put it, the creation by capital of surplus value is “conditional upon an expansion, specifically a constant expansion, of the sphere of circulation. The surplus value created at one point requires the creation of surplus value at another point, for which it may be exchanged” (Marx, The Grundrisse, p. 407). What effect does increased consumption spending—whether directly by the government or indirectly through tax concessions—have on the accumulation of surplus value? It does not increase it. In fact, insofar as additional government spending has to be financed by the creation of debt, it may worsen the problem in the long run by increasing bond holders’ interest claims. Increased government spending may lead to economic expansion, that is, to a rise in national income, for a period. But it will not, of itself, bring about an increase in the accumulation of surplus value and the rate of profit. Let us take an analogy from the sphere of medicine. If a young person receives an electric shock that stops their heart, then a shot of adrenalin that starts the heart beating again will save that person’s life. The adrenalin works because this is the heart of a healthy young person. But if the heart is seriously defective, then no amount of adrenalin will resolve the underlying problem. In the capitalist economy, if the production regime is healthy—if it continues to pump out sufficient surplus value—then a shot of economic adrenalin in the form of increased government spending can work wonders. But not if the economic pumping mechanism is defective or worn out, not if the arteries through which surplus value flows have become sclerotic. On the basis of these theoretical considerations, let us return to the historical development of the Great Depression.

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Writing in 1933, the British economist Lionel Robbins noted: “We live, not in the fourth, but in the nineteenth year of the world crisis.” He meant that the crisis began, not in 1929 but in 1914. Taking this approach enables us to gain a correct understanding of the causes of the Great Depression. The eruption of the world crisis in the form of World War I came, as we have already noted, at a turning point in the curve of capitalist development. After a stormy period of growth from the mid 1890s, profit rates began to turn down. This was not simply a fluctuation in the business cycle but, as the subsequent failure of the European economy to recover in the post-war period demonstrated, a new phase of economic development. In the 1920s, many observers were able to see how capitalism could advance: the European economy would have to be reconstructed on American lines, utilising the vastly more productive American methods in order to expand. But this was impossible. The war itself had arisen out of the conflict between the expansion of the productive forces and the constrictions of the nation-state system. Far from alleviating this conflict, the war’s outcome—the Treaty of Versailles—only worsened it. European industry’s expansion, the introduction of long run methods of production, was hemmed in by tariff walls, cartels, agreements to restrict production, and national borders. At the same time, the United States was undergoing rapid growth. But it was no longer self-sufficient. For American economic expansion to continue required an expansion of the European economy. The extraction of surplus value from the working class through the vastly more productive methods of American capitalism required the extraction of increased surplus value in Europe. That could not take place, and the result was the collapse of the American economy in 1929. In other words, while the Depression took the form of a collapse in effective demand, its cause was not underconsumption, but the under-production of surplus value, above all in Europe. The Great Depression was not a crisis that started in one country and then spread to the rest of the world. It was a global crisis, which found its most dramatic expression in the world’s two most productive economies, the US and Germany. If the collapse was so marked in the United States, it was because the European economies had never really emerged from the depressed state into which they had entered after the war. And if it was so sharp in Germany, it was because no economy was so constricted by the European

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nation-state system—a restriction the German bourgeoisie sought to throw off when it backed Hitler, in the hope that he would prove capable of establishing Lebensraum through military conquest in the East. Rather than Roosevelt’s New Deal providing a way forward for American capitalism, it was precisely its failure that convinced US ruling circles that only a complete reconstruction of the entire world order could resolve the historic impasse that had led to the Great Depression. The way had to be cleared for the more productive methods of American industry. As Trotsky explained in November 1933: “Sooner or later American capitalism must open up ways for itself through the length and breadth of our entire planet.” That task would be carried out, he wrote, by every means available, including war. Clearing the way for American capitalism meant that German plans for an empire on the European continent had to be thwarted. Likewise, Japanese plans for an empire in the East, the so-called Co-Prosperity Sphere. It also meant, as Churchill discovered when he met Roosevelt in 1941 to discuss the Atlantic Charter, that American visions for the postwar world did not include the British Empire, with its closed doors and imperial preference agreements on trade and finance. The post-war restructuring, expressed in the Bretton Woods Agreement of 1944 and the Marshall Plan of 1947, provided the economic foundations for a new period of capitalist expansion. These measures opened the way for the extension of American industrial methods, with their higher productivity of labour and greater extraction of surplus value, and the expansion of American investment, to the rest of the world. Within a period of less than three decades, however, all the fundamental contradictions of the capitalist mode of production were to re-emerge. The story of the collapse of the Bretton Woods monetary system in 1971-73 can be told in terms of the excess of dollars circulating throughout the world compared to the gold stored in the US that was supposed to back them. But this was only the expression of a more fundamental process: the contradiction between the growth of the world economy, which the post-war monetary system had itself made possible, and the grounding of that monetary system on the currency of a single nationstate—even the most powerful—the US. In other words the contradiction between world economy and the nation-state system had resurfaced. In the wake of the collapse of Bretton Woods, every proposal aimed at devising some kind of stable international unit of account foundered on the conflicting national interests of the major capitalist powers, just as had Keynes’s earlier proposal for an international currency.

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The other contradiction to which we have pointed also re-emerged. The world recession of 1974-75 resulted not simply from an escalation in oil prices, These were only a trigger. It stemmed from a downturn in the rate of profit that started to emerge from the end of the 1960s. The curve of capitalist development had entered a downswing. I traced the ensuing developments in my lecture The World Economic Crisis: A Marxist Analysis in December, so I will not repeat the points I made there, except to emphasise the central issue. The breakdown into which world capitalism entered in 2008 was not the outcome of bad policies, or a flawed understanding on the part of bourgeois policy-makers that can now, somehow, be corrected. It resulted from processes that had themselves been set in motion by the crisis of the early 1970s and which were lodged in the economic and historical logic of the capitalist mode of production itself. What flows from our assessment of the origins of the present situation is that nothing less than an international socialist revolution can overcome the crisis of the capitalist mode of production and, moreover, that is the only way to prevent mankind being plunged into a catastrophe. This conception is central to our struggle to develop the political consciousness of the working class. The bourgeoisie has experienced a devastating ideological collapse. The entire “free market” ideology on which it has based its attacks on the working class over the past three decades lies in tatters. Consequently, we see a desperate attempt to conjure up the illusion that a solution to this crisis within the framework of capitalism does exist. Various Keynesian, “left-wing” and even so-called Marxist economists are being mobilised in this endeavour. And beyond them, the bourgeoisie is actively seeking to cultivate new props from among the various radical groups. On the economic front, a statement signed by some 20 “left” economists and issued on January 1, under the auspices of the Schwarz Center for Economic Analysis at the New School and the Political Economy Institute based at the University of Massachusetts, is typical. It begins by warning that not since the Great Depression has the world faced an economic crisis like it does today, with a series of interlocking downward pressures from financial markets reaching into the real economy and unraveling economic stabilisers and institutions. “Swift and coordinated action by the Obama administration, other national governments and international financial institutions can stave off these crises if the action is boldly directed at serving the needs of people

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and communities, rather than protecting the failed institutions and past practices that helped create the crisis.” These “lefts” would like to present Obama as some kind of new Roosevelt. But the whole situation of American capitalism has undergone a vast change in the past 75 years. When Roosevelt took office in 1933, America was still a rising economic power. No longer. Now it is the most indebted country in the world. Obama has pledged to provide a boost in spending, largely to benefit business, but under conditions where American indebtedness threatens to explode, he has made clear that social security entitlements will come under attack. A similar statement was issued last September by a group calling itself European Economists for an Alternative Economic Policy. Like their American counterparts, they state that their policy prescriptions are based on the analysis advanced by Keynes in the depression of the 1930s. “Our proposals for an alternative economic policy to counter the financial crisis and the looming recession in Europe start from John Maynard Keynes’s famous notion that public policy must encourage the ‘euthanasia of the rentier’. ... In an alternative scenario, credit should not be employed for short-term financial gains but rather for encouraging productive investment so as to promote full employment and to contribute to the fight against poverty and exclusion.” These economists go on to outline a series of reforms, including an end to the privatisation of pensions, more democratic control over financial institutions and an end to those financial practices that have accelerated the movement to greater social inequality. Policies aimed at full employment and social cohesion would “transform finance and embed the financial sector as an important and indispensable element into this new framework. This would not be the end of capitalism but it would be the end of finance-driven capitalism.” The basic fallacy of this reformist program is that it proceeds from the assumption that the vast expansion in finance over the past three decades is somehow an unfortunate outgrowth that has arisen on an otherwise healthy real economy; that finance, which is supposed to function as an aid to productive economic activity, got out of control because of lax regulation and neo-liberal ideology, and now has to be brought back under control. This is to ignore the vast structural changes in world capitalism over the past 30 years. At the beginning of the 1980s, the US finance sector appropriated between 5 and 10 percent of corporate profits. In 2006 the

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figure was 40 percent. This is a qualitative transformation of the US economy. And it developed in response to the crisis in accumulation at the end of the 1970s. The new mode of accumulation has been based on financial operations, fueled by vast increases in debt. As a percentage of gross domestic product (GDP), US debt rose from 163 percent in 1980 to 346 percent in 2007. Household debt went from 50 percent of GDP in 1980 to 100 percent in 2007. The most rapid increase, however, was in the financial sector. Its debt rose from 21 percent of GDP in 1980 to 83 percent in 2000 and 116 percent in 2007. What these figures show is the crucial role of the finance sector in profit accumulation and the role of debt-creation in the entire process. This transformation in the mode of accumulation, which has spawned a new range of financial instruments, especially derivatives, is not confined to the United States. In Britain, for example, it has been estimated that employment in the finance sector has increased by 22 percent since 1984. There are 30 local authorities in Britain where at least 25 percent of the workers who live there are employed in business and financial services. And nine of 11 British regions have at least one local authority where 20 percent of residents work in business and financial services. A study published in 2003 found that in most OECD countries the share of rentier income—income going to the finance sector—had “dramatically increased.” It found that from the 1960s and 1970s to the 1980s and 1990s, the rentier share in the UK had increased by 143 percent, in the US 92 percent, in Korea 112 percent and in France 155 percent. Far from finance somehow being an excrescence on the otherwise healthy body of the capitalist economy, its growth signifies the emergence of all the contradictions inherent in this mode of production. The circuit of capital is M to M`—an initial outlay of money, M, that is returned with an increment, M`. Money-capital is the starting point and the point of return of the whole process. “It is precisely because the money form of value is its independent and palpable form of appearance that the circulation form M ... M`, which starts and finishes with actual money, expresses money-making, the driving motive of capitalist production, most palpably. The production process appears simply as an unavoidable middle term, a necessary evil for the purpose of money-making” (Marx, Capital Volume 2, p. 137). In other words it is not finance that is incidental to real production, but rather production which, as Marx puts it, is a “mere means for the valorisation of the value advanced.”

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That is why the historic crisis of the capitalist system as a whole makes its appearance as a financial crisis, because the very process of financialisation has raised all the contradictions of the capitalist mode of production to a new peak of intensity. The rise of finance has been inseparable from the development of a regime of accumulation that has integrated all sections of the world’s population into the global circuit of capital. In the first decade of the twentieth century Rosa Luxemburg, mistakenly, considered that capitalism would break down because all the noncapitalist regions of the world had been incorporated by the imperialist powers. While her specific assessment was wrong, history has certainly vindicated her emphasis on the crucial role of the less developed regions of the world. Capital managed to overcome the last crisis of accumulation through the incorporation of cheap labour in China, India and other regions into its global circuit. But, in doing so, it did not resolve its fundamental contradictions. Rather, it created the conditions for their eruption in an even more explosive form. The tendency for the rate of profit to fall was countered for a period of time through the super-exploitation of labour in China and elsewhere, as well as through the driving down of the conditions of the working class in all the advanced countries over a 30-year period. However this process, in turn, created a vast mass of fictitious capital, which stakes its claim on the accumulated surplus value. How are these claims to be met? There is not another China waiting in the wings to pump new blood into capitalism’s arteries, and even if there were, the boost obtained by employing labour costing one thirtieth of that in the advanced capitalist countries cannot be repeated. Whole sections of capital must be eliminated through recession and slump, through trade war and, if necessary, mechanically through war itself. And all around the world, the “lefts” are going to play a leading role in supporting their “own” bourgeoisie in the war of each against all. The ideological preparations are already being made. The latest issue of the Nation contains an article by William Greider, who points out that a stimulus policy by one nation alone will not work because “the most complex barrier to recovery is globalisation and its negative impact on the economy.” The Obama stimulus package, he continues, might restart factories in China, but leave US unemployment high.

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What is the answer? A global stimulus package. But what if other powers do not agree? “The United States could propose the outline with one crucial condition: if the trading partners are unwilling to act jointly, Washington will have to proceed unilaterally.” So much for the “lefts” criticisms of George W. Bush. And what would such a program involve? Tax penalties plus national economic policies to induce multinational corporations to keep more of their value-added production at home, to be enforced through the tax code and “if necessary, a general tariff that puts a cap on imports.” Back to the national hearth—a return to the policy of “beggar thy neighbor”. It is no accident that the breakdown of capitalism has emerged in the form of a global financial crisis because, as Marx explained, the credit system has been the means through which capitalism has always overcome constrictions in its development. Hence credit “accelerates the material development of the productive forces and the creation of the world market, which it is the historical task of the capitalist mode of production to bring to a certain level of development, as material foundations for the new form of production. At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of dissolution of the old mode of production. “The credit system has a dual character immanent in it: on the one hand it develops the motive of capitalist production, enrichment by the exploitation of others’ labour, into the purest and most colossal system of gambling and swindling, and restricts ever more the already small number of the exploiters of social wealth; on the other hand it constitutes the form of transition towards a new mode of production.” Where do we stand historically? There is no question that the year 2008 marks a fundamental turning point in the curve of capitalist development. This is not just a sort of very deep recession, but the end of an entire historical epoch. The historic breakdown of the capitalist mode of production means that we have once again entered a period of wars and revolution. All kinds of social and political struggles are going to develop all over the world. This will create new opportunities and challenges for our party. Our central task in the coming period is to introduce into these struggles a Marxist perspective, based on the analysis carried forward by our movement, and only by our movement, of the historical lessons of the strategic experiences of the working class throughout the past century.

World Socialist Web Site Online Pamphlet Series

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