The deepening crisis of capitalism, part 2
Falling profit rate, productivity of labor, Clintons, 2008 crash, cultural evolution
In an article titled “U.S. Imperialism Has Lost the Cold War,” printed in New International No. 11, Jack Barnes, leader of the Socialist Workers Party (United States), explained the situation that faced working people:
“We are witnessing a crisis in the world capitalist system. This is expressed in the long-term tendency toward lower rates of economic growth, as well as in sharpening business cycles that have included steep slumps in the mid-1970s and at the opening of the 1980s and of the 1990s. Low rates of investment, generalized indebtedness, socially unsustainable rates of unemployment, and a decline in the rate of profit are just a few of the symptoms of the delicate health of the system.”
—https://www.pathfinderpress.com/products/us-imperialism-has-lost-the-cold-war_by-jack-barnes
Barnes points to “the falling average rate of industrial profit,” which “lies behind” the problem. But why would the average profit rate be falling? The capitalists themselves, or their advisers—accountants, lawyers, and economists—might have recognized this happening in one or another accounting study. But if they did, they imagined that any number of explanations could be responsible for some, or all, of it. It could be a cheating by bankers, accountants, middlemen, or suppliers of parts and raw materials. It could be the unequal rates of exchange in international trade. It could be excessive taxes, rising wages, or unreasonable government regulations that were pressing down against the expected profit rates. Of course, those who had something to sell recognized it was no easy task to achieve profitability when rapacious competitors kept trying to undercut their prices.
But in the 1980s, the signs of the falling profit rate began to promote the abandonment of major U.S. industries by big money investors, as they shifted their funds toward more profitable investments.
Marx had (at least) four things to say about a situation like this:
1. Capitalists introduce methods that reduce the falling profit rates they are experiencing, but these profit-increasing methods work in such a way as to hasten the falling profit rate in the long run.
2. The measures undertaken by the capitalists can only stall or reverse this falling rate temporarily for the system as a whole in one country.
3. The capitalists cannot recognize, and will not understand, the underlying source of the decline in profit rates.
4. The profit rate will fall for the system as a whole, in the advanced capitalist countries, in the long run and in the final analysis.
Here’s one of Marx’s preliminary formulations of the tendency of the profit rate to fall—although, of course, those who are not too familiar with Marx are advised to take this with a grain of salt, and, if time is available, study the issue in depth. Marx wrote in the Grundrisse (p. 748):
“If the rate of profit of the larger capital declines, but not in proportion to its size, the GROSS PROFIT increases even though the rate of profit declines. If the rate of profit declines in proportion to its size, the GROSS PROFIT remains the same as that on the smaller capital; it remains stationary. If the decline in the rate of profit is proportionately greater than the increase in the size of the capital, the GROSS PROFIT on the larger capital, as compared with the smaller, declines just as much as the rate of profit does.
“This is in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and even less, consciously articulated. . . that the development of the productive forces brought about by the historical development of capital itself, when it reaches a certain point, suspends the self-realization of capital, instead of positing it. . . . The growing incompatibility between the productive development of society and its hitherto existing relations of production expresses itself in bitter contradictions, crises, spasms. . . . Hence, the highest development of productive power together with the greatest expansion of existing wealth will coincide with the depreciation of capital, degradation of the labourer, and a most straitened exhaustion of his vital powers. These contradictions, of course, lead to explosions, crises, in which momentary suspension of all labour and annihilation of a great part of the capital violently lead it back to the point where it is enabled [to go on] fully employing its productive powers without committing suicide.”
—MECW, Vol. 29, p. 132
Marx explained the inescapable fall in the ratio of the profit to the capital invested in production in great detail in Chapter 13 of Capital, Vol. III. But what about the productivity of labor? Some might have different definitions of the “productivity of labor,” but the U.S. Bureau of Labor Statistics defines productivity as the real output (quantity of products) divided by the hours worked. In a widget factory, productivity is widgets produced per hour of labor. A factory that produces 100 widgets every 8 hours, and the labor force is composed of 20 workers, that’s 12.5 widgets per hour. With 10 workers, that’s 1.25 widgets per worker-hour. That’s good enough for most purposes, but of course, there are many influences that can change the calculation.
Marx, on the other hand, gave a clear definition of the “productivity of labor” that is still comprehensible to most people today. Over time, as technology in industry improves because of the advances of science and engineering, the capital advanced for a given output of commodities is composed more and more of “capital cost” (tools, machines, raw materials, auxiliary materials and overhead) and less and less on wages paid to the workers. The ratio of capital expenses to wage expenses increases.
Regarding labor productivity, Thomas Hodgskin produced a vivid image of how humanity altered its own existence while consciously working to transform the world surrounding it, in his book Labour Defended against the Claims of Capital:
“If we duly consider the number and importance of those wealth-producing operations which are not completed within the year, and the numberless products of daily labour, necessary to subsistence, which are consumed as soon as produced, we shall, I think, be sensible that the success and productive power of every different species of labour is at all times more dependent on the co-existing productive labour of other men than on any accumulation of circulating capital. The labourer, having no stock of commodities, undertakes to bring up his children, and teach them a useful art, always relying on his own labour; and various classes of persons undertake tasks the produce of which is not completed for a long period, relying on the labour of other men to procure them, in the meantime, what they require for subsistence. All classes of men carry on their daily toils in the full confidence that while each is engaged in his particular occupation some others will prepare whatever he requires, both for his immediate and future consumption and use.”
—https://www.amazon.com/Labour-Defended-against-Claims-Capital/dp/198162189X
Progress in productive methods makes the product cheaper in one sector after another, and multiple sectors mutually interact to speed up the changes. Marx pointed to the “organic composition of capital,” which is defined by the ratio of the costs of the material resources needed for production (the raw materials, auxiliary materials, the maintenance, and repairs needed for the tooling and machinery). This productive mass of objectified labor increases over time in relation to the cost of labor power required on a daily or yearly basis to produce a given amount of commodity output. Marx had introduced this theme earlier in Vol. I of Capital:
“Apart from natural conditions, such as fertility of the soil, &c., and from the skill of independent and isolated producers (shown rather qualitatively in the goodness than quantitatively in the mass of their products), the degree of productivity of labour, in a given society, is expressed in the relative extent of the means of production that one labourer, during a given time, with the same tension of labour power, turns into products. The mass of the means of production which he thus transforms, increases with the productiveness of his labour. But those means of production play a double part. The increase of some is a consequence, that of the others, a condition of the increasing productivity of labour. E.g., with the division of labour in manufacture, and with the use of machinery, more raw material is worked up in the same time, and, therefore, a greater mass of raw material and auxiliary substances enter into the labour process. That is the consequence of the increasing productivity of labour. On the other hand, the mass of machinery, beasts of burden, mineral manures, drain-pipes, &c., is a condition of the increasing productivity of labour. So also is it with the means of production concentrated in buildings, furnaces, means of transport, &c. But whether condition or consequence, the growing extent of the means of production, as compared with the labour power incorporated with them, is an expression of the growing productiveness of labour. The increase of the latter appears, therefore, in the diminution of the mass of labour in proportion to the mass of means of production moved by it, or in the diminution of the subjective factor of the labour process as compared with the objective factor.”
—MECW, Vol. 35, p. 617
Over time, the improvements in the efficiency of the productive equipment—faster processing of the raw materials, more automatic functions built into the machinery, etc.—reduce the amount of living labor needed to produce a specific quantity of output. Scientific progress in understanding the laws of nature makes it possible for planners, designers, and engineers to improve the tools and equipment used in industry, thus reducing human effort for any given quantity of output. Automation becomes the key term to describe the nature of progress in industrial technology. The better the tools, the quicker you get the job done. Robert Gordon described the history of the rapid advance of labor productivity in the manufacture and construction of the necessities of life from the 1870s through the 1970s in his book The Rise and Fall of American Growth.
—https://press.princeton.edu/books/paperback/9780691175805/the-rise-and-fall-of-american-growth
But as we read Gordon’s book, we should keep in mind the fact that he ignores the labor movement, a powerful struggle of workers to organize themselves and carry out strikes, and thus be able to enjoy the results of the combined effects of scientific engineering and hard work. Labor productivity growth depends on the availability and organization of all the materials and actions that production needs. We recognize in the first place, buildings, machinery, tools, raw materials, and auxiliary materials (fuel, electricity, lubricants — but then, we must acknowledge the necessities of transport to get the semi-finished goods from one factory to another, and this includes trains, tracks, trucks, roads, bridges, ships, ports, airplanes and airports, containers, as well as warehouses for the needed temporary storage.
Furthermore, we can’t leave out the mining of metals and the extraction of petroleum products and the facilities necessary for the smelting and refining of these raw materials extracted from the earth for production. The construction of the electric power grid, with all its generative power plants plays a major role. The fact that some of these facilities are built not only for production but also for services to private residences makes no difference. The hiring and training of a competent labor force has always been the starting point.
And we must keep in mind that in most industrial processes, the material inputs, raw materials, and semi-finished products required for production also get cheaper as productivity rises. Innovation proceeds continuously in one sector after another, and the cheapening of the preliminary extraction and refining of the raw materials is augmented by the cheapening of the manufacturing processes which produce the finished product. One of the well-known stories in the history of industry is the cheapening of Henry Ford’s Model T through innovative rationalization of the means of production, as well as by the systematic simplification of the activity of the laborers themselves. The American Society of Mechanical Engineers recalls:
“In 1913, at $850, the new car was cheap for its day, but still cost $30 more than the average worker’s annual wage. . . . By the end of 1913, Ford and his engineers had built a huge new factory, created the moving assembly line, and driven the price of a Model T down to $550. . . . The 1927 Ford Model T, on display at ‘The Henry Ford’ [museum] is the 15 millionth Ford Model T to be produced. This touring car has a 4-cylinder, in-line, water-cooled, 176.7 cu. in., 20 hp engine, and its price at the time was $380.”
—https://www.asme.org/about-asme/engineering-history/landmarks/233-model-t
But the growth in the productivity of labor does not improve the rate of profit. On the contrary, we see profitability declining as a necessary function of the rising productivity of labor. On the scale of historical progress, the mass of profits grew together with the value and mass of productive output—yes, it was the mass of profit that grew, but not the profit produced by each fractional unit of the capital advanced—and this is the key to the whole problem for the capitalist. Not only did more products become available to wider layers of the population, but their usefulness and quality increased.
Millions of people have witnessed this same phenomenal acceleration of manufacturing automation in the digital technology revolution beginning in the 1970s and gathering strength. As Robert Gordon tells it:
“The fastest transition of all, as chronicled in Chapter 13, was the IT revolution, as the dominance of the mainframe computer for commerce and research yielded to the personal computer in the 1980s and then in the 1990s the PC was married to communications through the development of the world wide web.”
—Gordon, ibid.
But in most manufacturing, as we have seen, return on investment in manufacturing and basic industry began to decline in the 1970s, even while productivity gains were still making products cheaper to produce. What had changed? The rate of profit is what had changed, says Jack Barnes. Profitability began to lag, and this lag induced capitalists, especially those in heavy industry, to shift capital investments away from the large industrial manufacturing sectors. While the U.S. experienced a decline in basic steel production, other nations increased their rates of output, and thus there developed a “rust belt” in Pennsylvania, Indiana, and Ohio. As Barnes noted (above), “. . . they can’t secure a competitive rate of return on investment in capacity-expanding plant and equipment.”
Furthermore, the capitalists are quick to explain their profitability problem by conjunctural or temporary conditions, referring to issues arising from competition or government incursions on their property rights. Capitalists hire lawyers, accountants, lobbyists, politicians, and economists—the “agents” of capitalist production—in order to work out the strategies they believe are required to solve their problems. But they are handicapped by their practical and ready-made worldview, which—although it provides helpful hints for many difficult problems that arise in production and exchange—serves as a stand-in for their failure to understand the evolution of the capitalist system as a definite stage of world history. Marx took a look at this in Capital, Vol. III:
“. . . it is just as natural for the actual agents of production to feel completely at home in these estranged and irrational forms of capital—interest, land-rent, labor-wages—since these are precisely the forms of illusion in which they move about and find their daily occupation. It is therefore just as natural that vulgar economy, which is no more than a didactic, more-or-less dogmatic, translation of everyday conceptions of the actual agents of production, and which arranges them in a certain rational order, should see precisely in this trinity, which is devoid of all inner connection, the natural and indubitable lofty basis for its shallow pompousness.”
—MECW, Vol. 29, p. 295
The mental processes of the capitalists and their associates are a reflection of their activity and, since they limit themselves to what is palpable, measurable, and visible in daily life, they cannot recognize the underlying processes which have developed spontaneously — and continue to operate throughout the rise and fall of the capitalist mode of production. This underlying, inner law of capitalist development creates dislocations and clashes within and among the nations of the world. Thei inability to recognize what has developed under the surface is very much like the incapacity of humans to understand the processes of the organs of their own bodies prior to the emergence of biological science—anatomy and physiology—in the 16th century, when Vesalius began dissecting corpses. Likewise, it was not understood that the earth revolved around the sun until the early 16th century, when Copernicus could make the calculations necessary to prove this counter-intuitive reality. And in the 17th century, political economy was born, and social science became a new field of study.
Marx, for his part, could place the new science of historical development on a firm foundation as a genuine advance over what had previously been considered philosophy. In the early-to mid-19th century, Marx and Engels obtained an advanced understanding of the progress of Western civilization through their studies rooted in the “classics,” particularly benefiting from the ideas of Georg Hegel. Marx focused the main part of his research on the evolution of the science of political economy, which began with the work of William Petty (1623–1687) and continued with the writings of Adam Smith (1723–1790) and David Ricardo (1772–1823), as well as Francois Quesnay (1694–1774), making significant progress in the field before Marx’s time. But Marx was, above all, a revolutionist (as Engels proclaimed at Marx’s gravesite in 1883), and he recognized that the future inevitable weakening of the capitalist mode of production would precipitate an intensification of class struggles between the exploited workers and their bosses. This would promote the acceleration of the transition to a post-capitalist phase of social development, which would begin with the “dictatorship of the proletariat.”
Marx and Engels recognized that the history of the human race began with its emergence from a species of primate long ago. They had both appreciated the work of Charles Darwin, for his book, Origin of Species (1859), and later, The Descent of Man (1871) which offered substantial evidence for the emergence of human civilization, first through the process of biological evolution from ape to human, and then the development of our species through cultural evolution. Later in life, Marx and Engels both learned to appreciate the studies of the pioneers of anthropology L. H. Morgan (1818–1881) and E.B. Tylor (1832–1917).
Evelyn Reed, an authoritative defender of Marxism in anthropology, explained in her book, Sexism and Science, the impact of the early anthropologists on Marx and Engels:
“The work of this pioneer school was marked by the following traits: It was, first of all, evolutionary in its approach to the problems of pre-civilized humanity. These anthropologists extended Darwinism into the social world. They proceeded on the premise that in its march from animality to civilization, humankind had passed through a sequence of distinct, materially conditioned stages. They believed that it was both possible and necessary to distinguish the lower stages from the higher stages ones that grew out of them and to trace the interconnections between them.
“Secondly, this school was substantially materialist. Its members laid great stress upon the activities of human beings in procuring the necessities of life as the foundation for explaining all other social phenomena, institutions, and culture. They sought to correlate natural conditions, technology, and economics with the beliefs, practices, ideas, and institutions of primitive peoples. They probed for the material factors at work within society to explain the succession and connection of different levels of social organization. The most successful exponent of this evolutionary and materialist method was Morgan, who used it to delineate the three main epochs of human advancement, from savagery, through barbarism, to civilization.”
—https://www.pathfinderpress.com/products/sexism-and-science_by-evelyn-reed
Marx saw how, through the millennia of human social development, processes of movement had continued to give rise to the social relations that allow human groups to overcome backwardness and mobilize their creative powers to rise to higher levels of labor productivity. These changes, in turn, demonstrated a tendency to strengthen social cohesion among pre-civilized social formations during early development as hunters and gatherers. The struggle for life kept developing further the potentials for cooperation and ingenuity in laboring activities, and the bonds of human solidarity against the many dangers that threatened their existence. Social evolution is cumulative—lessons learned by one generation are passed on to the next, and the knowledge of human communities grows. As different groups intersect, they learn from one another, accelerating the body of knowledge they absorb. The knowledge itself is based on experience and provides practical lessons. And the “inner laws” of social progress, discovered by Marx, can be detected and analyzed by scientific investigation.
Paleoanthropologists long since have shown how the stages of evolution from the last common ancestor of humans and chimpanzees proceeded through the emergence of several hominin species. These pre-human societies developed upright gait, larger brains, and learned how to make and use tools. While this process advanced through infinitesimally small genetic changes, over 4 or 5 million years our species evolved. But our true advantage turned out to be our solidarity with one another in producing our needs, our ability to communicate our thoughts and emotions, and in our ability to pass the most critical lessons of life from generation to generation. As Harvard University’s biological anthropologist Joseph Henrich explains,
“This brings us to a central insight. Rather than opposing ‘cultural’ with ‘evolutionary’ or ‘biological’ explanations, researchers have now developed a rich body of work showing how natural selection, acting on genes, has shaped our psychology in a manner that generates nongenetic evolutionary processes capable of producing complex cultural adaptations. Culture, and cultural evolution, are then a consequence of genetically evolved psychological adaptations for learning from other people. That is, natural selection favors genes for building brains with abilities to learn from others. These learning abilities, when operating in populations and over time, can give rise to subtly adaptive behavioral repertoires, including those related to fancy tools and large bodies of knowledge about plants and animals. These emergent products arose initially as unintended consequences of the interaction of learning minds in populations over time. With this intellectual move, ‘cultural explanations’ become but one type of ‘evolutionary explanation,’ among a potential host of other noncultural explanations.”
—https://www.amazon.com/Secret-Our-Success-Evolution-Domesticating/dp/0691166854
Henrich developed a deep understanding of the key evolutionary truths with which Marx had begun to wrestle at an earlier stage of the development of his view of primitive social evolution. In the Grundrisse, Marx commented on how a social scientist might proceed when contemplating how to construct an analysis of historical change:
“It would seem to be the proper thing to start with the real and concrete elements, with the actual preconditions, e.g., to start in the sphere of economy with population, which forms the basis and the subject of the whole social process of production. Closer consideration shows, however, that this is wrong. Population is an abstraction if, for instance, one disregards the classes of which it is composed. These classes, in turn, remain empty terms if one does not know the factors on which they depend, e.g., wage-labour, capital, and so on. These presuppose exchange, division of labour, prices, etc. For example, capital is nothing without wage-labour, without value, money, price, etc. If one were to take population as the point of departure, it would be a very vague notion of a complex whole and through closer definition one would arrive analytically at increasingly simple concepts; from imaginary concrete terms one would move to more and more tenuous abstractions until one reached the most simple definitions. From there it would be necessary to make the journey again in the opposite direction until one arrived once more at the concept of population, which is this time not a vague notion of a whole, but a totality comprising many determinations and relations.”
MECW, Vol. 28, p. 37
As it turned out, Marx devoted most of his attention to unraveling social evolution from the 16th century to the 19th, while Henrich devoted himself to analyzing the biological and social underpinnings of human cultural adaptation. Marx came to recognize the underlying reality that drives the growth, maturation and decline of capitalism. Capital, in every phase of its existence, and in every branch of production that falls under its sway, generates rising labor productivity; the mass of material inputs into the production process grows, while the value newly added by the workers daily declines as a portion of the total product value. As I explained in my essay on the profit rate:
“We are discussing an evolutionary process in which the mass and value of the means of production constantly grow in relation to the value newly created by the workers who interact with this mass in the daily process of creating more value and surplus value in the product of labor. As this mass increases, the new value added per day shrinks ever smaller in relation to the ever-increasing value of the means of production each worker operates.”
—https://jmiller803.substack.com/p/why-the-profit-rate-must-fall
Some sectors of industry, such as basic and specialty steel, as well as the mining of iron ore and coal, which provided steel’s raw inputs, came increasingly under pressure as capital retreated from these formerly remunerative companies. The costs of upkeep and renovation became prohibitive. The enormous masses of capital, in search of anything that would boost the quarterly bottom line, led to the expansion of multiple financial sectors in the 1980s, which followed on the heels of a series of investment setbacks of the late 1970s, including the high inflation rate of that period. This inflation was brought to heel only by an unprecedented regime under Federal Reserve Bank chairman Paul Volcker, who tightened interest rates, ratcheting them up to the height of 20% in 1981. This provoked another market downturn and recession in 1981–82 as many businesses that had become accustomed to borrowing to sustain their profit-making were forced to cut back or declare bankruptcy. Volcker was initially seen by many as a heavy-handed, autocratic wrecker, but later came to be lauded as a savior for having strangled the inflation monster. But now, we are left to question how successful the Volcker Fed regime was, given the subsequent course of events in the deepening muck of financial quicksand.
As profits declined in the existing sectors of production, capitalists abandoned the most troubled sectors and sought to increase their profit rates in the newly emerging communications and entertainment sectors (as Gordon has explained). There was a massive capital migration into the sectors that seemed more likely to offer a higher rate of return. Jack Barnes took note of this in the 2005 article “Capitalism’s Long Hot Winter Has Begun,”
“The debtor-creditor relationship becomes increasingly central to the functioning of international capitalism, outstripping the earlier centrality of the relationship of buyer and seller. ‘This is the essence of imperialism and imperialist parasitism,’ he writes. Lenin would not have been surprised by the explosion over the past couple of decades of more and more forms of debt, more and more flavors of fictitious capital: not just traditional bank loans and bonds, but so-called derivatives, options, bundled mortgages and consumer debt, swaps, repos, the bond and gold carry trades, and others too numerous to list.”
—https://www.pathfinderpress.com/products/capitalisms-long-hot-winter-has-begun_by-jack-barnes
One of the early financial failures in the period was the Penn Square bank, which went under in July 1982. As investigative journalist Christopher Leonard reveals:
“During the 1980s, [Federal Reserve Bank of Kansas City president Thomas] Hoenig and his colleagues in Kansas City were left to sort out the long-term problems the Fed’s short-term thinking created during the 1970s. The biggest mess they cleaned up was the failure of Penn Square, a bank in Oklahoma that had extended a chain of risky energy loans during the 1970s.
“When Penn Square failed, it almost took down the entire U.S. banking system with it. It also illuminated a second important pattern that would harden in the coming years. The Fed didn’t just stoke asset bubbles. It found itself on the hook to bail out the very lenders who profited most off a bubble as it rose. Some banks, the Fed was about to discover, had grown too large and too interconnected to fail.
“. . . Penn Square was an early pioneer of what’s called securitization, whereby the bankers create risky debt and then sell it to someone else. Penn Square’s version of securitization was the sale of a ‘participating loan.’ [Penn Square CEO Bill] Jennings would loan money to an oil company, then sell most of the loan to another bank while keeping a small share of the debt on its own books. The idea was simple—extend as many loans as possible, collecting fees with each deal, and move the actual risk of a loan default onto someone else’s balance sheet. This helped Penn Square avoid rules requiring it to keep a certain amount of cash reserves on hand.”
—https://www.amazon.com/Lords-Easy-Money-Federal-American/dp/1982166649
In this climate, the savings and loan crisis emerged. As Jack Barnes explains:
“In addition, about one-third of the 3,120 U.S. savings and loan institutions accumulated losses totaling $13.4 billion in 1987, with almost $4 billion more in losses during the first three months of 1988. More than 500 failed over the past year, and up to 500 others are close to being insolvent. The true situation of these institutions is even worse than reported figures reveal, since their owners and managers use accounting tricks to maintain outstanding loans and the interest due on them as assets long after these debts have obviously become uncollectible.”
—https://www.pathfinderpress.com/products/new-international_number-10_imperialisms-march-toward-fascism-and-war_by-jack-barnes
Many of us remember the wave of excitement that stimulated the public optimism about the future growth of digital technology. As Robert Gordon tells it:
“A pivotal point in this transition was the decision of IBM, the developer in 1981 of the first widely purchased personal computer, to farm out not just the conception of the operating system software, but also the ownership of that software, to two young entrepreneurs, Paul Allen and the Harvard dropout Bill Gates, who had founded Microsoft in 1975. The Third Industrial Revolution, which consists of the computer, digitalization, and communication inventions of the past fifty years, has been dominated by small companies founded by individual entrepreneurs, each of whom created organizations that soon became very large corporations. Allen and Gates were followed by Steve Jobs at Apple, Jeff Bezos at Amazon, Sergei Brin and Larry Page at Google, Mark Zuckerberg at Facebook, and many others.”
—Gordon, ibid.
The speculative fever produced by these burgeoning blockbuster triumphs gave rise to the “dot.com bubble,” which burst in 2000 when billions of dollars of “venture capital” ended in big losses as the new digital businesses launched by self-appointed “geniuses” with grandiose dreams of creating a new Microsoft-style bonanza failed. By the late nineties, the sector was overwhelmed by a glut of risky gambles on companies whose reach far exceeded their grasp. The market crash in the year 2000 took place only eight years before the 2008 financial disaster. It seemed like the “fear of missing out” had reached an even higher pitch by that time. As it turned out, the dot.com bust was only a mild prelude to the deep-going 2008 catastrophe.
During the recovery after the brief 2000 recession, the struggle for higher returns in financial sectors was renewed. As Jack Barnes pointed out in The Clinton’s Anti-working-class Record (2016):
“The Clinton administration also accelerated steps by the U.S. rulers to try to counteract the declining rate of profit and the employers’ ‘inadequate’ returns on capital expenditures. The goal was to ‘encourage’ the capitalists to expand industrial plant and equipment and employ growing numbers of workers in production. To that end, the administration and Congress adopted legislation that, along with other White House measures, helped the employing class erect the enormous edifice of household, real estate, corporate, and government debt, and its accompanying array of derivatives, that began to unravel with the first signs of a world financial crisis in 2007 and its acceleration early this year.”
—https://www.pathfinderpress.com/products/clintons-anti-working-class-record-why-washington-fears-working-people_by-jack-barnes
The Clinton administration, under the pressure of the effects of the falling profit rate, and bedazzled by the prospects of major profits in the escalating issuance of derivatives, which absorbed masses of investment capital to build up “assets” that were then used as collateral for more credit operations. To this end, in 1999, the Clinton administration pushed through Congress the annulment of the 1933 “Glass-Steagall Act.” This law had been enacted after an overwhelming wave of 9,000 local bank failures, mainly in 1932–33, brought on by the bankruptcies of major industrial and commercial giants, as well as the massive withdrawal of savings by local bank depositors. Glass-Steagall had placed restrictions on banks to ensure they were adequately capitalized to meet emergencies, and that they did not invest funds in the stock market, which would expose them to unexpected risks.
The new law that the Clintons administration managed to get enacted in 1999, often referred to as the “Gramm-Leach-Bliley Act,” was titled the “Financial Services Modernization Act,” and was intended to open up banking to a wide range of investment opportunities, many of which had only emerged recently, such as mergers and acquisitions carried out by private equity firms or hedge funds, leveraged buyouts, futures and options market gambles on the rising or falling prices of agricultural and petroleum commodities, shorting stocks, bond market operations, and most famously, the buying and selling of collateralized debt obligations (CDOs). But in order to throw more fuel on the fire of speculative risk-taking, the federal regime under the Clinton administration, and with the help of the Fed chair Alan Greenspan, promoted the sub-prime mortgage boom. As Richard Wolff explains in his 2016 book, Capitalism’s Crisis Deepens:
“The large private banks were major players in aggressively promoting mortgages to millions who could not reasonably be expected to afford them. These financial institutions took extraordinary and excessive risks (often with other people’s deposits) in the new MBS [mortgage-backed securities] markets and their associated credit default swap markets. We know now that deals between the big banks and the rating companies (especially Moody’s, Standard & Poor’s, and Fitch) wrongly inflated risk evaluations of those securities. We also know now that insurance megacorporations (especially AIG [American International Group]) could not deliver the insurance protections they had sold to banks and other lenders when mortgages defaulted, and MBS values dropped.”
—https://www.amazon.com/Capitalisms-Crisis-Deepens-Economic-Meltdown/dp/1608465950
But at the same time, we must not forget that the bulk of the “money” that so freely multiplied itself by leaps and bounds, was nothing but numbers in bank ledgers. What was created was a massive mirage of trillions of dollars. This was “credit money” that Marx called “fictitious capital.” It is true that this was an unprecedented “quantity” of fictitious capital—it was enough to drive the major Wall Street investment firms deeply into “bankruptcy” territory once the mountains of imaginary money evaporated and the banks collapsed. Although the money was created out of thin air, it was “legal tender,” and it counted as real, measurable assets. The values of the reportable assets of these banks were announced by Bloomberg and CNBC every day through the summer and fall of 2008, while many thousands of desperate and bleary-eyed bankers stared at the spectacle on their TV screens. The bank stocks fell, day by day, hour by hour, with an unexpected brief rebound every few days, keeping all the horrified Wall Street magnates oscillating between despair and hope-against-hope.
Those who have seen the 2015 movie The Big Short (with Steve Carrell, Christian Bale, and Brad Pitt) or have read the book, might recall some of the explanations for the newly minted, incredibly complex, mortgage-backed securities that were packaged and sold to the biggest players on Wall Street (Morgan Stanley, J.P. Morgan Chase, Citigroup, Merrill Lynch, Goldman Sachs and Lehman Brothers) at breakneck speed. For a very good detailed explanation of the evolution of these market operations, and the enthusiastic support of the Clinton and Bush administrations for the sub-prime mortgage origination mania, I recommend Gretchen Morgenson’s 2011 book Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.
https://www.amazon.com/s?k=reckless+endangerment+morgenson&hvadid=241935329942&hvdev=c&hvlocphy
In October, the federal government stepped in, providing $700 billion in rescue funds, and worked out a “plan” for the recapitalization of the Wall Street banks, except for Lehman Brothers—the most heavily indebted of the group—which was allowed to declare bankruptcy and default on its outstanding obligations. The arrangement was dubbed the “Troubled Asset Relief Program,” and while it settled the troubled stock markets for the time being, it sowed the seeds for future catastrophe—which is stalking the world to this day. As Cristopher Leonard explains,
“What went unnoticed was that the law also updated the Federal Reserve Act in a manner that paved the way for quantitative easing. It allowed the Fed for the first time to directly pay banks an interest rate on the cash they held in their Fed reserve accounts. This might seem trivial, but it’s what allowed the Fed to transform the financial system. Now the Fed didn’t need repo operations [repurchase agreements providing short-term loans to banks from the Fed] to control short-term rates. There was no ceiling anymore on the level of excess bank reserves. Instead of controlling rates through repo trades, the Fed would control them by lifting or lowering the interest on excess reserves, or IOER, rate.”
The magnitude of the 2008 collapse is described this way by Christopher Leonard:
“The world of central banking was neatly divided into two eras. There was the world pre-GFC and the world post-GFC. The GFC itself was apocalyptic. The entire financial system experienced a total collapse that risked creating another Great Depression. This would mean years of record high unemployment, economic misery, political volatility, and the bankruptcy of countless companies. The crisis prompted the Federal Reserve to do things it had never done before. The Fed’s one superpower is its ability to create new dollars and pump them into the banking system. It used this power in unprecedented ways after Lehman’s collapse. So many of the financial charts that capture the Fed’s actions during this period look like the same chart—a flat line that bounces along in a stable range for many years, which then spikes upward like a reverse lightning bolt. The upward spikes capture the unprecedented amount of money the Fed created to combat the crisis. Between 1913 and 2008, the Fed gradually increased the money supply from about $5 billion to $847 billion.”
—Leonard, ibid.
The TARP (Troubled Assets Relief Program) experience showed how the top business and political decision-makers were following a path that would commit the government to a long-term course that would repeatedly pour “money” into the banking system to keep rescuing the banks and corporations over and over again. This reflected not only the fear of a collapse of the banking system but also the fear that reckless risk-taking would win out over prudence in banking and become normalized. This government coddling of irresponsible greed with “other people’s money” is called “moral hazard”—a reference to the way bankers become overconfident and reckless because they know, or suspect, that if their level of risk rises into insolvency and beyond, the government will bail them out—hence the phrase “too big to fail.” Richard Duncan, in his book The Dollar Crisis, explains (regarding the growing significance of moral hazard):
“In a sense, the International Monetary Fund (IMF) has already begun to resemble a global central bank (GCB). When it bails out distressed countries, it also bails out the international financial institutions (FIs) with exposure to that country. By so doing, the IMF prevents the global money supply from contracting in the same way that a central bank prevents its national money supply from contracting when it bails out a failed bank or banking system at the national level. On the one hand, by bailing out crisis-hit countries and the FIs that lend (too much) to them, the IMF has prevented any of the myriad economic crises of recent years from turning into a global crisis. On the other hand, however, by bailing out the FIs and thereby keeping the global money supply intact, the IMF has created other problems. First, it has created moral hazard. By demonstrating again and again that it will bail out the international FIs, the IMF has made the FIs less fearful of loss, which, in turn, has made them more aggressive lenders.”
Richard Duncan, The Dollar Crisis: Causes, Consequences, Cures (2005)
—https://richardduncaneconomics.com/books-i-recommend/
So now we can see how ever-expanding debt came to be the ultimate, unavoidable, and unstoppable remedy for the future of U.S. capitalism. But this “money” that the Federal Reserve system and the U.S. Treasury kept issuing—what is it? It is U.S. dollars: tokens of credit, fiat currency. We need to keep in mind that Marx explained, “credit” is not money. It is debt. I would imagine most five-year-olds understand the difference. But we adults have been so thoroughly bamboozled by the modern agents of capitalism that we can become confused on the issue. Stephanie Kelton provides an object lesson on this point.
But Stephanie Kelton, the major proponent of “modern monetary theory (MMT)” had a strikingly contrarian approach. She believed the federal government—the Treasury and the Fed—created real money, valid money, and this money was not a substitute or token or anything of the sort; it was certainly not debt. Of course, she would not go so far as to say that the U.S. dollar was “as good as gold,” buy in her 2020 book, The Deficit Myth, she argued that because the U.S. government and the federal reserve system together issue the money, they control the money supply, which is utilized by all those who need it, and thus it guarantees that sufficient quantities are issued for meeting all expenses. She maintained:
“First, as we learned in the previous chapter, the currency monopolist [the money issuer] doesn’t face the same constraints as currency users (households, businesses, or state and local governments). August 15, 1971, marked a major turning point in monetary history. President Nixon’s decision to suspend dollar convertibility increased monetary sovereignty to the United States, forever changing the nature of the relevant constraint on federal spending. Under the Bretton Woods system, the federal budget had to be fairly tightly controlled to protect the nation’s gold reserves. Today, we have a purely fiat currency. That means the government no longer promises to convert dollars into gold, which means it can issue more dollars without worrying that it could run out of the gold that once backed up the dollar. With a fiat currency, it’s impossible for Uncle Sam to run out of money. Yet these senators were talking as if overspending could lead to bankruptcy. They needed to update their monetary lens.
—https://www.hachettebookgroup.com/titles/stephanie-kelton/the-deficit-myth/9781541736191/?lens=publicaffairs
Many people thought that her arguments might be reasonable, and that’s not so difficult to understand. But nowadays there are very few people in the public eye who are willing to praise Kelton’s work as credible. Most respected financial analysts rarely, if ever, mentioned MMT. On the other hand, even though politicians and investors might have scorned MMT, many began to behave as if they agreed with Kelton. But it was not her arguments that moved them in that direction; rather, it was the crying need to print more money, to build the mountain of debt higher and higher.