Understanding the Current Economic Crisis

The ABC’s of the Economic Crisis: What Working People Need to Know
Fred Magdoff and Michael Yates

Monthly Review Press (2009)

Book Review

In the ABC’s of the Economic Crisis, Magdoff and Yates use stagnation theory to explain the origins of the current global economic crisis. Karl Marx predicted that overproduction and stagnation would be inevitable under monopoly capitalism once market demand has been saturated. Magdoff and Yates use the auto industry as an example. Immediately after World War II, consumers bought a lot of cars and trucks which were unavailable between 1941 and 1945. By 1970 there was a surplus of cars – all the Americans who wanted cars and trucks had already bought them. Meanwhile the world’s poorer nations didn’t have a mass market large enough to reduce this surplus.

The same was true of other durable goods (refrigerators, washing machines, dishwashers, vaccuum cleaners, etc). And as consumer buying slowed, so did profits and GDP growth.

Why Capitalism Didn’t End With the Great Depression

Many Marxists (including John Strachey in The Coming Struggle for Power) believed the Great Depression signaled end stage stagnation and the imminent death of capitalism. According to Magdoff and Yates, it was only the massive economic boost of World War II military spending that saved capitalism in the thirties and forties.

There was also a brief post war boom in the fifties and sixties, as consumers rushed to buy goods that were unavailable during the war. When the sixties ended, stagnation set in again, accompanied by a marked slowing of profits and growth. However neither declined to 1930s levels, thanks to the “financialization” of the US economy.

The Financialization of the US Economy

The term “financialization” describes the process of creating profits without producing products or services. In the US, finanancialization injected money into the economy in three ways: via massive government spending and indebtedness (to private banks), via massive consumer indebtedness and via an explosion in the trade of derivatives and similar financial products.

Between 1980 and the 2008 crash, the banking, insurance and investment sector became the largest growth sector of the US economy. Beyond financing unprecedented levels of consumer, business and government debt, this sector also engaged massively in speculation (ie gambling).

Financialization: A Giant Ponzi Scheme

As Magdoff and Yates describe, the enormous “wealth” created by the financial sector helps to drive the “real” productive economy. The main problem with financialization is that it’s basically a Ponzi scheme – it can continue only so long as economic growth continues. If it goes on too long, the speculative bubble will burst, resulting in financial collapse, as it did in 1929 and 2008.

The Link Between Declining Profits and Low Wages

Despite the life support provided by “financialization,” economic stagnation continued between 1970 and 2008. As Magdoff and Yates point out, GDP growth dropped from 4.4 to 3.3 percent in the 1970s, to 3.1 percent in the eighties and nineties, and 2.2 percent between 2000 and 2008.

A significant decline in wages and purchasing power accompanied this decline in profits and growth. In order to keep workers consuming, the corporate sector compensated by giving them credit cards – lending them money at 18-20% interest they were no longer paying in wages.

A Film About Economic Democracy

Can We Do It Ourselves? A Film About Economic Democracy

Patrick Witkowsky, Jesper Lundgren, Andre Nystrom and Nils Safstrom (2015)

Swedish with English subtitles

Film Review

“Economy democracy” describes a system in which workers control the workplace and determine the policies under which it runs. The workers cooperative is the best known model of economic democracy.

The filmmakers begin by differentiating capitalism from a free market economy and economic democracy from socialism – as many people confuse these terms. Under capitalism private capitalists own the capital to run a business and enter into a rental contract with workers to perform the labor. Under this system the capitalists own and control the business and keep all the profits.

With a worker cooperative, workers own and control the business and enter into a rental contract with labor to provide capital. They pay the capitalists for using their money but maintain ownership of the business and control of production. They also decide how profits will be distributed.

Under socialism, the capital is “socialized.” Theoretically this means workers own an equal share of the entire economy. In practice, this has generally translated into state control of the workplace, as opposed to worker control.

This film focuses on the day-to-day operation of two 30-year-old American cooperatives. The first is Massachusetts-based Equal Exchange, founded in 1986. The second is New York-based Cooperative Home Care Associates. The latter was founded in 1985 and has 2,300 member-employees.

The filmmakers also interview various academics, activists, business leaders and trade unions officials regarding their research and experience with cooperatives.

The part of the film I found most interesting was an analysis of how monopoly capitalism distorts the free market. Our present economic system actually consists of three markets: the consumer (goods and services) market, the labor market and the capital market. Only the consumer market operates democratically, in being driven by consumer choice. The goal of economy democracy is to democratize the labor and capital markets, which are controlled at present controlled by a tiny capitalist elite.

Because workers have virtually no say into their work and receive minimal direct benefit from it, capitalists must use the fear of being fired to force them to work. This is only possible in economies with high levels of unemployment and poverty. Historically the corporate elites have deliberately manipulated monetary and fiscal policy to keep unemployment rates high.

Once workers own and run their own companies, unemployment and poverty are no longer necessary to motivate them. Thus full employment is one of the most important benefits of economic democracy.