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.

The Importance of Fascism in End Stage Capitalism

The Coming Struggle for Power

by John Strachey

Victor Golancz Limited (1932)

Free download link: The Coming Struggle for Power

Book Review

In The Coming Struggle for Power, British historian makes the prediction (writing in 1932) that capitalism is in its death throes and will end by 1950. He was wrong, obviously. Strachey had no way of predicting the tremendous boost monopoly capitalism would receive from Cold War military spending, nor the “financialization” (the shift from selling products to selling financial instruments) that would happen in the 1970s.

The book is largely historical, tracing the transition all global economies underwent from feudalism to mercantilism (large scale international trade) and from mercantilism to capitalism. In Europe both transformations were violent. Strachey points to the Rebellion of 1640 (during which Charles I was beheaded) and the Revolution of 1688 (in which James II was overthrown) during the feudal-mercantilist transition. The Enclosure Acts of the 18th century marked the mercantilist-capitalist transition. During this period British troops drove tens of thousands of families off lands they had farmed communally for more than 1,000 years – with most ending up in prisons and work houses.

Strachey also stresses that neither the French Revolution nor the American Revolution was really about political freedom or equality. The real purpose of both wars was to end old feudal relationships that interfered with the right of the new capitalist class to freely produce, buy and sell goods at a profit

The Inevitable Decay of Monopoly Capitalism

Strachey takes the Great Depression of the 1930s as evidence that capitalism has reached its final stage of monopoly capitalism. Quoting Lenin, he lists the three telltale signs that monopolistic capitalism has begun to decay:

1. The monopolistic corporations that control finance capital (ie banks) essentially merge with the monopolistic corporations that control production.
2. There’s growing focus on exporting capital (ie moving factories overseas).
3. National governments, which are essentially controlled by their monopolies, are in constant conflict with one another over who will control the resources, markets and cheap labor of the Third World.

Gee, this sounds familiar. The parallels with 2017 are uncanny.

The Inevitable Rise of Fascism

Strachey also writes about the important role of fascism in end stage capitalism. The declining profits and growth (ie stagnation) associated with end stage capitalism inevitably lead to reduced wages, poorer working conditions and a claw back of social welfare benefits enacted during more productive periods. This, in turn, leads to more conflict between workers and capitalists. Ensuring that production continues during a period of heavy stagnation necessitates the rise of fascism, in which the capitalists themselves organize workers into right wing populist movements which enact laws unfavorable to working people.

How Capitalism Stifles Intellectual Life

For me, the most interesting section of The Coming Struggle for Power concerns the stifling effect of corporate capitalism on intellectual life. Emphasizing the narrow ideological framework capitalism imposes on intellectuals, he devotes one chapter each to religion, philosophy and science and two to literature.

Because “capitalist” theologians and philosophers are limited to value systems that support profit taking and wealth accumulation, humankind has made absolutely no progress in 200 years in leading more moral and ethical lives. This stifling effect is also obvious in the areas of renewable energy technology (people forget Carter had a solar panel on the White House in 1979) and health science. At present, the profit motive has distorted health care to the point that many medical interventions actually make people sicker.