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Book Review: Bonfire of Illusions, The Twin Crises of the Liberal World by Alex Callinicos

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Alex Callinicos is a Professor of European Studies at King’s College London, but more importantly he is a committed Marxist able to analyse the workings of capitalism on both an international economic and political level. Whilst many analysts of recent world history are working in a paradigm of apology for capitalism and a rather confused understanding of the factors at work, his Bonfire of Illusions, The Twin Crises of the Liberal World is refreshing, clear and packed full of explanation and evidence.

Callinicos identifies one of the two crises of the Liberal World unsurprisingly as the financial collapse of 2007-09. But although many would expect the attack on the twin towers to be the other major crisis, Callinicos instead identifies an event which had a more profound effect on the role of the US in world politics, the war between Russia and Georgia in 2008.

Most of us will be aware by now of the causes of the latest massive crisis of capitalism: the substitution of effective demand by consumer debt, the underpinning of borrowing by equity from homes, the bundling of mortgage debt and the growth of derivatives, the over-valuing of securities by tame companies, the spread of debt risk across the world through the international sale of securities, and of course, the subsequent popping of the bubble.

But as Callinicos points out, few are really aware of the endemic crisis in capitalism that led to it. The long-term profitability problems of capitalism in manufacturing led to the growth of more profitable businesses based on finance rather than production so that the value of financial commodities became more and more distant from their real industrial base.

To get some idea of the scale, we can note that the Bank for International Settlements reported that the total value of over-the-counter derivatives (that is not traded on the formal exchanges), peaked in mid-2008 at $683,700 billion, a staggering number made even more scary by the fact that it represents eleven times global output. That’s a lot of gambling in anyone’s money.

Callinicos examines the three most distinct perspectives on the financial crises: the Keynesian, the classical-liberal, and the Marxist approach. He looks at the analyses proposed by exponents of each approach guiding us through the detail and drawing out the implications for us to check against the known evidence.

Hyman Minsky is the most infuential of the Keynesian school, who himself identifies deep-rooted instabilities in capitalism, based as it is on capital accumulation. But he fears the effects of regulation on financial capital. After the crash of 1929, finance capital was regulated but driven by competition, it found forms to erode the controls put in place. It was ever thus. But he even makes clear that Ponzi schemes are important for the expansion of capital itself. “Capitalism without financial practices that lead to instability may be less innovative and expansionary; lessening the possibility of disaster might very well take part of the spark of creativity out of the capitalist system”.

Minsky though, faced with this obvious contradiction between social well-being and the capitalist system, remains vaguely committed to capitalism rather than addressing the underlying problem. Instead of analysing the deep relationship between capitalist economic relations and finance, and drawing the appropriate political conclusions, he chooses to stop short.

Not so in the case of F. W. von Hayek, darling of the new monetarists. He identified the crucial importance of the credit system and like Minsky, clearly believed that the credit system generates destabilised booms. Though he wouldn’t thank you for telling him, as John Strachey did, Hayek had stumbled upon a truth discovered by Marx before him, the inherent instability of the capitalist system caused by the accumulation of capital.

The difference though was that Hayek thought the state should do nothing about it except for moderating the expansion of credit. Instead, the markets should be left to their own devices, destroying capital, bleeding out where necessary, obeying what Hayek saw as natural laws of the system.

Both these approaches to crisis view the system as being inherently unstable but both think nothing can be done. The Keynesian approach is to tinker with the behaviour of the system to ameliorate its effects without addressing the underlying causes, the monetarist approach is to leave it all to the market and let those who suffer at the bottom take the strain. Both have their political ideologues.

But if capitalism is fundamentally crisis-ridden, how do we interpret the recent economic history, the succession of bubbles, the financialisation of the global economy, and how does it relate to global politics? The operation of the capitalist system is not a mere academic curio — it affects the lives of everyone on the planet. It is therefore incumbent on any serious analysis to relate the underlying instability of capitalism to the mechanism of political power, to analyse those who benefit and those who don’t.

And if the increasingly severe crisis pressures within capitalism cannot be resolved, what then are the political prospects?

The second part of the book is where Callinicos expands on the importance of the war between Russia and Georgia, which seemed at least in much of the press, a small border issue. But globalisation was supposed to have promised sustained prosperity in which national borders became insignificant, and the free movement of capital and labour allowed the markets to flourish. Opening up Russia to market competition in fact led to a drastic fall in living standards as many of the state’s assets were acquired by the mafia and favoured political elites.

For the mass of the population, the rape of Russian assets was an unmitigated disaster and far from leading to prosperity, led to mass misery. But ironically, far from leading to the demise of the nation state, globalisation and the pushing of the neoliberal agenda meant that states themselves were the agency of choice to shore up national enterprises during a crisis.

Russia waged the war with Georgia to halt the NATO-led encirclement. As the US pushed the economic advantage, Russia in turn recognised that the US was overstretched, involved in Afghanistan and Iraq, and successfully played France and Germany against the rest of Europe. France and Germany had already vetoed plans for EU membership of Ukraine and Georgia and this was enough to head of US expansionist plans.

This was a humiliation for US plans and demonstrated that the nation state still played a crucial role in international politics. Even the European response to the international crisis was a collection of national plans, devised separately with little except formal agreement between them. Europe lacks the political legitimacy to take concerted economic and political action on the world stage

Callinicos makes clear that the project of globalisation is in retreat. It hasn’t delivered on its promises and there is now a trend towards banks lending at home, pleasing their national governments. The World Bank pointed out in March 2009 that after the G20 had agreed at its meeting in November 2008 to avoid protectionism, no less than seventeen of the G20 had implemented no less than forty-seven protectionist measures.

So now we are entering a deglobalising world in which US hegemony is on the back foot, with emerging powers like China increasingly using their muscle. The projected decline of the nation state is in reverse, and against all the ruling neo-con ideologies, major states are major shareholders or owners of major financial institutions.

While the IMF and World Bank impose conditions on states that have borrowed to protect their capitalist institutions, some leftish social democrats are arguing that state ownership is the way towards a major transformation of capitalism.

Callinicos picks up these themes at the close of the book. John Holloway’s famous book Change the World Without Taking Power charmingly proposes that as long as everyone adopts a collective and cooperative economic model and ignores the state, then everything will be fine. Such naivety would be harmless enough except for its dire political consequences. Sooner or later then the question of who controls the economic resources comes to the fore. Owners of transnational corporations don’t simply disappear; they engage the force of the state, and others, to fight those who challenge them.

For the first time in many years, there is an active discussion about what you could replace capitalism with. For very many people, the capitalist system fails to deliver what is needed, promotes and maintains massive injustice, and its increasingly damaging crises threaten entire populations. Many people are asking how a competitive system based on profit and capital accumulation can produce the kind of cooperation needed to limit carbon dioxide in the atmosphere to prevent catastrophic global warming? The only answer capitalists have offered is to put their collective heads in the sand and hope it all goes away. They have singularly failed to address the need for cooperation and agreement.

So what can replace capitalism? We should all be engaged in this debate as the bankruptcy of capitalist theories becomes more and more apparent. Callinicos briefly critically reviews a number of approaches ranging from reformist claims, anarchist cooperativism, and a more promising approach from Pat Devine who calls his proposal “negotiated coordination”. Work is progressing on the realistic alternatives to the chaos of the current discredited system.

That old word so feared by capitalist politicians, “planning”, is back on the agenda and rightly so.

No-one here is being idealistic or pretending that there are not major problems to overcome, nor that it will be achieved without a struggle and conflict with those whose wealth and power are protected by the system. But it is equally clear that we have to make the effort and no longer accept the platitudes from discredited economists and politicians. When they say “there is no alternative”, we have to reply “oh, yes there is!”  When they say “you have to accept austerity measures,” we should answer “the wealthy first”.

This book is highly recommended for anyone who wants to know not just what happened in the last five years, but how the structure of international politics relates to the fundamental instabilities of modern capitalism.

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About Bob Lloyd

  • roger nowosielski

    Bob Lloyd, long time no see!

    I think you might find this interesting, and I cite in full:


    roger nowosielski • 23 minutes ago

    I should have included this sooner, but better late than never. Anyways, here’s a must-read primer by Benjamin Kunkel on “capitalism in crises” (the crisis theory of capitalism).

    Again, it’s from London Review of Books, an article “How Much Is Too Much?”
    See this link: http://www.lrb.co.uk/v33/n03/b

    As a bonus, here’s a review of Chris Harman’s last book, Zombie Capitalism: Global Crisis and the Relevance of Marx by Guglielmo Carchedi, himself an author of a topic-related book, Bonfire of Illusions, a review by none other than our own Bob Lloyd, as per this link: http://blogcritics.org/book-re

    It’s a small world indeed!


    Anyways, as I look at the date of your book review, it goes back to July 19, 2010, so I have no idea whether you’re still around or not. I certainly hope so, for you surely were ahead of the curve, so to speak.

    In any case, if you’re still around and game, perhaps you could rejoin our recent discussion on the very topic of your interest, as per the following link: