Just a few years back, business and economic pundits were falling over themselves in the mainstream press to offer belated warnings of the coming financial melt-down. Out of the blue, it seemed, was the sudden awareness that the plethora of fictitious financial products had no real value underpinning them, that the bubble of absurd expectations was fast approaching something sharp, and that those with a bit of sense were dumping their liabilities.
The crisis it seems, like many before it, approached with little warning and caught everyone unawares. At least, that's the popular story. The randomness of the business and trade world meant that crises were always possible if we weren't on our guard against it. And of course, when crisis strikes, those whose guards were down are the natural scapegoats. And those who made rash claims about years of uninterrupted growth were particularly exposed.
But the fact is that the crisis wasn't at all unexpected and it didn't come suddenly out of the blue. It actually developed over the last 30 years. Richard D. Wolff has now issued, in Capitalism Hits the Fan, a collection of his articles first published in Monthly Review which serves as a remarkable record of just how blind conventional economics really is, and also as a practical guide to how a real analysis of the crisis shapes up.
Between 1850 and 1975 in the U.S., the real incomes of working people pretty much kept pace with increases in productivity, which was good news for the owners of industry and the workers because the additional goods could be bought with the additional demand. Workers were earning enough to buy an increasing amount of the goods they produced. But then the link was broken in the mid-'70s and the power of the corporations forced down real wages.
As productivity outstripped real wages, profits of course rose as the cash that would have ended up in employee pay-packets ended up in the bank accounts of the owners where by and large it didn't get spent buying up the now surplus products. So there was insufficient demand for the surplus goods being produced. And we all know that crisis of overproduction led to falling prices and falling profits. How then to keep the demand up but without giving workers an increase in their real wages?
The master stroke was to lend the money to working people to satisfy their demand to possess an increasing range of consumer goods. By borrowing money, working people could still have the goods they wanted but couldn't afford, because their real wages were not growing. Under normal circumstances, not having the money would imply not being able to buy the products. Industry bosses realised this and the innovation was to boost consumer debt to keep the profits flowing.
But along comes problem number two. How then to provide the credit? Against what would the money be advanced? Well, the great American dream of everyone owning their own house was a reality for many people. And houses mean equity. The banks, and anyone else who could get in on the act, loaned working people the cash against the equity in their houses.
In 1974, the Federal Reserve estimated total consumer debt was $627 billion. By 1994 it had risen to $4,206 billion and by 2004 it was at $9,709 billion. Everyone and their financial friend was offering loans against equity. Following the 2000 stock market crash (another of those fragile bubbles), the Fed kept interests rates down, which gave rise to speculative investment in housing as more people borrowed to get that first home. Getting a mortgage was never so easy.
But underpinning all of this was the real value of homes, the real equity, the real economy, not the fictitious economy of double- and treble-sold collected securitized risk bundles. But the quest for profit continued unabated. New innovative ways were found to squeeze out more profit. Mortgage debts were bundled up and sold, their riskiness being assessed by financial companies set up to offer the right numbers. As they inflated the ratings of these bundles, the securitization of debt became more and more divorced from the real world and of course, as soon as the first doubt set in, it rapidly became a complete crisis of confidence.
The credit taps were jammed shut, loans were called in, banks refused to lend even to each other, and the whole irrational crazy pack of cards came crashing down. And then of course, everyone was hunting the guilty. Was it lack of regulation? Too much? Failure of government policy? Too big or too small government? Inadequate data? Fickle working people buying more than they could pay for? Irresponsible lenders encouraging people into debt?
The post festum squabble about policy is almost indecent in the way it covers up the endemic nature of crisis in capitalist economy. When the people who make the decisions are driven by profit and through competition are forced to put the public good a long way down the list if it is there at all, those really to blame are the ones who defend the system and insist it is the only way to go. All those Democrats and Republicans who insist that the free market guarantees the public good should recognise the empirical slap in the face they've just been given and start to rethink whether this system is the best we can manage.
Back in the days of Roosevelt, everyone was calling for state intervention to provide the necessary demand that profit-centred manufacturing wouldn't or couldn't provide. The social services established under the New Deal have now all but been clawed back by the owners of industry in successive waves of government cutbacks and during that time, the industrialists and company owners have seen their wealth explode to unheard of levels. They have never been so rich nor so powerful.
Everyone was a Keynsian between 1930 and 1970. But those inherent capitalist crises were still there and so it was all change in the 70s – everyone became monetarists and Milton Friedman and the Chicago School were the new prophets. But it was the very neo-classical economics which so obscured the tendency to crisis so evident in the capitalist economy.
The argument about bigger or smaller government, greater or lesser regulation, more or less fiscal stimuli, has been fruitless precisely because it doesn't address the real motor of capitalist economy, the extraction of profit by one class from another. The owners of capital are not patriotic and the market works to their benefit not to that of the common good. By ideologically displacing such ideas, economics becomes a faith-based activity rather than one based on the analysis of the facts.
Richard D. Wolff has provided a blow by blow account of how the crisis developed, how the politicians and parties reacted, and how the average folks suffered and will suffer in times to come. But he has done more than that. He has shown that Marxist economics provided a clear analysis throughout, which was not just accurate and prescient, but also points unmistakably to the need fundamentally to change the system. Profit benefits one class at the expense of everyone else and it has been empirically shown in every crisis who it is that picks up the tab.
Whether you align yourself with Democrat or Republican, New Labour or Tory parties, or are politically independent or non-aligned, this book provides an excellent source of clear well-focussed analysis of what happened in the last five years. For the first time in years, those parties who defend capitalism are on the defensive economically. In countries around the world they are talking austerity, sacrifice by working people, government bail-outs of financial companies, in the Messianic belief that their hallowed system will be fine just so long as their special treatment can bring it back to health.
They are defending a system that works against the public interest to benefit a small very wealthy minority. It time to question the system itself.