During mid-August 2007, a number of banks discovered that they couldn't balance their books, so they stopped lending to each other. Credit suddenly became scarce and the financial system first ground to a halt, then plummeted into free-fall, leading to the crash of October 2008. The reaction of major economists was bafflement. Alan Greenspan of the Federal Reserve said he didn't know what had gone wrong, and didn't know what to do. He told Congress that he "did not fully understand what went wrong in what I thought were self-governing markets."
Many of us were taught economics from textbooks that talked about equilibrium which resulted when wages and prices balanced out; markets automatically cleared, attracting productive investment, leading to growth. The idea was simple: the markets would bring about whatever adjustments were necessary to draw the appropriate resources to the appropriate places. We were also told that capital is the source of wealth and that investors were its creators.
And yet throughout its history, capitalism has been dogged by wave after wave of crises. Unfortunately, the equilibrium model of economics hasn't been able to explain this fundamental characteristic of capitalist systems. Ben Bernanke says that "understanding the Great Depression is the Holy Grail of macroeconomics." Edward C. Prescott, Nobel Laureate, says that it was a "pathological episode and it defies explanation by standard economics."
Of course, there have been many attempts to patch up the equilibrium model to try to explain such massive periodic crises, how markets which were supposed to "clear" somehow didn't. But there has been another tradition in economics which has had no problem explaining the periodic crises: Marxist economics.
There are those of course who immediately identify anything Marxist as being a defence of the Russian communist system, its centralised command state structure, its massive exploitation of working people for accumulation of wealth, and the slavish devotion of communist parties around the world to the Russian centre.
Chris Harman, in his book Zombie Capitalism, has no truck with Stalinism nor the state capitalist system of Russia, and his analysis is as incisive in dealing with state capitalist economics of the eastern bloc and China, as he is in examining the Western economies. He starts the book with an exposition of the labour theory of value, which shows how value is produced not by capital, but by labour itself. The difference between the cost of labour power and the value it produces is what is realised as profit.
Marx, of course, detailed this in enormous detail in his work Capital, including an explanation of how the value embodied in the means of production itself, the factory equipment, tools, raw materials, is also sourced from labour, and how capital circulates. The illusion that capital is a source of wealth gives rise to many of the assumptions of the equilibrium model that so singularly fails to explain modern economics.
Harman provides a detailed analyses, based on the figures from the OECD, UNCTAD, the WTO, World Bank, and the IMF, of how crises developed, what happened to the movement of capital, what were the dynamics driving the crises, and the political responses of governments. This is no mere political tract, arguing for Marxism: it is a detailed and thorough application of Marxist economic principles to the economic history of the twentieth century and covers all of the areas problematic for mainstream economists.
Why, for example, does the rate of profit tend to fall, and what factors mitigate it? Why do those factors become less and less effective? As capital concentrates, the marginal gain for each unit of additional production drops, and Harman shows how this is the motor for territorial aggression, the development of the state, and the expansion of state spending. How has globalisation affected the role of state spending? Why is it not working?
Turning to eastern Europe and Russia, Harman shows how competitive pressure from the growing world economy led revolutionary Russia to economic isolation precipitating a political crisis that led to a bureaucratic class taking control in the late 20s. By making production the servant of accumulation, state capitalism developed in the USSR, exploiting working people in exactly the same way as western capitalism.
Following WWII, most economists were predicting a return to slump but again, contradicting the accepted economic theories of the times, it didn't happen. Instead, the world saw the longest boom in 20th century economic history. Without explanation, many economists declared that capitalism had overcome its inherent tendency to crisis. Despite the tendency for the rate of profit to fall, in the US it was rising. What was the explanation? There were various attempts to explain it in terms of technical innovation, immigration of young workers, and the like.
Harman provides an alternative and much more explanatory account. Following the war, armament spending rose in the US from 4% of GNP to over 13% in five years, funneling surplus value in the form of investment in the military, an amount equal to 60% of the US gross capital formation. Such a massive stimulus to US industry fueled the boom, generating demand across all subsidiary industries, and crucially in a sector which was insulated from the effects of the rest of the economy.
As capital became more and more internationalised throughout the 70s, domestic markets found themselves in competition with lower labour cost countries. Crisis returned with a vengeance. State intervention to protect domestic producers became common and states took on more overt business interests as their own.
The Eastern bloc was not immune from these pressures despite propaganda to the contrary. First Poland opened up to the West, attempting to mitigate its own crisis with foreign investment. By 1989 Russia was talking openly about its own economic crisis. State capitalism is still capitalism. The fall of the Berlin Wall was merely a political recognition of the global nature of the economic crisis with only global options remaining. Capital flow was the only option left on the table for the eastern bloc rulers.
Harman covers the development of the global economy and international financial institutions and shows that the tendencies to crisis inherent in capitalism are stronger now than ever.
There will be many who suffer a knee-jerk reaction when the name of Marx is mentioned, immediately coming out in a McCarthyite rash, dismissing everything that follows as communist propaganda. But for those who read this book, they will see there is a highly detailed and consistent analysis of the 20th century global economy with explanatory power and precision.
While the leaders of the major financial institutions were baffled at what had happened, there were others who not only predicted it, but provided the detailed analysis to show what happened and why. At the very least, those interested in political and economic causes should give this book a read. Bernanke and Greenspan both might learn something new.