Is capitalism broke?

humpty

Strange times are becoming interesting.

I don’t think I’ll make any wild predictions about the current financial crisis being the precursor of an economic meltdown. I wouldn’t have a clue. Nor can I provide a rigorous and convincing case for the claim that crises are inevitable under capitalism.

What I can say is that people like the US Treasury Secretary sure look frazzled and there is no consensus among pundits on whether the $700 billion bail out will do the trick.

If it all goes bad and Wall St ends up infecting Main St in a big way, we can say that if it is not an inherent economic crisis it sure is a political one. In the latter case, either our rulers do not know what they are doing or political realities prevent them from doing what has to be done. (Read about public choice theory for how government is inherently peverse under capitalism.)

I can also blithely point out that an economy based on social ownership would not have these financial lunacies. As I suggest in my web site The Economics of Social Ownership, such a system would not rely on debt to fund investment but rather grants out of tax revenue. Under such a system most investments would be correctly treated as a sunk costs and no attempt made to recover them.

I have to giggle when I read the “Austrians” talking about how bailing out capitalists is socialistic. Excuse me guys, socialism is when   capitalist enterprises get expropriated by the people. But having said that, they are an interesting read. I plan to imbibe over the next few weeks. You might like to start here, then here and then here.
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Another Strange Times blogger, tomb feels more certain that an economic meltdown is now unavoidable.  I’ll add his post to mine:

Tomb:

I think it is good time to talk about the economy.  A few quick thoughts. A number of academics and professional economists are thinking this is it,    there is no way out of the liquidity crisis.  It won’t be possible for governments to convince banks that it is safe to to buy or sell money to each other.

Eight hundred billion dollars will not avert the crisis.   If they continue to increase the amount, it will just produce  falling prices with hyper inflation. Interesting! We have had governments fighting inflation while speculators pushed prices to record highs.  Of course everyone wants to blame corruption, derivatives, hedge funds, etc but no mention of the speculation, and what caused it.

The  banning of short selling for one month will only mean a rush of sales when that time is up.  And this of course  will be worse. Tighter controls of the market will only lead to a  further build up of the inevitable.

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over to discussion now…….

17 Responses to “Is capitalism broke?”


  1. 1 Bill Kerr

    I was impressed by this Kevin Phillips interview and article and wrote a summary of the interview here. Thanks for the links to the public choice theory and Lew Rockwell / Mises articles, David. I think your circumspect and cautious analysis is on the money, so to speak. Is the fact that capitalism always has had periodic crises sufficient evidence that it always will? Perhaps not?!

  2. 2 Cyberman

    Maybe David could explain Marx’s theory of “capitalism containing the seeds of its own destruction”? He did predict that the organic composition of capital , the ratio of constant to variable capital, should rise leading to a falling rate of profit.Is there any evidence that the current crisis has been brought about by a falling rate of profit or  capitalist economists trying to create new sources of surplus value in the form of the generation of capital gains?

  3. 3 davidmc

    I’m keeping all my bookmarks at delicious. Check out the ‘financial’ tag.

  4. 4 davidmc

    Just a thought. If a great chunk of the means of production are owned by people who have been bailed out by regular Joe taxpayers, the legitimacy of bourgeois private property is not going to come out unscathed.

  5. 5 arthur

    I agree that it’s inherently unpredictable. A short proof is that there is a more than an adequate smorgasboard of financial derivatives available that anybody able to predict accurately would also be able to arbitrage their way into ownership of pretty well everything, while simultaneously flattening the swings that they were accurately predicting. Developing that simple point is itself one aspect of “a  rigorous and convincing case for the claim that crises are inevitable under capitalism”.Another aspect of such a case is to show that this reality is specific to capitalism rather than to complex modern large scale industry. A  good start is provided by simply noting that a system of social ownership “would not rely on debt to fund investment but rather grants out of tax revenue. Under such a system most investments would be correctly treated as a sunk costs and no attempt made to recover them”.That isn’t widely understood (just as the nature of financial markets isn’t widely understood) so its worth explaining both in detail.

    The fundamental role of profit, and the rate of profit and the consequent necessity for periodically forming and absorbing a reserve army of unemployed to regulate wages and hence indirectly the rate of surplus value production and so the rate of profit, is simultaneously widely understood and at the same time mystified, in continuous pontification about how “the economy” (ie capital) needs to speed up growth to prevent unemployment or slow down growth to prevent “overheating”. That needs scientific exposition in order to strip away the apologetic mystification and confront people with the sheer absurdity of the social relations they take for granted.

    The connection between this absurd method of social regulation of the relations between investment and consumption and the use of monetary and financial “policy instruments” generating a tendency to boom and bust, needs detailed elaboration.

    The falling rate of profit is largely manifested, and at the same time concealed by, an increasing proportion of investment devaluing existing fixed capital by making it technologically obsolete far more rapidly than the “virtual depreciation” due to falling replacement costs that actually gets taken into account. This enables capitalization of unsustainable rent seeking income streams, at an unsustainable rate of profit as marketable securities that look “blue chip”, when in fact both the physical assets and the ownership rights over their future income streams are worth far less.eg Rent on urban land is largely based on huge investments in both the physical infrastructure of modern cities and the “social welfare” needed to reproduce capitalist relations within them. Despite workers actually being propertyless proletarians buying access to the means of subsistence, including homes, and the cities the homes are part of, from the owners, an illusion has been sustained that workers actually own their own portions of each city which they can mortgage.There isn’t any way to deal with that in a system that doesn’t treat investment as “sunk costs” but instead as the social basis for a class of owners.

    When the gap between the perceived values at the boom rate of profit and the actual values at the declining real rate of profit gets too wide, as it eventually must, a “crisis” is the means for writing off the book values and restoring the proportions between accumulation and consumption that are necessary for capitalist profit, instead of the artificially high levels of workers consumption that result from an insufficiently large reserve army. Interelations between all these and the export of capital and absorption of peasants into wage labour including mass emigration and immigration also need to be elaborated. Likewise a concrete exposition of modern relations of production. What roles people actually play in the societies we actually live in.

    The current financial crisis appears to be manifested in the mortgages on workers’ homes turning out to be worthless. The proposed resolution seems to be that workers won’t be seen as owning their homes, but just as living in buildings and cities owned by others, just as they work in workplaces owned by others with the “others” more and more taking the form of the state. That may work, but it would also lay more bare our real social relations. Obviously it is well past time to be resuming a study of political economy.

  6. 6 johan

    Kapitalisme dalam kegiatan ekonomi adalah bagian dari ego manusia untuk menggiatkan perekonomian.Sepertinya sudah suatu keharusan dan mendapatkan legitimasi tanpa wacana basa basi.Kapitalisme seperti halnya terorisme yang mengakar bak virus dalam masyarakat.Seorang anak manusia  lahir di tengah industri kapitalis raksasa yang tumbuh laksana tanaman yang merambat.Dimana Tenaga kerja manusia dipakai seperti robot yang ditempah sesuai dengan kebutuhan industri.Krisis finansial yang timbul sebagai akibat pergesekan antar raksasa industri kapitalis dunia sudah menjadi tren.Dalam Kapitalis dunia seorang pengamat hanya bisa termangu dan menggelengkan kepala.Dimana raksasa industri kapitalis membutuhkan darah segar yang menyedot dana pendapatan suatu negara dengan injeksi yang dianggap maklum dan biasa.Sementara kemiskinan merajalela dan pengangguran membengkak karena raksasa industri melakukan efisiensi tenaga kerja.Krisis dalam kapitalis terjadi laksana letupan gunung berapi sebagai kembang api kapitalisme.Sekali lagi Anak manusia lahir dalam epic matrix …..Welcome to Matrix Capitalism World.

  7. 7 anita

    (google translation of above comment)

    Capitalism in economic activity is part of the human ego to invigorate perekonomian.Sepertinya is a must gain legitimacy and without discourse basa basi.Kapitalisme such as terrorism, which take the vessel virus in human masyarakat.Seorang children born in the midst of capitalist industry is growing like a giant plant that merambat.Dimana human labor is used, such as robots that ditempah accordance with industri.Krisis financial needs arising as a result of friction between the giant industrial capitalist world has become a capitalist world tren.Dalam observer could only shake termangu and capitalist industry giant kepala.Dimana need of blood fresh siphon funds income countries with an injection that is considered to be informed and biasa.Sementara rampant poverty and unemployment stands as a giant industrial energy efficiency do kerja.Krisis occurred in the capitalist like volcanic eruptions as fireworks again kapitalisme.Sekali Children born in the epic human matrix … .. Welcome to My World capitalism.

  8. 8 Peter Martin

    The chaos that we see around us is only the latest crisis of capitalism. The global economy has undergone a series of recessions over the last 35 years, including in 1973, 1990-93, 1998 and 2001-2. It looks like this one will be worse, but its quite possible that it will indeed recover.
    Underlying all of these crises is a fundamental problem with the system – the tendency of the rate of profit to fall.  Marx identified this tendency over 100 years ago. It does not mean that actual profits fall – companies are still making billions and many are increasing their profits. But the rate of return on their investments, over time, tends to decrease. Profit rates have not recovered to the level they were at before the 1973 crisis. Each time a recession ends, the prophets of the free market tell us that all of the problems in the system have been fixed. But then they are thrown into panic by the next recession.

    This is because surplus  value, or profits, can, according to Marx, only comes from workers’ labour. Thefore, for the capitalist to make a profit, the value people create through work is greater than the amount they receive back in wages. This in turn leads to the additional problem that the workers collectively cannot afford to consume the full fruits of their labor.

    The pressure on capitalist firms to compete means that they try to cut the amount they have to invest in labour. Instead they invest in new technologies which means they will spend less on workers’ wages. They can produce the same or more with less people because of new technology or machinery. It also means that they will try to increase the level of exploitation of workers – making people work harder for less. Companies may benefit from investing in new technology in the short term because they can undercut their competitors. But once the other companies catch up, this advantage is lost, and employers must try and find new ways of increasing their falling profits. The falling rate of profit pushes capitalists to try and constantly find new ways of making money. They may do this by developing new markets or by building up speculative bubbles. The Dot.com of the late nineties and the property bubble of the last decade. This may keep the economy afloat temporarily and mask the problems that exist. But because crisis is built into the way that capitalism works, these same problems are bound to re-emerge in the future.

  9. 9 paul

    If the following article is correct  the USA will be back bigger and better and sooner than you may think.http://online.wsj.com/article/SB122230704116773989.htmlThe losers in this will be super funds and the like who will have to settle for between 20 and 70 cents in the dollar, but only to the tune of $1trillion in total.  GULP  !!!  but it is only 1 or 2 % of the worlds GDP for one year.

  10. 10 Cyberman

    Yes it is amusing how the “Austrians” , plus a good many others with similar right wing economic considerations, are talking about how bailing out capitalists is socialistic. There is quite a lot of commentary , after the nationalisation of Fannie and Freddie, and the big bail out for AIG , not to mention the $700 billion bail out package in the pipeline for Wall Street; along the lines of how ‘comrades’ Bush, Paulson and Bernanke may indeed have started the transformation of the US into the USSA (United Socialist States of America).
    It’s not of course socialism as is generally understood in the world. I doubt we’ll see free health and education schemes for all regardless of ability to pay. I doubt too that there will be much help for those poorer families who have been suckered into taking out big mortgages that they now can’t afford. Or, for many workers who will lose their jobs. And, of course, their won’t be any workers’ soviets for those who may be fortunate enough to keep them.
    There is a feeling in the US, that it is their “elites”,  rather than their working classes , who are the most left leaning. It looks like they have decided that socialism, at least their version of it, is too good to be left in the hands of the working classes. They can have the best of both worlds. They’ve been able to privatise their profits for the last twenty years, or more, and now they can can socialise their losses!PS Who’s this guy “Peter Martin”? He seems to know what he is talking about! 🙂

  11. 11 keza

    “Who’s this guy “Peter Martin”? He seems to know what he is talking about! :-)

    “Peter Martin” is  cyberman  trying to be smart, and perhaps get past being on moderation.

    Cyberman,  it’s all very well to  pontificate about the way in which the falling rate of profit is a fundamental problem for capitalism and must lead to crises of varying depths.  That really is just Marxism 101. 

    The far more difficult problem is to produce a  detailed analysis of the actual economic situation and how it is likely to develop. Simply “exposing” capitalism by spouting some Marxism doesn’t get us anywhere. 

    Doing this also requires being able to talk sensibly about the Marxist solution ( social ownership of the means of production) . This means thinking about how a modern, highly developed industrial economy could actually be run by the people.  Just waving one’s hand and saying that “there would be a workers’ state which would expropriate the capitalist class”, doesn’t cut it. Once again it is empty pontificating. 

    One of your statements above is a bit of a giveaway;

    “It’s not of course socialism as is generally understood in the world. I doubt we’ll see free health and education schemes for all regardless of ability to pay.

    I have never understood socialism as a society in which “those who can’t pay” get free education and health care. In fact, I can’t see that that is not possible under capitalism ( over the past 100 years the advanced capitalist societies have been moving in that direction anyway).

    Socialism would not be a vast welfare state in which people are looked after by a kindly government which understands their needs and is “fair” to all.  In fact there would not be “welfare”, once such a system had been established.

    People won’t be prepared to make the jump from capitalism to a new social system simply because a few “Marxists”  have explained to them that capitalism is inherently flawed, exploitative and absurd.  Even a major crisis won’t in itself convince them that some vague notion of socialism is what they want.

    Why should it?   There’s absolutely nothing inspiring in what’s proposed by those who merely “expose” capitalism and actually have no idea about what socialism would look like,  no exciting vision of the future.

    I don’t know enough myself to offer such a vision in any detail at all.  But I do know that we need to do a lot more than smugly spout a bit of Marx at people.   And I also know that cries of “how awful it all is”  and “wow, Marx was right!”, won’t get anywhere.

    I also know that I’m not living in 19th century Europe, or the first part of the 20th century in China or Russia.  We need a real  Marxist analysis of the situation we are now in and the possibilities it holds.

  12. 12 Cyberman

    I don’t really agree with hiding behind a ‘nom-de-plume’ or with using sock puppets  so, yes Ok, I must admit that Cyberman and Peter Martin are one and the same.Its all very well to say that such and such is “just Marxism” but we really do, as Marxists, have a social obligation to explain, in understandable terms, how Marxism can make sense of what is currently happening in the world, rather than trying to show how clever we are by deliberately obfuscating.Yes, I am a Marxist, but If I do have one criticism of Marx it would be that, whereas  he left us a good analysis of capitalism and all the inherent contradictions that it may contain, he didn’t have a whole lot to say on what might replace it. Having said that, I am of the opinion that , if he had lived longer than his 64 years, he might well have have had a bit more to say on the topic.It is very difficult to predict how revolutionary change may occur. If you look back at the history of all revolutions you’ll find that most revolutionaries started off with demands for reform of the system. For instance, most of the French revolutionaries of 1789 didn’t imagine that they were going to overturn their monarchy and set up a republic. One of the Parisian grievances at the time was that, unlike other French cities, they weren’t allowed their own local government, and they were prepared to go as far as supporting a civil insurrection to remedy the situation. So, yes, it is important to support demands for reform of the present system, even if, deep down,  you feel that that very system isn’t capable of reform and that a revolution is necessary. Most parents would wish their children to be well educated, and well looked after in hospitals if they were sick, and as Marxists, it wouldn’t do any good to say to them that they  should wait until after the revolution!It is important to fight for the principles of free education and free health care, regardless of ability to pay, even if some ‘ultra leftists’ might disagree.

  13. 13 arthur

    “Paul Martin” claims that periodic recessions “including in 1973, 1990-93, 1998 and 2001-2” are due to a long term tendency for the underlying rate of profit to fall. If that were so, the alternating expansionary periods and the overall enormous expansion in those same decades would also be due to the long term tendency for the underlying rate of profit to fall. In fact every single phenomenen that ever occurs could be accounted for by waving ones hands and spouting the same mystical formula.

    That this “sounds Marxist” is a reflection of the complete absence of Marxist political economy in the same decades. The best that can be said of it is that it isn’t quite as mind boggling as the rhythmic chanting of “oil”.

    Cyberman also claims that:because surplus  value, or profits, can, according to Marx, only comes from workers’ labour. Therefore, for the capitalist to make a profit, the value people create through work is greater than the amount they receive back in wages. This in turn leads to the additional problem that the workers collectively cannot afford to consume the full fruits of their labor.That sounds even more “Marxist”. But extraction of surplus value and underconsumption of the masses is common to all social systems based on exploitation, including slavery and feudalism, while periodic booms and busts are characteristic only of capitalism, and it is precisely in the boom preceding a bust that workers real living standards are at their highest, and underconsumption least pressing, as a sure sign of impending crisis.The precise opposite point was made by Marx. Since production under capitalism is entirely dependent on accumulation of capital, the whole economy periodically grinds to a halt if workers incomes rise to a level that slows down accumulation. The systemic functional purpose or “final cause” of every real crisis (as opposed to purely financial crises), is precisely to recreate the conditions necessary for capital accumulation by pushing down workers consumption through mass unemployment.

    That analysis logically supports the communist program for abolition of wage labour by establishing a system in which production is for the benefit of the producers rather than accumulation for its own sake.The opposite “underconsumptionist” analysis, supports the traditional reformist demands for “bigger cages, longer chains”.

  14. 14 keza

    I think that the deepest problem for capitalism is that it can’t help but create modern people with new needs and desires.  In order to stay in power, the system has to keep making accommodations to the very needs it has created. Workers in a modern capitalist society would not tolerate the conditions which were normal 150, 100 or even just 50 years ago.  Providing what is required for workers to keep producing and to reproduce themselves (subsistence) has a much higher price tag now than it used to have.  Workers have of course become dramatically more productive, but nevertheless, keeping them acquiescent must be costing rather a lot these days (relative to the cost when people were less modern). I have insufficient economic knowledge to turn this into any sort of detailed “Marxist” analysis, so I won’t try.  But that’s my guess. I’d be interested in what others think.

    As far as I can see, there’s  a real sense in which the ruling class is on a leash, held by the people. Lengthening that leash is very difficult. This seems to be the core political issue faced by the capitalist class at the moment.  I guess it’s why they can’t afford to follow the advice of “the Austrians” and let the market correct itself, although from a  purely economic perspective that would probably make more sense?

    In his response to me,  Cyberman seemed to be arguing that my position was that reformist struggle for better health care, education etc is not “revolutionary” and  people should just “wait until after the revolution”.  He added that we should fight for these things even if “deep down we believe that the system is not capable of reform”.   Actually, the system has shown itself to be capable of enormous amounts of reform/adaptation under pressure from the people, and also somewhat more indirectly (although still traceable to demands from “the people”).  The change in US foreign policy which has led to the liberation of Iraq is an example of the latter (and is something that cyberman continues to oppose, for all his suggestions that my position is that “the people should wait”!). 

    The point is not the so-called distinction between “revolutionary” and “reformist struggle”.  The role of the Left has always been to win, and this has mostly involved “reformist” struggle. Central to this has been the necessity to unite with different forces at different times, depending on what will lead to the best outcome.  Aiming to win, however  is sharply different from  the feel-good, moralistic posturing which is now regarded as “left”.  You can’t win much via a process of   “exposing capitalism” and “explaining” to people that they are just the helpless victims of a vicious system  …all the  while “believing  deep down” that such struggle is largely fruitless (but hey! if you’re decent you’ll vote democrat/labour anyway!)  That outlook just does lead inexorably to the “nonsense politics”, characterised most strongly at the moment by all those US Democrats  who are muttering among themselves about  packing their bags and going to Canada if “the worst” happens and the American people are “idiotic” enough to elect a Republican president. 

    For years the pseudo-left has been claiming that things are going from bad to worse, when in fact they haven’t been. If (as now seems inevitable), things  do begin to go  from  ‘getting better’ to  ‘getting worse’, I doubt that people will be in the least inspired by those who have been crying wolf all these years (while at the same time attacking “consumerism” and conflating it with “capitalist greed),  saying smugly “we told you so , now just follow us”. They also won’t listen to the cybermen. In fact listening to know-it-alls, is something that most people respond to with an innate revulsion.

    I actually don’t have any clear idea about what is to be done. I’m prepared to admit that.  The point of these discussions is to begin to figure it out.

  15. 15 paul

    Broke ?  certainly large sections of it . USA for sure.I wonder how quick things could move here. Read thishttp://www.financialpost.com/story.html?id=866522 and thishttp://blogs.wsj.com/economics/2008/10/15/dispatch-from-iceland-we-might-lose-our-country/and this http://elainemeinelsupkis.typepad.com/culture_of_life_news/for plenty of financial info.  Shes  a left nationalist but her coverage is spot on and predicts all of this nightmare by years

  16. 16 Arthur

    There needs to be a topic for discussion of the current economic crisis always available on the front page. If nobody has a substantive post it can just be an “open thread”. I just re-read “Unemployment and Revolution” from nearly 3 decades ago, and David McMullen’s material on “The Economics of Social Ownership”. There’s been very little interest in such questions but it seems obvious that however things develop there will be a LOT more interest developing soon.There is still nothing resembling an actual program for revolutionary transformation of the economic system as discussed in part 7 of “Unemployment and Revolution”.I still think the ideas there are highly relevant. Given overwhelming consensus that we are heading into a period of high unemployment there’s no excuse for not working towards a program now.

  17. 17 Sofortkredit

    Grue&szlig Dich, das ist ja einmal was Anderes hier. Da hab ich mir eine Bookmark gemacht.

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