When the American financial system began to unravel in late 2007, sending trillions of dollars up in smoke, not only politicians but most experts, from the halls of academe to newspaper financial pages, agreed that though things might be serious, comparisons to the Great Depression were un-called for. A few months later, however, that comparison was everywhere, if only as background for insistence that this time the downward spiral could be controlled – provided that governments did the right thing, and fast. (Otherwise, as the then leader of the free world put it, ‘This sucker’s going down.’) Three years later, the worst seems to have been avoided, and what has been dubbed the Great Recession is generally supposed to be giving way to recovery. This recovery, however, seems to be of the jobless variety, with banks still reluctant to extend much credit and successive fiscal crises in Europe and elsewhere doing nothing to counter unease in the world’s financial markets.
Only a few years ago, economists who explained the rational, efficient, self-correcting nature of the market system were winning Nobel prizes; those who disagreed with them were sure that proper government policies would make up for whatever limits to growth capitalism might bump up against. Both of these versions of economic orthodoxy have been more difficult to believe since the economic gains of yesteryear melted away like glaciers under the impact of global warming, as fortunes vanished from stock markets around the world and the nine largest US banks lost more money in three weeks of early 2008 than they made in profit during the three years after 2004, while governments struggled to contain the damage. And yet, despite the surprising readiness of publications like The Economist (which, on 18 October 2008, featured a story on ‘Capitalism at Bay’) to consider the economic system as truly imperilled by its current disorder, it is still difficult for people to understand that the current crisis is the result of more than greed, corporate irresponsibility and the deregulation of financial markets. Greed and corporate irresponsibility are hardly novel features of capitalist society. And if the dismantling of the regulations put in place in the United States during and after the Great Depression to limit financial hijinks eased the way both to fraud and to the extension of speculation beyond sustainable limits, it is also what made possible the exuberant expansion of credit on which the level of well-being achieved over the last two decades depended. Understanding the Great Recession requires looking beyond the contributions made to the debacle by governmental connivance and the instability inherent in newfangled financial contrivances like the now infamous collateralized debt obligations and credit default swaps, to the long-term dynamic of capitalism itself.
This book attempts to understand the present-day state of affairs by setting it in the context of that long-term dynamic. Doing this, of course, requires making judgements about which aspects of the past are most relevant to understanding the present and speculating about the future. The failure of economic theory to predict or even explain the story so far should, to put it mildly, give us pause before we take the pronouncements of its quarrelling practitioners too seriously. So the approach taken here starts with the conclusion James K. Galbraith recently drew from wide know ledge of his academic profession: that it is ‘pointless to continue with conversations centred on the conventional economics’.1 Instead I draw upon the thinking of Karl Marx, who described himself not as an economist but as a critic of economic theory.
Marx lived a long time ago, and capitalism has changed in important ways since he wrote about it. But his theorizing operated on such a high plane of abstraction that it is still relevant to the economic system we live in today.2 Marx’s abstractions, moreover, are different from those of conventional economics, which claim to apply across history: Marx emphasized those features of modern society that make capitalism different from other social systems. Hence his focus on the role of money in economic affairs, and in particular on the need of businesses to make profit, central both to a general understanding of the alternation of prosperity and depression and, as we will see, to grasping the limits of economic policy when, as at the present time, governments attempt to move an economy in trouble back to recovery. My confidence in this mode of analysis has been strengthened by the fact that since the start of the crisis in 2007 I have correctly anticipated the ways in which it has continued to unfold, in contrast to most professional commentators. This is not because I am smarter than other people, and it has been true despite my having less access to data than most professional economists; it is a matter of knowing how to think about what is going on. This is what I want to share with readers.
While this book thus does not avoid theory, because reality cannot be understood without it, I have made an effort to avoid jargon of any sort. I assume neither great acquaintance with economics nor much knowledge of economic history on the reader’s part; my wish is to supply just enough of both to make sense of ongoing events. I do not spend much time discussing alternative approaches (unavoidable or irresistible comments in this vein are for the most part confined to footnotes), beyond discussion of the dominant modes of economic theory insofar as they have influenced economic policy. Historical data is for the most part drawn from official sources. The limits to the accuracy of such data are well known, or ought to be; though we have to use them, because they are all there is, exact numbers for things like growth rates or unemployment should be taken with a pinch of salt.3