the crisis of capitalism: a socialist perspective

14 04 2013

By Eric Chester

     The global economy is mired in the worst crisis since the Great Depression of the 1930s, and yet capitalism has always been characterized by instability and insecurity. An economic system that operates without an overall plan, and in which powerful economic forces act on the basis of maximizing short-run profits, is a system that is inherently unstable. Marx predicted a collapse of capitalism leading to a revolutionary upsurge as early as the 1850s.[i] This would appear to be one of his predictions that has been contradicted by the course of history, but in fact the global economy has been plunged into one crisis after another.


     The unpleasant reality we confront today is that although capitalism is constantly changing, the impact of these changes is, on balance, overwhelmingly destructive. Indeed, as capitalism grows and expands, it destroys everything in its path. As the system unravels, more and more workers become permanently displaced from the workforce; income and wealth differentials widen within the already industrialized societies, as  an increasing number of countries are added to the list of “failed” nations; and ecological catastrophe threatens the continued existence of the planet as we know it. We are at a crossroads. Either the working class acts as a class and wrests power from the capitalist class, or the system will disintegrate into a catastrophic freefall.

The Business Cycle

     Capitalism has always been marked by short-run business cycles in which times of prosperity are followed by harsh times. To some extent, these short-run cycles are self-regulating. Unplanned growth leads to overproduction in certain sectors and investors pull back. Bankruptcies ripple through the economy allowing venture capitalists to purchase existing assets at bargain prices. Lower prices, and, more importantly, even lower wages, create opportunities for new investment, and the cycle begins again.

Capitalism has also experienced several severe downturns when its continued existence was called into question. Frequently, an economic boom is accompanied by a period of frenzied speculation. When the bubble bursts, and speculators go bankrupt, the crisis spreads rapidly through the entire economy, with banks and financial institutions the hardest hit. Investment banks play a vital role in directing investment into new sectors, the dynamic growth sectors. Once confidence in the financial sector has been lost, investment spirals downward, and the entire economic system confronts a total collapse.

Although a decline in the price of capital goods might help to overcome the down phase of the usual short-run business cycle, the opposite occurs when bankruptcies occur as the result of a sustained and precipitous slump, such as the current one. Firms coming out of administration initiate massive layoffs as venture capitalists squeeze a greatly reduced workforce in a desperate search for profits. Ultimately, bankruptcies in the midst of an economic crisis only reinforce the pervasive collapse in investor confidence, thus making it even more difficult to spur the economy back into sustained growth.

     Bailouts and Total War

     When the system reaches the point of catastrophic collapse at the onset of a crisis of confidence, the most powerful capitalist interests usually intervene, often in conjunction with the state, bailing out the banks in order to avert a disastrous crash. This happened in the fall of 2008 and into the spring of 2009, with the support of both President Bush and President Obama. Confronted with the imminent possibility of a precipitous fall in output, and in stock market prices, the rich and powerful abandoned their distaste for planning and government intervention, and agreed to a massive rescue of bankrupt financial institutions, as well as the auto industry. The recent bailout is not the only time that such a crisis intervention has occurred during a financial panic.

An imminent economic collapse is not the only moment of crisis when the government can rapidly assert a dominant role in the economy. The planned mobilization of a nation’s resources when fighting a total war is the other circumstance. During both world wars, the governments of the combatant nations commanded vast resources, becoming the predominant factor in the economy. In some cases, key industries were nationalized, and the rudiments of a national economic plan were put into practice. Segments of the Left, especially mainstream social democrats, viewed these developments as significant steps toward a socialist economy. The move toward a more planned economy was cited as further proof that a socialist transformation was inevitable. Furthermore, it was argued, the inefficiencies of an unplanned economy were so glaring that even segments of the capitalist class understood the need for a regulated economy, with a substantial public sector that included key industries.

These arguments were advanced by some influential socialists in the United States during World War I, only to quickly be proven totally wrong. Once the war ended, there was a concerted corporate onslaught designed to ensure that the capitalist class regained its hegemonic control of the economy. The entire network of railroads  had been taken over by the federal government during the war, but the railroads were returned to their owners soon after the war came to an end. Public sector spending was sharply curtailed, and any hint of government planning was abandoned. After World War II, the anti-Communist hysteria provided a convenient rationale for dismantling wartime planning, along with the social reforms of the New Deal.

The dire threats arising from a total war provide a temporary crisis situation in which the government displaces the capitalist class as the prime factor in determining investment. In a very different context, a pending economic collapse has the same effect. In both cases, the role of the state as the determining factor in the economy has proven to be a temporary phenomenon. As the crisis passes, the pendulum soon swings back, and the government is forced to retreat.

The Limits of Deficit Financing

     The capitalist economy is not self-regulating. Furthermore, emergency bailouts of bankrupt banks and corporations can prevent a rapid and total collapse, but they don’t resolve the crisis, which continues as economic stagnation threatens to deepen into a downward freefall.

Keynesian economists recognize this and argue for active government intervention as an effective means of stabilizing the system. In “normal” times, Keynesian economics can act to provide a certain balance, smoothing out the cycle. Higher interest rates can check the tendency to high inflation rates during the boom years. Deficit financing can enable the government to stimulate output and employment during the downturn. Only a few years ago, many mainstream economists were convinced that counter-cyclical government intervention assured the stability of the system. The current  crisis has proven that this forecast was nothing more than an ideological rationale for the capitalist system.

In fact, once an immediate crisis situation has been passed, the traditional resistance to government intervention, and, indeed, to any kind of broader plan, reasserts itself. This resistance represents more than an adherence to the ideology of “free markets.” Indeed, the powerful corporate interests that backed the bailout did so in pragmatic disregard for “free market” dogma. One of the essential mechanisms of control held by the capitalist class is its ability to determine how much of its savings it will invest and in which industries it will invest. To permit the government to become the primary channel for the flow of investment funds is to strip capitalists of a key component of the economic power they control as the ruling class.

It is easy for the wealthy to bring pressure on the government because a rapidly growing debt will lead bondholders to become more fearful of a default. With an increasing public debt to government budget ratio, or public debt to output ratio, interest on the debt starts rising as a proportion of total spending. This can not continue indefinitely since some expenditures are viewed as critically important, and are extremely difficult to cut. Thus, aside from upholding the interests of the capitalists as the ruling class, bondholders have real concerns that the state will default on interest payments as debt ratios increase. Deficit financing by its nature can only act as a short-term means of stimulating the economy.

The Failure of Keynesian Economics and the 1930s

Thus, the curious paradox that Keynesian policies only work in “normal” times to smooth the short-run fluctuations of the business cycle, and not in a time of crisis when the system is threatened with collapse. Yet Keynes developed his General Theory in the 1930s with the express purpose of countering the Great Depression. He was convinced that his policies would enable the industrialized countries to overcome the Great Depression, and to avoid further slides into mass unemployment. Both predictions proved to be false. Once the “animal spirits”[ii] of investors have totally soured, as the wealthy few lose confidence in the growth potential of the economy, deficit spending will not succeed in moving the economy back on track.

The experience of the United States in the 1930s provides an interesting case to examine. FDR was surrounded by advisers who viewed themselves as social reformers and were open to Keynesian economics. The federal government deliberately expanded its expenditures on social services, through deficit financing, with the explicit intention of stimulating economic growth and returning the country to prosperity. These policies were followed from the time FDR was inaugurated in March 1933 to June 1937.

At the height of the depression, in 1934, the official unemployment rate stood just short of 25%. One out of four workers were officially counted as out of work, and many more were missing from the official tally. This was a catastrophic disaster, one requiring drastic measures. Congress created the Works Program Administration and gave the President a wide discretion in determining how this money was spent. Through Keynesian pump-priming, the official unemployment rate fell to 17% in the three years from 1934 to 1937. This was an improvement, but hardly an impressive one. The United States was still bogged down in a economic depression, with millions remaining out of work, and with little hope for the future.

In June 1937, the Roosevelt Administration came under heavy attack from corporate interests and retreated from its previous policies. As the government moved toward a balanced budget, output fell  once again. In 1938, the unemployment rate averaged 19%. Only with the end of the decade, and the advent of World War II, did the United States emerge from the Great Depression.

This is hardly a tremendous success story. Keynes’ technical analysis was shown to be true. Government spending when not counterbalanced by taxes on the working class has a significant multiplier effect on output, income and employment. Nevertheless, Keynes did not take into account the overall context. First, unlike wartime, countering an economic downturn does not provide the government, even a very popular one such as that of FDR’s New Deal, with sufficient momentum to engage in the level of deficit spending required to counter the collapse in private investment. As a result, the economy remains stuck in the doldrums, although no longer at the trough of the cycle.

Second, Keynes’s analysis views pump priming as a temporary fix. The government gives the system a boost and then the economy returns to its previous course. In fact, during a severe downturn investor confidence does not respond to deficit financing. Once the government moves toward a balanced budget, usually by reducing spending on social services, output falls, moving back to the level where it was prior to the government intervention. The underlying problem, the refusal by the wealthy few to invest, has not been resolved.

The only way deficit financing could work in the midst of a severe economic downturn is if it were to be made a permanent feature of the economy, but this will never happen. Deficit financing can only be a temporary measure because the state is taking over an essential task in a capitalist economy, one reserved to the capitalist class. Thus the rich and powerful will use all of their power to ensure that deficits are cut and they again become the driving force in the economy, determining the flow and direction of investment.

The pattern of the 1930s in the United States provides an archetypical model. The government responded to a sharp downturn by increasing expenditures on social services without increasing taxes. With increasing demand came higher output, and yet depression level unemployment rates, while lower than before, continued. After a few years, the government, responding to the pressure of a threatened capitalist class, retreated from its commitment to deficit financing. Almost immediately, the economy headed downward again, as the wealthy few still refused to funnel funds into new investment opportunities.

The Great Depression ended when the United States entered World War II. This solution to the current economic crisis is no longer possible. Capitalism is a dynamic system in which certain innovations are fostered. The producers of armaments are always seeking deadlier weapons that require fewer soldiers to deploy them. Thus, a future total war would be over quickly and would leave the planet a radioactive waste land. Smaller, localized wars of occupation do not necessitate a huge output of military weapons and do not involve enormous armies. Indeed, the United States was fighting two localized wars in 2008 and yet experienced the worst economic downturn since the Great Depression. In the current context, the military can not provide the sustained demand needed to lift a country out of the mire of economic stagnation.

The Myth of Neo-Liberalism

     In analyzing the failure of Keynesian economics to resolve the tendency of the capitalist economy to veer into an economic collapse, the emphasis has been on the underlying economics and class relations, and not on ideological dogma. The current “common wisdom” of the Left ascribes the defeat of Keynesian economics to the ascendancy of neo-liberal ideologues. This is a highly dubious explanation.

There is nothing new about the theory that the capitalist system  is self-regulating, and that any government intervention can only make the situation worse by upsetting the automatic correcting mechanisms built into a market economy. Similar ideas were formulated by the Austrian school of economists in the late nineteenth century in response to the rise of a working class movement influenced by Marxism.

There is no doubt that this perspective has more traction now than even a few decades ago, but this is hardly because of its cogency or insights. The globalization of production has provided the objective basis for the rise of neo-liberalism. Corporations have outsourced their factories and mills to low-wage countries, thus destroying unions in the private sector. Unions provided the essential base of support for social democratic parties that legislated the welfare state in Western Europe, and for the liberal wing of the Democratic Party as well.

As corporations create a global workforce they see no need to pay higher wages and benefits to workers in the previously industrialized countries than to those paid to workers in Bengla Desh, China or India. This drive to reduce wages is not a matter of ideology, but rather the pragmatic imperative of the bottom line. Globalization has substantially shifted the balance of class forces. The rightward tilt in the ideological debate reflects a more fundamental shift in the underlying balance of class forces.

This is not to deny that the rise of neo-liberal ideologues  marks a meaningful change in the political terrain. In particular, in the United States, which has a long history of elections dominated by two corporate parties controlled by opportunistic politicians whose political perspective is limited to upholding the power of the capitalist class, while maintaining the stability of the system. The Tea Party has a program and an ideology that goes well beyond this, calling for the total dismantling of the welfare state reforms instituted during the New Deal of the 1930s. Its rapid rise in visibility has made a significant impact on the Republican Party, which has begun to present a distinct alternative to the pragmatic centrism of the Democrats.

As socialists, we can recognize that there are genuine differences between the pragmatic Obama Democrats and the Tea Party neo-liberal ideologues. Nevertheless, both approaches remain well within the constraints of mainstream capitalist politics. Neither trend is interested in moving society toward greater equality, and both believe that social services need to be substantially cut and public sector workers must be paid less. When leftists target neo-liberalism as the primary problem, they underscore their failure to understand  the essential dynamic of the current crisis in order to  exaggerate the differences between neo-liberals and their pragmatic opponents. This position is often followed by a call for a coalition of the broad Left against the rabid, dogmatic Right, as those on the Left subordinate their radical politics to defeat the perceived threat of a neo-liberal victory. Global capitalism, not neo-liberalism, is the primary problem, and a rapid transition to a socialist society provides the only possible answer.


     Capitalism has always had an inherent tendency to expand. Of course, the drive to conquer others precedes the rise of the capitalist system, as imperial rulers have always fought to expand their domain. In the past, this would involve looting and pillaging. The empires that have arisen in modern times have certainly looted and pillaged, but this has been a secondary aspect of their rule.

Historically, a capitalist power has sought to create a distinctive link between the imperial center and the subject countries on its periphery. The British empire of the nineteenth century is the classic example. Industrial production was concentrated in the center, England and Scotland, while industry in the periphery was actively discouraged. The headquarters and coordinating functions of the finance sector were also centrally located in London. Conquered countries were limited to one primary economic role, providing cheap raw materials for the industries of the imperial power. This could entail the exploitation of scarce natural resources, with no regard for the environment, or the extreme exploitation of unskilled labor through the use of force.

In this context, the working class of the imperial power had a vested interest in maintaining the empire. Indeed, a century ago the more far-sighted strategists of the British empire understood the utility of ensuring the loyalty of the British working class by providing limited social benefits and establishing a minimum wage. In the past, there had been a definitive set of economic relationships between the imperial power and its dependent colonies.

The outsourcing of industry and mining to the developing countries has devastated the the traditional working class, Marx’s proletariat, in the developed capitalist countries. Unions in the private sector have been virtually wiped out, and public sector unions have come under intensive attack. As a result, inequalities in income and wealth have significantly widened, thereby increasing the volatility of the system, as well as its tendency to become mired in prolonged slumps.

Globalization also increases the volatility of the system because it greatly restricts the ability of governments to regulate the economy, and to redistribute income through taxes. The interconnectedness of the global economy also increases the likelihood that a crisis triggered in one country will spread quickly throughout the globe.

Globalization makes the system more volatile, but it only  accentuates the fundamental underlying problems. Indeed, the Great Depression of the 1930s occurred decades before corporations began shifting industrial production overseas. Still, globalization adds to the instability of the system, while making it more difficult to pull the economy out of a prolonged downturn.


The Keynesian policy of deficit financing as a method of stimulating the economy constitutes one of an array of government programs designed to stabilize the system. Many of those on the Left are convinced that the deregulation of markets, as driven by the neo-liberals, provides the primary reason for the current global downturn. In their view, future disasters can only be avoided by strict regulation of the economy, especially the financial sector.

At the turn of the twentieth century, progressives pushed for government action to break up the trusts. They called for anti-trust legislation, hoping that the market economy would return to a mythical golden age when small firms, each acting independently, operated within competitive markets. This project proved to be a total failure, as large corporations discovered ingenious ways to evade anti-trust legislation in order to create ever more gigantic entities, and to act in collusion with other powerful firms in their market. Capitalist economies have always been dominated by a few large corporations that manipulate prices and outputs so as to maximize profits. These days, corporations span the globe, crossing national borders with ease.

During the New Deal, the focus of reform shifted from anti-trust legislation to the financial sector. The current crisis has lead progressives, once again, to argue that strict regulation of the financial sector will be a critical element in a program that will allow the economy to overcome the current slump and prevent another one from occurring. In fact, such a policy is bound to fail.

To start with, a speculative frenzy only occurs when investors are confident of the future and are willing to take risks. The current situation is characterized by investor pessimism, and a reluctance to undertake risky projects. Indeed, investor confidence appears to be heading downward, with no sign of any imminent upswing. The current problem confronting capitalism is not how to curb an unbridled speculative frenzy. Quite the contrary, investors are following an extremely cautious path.

Even if the current crisis is overcome, it will be very difficult for any government to enforce strict regulations on the financial sector that inhibit speculative investments. The only time the economy can prosper is when investors are prepared to undertake investments in new sectors where, by definition, the future is unclear and the risks are high. Obviously, there are no gains to society from the kind of scam investments that brought the housing market to a standstill. Still, it is difficult to discern in the midst of a boom what are risky but still potentially worthwhile investments and what are elaborate frauds.

Furthermore, even the most skillful regulation does not touch the underlying problem. Capitalism generates more savings than can be matched by profitable investments. Globalization has further exacerbated this underlying problem by widening the gap between rich and poor. Regulating the financial sector will not add to effective demand, and, indeed, may well reduce it by dampening investment.

There is also little reason to believe that regulation of the financial sector will prove to be effective. Globalization has integrated the world’s financial markets, making it easy to shift funds from country to country. Financial institutions need no longer remain in New York or London, but rather can be relocated to any place that is connected to the internet. Restrictive legislation in the United States and Britain will just speed the rate at which financial institutions move offshore.

Finally, the impetus to enforce strict regulation dissipates as the crisis that spurred these actions fades in memory. As time goes on, enforcement becomes increasingly lax and banks and financial institutions become more adept in evading the rules. Corporations use their enormous power to press the case for regulatory “reform,” insisting on the need for freeing financial institutions from “unnecessary” restrictive red tape.

This trajectory can be traced in the United States from the 1930s to the recent debacle. During the New Deal, the Glass-Steagall Banking Bill was passed with the goal of stabilizing the financial sector, in part by making it harder for banks to invest in high-risk loans. One aspect of this was the creation of a tight barrier between retail banks, those taking deposits from individuals and small businesses, and investment banks, which funnel large sums to fund mergers and new technologies, but also underwrite risky investment vehicles. Over the years, the tight separation of financial institutions was eroded until legislation passed during the Clinton years junked the entire policy, permitting retail banks to merge with investment banks. The funneling of funds from retail banks to the high-risk investments of credit default swaps and real estate investment trusts was one factor facilitating the speculative frenzy in the housing market which, when it collapsed, triggered the current crisis. It should be noted that this piece of deregulation was not formulated by neo-liberal ideologues, but rather by the pragmatic advisors of Bill Clinton who were enamored with the rapid spread of a global financial sector.

Capitalism is inherently unstable, and subject to extended periods of mass unemployment, bankruptcies and crisis economics. Government regulation will not prevent economic instability. Efforts to regulate the financial sector in order to prevent destructive   speculative booms are bound to fail. These efforts represent yet another case of reformers fruitlessly trying in vain to fix a system through piecemeal changes. Capitalism can not be reformed. It must be transformed through a revolutionary process.

Obama and the Economic Crisis

     Emergency bailouts of banks and bankrupt corporations can forestall a total collapse, but the economy remains mired in stagnation. The recent course of events in the United States is indicative of the depth of the problems confronting a capitalist system in decline.

President Obama is, above all, a pragmatist. He has no ideological reluctance to using the state to intervene in the economy, and yet he also has no intention of confronting the capitalist class. Very much the corporate centrist, Obama’s economic policy has been marked by cautious timidity. A mildly expansive fiscal policy has left the official unemployment rate stuck at above 8%, with tens of millions of young people unable to find a job or stuck in minimum wage, part-time employment.

Official unemployment rates that remain at a high level for a period of several years become an increasingly unreliable measure of the true situation in the labor market. Once a slump continues for years, the unemployed become discouraged and stop looking for work.  This strikes particularly hard among older workers, who, in effect, are forced into retirement.

Thus, the situation in the United States looks worse than the official statistics indicate. Obama’s approach to overcoming the crisis has been far more cautious than Roosevelt’s New Deal, as limited as that was. This reflects several factors. First, the bailout of 2008 was enormously expensive, adding significantly to the total debt, and thus making it more difficult to undertake deficit financing to spark a revival. Furthermore, globalization has led to the U.S. debt being held by wealthy individuals and financial institutions from around the world. It is all too easy for those currently holding U.S. bonds to sell them should they become concerned with the federal government’s increasing debt. Such a dumping would increase the interest rate accruing to U.S. bonds, making it more expensive to borrow.

These factors are relevant, but secondary to the significant shifts in the objective situation since the 1930s. Globalization has undermined the strength of the working class in the previously industrialized countries. (In the United States, only 7% of those working in the private sector are union members.) With the working class in retreat, Obama has been only willing to implement a fiscal policy of economic stagnation. This is in contrast with the first years of the New Deal, when Roosevelt authorized deficit financing on a scale that led to lower unemployment rates, although unemployment still remained at depression levels. Globalization makes capitalism even more susceptible to severe economic downturns, while at the same time making it more difficult to recover.

Obama has also been eager to limit the scope of counter-cyclical spending to capital projects that can be viewed as emergency measures, while avoiding projects that widen the areas of responsibility undertaken by the public sector. New Deal plans to counter mass unemployment were quite different. The Civilian Conservation Corps constructed roads and buildings that made natural parks more accessible and desirable, and thus stimulated the demand for increased funding for the park system that went well beyond the 1930s. The Works Progress Administration was given a broad mandate that led to a variety of projects such as the that could only inspire working people to demand that the federal government do more than fund a vast military apparatus. The Obama Administration has studiously avoided any creativity in envisioning pump-priming projects.

This difference in approach reflects the underlying shift in the balance of class forces. Roosevelt was worried that the working class in the United States might be attracted by Soviet Russia or Nazi Germany. He therefore sought to present a positive alternative, a welfare state which remained a capitalist market economy.

The change in approach to deficit financing also reflects the very different global context in which the United States finds itself. In the 1930s, most Americans believed that the Great Depression was merely a temporary downturn that would be followed by further periods of prosperity. Eighty years later, globalization has led to deindustrialization. For three decades prior to the economic crisis of 2008, the working class has suffered through declining real wages and a deterioration in essential social services. Although Obama has pursued a fiscal policy of modest economic stimulus that has forestalled a total collapse, state and local governments have not been provided with funds from the federal treasury needed to counteract the precipitous drop in tax revenues at every level of government. As a result, there have been drastic cutbacks in education, health care and mass transit, compounding those that were already in place before the current crisis. Workers are constantly told that austerity is inevitable, and that they will have to live on less, not just now but in the future.

The Eurozone Debt Crisis

     The sharp downturn in the global economy has led to a rapid increase in the debt owed by governments in most of the developed capitalist countries. Banks have been bailed out by governments anxious to avoid a collapse of the financial sector. Tax revenues have substantially declined, as output and incomes spiral downward. At the same time, some countries have pursued Keynesian pump-priming policies by increasing expenditures on infrastructure projects, such as roads, railroads, even prestige projects such as venues for the Olympics.

For most countries, the rising debt ratios, debt versus output, frequently creates a situation where government bonds come under speculative pressure. Hoping to counteract this pressure, governments feel that they must cut the deficit, even though this means that the global economy is likely to slide into an even deeper economic slump. In this context, social services are cut even more, and the wages and benefits of public sector workers are further reduced. This has produced an unstable situation, but it has not, at least until now, triggered a crisis threatening the continued existence of the system.

Nevertheless, in several countries problems arising from the government debt have reached crisis proportions. All of these countries operate within the Eurozone, and, generally, these countries are among those with the weakest economies, having the lowest per capita incomes within Western Europe. Nevertheless, despite some similarities they have entered into a crisis situation for different reasons.

Ireland became the epitome of the deregulated economy prior to the crash. Its government was desperate to attract foreign investment, so no limits were set on speculation. For awhile Ireland was presented as a model of success, but when the bubble burst the economy crumbled. Iceland’s banks sought online deposits from abroad, offering unsustainable interest rates. When the downturn came, the entire banking system failed, leaving the Icelandic people liable to billions of dollars in lost deposits, a liability they have refused to accept.

Both Ireland and Iceland are small countries enmeshed in the international network of finance and commerce. Spain is one of Europe’s largest countries, but the recent upswing came with a speculative boom in property, as the affluent middle-class of Western Europe sought vacation homes. After the collapse in the housing market, Spain has been left with an official unemployment rate of 25%, with a majority of its youth excluded from the workforce.

Italy is a somewhat different situation. A country where corruption is endemic, organized crime is a major factor, and tax evasion a national sport, the economy has always been on shaky ground. Part of the speculative attacks on Italian government bonds reflect investor distrust of the entire society, one that is marked by pervasive tax avoidance, organized crime and corruption.

Greece has become the most critically ill country, with the value of its government bonds hurtling downward. Greece was one of the poorer countries admitted into the European Union. The promise of that time was that by creating a common market there would also be a sustained effort to equalize incomes throughout the EU. This largely meant a commitment by Germany to subsidize countries such as Greece. When everything went well, Greece could sustain a network of social services, relying on German aid and borrowing on the basis of future prosperity. When the global economy tanked, Greece was left with huge debts and zero credibility. The results have been catastrophic.

The debt crisis has spread through much of the Eurozone. Portugal and Holland are two other small Eurozone countries  experiencing rising interest rates for their bonds. France, one of the larger and more prosperous countries in Western Europe, has also come under attack by speculators.

Although the specific road to the debt crisis has varied, the results have been very similar. The economic crisis has led to a sharp fall in output and, as a result, tax revenues have fallen as well. As deficits increase, the countries are pressured into sharp cuts in social services, which produce even further cuts in output, and the downward spiral continues as the system spins out of control.

Bondholders observe debt to output ratios rapidly increasing in the weaker Eurozone countries, and they respond by shifting out of the bonds of those countries and into safe havens, such as U.S. government bonds. The increase in those wanting to sell leads to a fall in the price of the bonds of the beleaguered countries, and an increase in interest rates. Higher interest rates add to government expenditures, thus creating even larger government deficits, and a further twist in the downward spiral.

As interest rates on government bonds approach 7% per year, bondholders begin to panic, and bankruptcy looms. Interest rates for both Greece and Spain have begun to approach this critical point. To avoid a crisis, the European Union, that is primarily the German government, provides emergency funds to buy the bonds of the targeted country, demanding stringent repayment plans and further cutbacks. The emergency infusion of funds stabilizes the bond market for awhile, until the spiral begins again and the abyss approaches again.

In this situation, austerity measures are self-defeating. Cutting government spending only exacerbates the underlying problem. Still, Keynesian policies will not work either, given the readiness of bondholders to flee from risk. Furthermore, the draconian cuts required to service the emergency loans virtually propel the working class into action, and the militancy of the popular resistance deters the government from fully implementing the austerity program demanded by the European Union and the International Monetary Fund.

There would appear to be only one way out of this impasse within the constraints of a capitalist market economy. The wealthy few must be heavily taxed, and the revenues thus generated used to fund vital social services. This would require a significant shift in the class struggle toward the working class. The recent decades have been characterized by the exactly contrary trend, as the gap between the rich and the poor widens even further.

Globalization not only undercuts the power of the working class in the previously industrialized societies, but it also makes it easier for the affluent to hide their incomes in the many tax havens that have sprung up around the world. The ability of nation states to effectively tax wealthy individuals or large corporations has been significantly undermined by globalization. Incomes and corporate profits would have to be taxed at the source, and this would require full and open transparency by corporations to become meaningful. A true accounting would necessitate a direct confrontation with international capital, triggering massive capital flight.

Immediately, the Eurozone countries confronting economic collapse can gain a breathing space by leaving the European Union and defaulting on sovereign debt. By being integrated into a currency zone dominated by Germany, less technologically advanced countries such as Spain and Greece have been saddled with overpriced exports. This has exacerbated the impact of the global downturn, and has been one factor contributing to the economic crisis in these countries. Nevertheless, leaving the Eurozone will not resolve the underlying problems. Investor confidence has been decimated, and a brief upsurge in exports is not likely to remedy the problem.


The choice is stark. Either countries such as Greece and Spain move rapidly to overthrow capitalism, and to establish a new society, or economic stability will be restored by quashing the working class, dismantling social services and slashing wages. This is a choice that can not be confined to one country. The revolutionary option will only succeed if it rapidly spreads. The current crisis can not be transcended through half-measures and limited reforms. We need to think in bold terms, to view our commitment to building a new society as an immediate strategic priority, not as a goal for some vaguely defined future.

[i] In a letter to Engels written on September 25, 1856, Marx suggested that the crisis had “assumed European dimensions such as have never been seen before.” The two revolutionaries would not “be able to spend much longer here merely as spectators.” Karl Marx and Frederick Engels, Collected Works (London: Lawrence and Wishart, 1983), 40:72.

[ii] John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936), p. 161.

From the Anarcho-Syndicalist Review (Winter 2013)

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5 responses

14 04 2013

Eric, a welcome contribution to the analysis of capitalist crises.

Whilst overtly anti-Keynesian in many parts, my concern is that it still implicitly accepts a Keynesian diagnosis of crisis – i.e. deficient demand.

You state, “Keynes’ technical analysis was shown to be true”
“…unlike wartime, countering an economic downturn doesn’t provide the government…with sufficient movement to engage in the level of deficit spending required to counter the collapse in private investment”, going on to say that deficit financing could work if made a “permanent feature”.
& also
“Capitalism generates more savings than can be matched by profitable investment”.

It seems you are approaching things based upon a Keynesian analysis of the economy using national income accounting with expenditure on one axis & output of the other & aggregate demand equalling C + I + G -T + X – M

Thus the shortfall in investment you still ascribe to a shortage in aggregate demand, with only bondholders & capitalist desire to run things preventing governments being able to engage in enough fiscal stimulus to get things going.

But this is to misunderstand the nature of value as explained by Marx & the explanation of crises of overproduction not being limited to “certain sectors” as you state, but rather to generalised overproduction, which recognises that production has got ahead of what can be realised in the longer run due to excessive credit/debt (which itself can, but doesn’t have to be, a result of a falling rate of profit, even if this fall is hidden by the actual excessive credit/debt).

The cure for overproduction is a recession. Output falls, business go bankrupt & a proportion of credit money disappears. This is Marx’s law of value.

Printing more money, only worsens the crisis of overproduction. It may delay the crisis, as we have seen since 2008, but it can’t resolve it. By governments buying up the banks bad debt, it merely moves some of the risk from the financial sector to the government sector. But the two are linked as we have seen in the Eurozone crisis. Sovereign debt crisis is financial crisis.

Capitalism today still has a massive crisis of overproduction & will still need to devalue a huge amount of credit money.

14 04 2013

I for one tend to agree with Eric’s analysis, with lesser differences: for example I do not thing that leaving the eurozone is a realistic possibility for any state, unless committed to socialism. Being committed to some form of real and quite radical socialism would also be necessary to confront the effects of default, which would be overwhelming pressure, including military, from the creditor states, i.e. NATO. When Soviet Russia declared default, it was immediately invaded by the creditor imperialist states… although they could not do much in the mid-run – but imagine that in Greece.

As for what Bill says: this crisis is actually worse than the one of 1930s, although also a bit slower in unfolding. It is more similar in nearly everything to the crisis of the Ancien Régime that preceded the French Revolution. But in many aspects it is also way too similar to the crisis of the 1930s, including the promotion of fascist forces, the convergence of bourgeois forces, including and importantly so the social-democrats into desperate attempts to keep the status quo working one day, week, month, year… more. Efforts obviously doomed as they can offer no more hope nor sense of social belonging.

As for what Duvinrouge says, it’s quite complex but IMO either we accept that Marx accepted demand implicitly (but had not the theoretical tools to describe it in his time) or we must make a criticism of Marxist economics in this aspect as insufficient. Business that were doing fine a few years ago are not closing because overproduction but because the masses have seen their share of the general wealth dramatically cut down, so they, we, cannot buy almost even the basics, let alone any caprice. The offer side of the economy could well distribute that offer to many people who need it, who demand it but cannot afford it. Effective demand has been curtailed, what affects business with overproduction-like results.

But it’s a matter of semantics, this is not really contradictory with what Marx says. Ignoring the environmental limitations however, Capital could theoretically produce more and more and more and there would be people demanding it. Because there are billions without a car, internet or a decent home and, in raw theory, Capital could provide for them and keep growing. But they do not because of costs. Cost cutting (= surplus value concentration in Capitalist hands) cuts down demand (= reduction of the working class’ share of value) what causes an overproduction crisis, and this is not really contradictory with what Marx said, just different wording in some details.

At least that’s how I see it. I also think, even if just as precaution, that Marx on occasion may have been wrong, even if in general he was quite right. He was just a man, not any god nor prophet (a genius no doubt but still), and lived 150 years ago what is long ago in terms of Capitalist history.

14 04 2013


A proper reading of Marx shows that he was fully aware of the demand side.
He, like most of the classical economists of the time, understood that a crisis of generalised overproduction is to do with restricted demand. But this is quite different from the Keynesian concept of demand deficiency.

Whilst is quite possible for there to be a lack of demand due to a hoarding of capital, as Marx would have acknowledged, a crisis of overproduction is more complex because it involves credit/debt & often outright speculation causing asset bubbles. But it is the credit/debt that allows production to temporarily outstrip demand, at least demand that represents the realisation of surplus value. For the credit/debt represents payment in future labour values. When the credit/debt gets too big the future labour values cannot be realised & there has to be a devaluation to restore balance. The Keynesians have no concept on labour values, for them money, even credit money, is value. This is why they are unable to understand a crisis of overproduction & hence the fundamental nature of the capitalist system.

Absolutely nothing lacking in Marx’s analysis, beyond perhaps a clear explanation of crises of overproduction & how they differ, although interact, with a crisis to do with the falling rate of profit.

14 04 2013

I can’t but agree that the Keynesians, as all Capitalists, have no sense of material boundaries, be them labor value or environmental limits (which are lacking in Marx as well, what I attribute to the time of his life).

But I am amiss when it comes to conciliate the labor theory of value with high unemployment, which is labor rendered worthless (among other things) and therefore important loss of surplus value for the bourgeois class. Unemployed are costly for the system because they still need to eat and live somehow, be it via welfare or private family/charity assistance (which overall increases the cost of active labor per capita in monetary and material terms, i.e. in “wasted” surplus value). In Spain, for example, 10% unemployment or more has been the norm for decades and is now nearing 30% (official figures are already well above 25%). How can this be explained? It cannot be explained in terms of threat to workers because much lower levels work perfectly well, it cannot be explained in terms of costs because then the system would try to lower the real cost of labor by means such as cheaper homes and the like, what they do not.

It is a clear malfunctioning of the system related to the overproduction crisis (which can be also read in terms of demand) but how can we say with certainty that well-thought social-liberal reforms like effectively promoting cheaper housing for all would not work?, increasing the standard of living while at the same time lowering the cost of labor (if I have to pay €700 for a rent I need to earn €1000 but if I get a rent for just €200 then I can assume to be paid just €600, and I’m even better off in practical terms). This is not a merely monetarist approach but something probably closer to genuine Keynesian ideas which are social-democratic in essence: both workers and capitalists get benefits from such strategic targeting. In fact a key element of the relative success of countries like Germany, Finland or Sweden in our days is that they still have some of this Keynesian/socialdemocratic approach to costs via welfare, what allows their labor costs to be relatively low, everything else equal (of course it’s not the only measure but it seems a key one).

So it seems to me at this level of analysis that the stick in the gear is one of excessive ill-thought greed without proper planning. However we know that the Capitalist regime has many think tanks and planning organizations: can they be so blind? Or is it me the one who is blind?

One of the main fears I have in this critical juncture is that a vanguard bourgeois state such as Germany can maybe overcome the crisis via the combination of: (1) welfare intervention to lower the cost of labor, (2) heavy investment in renewable energy (which they are doing quite successfully) and (3) the semi-colonial exploitation of peripheral Europe (which is the most contradictory of all elements but is potentially manageable), as well as other countries (that’s why they want a strong euro/DM: cheaper imports). Is this a mirage?

15 04 2013
Roy Ratcliffe

My own view is closer to Duvinrouge, but would argue the crisis facing humanity is larger than just the economic and financial aspects, important and as complex as they are. My own latest contribution to the current situation is entitled ‘Humanity at a cross-roads’. An article ‘The Five-fold Crisis of Capitalism’ dealing with the other aspects of crisis is also available at

Regards, Roy


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