Duncan K.

Foley The Political Economy of Postcrisis Global Capitalism

Marxs Theories of Capitalist Crisis

World capitalism from the last decades of the

nineteenth century to the first decades of the twenty-first century seems to exhibit two major types of crisis, crises of falling profitability and crises of rising rates of exploitation, each emphasized by Karl Marx at different stages of his work. It appears more clearly in retrospect that the depression of the 1890s and the stagflation of the 1970s were manifestations of a falling rate of profit, while the Great Depression of the 1930s and the Great Recession of the 2000s had their roots in increasing rates of exploitation.1 In his earlier writings on capitalism, Marx explored the contradictions that arose from combining David Ricardos and Thomas Malthuss theories that capitalism would tend to force wages to a minimal subsistence level with Adam Smiths postulate that capital accumulation would lead to rising labor productivity through the extension of the division of labor. Marxs rate of exploitation is the ratio of nonwage incomes (profits, interest, rent, expenditures on unproductive labor, and taxes, which Marx calls surplus value) to wages; this rate rises without limit in an economy where

The South Atlantic Quarterly 111:2, Spring 2012 DOI 10.1215/00382876-1548203 2012 Duke University Press

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wages grow less rapidly than labor productivity (value added per worker). The contradictions of this pattern of capital accumulation, which might be called the tendency for the rate of exploitation to rise, center on the difficulty society has in managing a large and growing surplus value. From a purely economic point of view the main difficulty is maintaining what John Maynard Keynes has taught us to think of as aggregate demand. Wages are spent rapidly and reliably on workers consumption, but capitalist consumption absorbs only a small part of surplus value incomes; the remainder has to find an outlet in investment, social expenditure, or the employment of unproductive labor to maintain aggregate demand. A rise in the rate of exploitation makes great demands on the financial system, which must recycle realized surplus value from its highly liquid form as money revenue from the sale of commodities to a highly illiquid form as means of production. If the financial system fails to accomplish this function, aggregate demand stagnates and capital accumulation is frustrated, not through a lack of potential profit but through an inability to realize potential profit. A rising rate of exploitation, which fosters increasing inequality in the distribution of incomes, also exacerbates the latent class tensions that shape bourgeois society and politics. The gap between the growing productivity of workers and their diminishing share of the fruits of that productivity feeds various forms of critical consciousness, which, in Marxs view, would lead to a revolutionary political crisis. While Marx was developing his analysis of capitalism in the 1850s and 1860s, European, particularly British, and North American capitalism began to show a distinctly different pattern in the evolution of the rate of exploitation. Wages started to grow, eventually at rates comparable to the growth of labor productivity, stabilizing the ratio of surplus value to wage incomes. Marx observed this historic change and reformulated his picture of the long-horizon evolution of capitalism along the lines of a tendency for the rate of profit to fall. The main mechanism for this dynamic in Marxs analysis was induced technical change, first systematically analyzed by Ricardo in his chapter on machinery.2 Capitalists, faced with rising real wages (imposed from the point of view of each individual capital by the overall labor market), would seek to avoid the consequent increases in production costs by substituting capital equipment for labor, thereby raising labor productivity. Marx pointed out, however, that in many cases the result of this substitution would be a rise in the value of capital per worker (or in Marxs own terms the organic composition of capital3). Since the profit rate is the ratio of surplus value not to wage incomes but to the capital

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invested in production even if capitalists manage to maintain the rate of exploitation, they may experience a fall in the rate of profit. If capitalists willingness to invest depends on the level of the rate of profit, the falling rate of profit may also lead to aggregate demand stagnation, as business investment dries up. While an increasing rate of exploitation and a falling rate of profit can both eventually lead to a crisis of aggregate demand, the two scenarios have different implications in other political and economic dimensions. The fundamental phenomenon that causes the falling rate of profit is upward pressure on wages, which in nongold standard monetary systems can be seen as cost-push inflation. An increasing rate of exploitation, on the other hand, is rooted in the stagnation of wages, the aggressive pursuit of cost reduction, and price deflation. As a result the crises stemming from the two different scenarios unfold in divergent ways. The falling-rate- of-profit crisis is often precipitated by central bank action to raise interest rates by reducing the liquidity of the financial system to restrain capital accumulation, so as to create unemployment in order to reduce upward pressure on wages. (Micha Kalecki analyzed this dynamic in his prescient 1943 article, Political Aspects of Full Employment.4) The increasing-rate- ofexploitation crisis more often occurs in an atmosphere of speculation in financial assets and the bursting of financial asset bubbles, leaving the economy overleveraged and vulnerable to a long period of debt deflation, which central bank provision of liquidity is powerless to combat. From 1977 to 2007 Mainstream economists tend to represent the crisis of the 1970s primarily as a scientific turning point in economic theory.5 According to this view, during the postWorld War II decades a wrong theory (the US version of Keynesian aggregate demand management, including the idea of a trade-off between inflation and unemployment) had gained consensus acceptance in the academy and decisive influence over economic policy, particularly monetary policy. The attempt to manage the US economy on the basis of Keynesian principles failed with the emergence of stagflation, a combination of stubborn inflationary pressures and excess economic capacity. Edmund Phelps and Milton Friedmans demonstration of the existence of a natural rate of unemployment, Thomas Sargent and Robert Lucass development of rational expectations equilibrium macroeconomic theories, and Lucass critique asserting the philosophical necessity of ground-

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ing macroeconomics in the microeconomic foundations of Walrasian equilibrium theory overturned discredited Keynesian theories and policies. The key innovation in academic economics was the replacement of structural dynamic macroeconomic models by real business cycle models and then by dynamic stochastic general equilibrium models in which monetary policy has no or only temporary effects on the real economy. In line with the vision behind these models, which holds that markets reliably and stably enforce a growth path on the real economy determined by tastes, technology, and resources, economic policy was reoriented to the empowering of markets through deregulation and privatization. Monetary policy, powerless to affect the real economy according to this view, is appropriately centered on inflation targeting. The development policy that follows from this same worldview emphasizes liberalization of trade and capital flows, and the orientation of developing economies to the world market through export-led growth. The mainstream economists argue that the adoption of economic policies consistent with universal economic laws following the new classical counterrevolution in academic economics overthrowing Keynesian errors resulted in a great moderation in macroeconomic stability in the advanced capitalist world and unprecedented gains in incomes in developing countries as a result of globalization. Many aspects of this just-so story are controversial or false (for example, advanced econometric techniques are unable to pin down the elusive natural rate of unemployment; monetary policy has inescapable impacts on the stability and viability of credit markets; and speculative assets markets have exhibited recurrent instability). But in my view the greatest weakness of this conventional mainstream narrative is that it leaves the political economic aspects of the 1970s crisis and its aftermath obscured and mystified. The concrete source of inflationary pressures in Europe and the United States in the 1970s was upward pressure on wages. (The dramatic increases in the price of oil in this period were a secondary phenomenon that served mostly as a smoke screen to obscure the class dimension of the inflationary pressures of that period.) This wage-push pressure presented central banks with an unwelcome dilemma. They could allow oligopolistic corporations to pass on wage increases to consumers in the form of higher prices, validating the resulting inflation by increasing the money supply. Or the central bank could resist inflation by restricting the money supply and creating a crisis of credit availability. The inability of central bankers to resolve this dilemma led to stagflation. It is in this political economy context that the full implications of Friedmans slogan that inflation is always and every-

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where a monetary phenomenon can be appreciated.6 From the political economy point of view, inflation targeting is more aptly understood as surplus value targeting. The resolution of the class struggles of the 1970s involved much more than the reorientation of mathematical economics or even the reform of monetary policy. Deeper and more structural changes in world capitalism as a context for US capitalism were necessary.7 The sharp and unprecedented (in the postWorld War II period) rise in real interest rates that followed Paul Volckers appointment as chairman of the Federal Reserve Board in 1979 encouraged corporate management to shift focus from growth to profitability and cost reduction. The business school cult of shareholder value that blossomed in this period had as much impact on firm management as the Lucasian revolution had on macroeconomic policy. The Thatcher and Reagan regimes created political environments hostile to labor and unionization. The postWorld War II preponderance of US corporations in the world economy was challenged particularly by recovered and energetic German and Japanese competition. The convergence of these developments transformed the political economy of the United States and other advanced capitalist economies. Upward pressure on wages eased and then practically disappeared in the United States, where real wages stagnated for decades starting in 1975 1980. The pressure on capitalist firms to increase profits by cutting costs was increasingly met not by capital-using innovations but by the relocation of major parts of the production chain to lower-wage regions of the world. The pattern we associate with Marxs falling rate of profit was replaced by a pattern of increasing rates of exploitation. Globalization emerged as a tremendous engine of surplus value creation and appropriation. Out of the political economic crisis of the 1970s a new global configuration of capitalist accumulation emerged. While these developments were undoubtedly reflected in the changing style and rhetoric of academic economics, they were rooted in far more fundamental changes in the structure of production and the sources of profitability than market fundamentalism can reveal. With the easing of upward pressures on wages, the political lives of central bankers did indeed become easier. In place of the unpleasant task of resisting wage pressures through unaccommodating monetary policy, central banks found themselves more frequently playing the role of heroic rescuers in various catastrophes arising from the instabilities of unregulated speculative financial markets. The emergence of globalization, how-

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ever, did not solve all the problems of the capitalist economy. In particular, the problem of regulating world aggregate demand became more acute and problematic. Following the 1944 Bretton Woods conference and the US veto of Keyness proposals for a genuinely international central bank that could create world liquidity, the United States became the world economys de facto central bank and regulator of world aggregate demand. This system privileged the United States as the creator of world money and exempted it from the disciplines of trade and investment balance that other countries experience. The growth of world liquidity depended on the emission of dollar liabilities by the United States. The US balance of payments deficit on current account effectively became the fulcrum for the regulation of world aggregate demand. The United States ability to create world money complemented its role as diplomatic and military leader of the free world by releasing any budget constraint on US foreign expenditures for these purposes. This system also placed certain burdens and responsibilities on the United States, which lost its ability to manage the value of its own currency and in theory had to balance its domestic economic management against the needs of the world system in shaping its economic policies. In theory the collapse of the fixed exchange rate system that also occurred in the 1970s restored control of fiscal and monetary policies determining aggregate demand to individual nations. Each country could regulate aggregate demand as it pleased, with the flexibility of exchange rates taking up the slack and compensating for divergent rates of price inflation. But this theoretical freedom proved to be incompatible with the exigencies of globalization. The world capital market tended to overvalue the currencies of emerging market economies, which led to capital inflows, deindustrialization, and bubbles in nontradable assets like real estate, culminating in financial crises and currency devaluations. (Such crises have become a quasiregular feature of the world economy.) Thus globalization put a premium, especially for export- oriented economies, on stabilizing exchange rates through interventions in currency markets. As a result the regulation of world aggregate demand returned to the size of the US current account deficit. The accounting mirror image of the current account of the balance of payments that tracks exports and imports is the capital account, which tracks investment and monetary transfers. The huge engine of surplus value generation created through globalization required mechanisms to recycle surplus value into aggregate demand on an unprecedented scale.

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US and other leading financial institutions were happy to take on this function and collect increasing shares of the surplus value in the process but proved incapable of achieving the necessary intermediation. As Keynes eloquently observed, it is no easy trick to persuade wealth holders to part with liquidity by transforming the immediately fungible and liquid form of money surplus value into stubbornly specific and risky concrete investments.8 It is not surprising that this was an era of an explosion of technical financial devices such as derivative securities, which offered to straddle one or another part of this gap. Of course, no amount of ingenious financial innovation can actually eliminate the gap; someone has to be left as the residual bearer of risk for specific real investments. Thus the solution of the political economic problems of the 1970s shaped the environment that produced the financial-economic crisis of 20072008. The Political Economy of Postcrisis Global Capitalism The political debacle of Barack Obamas administration in the United States reveals the dangers inherent in thinking of macroeconomic performance and policy in excessively narrow terms. Obamas economic advisers tended to operate in a discourse in which the economy is the central concept. In this discourse the economy has its own laws and behavior, reflected in the movement of a statistical indexreal, that is, inflation- corrected, gross domestic product (GDP). The theories of growth and fluctuation dominant in mainstream teaching and research argue that tastes, technology, and resources (including labor), typically regarded as slowly changing parameters, give rise to a long-run growth path around which the economy fluctuates due to external shocks. Conventional mainstream economic opinion is sharply divided between freshwater laissez-faire economists who argue that self-stabilizing market processes provide the best possible response to external shocks, and saltwater interventionist economists who allow for some degree of market failure that justifies government intervention in the form of monetary or fiscal policy to achieve a better adaptation of the economy to (especially large) external shocks. There is no disagreement, however, on the basic assumption that the economy tends to return to a long-run growth path after a major macroeconomic shock. This view of the economy typically abstracts from political and political economic institutions, and relegates specific discussion of historical factors to the realm of changes in tastes, technology, and resources. Thus, for example, the distinction between productive and unproductive labor characteristic of clas-

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sical political economists like Smith and Marx hovers only on the vague edge of conventional economics as the empirical observation of the growing share of the service sector in GDP. The global context in which national economies operate tends to be regarded, at least in first approximation, as a boundary condition, the rest of the world, which is a source of shocks. Obamas economic advisers not only internalized these views but made the terrible political error of publicly proclaiming them, assuring the public that a recovery of the economy was inevitable and even venturing to quantify its dimensions, for example, in the prophecy that the US unemployment rate would, even in the absence of fiscal stimulus, peak at 8 percent. The laissez-faire Right of the profession opposed extreme fiscal and monetary policy responses to the crisis on the grounds that they would do more long-run harm than good; the Keynesian Left of the profession argued strongly that in the face of a catastrophic collapse of finance, even the almost-unprecedented monetary and fiscal measures taken would prove inadequate to hasten the return of the economy to its long-run path. This conventional view of macroeconomic dynamics is strongly bolstered by the fact that major departures from a relatively stable long-run growth path (at least for the US economy) have been rare. The main disturbing anomalies to these views up to the current crisis were the Great Depression, which depressed measures of real GDP below their trends for more than a decade, and the ongoing stagnation of the Japanese economy following the bursting of its real estate bubble in the late 1980s. Uncannily enough (and contrary to the expectations of the majority of the economics profession), US real GDP did return to a close approximation to its pre Great Depression trend path after World War II. (So far a similar happy denouement has eluded the Japanese.) Marxist-based political economic analysis of macroeconomic dynamics, though far from having achieved consensus even on major points of interpretation, offers a considerably more articulated institutional and historical picture. The Marxist tradition, following the work of the European regulation school and the American social structures of accumulation school, understands that national systems of capital accumulation depend on historically specific institutions, policies, and practices that constitute a system of accumulation. Within this political economic paradigm, the question of the eventual recovery of the US economy unpacks into two related questions. First, does the global system of financialized capitalism, guided by largely unregulated speculative asset markets that developed in the decades prior to the crisis of 20072008, provide a viable framework

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for world capital accumulation? Second, will the United States be able to return to the political and economic hegemony it enjoyed in the 19452007 period? Global Accumulation One striking feature of postcrisis global capitalism has been the extent to which the peripheral or emerging markets economies have escaped major disruption. Continuing stagnation or renewed contraction of the big advanced capitalist economies could eventually result in major damage to accumulation in the peripheral economies. But from the vantage point of the last months of 2010, it is hard to make a strong case against the viability of the process of surplus-value extraction and realization that the peripheral economies have evolved. It is instructive, however, to understand how these economies, particularly but not only in East Asia, have managed to insulate themselves from the crisis-produced turmoil in the advanced capitalist world. After the East Asian financial crisis, shrewd policy makers in peripheral economies realized the immense advantage for their export-led models of development of maintaining low (or, depending on ones point of view, undervalued) exchange rates against the dollar. These countries (particularly China) followed a policy of pegging their exchange rates to the dollar at relatively low values for their national currencies. These countries typically also have effective methods of repressing upward pressure on money wages and can, as a result, limit the inflationary pressures that a low exchange rate policy generates. The main side effect of this exchange rate policy has been the need for central banks to accumulate very large foreign currency reserves, mostly in dollar- denominated assets. Since central banks can always create the domestic currency required to buy dollars to prevent a rise in their exchange rates, there is no technical limit on this policy stance. In theory the enormous reserves these countries are accumulating could be more profitably invested in real capital accumulation in their own economies, but this consideration pales beside the promise of continuing access to world export markets and the (apparent) autonomy for domestic macroeconomic policy provided by reserve accumulation. Other emerging market economies, such as Brazil, face a much tougher policy dilemma. Historically these economies have been prone to inflation, even hyperinflation, set off by undervalued exchange rates. In the current world environment, the currencies of countries that do not inter-

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vene vigorously to prevent their values from rising are being bid up relative to the dollar, and their economies are threatened by the resulting loss of competitiveness of their exports. The Dollar Dilemma One of the pillars of precrisis US global hegemony was the role of the dollar as the de facto world currency, and the consequent privilege of the United States to ignore its current account deficits. But precisely this asymmetric role of the dollar in the world economy implies that the United States cannot control its own exchange rate; the international value of the dollar is the result of the decisions of other countries as to how to intervene to control their own exchange rates. In the postcrisis environment of slow world economic growth and high unemployment in advanced capitalist countries, a war of competitive devaluation has predictably emerged. US policy makers are helpless to confront the resulting dynamic except by contemplating a major change in world financial institutions, which up to this time has been kept off-limits to responsible policy debate. The consequences have contributed significantly to the weakness of the US recovery and its stubbornly high rate of unemployment. The immediate aftermath of the financial crisis centered on US financial markets and institutions was a rise in the value of the dollar. The monetary and fiscal stimulus measures adopted in the hopes of engineering a domestic US recovery of vigorous GDP growth were offset by the failure of the dollar to fall. It is interesting to see that international reaction to the adoption, by the Federal Reserve, of further quantitative easing of US monetary policy has been a chorus of criticism about the possible deleterious effects of this policy in other countries. World Aggregate Demand The main obstacle to renewed stable capital accumulation on a world scale, then, is chronic insufficiency of world aggregate demand. The peripheral economies have avoided the consequences by successfully diverting demand to themselves through maintaining low values of their domestic currencies relative to the dollar and euro. But from a global perspective, there is simply not enough generation of demand to support continued rapid growth of the emerging markets economies and to provide politically acceptable levels of job creation in the advanced capitalist economies. As I discussed above, this dilemma was already significant in the precrisis

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period, and it contributed to the constellation of circumstances that precipitated the crisis itself. The possible solutions to aggregate demand insufficiency in closed economies (such as the world economy necessarily constitutes) are well known. Effective demand in a closed economy arises from household consumption, business investment, and government expenditure. Thus any resolution of the problem of inadequate aggregate demand would have to stem from some combination of increased spending of these sectors. The prospects for a strong increase in demand from the households of the advanced capitalist economies are very slim, due to the enormous overhang of household debt in these economies, particularly the United States. Increases in household income in these countries are much more likely to be used to deleverage households by reducing debt than to be spent. This is the proximate cause for the weak response of the US and European economies to the postcrisis stimulus. The year 2010 also saw a (panicky and exaggerated) shift of political sentiment in the advanced capitalist countries against government spending, whether funded by taxation or borrowing. The resulting reforms (effectively, contractions of the level of government spending) are very likely to further shrink world demand. Whether this effect by itself will be enough to trigger another actual world recession or will simply prolong the stagnation of growth is hard to predict. The remaining potential source of aggregate demand for the world economy would be spending by workers in peripheral economies, which would require an increase in their incomes. Either a revaluation of domestic currencies, thus increasing the world purchasing power of wages, or a rise in wages in domestic currencies of these economies could support such an increase in spending. This observation explains why the United States would very much like China, for example, to revalue its currency. Hegemony Reconsidered While the United States still claims world economic leadership, as a result of the financial crisis of 20072008 it finds itself in a position where it cannot create sufficient world aggregate demand through its own policies and, ironically, is equally powerless to divert aggregate demand to its own stagnating economy. These problems are inherent in the very institutions that support US hegemony. One of the chief functions of US world economic-financial hegemony

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in the years after World War II was to prevent a recurrence of the nationalist capitalist conflicts that wrecked European capitalism in the crises of World War I and its aftermath. During the Cold War, the United States was able to keep the leading capitalist nations more or less in line with its overall imperialist strategy, despite some sharp disagreements, for example with Europeans in the 1960s over the financing of the Vietnam War. Even after the watershed changes of the 19751980 period in world capitalism and the collapse of the Soviet Union, US leadership managed to suppress latent competitive conflict among the advanced capitalist nations. The Plaza (1985) and Louvre (1987) Accords provided some degree of centralized regulation of currency values (and hence world aggregate demand). During World War II, Keynes himself had been preoccupied with scenarios of competitive devaluation in conditions of world depression. As I mentioned earlier, he suggested the creation of a world central bank with the power to create world money and regulate exchange rates, to put as much pressure on countries with current account surpluses as on countries with current account deficits to adjust their economic policies. Keynes evidently hoped that the United States would accept such an immensely powerful international institution with the understanding that British governments would effectively ensure US-British control of world monetary policy. The United States refusal to accept this proposal set the stage for the postwar reconstitution of the world financial system. Keyness ideas seem as relevant today as they were in 1944, but it is difficult to see much political will in the United States or other advanced capitalist nations to create international institutions powerful enough to resolve the aggregate demand problem. Inadequate world aggregate demand poses serious threats to continued economic cooperation among the advanced capitalist countries, threats as or more serious than the European imperial powers panic over control of natural resources posed in the period before World War I. The fate of the neoliberal regime of globalized financial capitalism hangs on the collision between its huge success as an engine of surplus value creation and its failure to solve the aggregate demand problem either through an increase in capitalist investment spending or through a more coherent world fiscal and monetary policy.
Notes
This essay was prepared for the Global Crisis: Rethinking Economy and Society conference at the University of Chicago, on December 35, 2010. These remarks reflect ongoing conversations with Ramaa Vasudevan on the political economy of contemporary world capitalism.

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3 4 5

6 7

See Duncan K. Foley, Adams Fallacy: A Guide to Economic Theology (Cambridge, MA: Belknap Press of Harvard University Press, 2006), chap. 3, for further detail on Marxs theories. David Ricardo, On Machinery, chap. 31 in On the Principles of Political Economy and Taxation, available at http://marx.org/reference/subject/economics/ricardo/tax/index .htm (accessed October 28, 2011). Karl Marx, The Law as Such, chap. 13 in Capital, vol. 3, part 3, available at www .marxists.org/archive/marx/works/1894- c3/ch13.htm (accessed September 18, 2011). Micha Kalecki, Political Aspects of Full Employment, Political Quarterly 4 (1943): 32231. See Thomas J. Sargent, Evolution and Intelligent Design, American Economic Review 98, no. 1 (2008): 537, for a spirited statement of these views. Sargents bibliography is a convenient summary of the literature I refer to in this paragraph. Milton Friedman, The Counter-revolution in Monetary Theory (Wincott Memorial Lecture, London, September 16, 1970). For a thorough quantitative examination of the process of globalization and financialization summarized here, see two works by Grard Dumnil and Dominique Lvy: Capital Resurgent: Roots of the Neoliberal Revolution (Cambridge, MA: Harvard University Press, 2004); and The Crisis of Neoliberalism (Cambridge, MA: Harvard University Press, 2011). John Maynard Keynes, The General Theory of the Rate of Interest, chap. 13 in The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936).