[Michel Bauwens has kindly invited me to serialize excerpts from my forthcoming book The Homebrew Industrial Revolution:  A Low-Overhead Manifesto.  Over the next several weeks, I will post two excerpts from each chapter (one excerpt a week).]

State capitalism, with industry organized along mass-production lines, has a chronic tendency to overaccumulation:  in other words, its overbuilt plant and equipment are unable to dispose of their full output when running at capacity, and the system tends to generate a surplus that only worsens the crisis over time.

Paul Baran and Paul Sweezy, founders of the neo-Marxist Monthly Review, described the Great Depression as “the normal outcome of the workings of the American economic system.” It was the culmination of the “stagnationist tendencies inherent in monopoly capitalism,” and far from being a deviation from economic normality was “the realization in practice of the theoretical norm toward which the system is always tending.” [Monopoly Capital]

Fortunately for corporate capitalism, World War Two postponed the crises for a generation or so, by blowing up most of the plant and equipment in the world outside the United States….

Harry Magdoff and Paul Sweezy of the Monthly Review group described it… as a virtual rebirth of American capitalism.

…Much capital was destroyed; the diversion of production to wartime needs left a huge backlog of unfilled consumer demand; both producers and consumers were able to pay off debts and build up unprecedented reserves of cash and borrowing power; important new industries (e.g., jet planes) grew from military technologies; drastically changed power relations between and among victorious and defeated nations gave rise to new patterns of trade and capital flows.  In a real sense, world capitalism was reborn on new foundations and entered a period in important respects similar to that of its early childhood. [“Capitalism and the Distribution of Income and Wealth,” in The Irreversible Crisis]

Even so, the normal tendency was toward stagnation even during the early postwar “Golden Age.”  In the period after WWII, “actual GNP has equaled or exceeded potential” in only ten years.   And eight of those were during the Korean and Vietnam conflicts.  The only two peacetime years in which the economy reached its potential, 1956 and 1973, had notably worse levels of employment than 1929. [John F. Walker and Harold G. Vattner, “Stagnation—Performance and Policy,” in Magdoff and Sweezy, eds., The Irreversible Crisis]

The tendency postwar, as before it, was for the productive capacity of the economy to far outstrip the ability of normal consumption to absorb.  The difference:

Whereas in the earlier period this tendency worked itself out in a catastrophic collapse of production… in the postwar period economic energies, instead of lying dormant, have increasingly been channelled into a variety of wasteful, parasitic, and generally unproductive uses….  [T]he point to be emphasized here is that far from having eliminated the stagnationist tendencies inherent in today’s mature monopoly capitalist economy, this process has forced these tendencies to take on new forms and disguises.

The destruction of capital in World War II postponed the crisis of overaccumulation until around 1970, when the industrial capacity of Europe and Japan had been rebuilt.  By that time, according to Michael Piore and Charles Sabel, American domestic markets for industrial goods had become saturated. [Second Industrial Divide]

This saturation was simply a resumption of the normal process described by Marx in the third volume of Capital, which World War II had only temporarily set back.

Leaving aside more recent issues of technological development tunneling through the cost floor and reducing the capital outlays needed for manufacturing by one or more orders of magnitude (about which more below), it is still natural for investment opportunities to decline in mature capitalism.  According to Magdoff and Sweezy, domestic opportunities for the extensive expansion of capitalist investment were increasingly scarce as the domestic noncapitalist environment shrunk in relative size and the service sectors were increasingly industrialized.  And quantitative needs for investment in producer goods decline steadily as industrialization proceeds:

…[T]he demand for investment capital to build up Department I, a factor that bulked large in the later nineteenth and early twentieth centuries, is of relatively minor importance today in the advanced capitalist countries.  They all have highly developed capital-goods industries which, even in prosperous times, normally operate with a comfortable margin of excess capacity.  The upkeep and modernization of these industries—and also of course of existing industries in Department II (consumer goods)—is provided for by depreciation reserves and generates no new net demand for investment capital.

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…[T]he need for new investment, relative to the size of the system as a whole, had steadily declined and has now reached an historic low.  The reproduction of the system is largely self-financing (through depreciation reserves), and existing industries are for the most part operating at low levels of capacity utilization.  New industries, on the other hand, are not of the heavy capital-using type and generate a relatively minor demand for additional capital investment.

“Upkeep and modernization” of existing industry is funded almost entirely by retained earnings, and those retained earnings are in fact often far in excess of investment needs….

If anything, Magdoff’s and Sweezy’s remarks on the reduced capital outlays required by new industries were radically understated, given developments of the subsequent twenty years.   Newly emerging forms of manufacturing, as we shall see in Chapter Five, require far less capital to undertake production.  The desktop revolution has reduced the capital outlays required for music, publishing and software by two orders of magnitude; and the newest open-source designs for computerized machine tools are being  produced by hardware hackers for a few hundred dollars.

The result, according to Magdoff and Sweezy, is that “a developed capitalist system such as that of the United States today has the capacity to meet the needs of reproduction and consumption with little or no net investment.”  From the early days of the industrial revolution, when “the demand for investment capital seemed virtually unlimited, [and] the supply was narrowly restricted,” mature capitalism has evolved to the point where the opposite is true:  the overabundant supply of investment capital is confronted by a dearth of investment opportunities.

Marx, in the third volume of Capital, outlined a series of tendencies that might absorb surplus investment capital and thereby offset the general trend toward a falling direct rate of profit in mature capitalism.  And these offsetting tendencies theorized by Marx coincide to a large extent with the expedients actually adopted under developed capitalism.  According to Walden Bello the capitalist state, after the resumed crisis of the 1970s, attempted to address the resumed crisis of overproduction with a long series of expedients—including a combination of neoliberal restructuring, globalization, the creation of the tech sector, the housing bubble and intensified suburbanization, and the expansion of the FIRE economy (finance, insurance and real estate)—as successive attempts to soak up surplus capital.

Unfortunately for the state capitalists, the neoliberal model based on offshoring capital has reached its limit; China itself has become saturated with industrial capital.  The export-oriented industrialization model in Asia is hitting the walls of both Peak Oil and capital saturation….

Today…, as “goods pile up in wharves from Bangkok to Shanghai, and workers are laid off in record numbers, people in East Asia are beginning to realize they aren’t only experiencing an economic downturn but living through the end of an era.”…

Suburbanization, thanks to Peak Oil and the collapse of the housing bubble, has also ceased to be a viable outlet for surplus capital.

The stagnation of the economy from the 1970s on—every decade since the postwar peak of economic growth in the 1960s has seen lower average rates of annual growth in real GDP compared to the previous decade, right up to the flat growth of the present decade—was associated with a long-term trend in which demand was stimulated mainly by asset bubbles….

But it was only after the collapse of the tech bubble that financialization—the use of derivatives and securitization of debt as surplus capital sponges to soak up investment capital for which no outlet existed in productive industry—really came into its own.  As Joshua Holland noted, in most recessions the financial sector contracted along with the rest of the economy; but after the 2000 tech bust it just kept growing, ballooning up to ten percent of the economy.  We’re seeing now how that worked out.

Financialization was a way of dealing with a surplus of productive capacity, whose output the population lacked sufficient purchasing power to absorb—a problem exacerbated by the fact that almost all increases in productivity had gone to increasing the wealth of the upper class.  Financialization enabled the upper class to lend its increased wealth to the rest of the population, at interest, so they could buy the surplus output.

Conventional analysts and editorialists frequently suggest, to the point of cliche, that the shift from productive investment to speculation in the finance sector is the main cause of our economic ills.  But as Magdoff and Sweezy point out, it’s the other way around.  The expansion of investment capital against the backdrop of a sluggish economy led to a shift in investment to financial assets, given the lack of demand for further investment in productive capital assets.

It should be obvious that capitalists will not invest in additional capacity when their factories and mines are already able to produce more than the market can absorb.  Excess capacity emerged in one industry after another long before the extraordinary surge of speculation and finance in the 1970s, and this was true not only in the United States but throughout the advanced capitalist world.  The shift in emphasis from industrial to pecuniary pursuits is equally international in scope.

In any case the housing bubble collapsed, government is unable to reinflate housing and other asset values even with trillion-dollar taxpayer bailouts, and an alarming portion of the population is no longer able to service the debts accumulated in “good times.”  Not only are there no inflated asset values to borrow against to fuel demand, but many former participants in the Ditech spending spree are now becoming unemployed or homeless in the Great Deleveraging.

Besides, the problem with debt-inflated consumer demand was that there was barely enough demand to keep the wheels running and absorb the full product of overbuilt industry even when everyone maxed out their credit cards and tapped into their home equity to replace everything they owned every five years.  And we’ll never see that kind of demand again.  So there’s no getting around the fact that a major portion of existing plant and equipment will be rust in a few years.

State capitalism seems to be running out of safety valves.  Barry Eichengreen and Kevin O’Rourke suggest that, given the scale of the decline in industrial output and global trade, the term “Great Recession” may well be over-optimistic.  Graphing the rate of collapse in global industrial output and trade from spring 2008 to spring 2009, they found the current rate of decline has actually been steeper than that of 1929-1930.  From appearances in early 2009, it was “a Depression-sized event,” with the world “currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30.”

Left-Keynesian Paul Krugman speculated that the economy narrowly escaped another Great Depression in early 2009.

A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators — world trade, world industrial production, even stock prices — were falling as fast as or faster than they did in 1929-30.
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But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year.
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So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government….

And we should bear in mind that it’s far from clear the worst has, in fact, been averted.  Karl Denninger argues that the main reason GDP fell only 1% in the second quarter of 2009, as opposed to 6% in the first, was increased government spending.  As he points out, the fall of investment slowed in the second quarter; but given that it was already cut almost in half, there wasn’t much further it could fall.  Exports fell “only” 7% and imports 15.1%; but considering they had already fallen 29.9% and 36.4%, respectively, in the first quarter, this simply means that exports and imports have “collapsed.”  Consumer spending fell in the second quarter more than in the first, with a second quarter increase in the rate of “savings” (or rather, of paying down debt).  If the rate of collapse is slowing, it’s because there’s so much less distance to fall….

The reduction in global trade is especially severe, considering that the very modest uptick in summer 2009 still left the shortfall from baseline levels far lower in the Great Recession than it was at a comparable point in the Great Depression.  As of late summer 2009, world trade was some 20% below the pre-recession baseline, compared to only 8% the same number of months into the Depression…

In any case, if Keynesianism  is necessary for the survival of state capitalism, we’re reaching a point at which it is no longer sufficient.  If pessimists like Denninger are wrong, and Keynesian policies have indeed turned the free fall into a slow motion collapse, the fact remains that they are insufficient to restore “normalcy”—because normalcy is no longer an option.  Keynesianism was sufficient during the postwar “Consensus Capitalism” period only because of the worldwide destruction of plant and equipment in WWII, which postponed the crisis of overaccumulation for a generation or so.

Bello makes the very good point that Keynesianism is not a long-term solution to the present economic difficulties because it ceased to be a solution the first time around.

The Keynesian-inspired activist capitalist state that emerged in the post-World War II period seemed, for a time, to surmount the crisis of overproduction with its regime of relatively high wages and technocratic management of capital-labor relations. However, with the addition of massive new capacity from Japan, Germany, and the newly industrializing countries in the 1960s and 1970s, its ability to do this began to falter. The resulting stagflation — the coincidence of stagnation and inflation — swept throughout the industrialized world in the late 1970s.

Conventional left-Keynesian economists are at a loss to imagine some basis on which a post-bubble economy can ever be reestablished with anything like current levels of output and employment….

The problem is that pre-collapse levels of output can only be absorbed by debt-financed and bubble-inflated purchasing power, and that another bubble on the scale of the tech and real estate booms just ain’t happening.

Keynesianism might be viable as a long-term strategy if deficit stimulus spending were merely a way of bridging the demand shortfall until consumer spending could be restored to normal levels, after which it would use tax revenues in good times to pay down the public debt.  But if normal levels of consumer spending won’t come back, it amounts to the U.S. government borrowing $2 trillion this year to shore up consumer spending for this year—with consumer spending falling back to Depression levels next year if another $2 trillion isn’t spent….

So capitalism might be sustainable, in terms of the demand shortfall taken in isolation—if the state is prepared to run a deficit of $1 or $2 trillion a year, every single year, indefinitely.  But there will never again be a tax base capable of paying for these outlays, because the implosion of production costs from digital production and small-scale manufacturing technology is destroying the tax base.  What we call “normal” levels of demand are a thing of the past.  As Paul Krugman points out, as of late fall 2009 stimulus spending is starting to run its course, with no sign of sufficient self-sustaining demand to support increased industrial production; the increasingly likely result is a double dip recession with Part Two in late 2010 or 2011.

So the crisis of overaccumulation exacerbates the fiscal crisis of the state….

Those who combine some degree of “green” sympathy with their Keynesianism have a hard time reconciling the fundamental contradiction involved in the two sides of modern “Progressivism.”  You can’t have all the good Michael Moore stuff about full employment and lifetime job security, without the bad stuff about planned obsolescence and vulgar consumerism.  Krugman is a good case in point:

I’m fairly optimistic about 2010.
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But what comes after that? Right now everyone is talking about, say, two years of economic stimulus — which makes sense as a planning horizon. Too much of the economic commentary I’ve been reading seems to assume, however, that that’s really all we’ll need — that once a burst of deficit spending turns the economy around we can quickly go back to business as usual.
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In fact, however, things can’t just go back to the way they were before the current crisis….
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The prosperity of a few years ago, such as it was… depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either….
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So what will support the economy if cautious consumers and humbled homebuilders aren’t up to the job?…

Krugman first compares the longer duration and greater severity of depressions without countercyclical government policy to those with, and then cites Keynes as an authority in estimating the length of the current Great Recession without countercyclical  stimulus spending:  “a recession would have to go on until ‘the shortage of capital through use, decay and obsolescence causes a sufficiently obvious scarcity to increase the marginal efficiency.’”

But as he himself suggested in his earlier column, the post-stimulus economy may have much lower “normal” levels of demand than the pre-recession economy, in which case the only effect of the stimulus will be to pump up artificial levels of demand so long as the money is still being spent.  In that case, as John Robb argues, the economy will eventually have to settle into a new equilibrium with levels of demand set at much lower levels….

The truth of the matter is, the present economic crisis is not cyclical, but structural.  There is excess industrial capacity that will be rust in a few years because we are entering a period of permanently low consumer demand and frugality….

It’s a fairly safe bet we’re in for a period of prolonged economic stagnation and decline, measured in conventional terms.  The imploding capital outlays required for manufacturing, thanks to current technological developments, mean that the need for investment capital falls short of available investment funds by at least an order of magnitude.  The increasing unenforcability of “intellectual property” means that attempts to put a floor under either mandated capital outlays, overhead, or commodity price, as solutions to the crisis, will fail.  Established industry will essentially cut off all net new investment in capital equipment and begin a prolonged process of decay, with employment levels suffering accordingly.

Those who see this as leading to a sudden, catastrophic increase in technological  unemployment are probably exaggerating the rate of progression of the crisis.  What we’re more likely to see is what Alan Greenspan called a Great Malaise, gradually intensifying over the next couple of decades.  Given the toolkit of anti-deflationary measures available to the central bankers, he argued in 1980, the collapse of asset bubbles would never again be allowed to follow its natural course—a “cascading set of bankruptcies” leading to a chain reaction of debt deflation.  The central banks, he continued, would “flood the world’s economies with paper claims at the first sign of a problem,” so that a “full-fledged credit deflation” on the pattern of the early 1930s could not happen.   And indeed, Sweezy and Magdoff argue, had the government not intervened following the stock market crash of 1987, it’s quite likely the aftermath would have been a deflationary collapse like that of the Depression….

The upshot of this is that the crisis of overaccumulation and underconsumption is likely to be reflected, not in a sudden deflationary catastrophe, but—in Greenspan’s words—a Great Malaise.

Thus in today’s political and institutional environment, a replay of the Great Depression is the Great Malaise.  It would not be a period of falling prices and double-digit unemployment, but rather an economy racked with inflation, excessive unemployment (8 to 9 percent), falling productivity, and little hope for a more benevolent future…. [Quoted by Magdoff and Sweezy in “The Great Malaise,” The Irreversible Crisis]

That kind of stagnation is essentially what happened in the late ’30s, after FDR succeeded in pulling the economy back from the cliff of full-scale Depression, but failed to restore anywhere near normal levels of output.  From 1936 or so until the beginning of WWII, the economy seemed destined for long-term stagnation with unemployment fluctuating around 15%.  In today’s Great Malaise, likewise, we can expect long-term unemployment from 10% to 15%, and utilization of industrial capacity in the 60% range, with a simultaneous upward creeping of part-time work and underemployment, and the concealment of real unemployment levels as more people stop looking for work and drop from the unemployment rolls.

Joshua Cooper Ramo notes that employment has fallen much more rapidly in the Great Recession than Okun’s Law (which states the normal ratio of GDP decline to job losses) would have predicted.  Instead of the 8.5% unemployment predicted by Okun’s Law, we’re at almost 10%….

To put things in perspective, the employment-to-population ratio—since its peak of 64.7% in 2000—has fallen to 58.8%.   That means the total share of the population which is employed has fallen by about a tenth over the past nine years….  Another statistic, the hours-worked index, has also displayed a record decline (8.6% from the prerecession peak, compared to only 5.8% in the 1980-82  recession). [Ibid.]

A much larger portion of total unemployed in this recession are long-term unemployed….      The Bureau of Labor Statistics announced in January 2010 that the rate of long-term unemployment was the highest since 1948, when it began measuring it; those who had been out of work for six months or longer comprised 40% of all unemployed….

Charles Hugh Smith expects “a decades-long period of structural unemployment in which there will not be enough jobs for tens of millions of citizens”….