Walden Bello´s Primer on the Financial Meltdown

One of the clearest explanations of the financial meltdown, read it in full here.

Walden Bello:

The tendency for capitalism to build up tremendous productive capacity that outruns the population’s capacity to consume, owing to social inequalities that limit popular purchasing power. Profitability is thus eroded.

But what does the crisis of overproduction have to do with recent events?

Plenty. But to understand the connections, we must go back in time to the so-called Golden Age of Contemporary Capitalism, the period from 1945 to 1975.

This was a period of rapid growth both in the center economies and in the underdeveloped economies — one that was partly triggered by the massive reconstruction of Europe and East Asia after the devastation of the Second World War, and partly by the new socioeconomic arrangements that were institutionalized under the new Keynesian state. Among the latter, key were strong state controls over market activity, aggressive use of fiscal and monetary policy to minimize inflation and recession, and a regime of relatively high wages to stimulate and maintain demand.

So what went wrong?

Well, this period of high growth came to an end in the mid-1970s, when the center economies were seized by stagflation, meaning the coexistence of low growth with high inflation, which was not supposed to happen under neoclassical economics.

Stagflation, however, was but a symptom of a deeper cause: The reconstruction of Germany and Japan and the rapid growth of industrializing economies like Brazil, Taiwan, and South Korea added tremendous new productive capacity and increased global competition, while social inequalities within countries and between countries worldwide limited the growth of purchasing power and demand, thus eroding profitability. This was aggravated by the massive oil price rises of the ’70s.

How did capitalism try to solve the crisis of overproduction?

Capital tried three escape routes from the conundrum of overproduction: neoliberal restructuring, globalization, and financialization.

What was neoliberal restructuring all about?

Neoliberal restructuring took the form of Reaganism and Thatcherism in the North and Structural Adjustment in the South. The aim was to invigorate capital accumulation, and this was to be done by (1) removing state constraints on the growth, use, and flow of capital and wealth, and (2) redistributing income from the poor and middle classes to the rich on the theory that the rich would then be motivated to invest and reignite economic growth.

The problem with this formula was that in redistributing income to the rich, they were gutting the incomes of the poor and middle classes, thus restricting demand, while not necessarily inducing the rich to invest more in production. In fact, what the rich did was to channel a large part of their redistributed wealth to speculation.

The truth is neoliberal restructuring, which was generalized in the North and South during the 1980s and ’90s, had a poor record in terms of growth: Global growth averaged 1.1 percent in the ’90s and 1.4 in the ’80s, whereas it averaged 3.5 percent in the ’60s and 2.4 percent in the ’70s, when state interventionist policies were dominant. Neoliberal restructuring could not shake off stagnation.

How was globalization a response to the crisis?

The second escape route global capital took to counter stagnation was ‘extensive accumulation’ or globalization, or the rapid integration of semi-capitalist, non-capitalist, or pre-capitalist areas into the global market economy. Rosa Luxemburg, the famous German revolutionary economist, saw this long ago as necessary to shore up the rate of profit in the metropolitan economies. How? By gaining access to cheap labor, by gaining new, albeit limited, markets, by gaining new sources of cheap agricultural and raw material products, and by bringing into being new areas for investment in infrastructure. Integration is accomplished via trade liberalization, removing barriers to the mobility of global capital and abolishing barriers to foreign investment.

China is, of course, the most prominent case of a non-capitalist area to be integrated into the global capitalist economy over the past 25 years.

To counter their declining profits, a sizable number of the Fortune 500 corporations have moved a significant part of their operations to China to take advantage of the so-called ‘China Price’ — the cost advantage deriving from China’s seemingly inexhaustible cheap labor. By the middle of the first decade of the 21st century, roughly 40-50 percent of the profits of US corporations were derived from their operations and sales abroad, especially in China.

Why didn’t globalization surmount the crisis?

The problem with this escape route from stagnation is that it exacerbates the problem of overproduction because it adds to productive capacity. A tremendous amount of manufacturing capacity has been added in China over the past 25 years, and this has had a depressing effect on prices and profits. Not surprisingly, by around 1997, the profits of US corporations stopped growing. According to another index, devised by economist Philip O’Hara, the profit rate of the Fortune 500 went from 7.15 in 1960-69 to 5.30 in 1980-90 to 2.29 in 1990-99 to 1.32 in 2000-02.

What about financialization?

Given the limited gains in countering the depressive impact of overproduction via neoliberal restructuring and globalization, the third escape route became very critical for maintaining and raising profitability: financialization.

In the ideal world of neoclassical economics, the financial system is the mechanism by which the savers or those with surplus funds are joined with the entrepreneurs who have need of their funds to invest in production. In the real world of late capitalism, with investment in industry and agriculture yielding low profits owing to overcapacity, large amounts of surplus funds are circulating and being invested and reinvested in the financial sector — that is, the financial sector is turning in on itself.

The result is an increased bifurcation between a hyperactive financial economy and a stagnant real economy. As one financial executive notes, ‘There has been an increasing disconnection between the real and financial economies in the last few years. The real economy has grown . . . but nothing like that of the financial economy — until it imploded.’

What this observer does not tell us is that the disconnect between the real and the financial economy is not accidental — that the financial economy exploded precisely to make up for the stagnation owing to overproduction of the real economy.

What were the problems with financialization as an escape route?

The problem with investing in financial sector operations is that it is tantamount to squeezing value out of already created value. It may create profit, yes, but it does not create new value — only industry, agriculture, trade, and services create new value.

Because profit is not based on value that is created, investment operations become very volatile and prices of stocks, bonds, and other forms of investment can depart very radically from their real value — for instance, the stock of Internet startups that keep on rising, driven mainly by upwardly spiraling financial valuations, and that then crash.

Profits then depend on taking advantage of upward price departures from the value of commodities, and then selling before reality enforces a ‘correction,’ that is, a crash back to real values.

The radical rise of prices of an asset far beyond real values is what is called the formation of a bubble.

Why is financialization so volatile?

Profitability being dependent on speculative coups, it is not surprising that the finance sector lurches from one bubble to another, or from one speculative mania to another.

Because it is driven by speculative mania, finance-driven capitalism has experienced about 100 financial crises since capital markets were deregulated and liberalized in the 1980s.

Prior to the current Wall Street meltdown, the most explosive of these were the Mexican Financial Crisis of 1994-95, the Asian Financial Crisis of 1997-98, the Russian Financial Crisis of 1996, the Wall Street Stock Market Collapse of 2001, and the Argentine Financial Collapse of 2002.”

Leave A Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.