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Review of The Great Financial Crisis: Causes and Consequences by John Bellamy Foster and Fred Magdoff

Monthly Review's Concept of the Crisis of Capitalism

As the worldwide economic crisis exploded onto the front pages in late 2008, Fred Magdoff and John Bellamy Foster responded by reissuing five essays that had originally appeared in the pages of Monthly Review in the few years prior to 2008. The Great Financial Crisis: Causes and Consequences collects these essays and adds an introduction and a concluding chapter written specifically for this volume.

Given that most chapters originally appeared as self-contained essays written months apart from each other, it's no surprise that each one covers the same ground. Every essay begins with the authors trotting out their intellectual predecessors, namely Paul Baran, Paul Sweezy, and Fred Magdoff's father Harry Magdoff. (This isn't just filial piety -- Sweezy and Magdoff have been sounding the alarm about capitalism's turn to finance and debt since the 70s. Still, citing your sources and noting their prescience comes to look like hagiography when you do it every twenty pages.) Magdoff and Foster then invariably turn to explaining the causes of the crisis. Here especially the format of the book fails readers, since the authors chart the genealogy of the crisis six times in brief rather than once in depth. To prove their arguments, each article then throws a few graphs at you. Most essays then conclude with a reminder of the intractability of the crisis facing capitalism. Thus, while each chapter is individually satisfying -- if short -- the book as a whole is redundant, with each chapter reading like a variation of the one preceding it. This might compromise the quality of the book as a product or piece of literature, but this tedious exposition doesn't diminish the worth of the authors' thesis.

For Magdoff and Foster, the ultimate cause of the crisis can be summarized as follows: in the modern era of capitalism, the economy is dominated by monopolies. Under monopoly capitalism, price warfare has disappeared and monopolies more or less tacitly agree to fixed prices, with the actual competition taking place in advertising and the "sales effort." Consequently, greater profits are realized. In fact, the profits are too great to reinvest back into production because supply already exceeds demand and the infrastructure of the modern economy has already been developed. When such a situation arises, the economy is said to be "stagnant." The world avoided an earlier onset of stagnation thanks to the advent of the automobile and the new markets it meant, the necessity of rebuilding a world literally destroyed by the Second World War (what better way to increase demand?). Moreover, the initial profitability of the finance, insurance, and real estate (FIRE) sectors was a counterweight to any tendencies towards stagnation. But this profitability of the FIRE sector is a double-edged sword. The paper claims of the FIRE sector are meant to reflect real investment in factories and the like, but as the real economy hit a brick wall in the 70s there were even fewer investment opportunities in the real economy. This led bourgeoisie to turn the FIRE sector more greedily than ever -- but it also meant that the FIRE sector would have to be divorced from the stagnant real economy if it was to remain profitable. Now any lack of confidence in the soundness of the foundations of the FIRE sector could lead to economic disaster. Each time the FIRE sector's bubble threatened to burst, the bourgeoisie averted disaster by borrowing more and increasing profitability by holding down the wages of workers, who were in turn themselves forced to turn to debt as the only means of maintaining their standard of living (which, of course, was quite profitable for the FIRE sector). But by 2007 and 2008, led by the collapse of the mortgage bubble, the whole rotten edifice finally collapsed.

To back up this history, Magdoff and Foster offer some convincing proofs of capitalism's increasing reliance on the FIRE sector. For instance, they point out that the share of financial profit as part of the total domestic profit rose from about 16% in 1965 to almost 40% in 2007. Similarly, the ratio of total debt to GDP went from about 1.5 to 1 in 1970 to 47.7 to 13.8 in 2007. In the financial sector alone, this ratio went from 0.1 to 1 to 16.0 to 13.8, which was the largest increase of any sector. Household debt increased from 40% of the GDP in 1960 to 100% of the GDP in 2007, in large part due to the fact that wages in real dollars haven't risen since 1972 while consumer spending has increased greatly. (This disparity between debt and income led to the mortgage crisis.) Finally, the precariousness of this situation is shown by the fact that corporations held 600 billion dollars in savings, but total investment between 1986 and 2006 only once reached the average of the years 1960-1979. Clearly, the tremendous profits of these corporations don't correspond to anything in the 'real' economy.

Now, given the fact that the laws of capitalist production have forced the bourgeoisie to turn to debt, Magdoff and Foster reject the idea that banking reforms and the like can accomplish anything. Against the whining liberals who belief that all that's necessary is to force the capitalists back to investing in the "real" economy, Magdoff and Foster argue that the only reason capital turned to finance in the first place is because investment in the 'real economy' was untenable. No legislation can change this.

In looking at speculation and the reliance on debt as the effects of a deeper crisis in capitalist production, rather than the causes of the crisis itself, the authors join the ranks of the Marxists (and others) who point to inescapable contradictions in the base of the capitalist economy (e.g., tendency for the rate of profit to fall, overproduction, or the loss of extra-capitalist markets, etc.) as the root causes of the periodic crises that throw hundreds of millions of workers into ever-increasing misery.

The Crisis of Monthly Review's Concept of Capitalism

In passing, it's worthwhile to point out what I see as the most unsatisfactory aspects of Magdoff and Foster's explanation: the stagnation thesis. This is a concept that the authors acknowledge came from Keynes and his student Hasen, so to cast doubt on it doesn't mean to cast doubt on the work of Marx in the 1800s or those who built on the foundations of his piercing investigations of political economy.

Stagnation, as Magdoff and Foster explain it, appears to be a special kind of overproduction. At any rate, stagnation doesn't bankrupt the capitalists as overproduction did in the past; on the contrary, it merely deprive him of the opportunity to reinvest his capital (which, because of the supposed monopolistic nature of capitalism, is quite large). That this is a problem according to the stagnation thesis shows (at least to my mind) the thesis's shortcomings. According to Marx and those who have followed him in investigating capitalism objectively, competition compels capitalists to return their profits to the sphere of production as they continuously upgrade their production capabilities and so on, in order to sell lower than their competitors. But under the stagnation thesis, competition of this kind is a thing of the past. Why, then, does it matter if capitalists cannot invest their money back into production? Why wouldn't they be content to consume these profits unproductively (as we well know they can)? What, other than greed, compels them to increase their capital?

Now, it may be that my understanding of capitalism is wrong and this isn't an issue; and it may be the case that Baran and Sweezy and their successors explain this in their other works. But it also appears to be the case that Sweezy and Baran had an ulterior motive for the stagnation thesis: to argue that "capitalism" was no longer able to develop the productive forces of society, while third world "socialism" was, as shown by the great industrial advancements in Russia, China, and so on. Whatever the statistical merits of this argument, it missed the point that economic development is the prerequisite of socialism, not its goal. The very fact that these regimes were just then imposing, on a greatly accelerated scale, the same drive towards wage labor that the west experienced in the 1700s and 1800s was testament to their capitalist character. The forced relocation of Romanian peasants to industrial cities, the Chinese attempt to modernize overnight with the "Great Leap Forward," and the Soviet cult of Stakhanovism are all examples of this developmentalist, capitalist character. This association of Socialism with economic development was the essence of the Stalinist counter-revolution, and explains why "Marxism-Leninism" (i.e, Stalinism) was a force to be reckoned with, if not a prevailing power, in virtually every underdeveloped country in the world. For a more serious exposition of this argument, specifically as it relates to the work of Baran and Sweezy, see The Exploits of University Marxism.

At any rate, it seems that the stagnation theory at best is inessential to the core of Magdoff and Foster's work, which shows the increasing importance of debt in the capitalist economy -- something one can explain by factors other than overproduction (such as the tendency for the rate of profit to fall or overproduction).

The Crisis of Monthly Review's Politics

Given that Foster and Magdoff see the crisis as a symptom of capitalism's contradictions rather than the poisonous fruit of the irresponsible behavior of a few bankers, it seems logical that Foster and Magdoff would reject any suggestions that reforms can overcome this crisis.

Not so.

While the authors do occasionally point to a vaguely-defined socialism here and there as the only solution, elsewhere they claim that reforms -- if big enough -- actually can overcome capitalism's internal contradictions. In effect, the authors fall prey to the delusion that "reform is revolution, and vice versa."

In fact, Magdoff and Foster explicitly state that the working class can end the crisis while working "within in the system":

The only thing that conceivably done within the system to stabilize the economy, Sweezy stated at Harvard in 1994, would be greatly to expand civilian state spending in ways that genuinely benefited the population; and to carry out a truly radical redistribution of income and wealth of the kind "that Joseph Kennedy, the founder of the Kennedy dynasty" referred to "in the middle of the Great Depression, when things looked bleakest" -- indicating "that he would gladly give up half of his fortune if he could be sure the other half would be safe." Neither of these radical proposals of course is on the agenda at present, and the nature of capitalism is such that if a crisis ever led to their adoption, every attempt would be made by the vested interest to repeal such measures the moment the crisis had passed.

In praising this explicitly conservative call for reforms that would save capitalism, Magdoff and Foster ignore Marx and Engels's time-tested warning that "a part of the bourgeoisie is desirous of redressing social grievances, in order to secure the continued existence of bourgeois society." It's no surprise that their suggested course of action amounts to pallid reformism. Indeed, our authors insist that we need a "mass social and economic upsurge, such as in the latter half of the 1930s, including the revival of unions and mass social movements of all kinds -- using the power for change granted to the people in the Constitution; even going so far as to the threaten the current duopoly of the two-party system."

Thus, amid such bold prescriptions as "threatening the current duopoly of the two-party system" -- what Bolsheviks! -- Magdoff and Foster call for a return to the Union building of the 1930s, which was largely a legally mandated, government-imposed response to working class struggle exploding onto the streets in 1933 and 1934. And at the head of this challenge that Magdoff and Foster envision are the union and "social movement" activists who are charged with making "the larger public ... see through this deception" of austerity and attacks on wages. Of course, Magdoff and Foster should know that the unions can't be counted on to do anything more than muster up a bit of harsh invective as they blame the crisis on the "greed" and the failings of Wall Street and Congress rather than the immutable laws of capitalist production. Neither can they be counted on to fight back against attacks on wages. Far from it!

Elsewhere, Magdoff and Foster call for "massive class struggle" to increase government spending and unstintingly praise the social spending of the New Deal. However, they themselves point out that civilian government has already increased from its New Deal levels: civilian government purchases totaled 13.3% of the GDP in 1939, but from 1960 to 2008 the average was around 13.7%. All of this without even the slightest palliative effects! An even more important objection must be made: even if government spending were to double or triple, capitalism, as a system of production in which value is created by the exploitation of wage labor in the production of commodities, would remain unaffected; and as capitalism would remain regnant, all of the tendencies towards crisis and collapse that are inherent in any economy based on wage labor and commodity production would persist unchanged.


Near the end of the book the authors remind readers that political economy once consisted of "splendid tournaments" in which economists represented different classes struggling for supremacy. Today the bourgeoisie reigns supreme, but economics is still used as a weapon in the fight between different sections of the bourgeoisie and the between the bourgeoisie and the working class. If the work of Magdoff and Foster can be likened to participants in such a "splendid tournament," they should be seen as fighters in a frenzied melee: for every blow the authors strike against the bourgeoisie with their lance of economic analysis, another blow is struck against the working class with their mace of political recommendations. The authors' insistence that crises are inherent in the capitalist mode of production is overshadowed by their insistence that class struggle take the form of reinvigorating the bourgeois unions and confining political action to the realm of bourgeois elections. In the end, their economics might open the eyes of the working class, but their politics will never lead the working class to break its chains.