David McNally: From Financial Crisis to World Slump: Review

David McNally is a Canadian academic Marxist from the Cliffite state capitalist tradition. His article “From Financial Crisis to World Slump: Accumulation, Financialization, and the Global Slowdown”, is an attempt to provide an overview of the trends in global capitalism since the 1980s, which have lead to the present financial crisis and world recession.....writes Bill Jefferies...

McNally’s analysis treads much familiar ground, he emphasizes the financialisation of capitalism, the restoration of profit rates from the early 1980s onwards, the impact of the ICT revolution on raising productivity, indeed it re-capitulates many of the themes which PR have developed over the last two and a half years. Yet McNally is hidebound by his dependence on Cliffite state capitalism, which means he fails to mention the key development which transformed the 1980s neo-liberal offensive on the working class, into a new period of globalisation during the 1990s and onwards – the restoration of capitalism[1] in the former centrally planned economies of China, the USSR and Eastern Europe, expansion of the world market by a geographical third and the doubling of the world’s working class that could be exploited by capitalism.

Unfortunately, as we shall show, without this key reference point, McNally’s analysis ultimately fails to provide a full explanation of the current crisis, or its limits, notwithstanding the fact that compared with stagnation theorists, Robert Brenner, Chris Harman et al it represents a major step forward. 

The world capitalist system in crisis

McNally’s paper opens with a by now familiar restatement of the world capitalist crisis, which accelerated so markedly after the collapse of Lehman Brothers on September 15th. He summarises what he sees as the phases of the crisis so far and its likely development;

 The Left and the Crisis

“On the Left, most analyses of the crisis have tended to fall into one of two camps. On the one hand, we find a series of commentators who view the financial meltdown as just the latest manifestation of a crisis of profitability that began in the early 1970s, a crisis that has effectively persisted since that time. In another camp is a large number of commentators who see the crisis as essentially caused by an explosion of financial transactions and speculation that followed from de-regulation of financial markets over the past quarter-century. 3”

McNally points out that those commentators, who essentially see the present crisis simply as a financial one, do not look at its deeper causes and propose reformist solutions, whereas;

“Those analyses that effectively read the current crisis in terms of a decline in the rate of profitability in the early 1970s at least focus on deeper problems at the level of capitalist accumulation.14 But they tend for the most part to be amazingly static, ignoring the specific dynamics of capitalist restructuring and accumulation in the neoliberal period.”

Recovery in profit rates

That is not to say that there was not a decline in the rate of profit after 2006 there was and it is this fall which explains the present crisis and recession, but even taking that into account, profit rates up to the third quarter of 2008, remain far higher than their levels of the 1970s/80s and have at least matched if not exceeded their average rates of the 1950s/60s.

McNally is correct to emphasise the significance of new centers of capital accumulation in China, but why limit himself to that? The addition of the USSR and Eastern Europe were also pretty important. McNally is asking the right questions, unfortunately the theory of state capitalism means he cannot answer them, at least not fully. The reason why new centers of capital accumulation could be founded in Eastern Asia is simple. China, a non-capitalist centrally planned economy, became a capitalist one after around 1995. If it had remained a non-capitalist one, then the transformation of millions of peasants into workers would have made no difference to capitalism at all. Just as the USSR’s five year plans in the 1930s made no difference to the scale of the Great Depression. It remains something of a mystery how Marxist economists and McNally is absolutely typical in this regard, can fail to see the importance of the transformation of one mode of production into another and qualitative expansion of the world capitalist market it entailed.

Five points

 McNally summarises his argument as centring around five points;

World money and financialisation

McNally points out the impact of the collapse of Bretton Woods in 1971, meant that exchange rates became uncertain so there was a premium on hedging against currency losses, leading to a rash of financial speculation, which mutated into ever more exotic financial instruments like credit default swaps and derivatives. This exacerbated the risk of financial crisis.

Wages and credit

McNally explains that financial profits have doubled as a share of US corporate profits, while wages have fallen as a result of the re-location of production to emerging markets, the increase in the size of the global labour force with the transformation of peasants into workers in China and India, the increase in absolute surplus value through the extension of the working week and cuts in the social wage.

He asserts “all of these strategies have reduced the living standards of working class people while spectacularly concentrating wealth at the top of the economic ladder.”

He is correct of course the reduction in the value of labour power over the last two decades, has increased profits and wealth for the capitalists. But it is glib, not to say empirically unsustainable and wrong, to assert that living standards for workers have similarly fallen. Wages have stagnated in the imperialist heartlands, but once the economies of the former centrally planned economies had recovered from the impact of capitalist restoration in the 1990s, living standards for workers there have recovered and for the new working classes of China and India wages have increased markedly over the last period. This explains the ability of the Chinese bureaucracy to control the level of working class struggle in the massive urban working class they have newly created. What’s more as productivity has risen faster than the reduction in the value of wages, then the purchasing power of wages has generally increased, even while their value has fallen. There has been marked deflation of manufacturing production over the last two decades with the integration of the former centrally planned economies into world capitalism and as the ICT revolution has transformed productivity, as McNally recognises himself later in his piece. 

Global imbalances

McNally asserts that renewed “over-accumulation” set in after 1997, after which a crisis was only offset by credit expansion. This reflects a common misuse of the term “over-accumulation” amongst Marxist economists. Over-accumulation means that there is too much capital relative to the quantity of profits. It does not mean that there is loads too much stuff produced. In effect it is the same thing as saying that the rate of profit is falling. Yet as McNally has already conceded, following Fred Moseley, the rate of profit surged from the mid 1990s onwards until 2006. Where then the over-accumulation of capital?

After 2006 the mass of capital had grown too large for the mass of profits, so the rate of profit fell. After 2006 there was the over-accumulation of capital. Before 2006[3] in the periods when profit rates were rising, then there was the under-accumulation of capital and so capital rapidly expanded to take advantage of the opportunities for profit generation,[4] and output expanded very rapidly alongside it. But McNally claims that post 1997 the over-accumulation of capital is demonstrated as;

The very rapid accumulation of capital, particularly from 2002 onwards created over-accumulation, as capital accumulation outstripped the mass of profits and the rate of profit began to fall from 2006 onwards, but this is not some perpetual condition akin to a skin rash which simply refuses to go away. The low rates of interest generalised across the imperialist heartlands from 2002 onwards, were a product of the glut of surplus profits invested there by the emerging markets in general and China and the oil exporters in particular. It was not a policy mistake by the Federal Reserve. The surging mass of profit provided the funds for the financiers to indebt the workers with. The rise in consumer debt was not a sign of crisis but of growth. Its collapse now is a sign of crisis not growth.

Over-accumulation since 1997?

In contrast today, when there is actually over-production, i.e. during crises or recessions production contracts as capitalists reduce production to restore profitability. Profits fall alongside output. Production and profits do not grow explosively during periods of the over-accumulation of capital. 

Inflation restrained by raw materials glut

Inflation was further restrained in this period by the glut of new raw material supply for the newly restored capitalist economies of the former centrally planned Russia and the Central Asian Republics.

As raw materials surged from 2006 onwards, manufacturing prices began to rise inflation returned, reducing the rate of profit and hitting demand in the major imperialist nations. The collapse of raw materials prices from the summer of 2008 onwards has put this process into reverse, leading to very rapid deflation which is restoring real disposable incomes in the major imperialist nations and profit margins, while hitting the raw materials exporters, notably Russia and the Central Asian Republics. McNally fails to pay any attention to this key point.

McNally emphasises how the USA was the “consumer of last resort”, attributing the growth of China principally to US consumption. In fact the Eurozone accounts for 24% of Chinese exports compared with 19% for North America, the overwhelming majority of Chinese exports go to Asia, around 47%.

McNally also points out there was a flight out of US treasuries in the first half of 2007. But misses out that there has been a massive flood back in during the second half of 2008, reducing the interest rate on treasuries to negative levels, meaning investors were paying the US government to look after their money.

Profound systemic crisis

McNally concludes with his assessment of the progress of the crisis so far and what we might expect next.     

“We are, in sum, entering the second stage of a profound systemic crisis of neoliberal capitalism. The first stage involved a staggering financial shock that toppled major banks and elicited a multi-trillion dollar bailout of the global financial system. The second stage will entail the collapse, merger, and/or effective nationalization of major corporations, especially in the auto and electronics industries. Unemployment will ratchet higher – much higher. And the ongoing collapse of sales and profits will topple more financial institutions.”

Similarly while, in his introduction, he reports on the fall of Chinese exports by –2% in November, due to the impact of the credit freeze after Lehmans and reports that imports declined by 18%, he attributes this to a “dramatic contraction” of China’s domestic market, when in fact China’s retail sales rose by 22% in November. Consumer demand only accounts for around 35% of Chinese GDP, the bulk of which is fixed asset investment, particularly in residential construction, which has also it should be said, been slowing.

The collapse in imports probably does point to slowing Chinese domestic demand, but it is principally the result of a decline in imported inputs for re-export and the fall in raw materials prices, which meant that the collapse in the value of imports was larger than the decline in physical quantities imported. China’s November balance of payments surplus reached a record $40bn.

What’s more any assessment of the duration of the crisis needs to take account of the impact of the enormous reflationary measures announced by the major industrial powers and the huge scale of their interventions in the money markets which have markedly reduced the signs of financial stress by most indicators. Whether these will be enough to offset the impact of rising unemployment, continued slow bank lending and the rebuilding of savings by financial institutions and working class consumers remains to be seen. But it needs to be built into any perspective about the prospects for capitalism in the next year.

An incomplete theory

McNally points out that the centralisation of capital as a result of the crisis, the ongoing imbalances in the world economy and the challenges this poses to capital and the need for socialist answers. There is no question about any of that. But while his theory marks an important step forward when compared with the stagnation theorists, it remains an incomplete break with them, and therefore unable to provide a fully rounded analysis of the current crisis or the period of globalisation.

Fri 02, January 2009 @ 15:08