John Bellamy Foster and Fred Magdoff: Financial Implosion and Stagnation: Review

John Bellamy Foster and Fred Magdoff’s article “Financial Implosion and Stagnation”, explains the credit crunch from the under consumptionist viewpoint of the Monthly Review/Sweezy school of Maoism-Marxism.....writes Bill Jefferies....

Stagnation school

The authors article begins with a by now familiar summary of the depth of the financial crisis. But it is not until the reader has waded through over 3,000 words, nearly a third of the article, that they finally arrive at their argument namely that;

“…the real root of the financial bust, we shall see, went much deeper: the stagnation of production and investment.”

“Our argument in a nutshell is that both the financial explosion in recent decades and the financial implosion now taking place are to be explained mainly in reference to stagnation tendencies within the underlying economy.”

Readers familiar with the work of Robert Brenner, Chris Harman and Richard Brenner (no relation) of the stagnation school will recognise the origin of their theory in the under-consumptionist assertions of the Maoists. According to the Magdoff and Bellmay Foster this stagnation gave;

“… rise to financial explosion as capital sought to “leverage” its way out of the problem by expanding debt and gaining speculative profits.”

And they point to the growth of debt across all sectors of the economy;

 “When all sectors are included, the total debt as a percentage of GDP rose from 151 percent in 1959 to an astronomical 373 percent in 2007!”

But was the rise in indebtedness a result of the stagnation of the economy? Has investment and production stagnated over the last two decades? Have profit rates fallen? Was the period between 2003-2007, which the Economist described as the fastest period of capitalist development in its history really one of deepening slowdown and the deceleration of capitalist production?

Indebtedness and growth

It is not difficult to show that in fact the rise in indebtedness which accelerated markedly through the 1990s was a consequence of the growth of capitalist production – with the integration of the former Stalinist centrally planned economies into world capitalism – rather than its decline and stagnation. The falling interest rates of the last two decades, which were a pre-condition for the huge growth of particularly consumer debt were a result of the cheapening of money. And money was cheaper due to a secular two decade upward trend, peaking in 2006/7, in the rate of profit.

Profit rates recovered as a result of the opening up of the world, the former centrally planned Stalinist economies and the previously relatively protected semi-colonies like India and Brazil, to unlimited exploitation by finance capital, the defeats of the workers movement in the core imperialist nations notably the USA and UK and the consolidation of that defeat by the collapse of the ideology of “socialism” with the fall of the USSR.

The reduction in the cost of money, the interest rate, and the flood of excess profits invested in the West but notably in US government treasuries by China in particular, provided both the funds and the opportunity for the financiers to indebt the world.

The nominal total level of debt could not have increased unless its cost had fallen, so while indebtedness has multiplied several fold the actual cost of interest repayments has increased far less. According to the authors figures household debt increased from 1990 $3.6 trillion to 2007 $13.8 trillion an increase of 283%, yet in the same period because interest rates fell, the cost of borrowing declined, so the proportion of disposable income spent on debt repayments rose much less than the nominal increase in indebtedness from 1990 15% to 2007 18%.

Debt fuels financial profits

That is not to say that this increase was unimportant, it represents a transfer of profits away from manufacturing and service sector capitalists to financial capitalists, as workers wages are immediately repaid from their employers to the financiers rather than being spent on goods and services, this could be described as the direct exploitation of workers by the banks and finance houses, or the indirect exploitation of their employers by the financiers, either way the result is the same, the growth of financial profits at the expense of non-financial profits. As the authors explain;

“However, in the late 1990s, finance seemed to take on a life of its own with the profits of U.S. financial corporations (and to a lesser extent nonfinancial corporate profits too) heading off into the stratosphere, seemingly unrelated to growth of national income, which was relatively stagnant.”

According to the author’s own figures from 1990 onwards financial profits rose 3.5 fold, while non-financial profits rose 1.5 fold. Incidentally this also explains why when stagnation theorists like Robert Brenner, Chris Harman and Richard Brenner (no relation) assert that profit rates had not recovered to their levels of the 1960s up to their peak 2006 they restrict their calculations to non-financial profits, ignoring the exponential rise of the financiers with the rapacious imperialism of the globalisation period.

According to Magdoff and Bellamy Foster, the growth of financial profits vindicates the stagnation theories of Paul Sweezy;

“American economist Paul Sweezy pointed out long ago that stagnation and enormous financial speculation emerged as symbiotic aspects of the same deep-seated, irreversible economic impasse. He said the stagnation of the underlying economy meant that business was increasingly dependent on the growth of finance to preserve and enlarge its money capital and that the financial superstructure of the economy could not expand entirely independently of its base in the underlying productive economy.”

Which begs the question has the economy been stagnant over the last three decades and is stagnation the “normal state” of the monopoly capitalist economy, not withstanding exceptions like the 25 year long boom after WWII?

Globalisation and the expansion of world capitalism

Magdoff and Bellamy Foster attempt to vindicate this assertion by the use a graph for US GDP growth by decade from 1930-2007. According to this graph US growth has indeed been on a continuous downward slide from the 1940s onward, which would be fine and good if the US economy was indeed a proxy for world growth. But that is very far from being the case.

If we compare the IMF’s figures for GDP/capita growth rates for the entire world, we arrive at an entirely different picture from that described by Magdoff and Sweezy. Growth slowed through the 1970s/80s, marginally recovered in the 1990s before growing very fast between 2000-2008.

But in fact even this recovery underestimates the growth of world capitalism during the period of globalisation.

The IMF’s figures measure the collapse of the Stalinist centrally planned economies in the 1990s as the collapse of capitalism rather than as an addition to it. Hence the figures for the 1990s show the continued stagnation and decline of the world economy, rather than its massive expansion with its geographical expansion across a third of the world’s surface. If the figures are adjusted to take account the transformation of the production of the formerly non-capitalist centrally bureaucratically planned economies into capitalist ones, then the growth rates for the 1990s need to be adjusted upwards by around an additional 25% or around 2-3% a year. The stagnation theorists can only claim that capitalism has been declining over the last two decades – by ignoring everywhere it has been growing.

Falling wages in the USA

Magdoff and Bellamy Foster claim that a further sign of stagnation of capitalism is the continuously falling wages of US workers as a proportion of GDP over the last four decades “despite the enormous growth in productivity and profits over the past few decades.”

Evidently the key measure of capitalist stagnation is not the growth of productivity and profits of the capitalists but the welfare and wages of the working class?!!

It is certainly true that income inequality has risen alongside profits over the last two decades in striking contrast to the post war period.

“Over the years 1950 to 1970, for each additional dollar made by those in the bottom 90 percent of income earners, those in the top 0.01 percent received an additional $162. In contrast, from 1990 to 2002, for each added dollar made by those in the bottom 90 percent, those in the uppermost 0.01 percent (today around 14,000 households) made an additional $18,000.”

They claim that this growth in income inequality sits oddly with the growth of consumption in as a proportion of national income;

“The truly remarkable fact under these circumstances was that household consumption continued to rise from a little over 60 percent of GDP in the early 1960s to around 70 percent in 2007. This was only possible because of more two-earner households …(and as)…household debt increased from about 40 percent of GDP in 1960 to 100 percent of GDP in 2007, with an especially sharp increase starting in the late 1990s.”

Certainly the growth of household consumption was in part a consequence of rising working class indebtedness and as the authors point out, particularly as a result of dodgy loans paid out during the height of the housing bubble. But this rise in debt did not lead to a unilinear increase in working class consumption. Debt increased consumption by the amount of money borrowed – but reduced it by the rise in interest repaid. By 2008 this amounted to hundreds of billions of dollars in extra interest payments not consumed by the working class – but by the capitalists.

As importantly for explaining the general rise in consumption was the increase in boss class gluttony. The collapse of consumption since mid-2008 is not simply as a result of a tightening of loan conditions, although that is certainly an important fact particularly with expensive “big ticket” items like automobiles, but it is also due to a fall in financial profits which has constrained the consumption of the capitalists as banks and financial institutions hoard money to rebuild their asset base.

The rising indebtedness of the working class increases the rate of profit overall and notably among the financial sector. But at a cost. The decline in lending standards, particularly during the housing bubble, meant that loans were made to “sub-prime” workers with little or no chance of servicing those loans. As the housing bubble burst, the true extent of this dodgy lending has been exposed. In order to restore capitalism to health these claims on future profits must be written down. That process is brutally underway now. Just where or when it will end remains unclear. But it was not a consequence of generally falling profitability (up to 2006/7), a decline in investment or the stagnation of the world economy.

Investment and the real economy

Magdoff and Bellamy Foster attribute the rise of financialisation to a lack of opportunities for capitalists to invest in the “real” economy;

“Little of the vast economic surplus was used to expand investment, which remained in a state of simple reproduction, geared to mere replacement (albeit with new, enhanced technology), as opposed to expanded reproduction. With corporations unable to find the demand for their output—a reality reflected in the long-run decline of capacity utilization in industry (see chart 4)—and therefore confronted with a dearth of profitable investment opportunities, the process of net capital formation became more and more problematic.”

And they point to the decline of capacity utilization in the USA. But the reason for the general decline in capacity utilization in the USA is a consequence of the replacement of manufacturing production by services. Services have a lower capacity utilization than manufacturing.[1]

As production was re-located abroad the trend in domestic US investment fell. Profits were directed away from investment in fixed capital inside the USA – towards new producers in China, India, Brazil etc. who could manufacturer cheaper and more efficiently. This trend was consolidation by the ICT revolution from the late 1990s onwards, which revolutionized manufacturing productivity lowering the cost of fixed capital and so further reducing the price of investment.

In addition the means of production of the former Stalinist centrally planned economies were inherited by the capitalists for no cost. Russia had the second longest railway system in the world. This was passed over to world capitalism for free. Whole cities, Shanghai, Prague, Warsaw, Moscow, Leninigrad alongside all their attendant infrastructure decades worth of investments in means of production, trillions and trillions of value cost the capitalists nothing.

Savings glut or surplus profits?

They authors explain that; “The same phenomenon existed globally, causing Bernanke to refer in 2005 to a “global savings glut,” with enormous amounts of investment-seeking capital circling the world and increasingly drawn to the United States because of its leading role in financialization.”

But in fact there was a decline in savings through the 1990s as consumption increased and investment fell – the “savings glut” were the surplus profits of the emerging markets, which were being produced so fast they could not be absorbed in their domestic markets notably China, notwithstanding the tremendous rate of fixed capital investment there and were therefore loaned to the USA at very low rates – enabling the cheap loans that caused the present credit crunch. Far from this being a result of stagnation or decline it was a consequence of the huge increase in capitalist production through the 1990s with the integration of the former Stalinist centrally planned economies into the world market and the recovery of profit rates alongside it.

As they point out in the USA profits rose as net investment declined, as US capitalists increased the proportion of services in the economy, with a lower organic composition of capital and higher rate of profit and shipped their manufacturing abroad.

Certainly this glut of US consumption means that the collapse of the US financial sector over the last 12 months and dramatic write downs of US speculative investments has lead to an instant re-proportioning of the world economy away from US consumption, with a striking impact on exporters like China and Germany.

The authors speculate about the possible consequences of the crisis without committing themselves to anything concrete. Their article drifts off into a discussion of the need for political economy and socialism. And that’s it.

Thu 22, January 2009 @ 22:09