From Crisis to Crisis: Theory and History of Capitalist Crises

Part I: Can Capitalism Survive?
Part II: Details Proliferate, Structure Abides

Can capitalism survive?

“No,” argued two of the system’s most astute observers, “it cannot.” For Karl Marx, it was the internal contradictions of capital accumulation that would ultimately cause the system to self-destruct, by unleashing an intensifying pattern of ever-deeper crises. For Joseph Schumpeter, failure was not a dirty word. Indeed, crisis in his view was a fundamental part of capitalist progress, which he believed to operate through the mechanism of ‘creative destruction’. Still, Schumpeter argued that capitalism would eventually undermine itself — not due to its failures, but rather as a result of its successes. By gradually eroding the entrepreneurial spirit that functions as the engine of the system, capitalism, according to this free-market economist, was bound to give rise to socialism.

Schumpeter wrote in the 1940s, when the specter of communism was still haunting Europe, but in today’s climate of financial meltdown the idea that capitalism is destroying itself has once again gained traction outside of traditionally socialist circles. Nouriel Roubini, the leading economist and business analyst, famously argued in a recent op-ed that Marx was actually right about capitalism’s tendency to collapse. But it was not only Dr Doom who spoke out – even leading free-market publications like Forbes, Business Insider, the Financial Times, the Wall Street Journal, the Harvard Business Review published pieces arguing that we might be facing the end of capitalism.

A growing sense of uncertainty and fear about the future is certainly part of this Zeitgeist. But there is also something immensely powerful about the Marxian and Schumpeterian analyses that both Keynesians and neoliberals seem ill-equipped to “see”. After Queen Elizabeth visited the London School of Economics in 2009, for example, and embarrassed all the assembled experts by asking them “how they did not see this crisis coming,” a committee of esteemed economists was called into life to find an answer to Her Majesty’s subversive research question. The simplicity of their findings was astonishing. “Somehow,” they concluded, “we missed systemic risk.”

For both Marx and Schumpeter, systemic risk is at the very heart of the system. It is what drives innovation. It is what separates the profitable and productive forces from the unprofitable and unproductive ones. It is capitalism’s own system of natural selection. Marx, however, made a crucial observation. “Capital”, he observed, “abides no limit”. Once the process of capital accumulation is set in motion, the system is like (the incorrect analogy of) a bicycle: it cannot stop without the rider falling on his face. Although Marx never lived long enough to finish his theory of capitalist crisis (laid out for Volume III of Capital), his work has inspired a wide range of often seemingly conflicting interpretations of the deep drivers behind financial and economic crises.

As Erik Olin-Wright summarized in an important article, there are roughly four schools of thought within the Marxian church, each of them giving priority to a different set of fundamental contradictions in the process of capital accumulation: (1) the rising composition of organic capital and the tendency of the rate of profit to fall; (2)  underconsumption; (3) wage rises and the capitalist profit squeeze; (4) the contradictory role of the state in the accumulation process. Yet rather than seeing these different approaches as necessarily opposed to one another, Olin-Wright is correct to argue that they are merely different impediments to accumulation that the system faces at different stages of its development.

David Harvey makes a similar argument in The Enigma of Capital. Emphasizing that capital is about flow, not, as some of Marx’s critics have argued, about a static stock of value, Harvey goes back to Marx’s dictum that capital abides no limits. If the continuous circulation of capital is blocked at any given stage, the system needs to confront this limit to accumulation as a barrier instead, and transcend this barrier in order to survive. The barriers of high wages (as in the profit squeeze theory) or low wages (as in the underconsumption theory), should not be seen as matters of dogmatic contestation but rather as complementary explanations of the challenges faced by a highly dynamic system that perennially finds itself on the precipice of meltdown.

Sometimes the wages are too high and sometimes they are simply too low to sustain accumulation. What matters, therefore, is not so much which theory is true and which one is not, but rather how capitalists choose to respond to these divergent realities at different stages of capitalist development. This is where the true power of the Marxian analysis lies: it can account for both neoliberal “shock therapy” and neo-Keynesian “shock-and-awe” stimulus as political strategies to restore capital flow in different historical moments. In this respect, Keynesianism, by promoting the deliberately wasteful state as a “spender of last resort”, was a response to the underconsumption crisis of the 1930s.

The Keynesian “solution”, however, introduced a new set of barriers. By expanding the role of labor unions and allowing wages to rise faster than productivity, it gave rise to the profit squeeze of the 1970s. Neoliberal reforms were the logical response to this crisis. By liberalizing capital accounts and deregulating the financial sector, labor could be outsourced to the Global South and wages repressed, while cheap credit could replace the state’s role in maintaining living standards. But while this strategy helped solve one major barrier to accumulation, it immediately introduced another: a major build-up of debt. The credit bubble that resulted from the neoliberal reforms should have burst back in 2001, along with the dotcom bubble, but given the political sensitivity of the post-9/11 moment, the Fed lowered interest rates even further. The result was the housing bubble that finally popped in 2007.

It is fascinating to observe how well-intentioned “enlightened” capitalists like Joseph Stiglitz and Paul Krugman have responded to this new crisis of underconsumption. Now that credit has dried up, there is only one way to boost aggregate demand: a return to Keynesian deficit spending. But as Olin-Wright observed, this process itself gives rise to the fiscal crisis of the state. And because the states borrowed heavily from private banks, this sovereign debt crisis is by definition also a banking crisis (as became apparent over the weekend with the bailouts of Dexia in Belgium and Proton in Greece). This, one could argue, has at least partly to do with the contradictory role of the state in the accumulation process, especially given the close ties between the financial sector and the political establishment in democratic capitalist society.

One aspect in which Schumpeter was perhaps naïve was in overlooking the impact of ever further accumulation. For Schumpeter, a crisis was always a good thing, for it helped purge the system of its unproductive elements. What he ignored, however, is the fact that the Kontratieff Waves (the ups and downs in the business cycle) seem to be getting bigger and bigger. From the Latin American debt crisis and Loan and Savings Crisis of the 1980s, to the bursting of the Japanese bubble, the Scandinavian banking crisis, the East-Asian crisis of 1997-’98, the Russian default, the Brazilian devaluation, the Argentine Depression, and finally the subprime mortgage crisis, the financial sector meltdown and the consequent First World Debt Crisis — the pattern appears to be one of ever more intense and deeper downturns.

If there is one overriding conclusion here, it is exactly Harvey’s insight that capitalism never solves its own crisis – it merely moves them around geographically and temporally. So what does that tell us about the system’s ability to survive? Given the fact that it is still here, it apparently can. The system is incredibly resilient, and Marx himself probably recognized this more than bearish Keynesian economists like Roubini do. But respecting capitalism’s productive magic and its resilient nature is not the same as praising its desirability or extolling its immortality. One aspect in which both Keynesians and neoliberals share a Utopian attachment to the immortality of capitalism, is in their failure to admit that their solutions to the system’s inherent contradictions are always only partial and temporary. In reality, the two ideological nemeses keep each other in a delicate lover’s embrace – even if their mutual dependency is founded upon the Kiss of Death.

So what if Marx and Schumpeter were both right, and capitalism is just another chapter in the largely unwritten history of mankind, telling the story of an epic human adventure from the bonds of manor and guild to the commanding heights of the global economy? What if Marx underestimated how capitalism’s success could one day undermine the system before its internal contradictions would even come to the fore? And what if Schumpeter underestimated how the increasingly powerful swings of the Kontratieff Wave could cause the system to wipe itself out before its success could even give rise to a post-capitalist world? In this respect, neither Marx nor Schumpeter really tells us anything we didn’t know already. For nothing lasts forever – and neither will capitalism. The point, in this respect, is not to interpret the world but to change it.