Monday, December 29, 2008
Thursday, December 11, 2008
Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.
by Joseph E. Stiglitz
There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history-a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it's crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road-we had what engineers call a "system failure," when not a single decision but a cascade of decisions produce a tragic result. Let's look at five key moments.
No. 1: Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you'll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.
Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown-as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation- or "liar"-loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn't have the tools, he could have gone to Congress and asked for them.
Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen-for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk-but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one's own position. Not surprisingly, the credit markets froze.
Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn't put it as memorably as Warren Buffett-who saw derivatives as "financial weapons of mass destruction" -but we took his point. And yet, for all the risk, the deregulators in charge of the financial system-at the Fed, at the Securities and Exchange Commission, and elsewhere-decided to do nothing, worried that any action might interfere with "innovation" in the financial system. But innovation, like "change," has no inherent value. It can be bad (the "liar" loans are a good example) as well as good.
No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act-the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn't its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest- toward short-term self-interest, at any rate, rather than Tocqueville' s "self interest rightly understood."
The most important consequence of the repeal of Glass-Steagall was indirect-it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people's money-people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can't, in any case, identify systemic risks-the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.
As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation-a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar- plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant-and successful-in their opposition. Nothing was done.
No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease-the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil-money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America's household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly-and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending-not that American consumers needed any more encouragement.
No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals-notably the collapse of WorldCom and Enron-Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can't have faith in a company's numbers, then you can't have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are "incentive pay" in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.
The incentive structure of the rating agencies also proved perverse. Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy-that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008-that is, with the administration' s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America's banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn't address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding-and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America's taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues-they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely-which they hadn't-the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.
The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems-the flawed incentive structures and the inadequate regulatory system.
Was there any single decision which, had it been reversed, would have changed the course of history? Every decision-including decisions not to do something, as many of our bad economic decisions have been-is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You'll hear some on the right point to certain actions by the government itself-such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.'s had the same perverse incentive to indulge in gambling.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America-and much of the rest of the world-of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
© 2008 Vanity Fair
Joseph E. Stiglitz is University Professor at Columbia University. Among many books, he is the other of Globalization and Its Discontents. He received the Nobel Prize in Economics in 2001 for research on the economics of information. Most recently, he is the co-author, with Linda Bilmes, of The Three Trillion Dollar War: The True Costs of the Iraq Conflict.
Today at 5:25am
Manila Standard Today
Tuesday, December 9, 2008
It was columnist Lito Banayo who first raised the question of why the chartered Philippine Air Lines Flight 001, carrying President Gloria Arroyo and her party to the Asia-Pacific Economic Cooperation Summit in Lima, Peru last Nov. 21 was diverted in mid-flight, six hours after leaving Manila. It was made to detour to Osaka , Japan .
The First Gentleman, Mike Arroyo, was said to have suffered “severe stomach pains and vomiting” and, although there were doctors on board, it was decided to unload him in Osaka so that he could receive emergency medical treatment in a hospital.
PGMA is said to have waited for his physicians to arrive in Osaka from Manila (in a San Miguel Corporation HS-125 executive jet) before proceeding to Lima .
Banayo quotes an unnamed “friend” who asked: “Was it a case of the presidential party being alerted by phone that someone among them was going to be picked up by authorities upon landing at Los Angeles airport for money laundering activities?
“Remember that in the wake of Lehman Brothers, Merrill Lynch, AIG and so many other Wall Street corpses, the federal anti-money laundering task force may have found the smoking gun documents about the financial capers of someone in the presidential plane.
“That would have been a terrible embarrassment, because no one else in the party aboard PAL Flight PR 001 was important enough to merit a reason to retreat and fly back except the President or her husband….”
Frank Wenceslao, president of an organization called Philippine Anti-Corruption Movement USA, has a different take:
“GMA, husband and their children are reportedly barred to enter the US by virtue of the United Nations Convention against Corruption (UNCAC) and the Bush administration’s ‘No Safe Haven’ policy to deny kleptocrats to enjoy the fruits of corruption.
“The Family’s last visit when the policy was specially lifted was when Ambassador Kristie Kenney thought that the MOA on Ancestral Domain would push through and the US could negotiate a bases agreement with the Bangsa Moro.
“GMA’s US visit [last October] was only allowed for a head-of-state attending UN-related conferences or meetings.
“It is out of protocol [that] Mrs. Arroyo is allowed to come to the US , but not her husband. There is a report that Atty. Arroyo’s emergency landing in Japan happened when the presidential party learned [that] his request for [a] US visa wasn’t granted, and he really needed [one] for a stopover in Los Angeles.
“Mike Arroyo might suffer what happened to Joc Joc Bolante and be detained…”
I do not know which version, if any, is accurate: Was Mr. Arroyo about to be arrested in LAX for money laundering, or was his request for a US visa denied and he was going to detained, like Joc Joc Bolante before him, for having an expired US visa? I tend to doubt that Mr. Arroyo would leave for LAX without a valid US visa.
But both columnist Banayo and crusader Wenceslao did not mention a significant fact: namely, that six hours out of Manila, in a non-stop 12-hour flight eastward towards LAX, PAL Flight 001 would have been within a triangle described by Wake Island, Midway Island and Hawaii, the first two US territories, the third a state in the American Union..
In case of a medical emergency situation—and I have no doubt that Mr. Arroyo needed emergency help—the most logical place to make a stop would have been Honolulu, about an hour and a half away from where the plane was when the decision was made to rush him to a hospital.
Turning back to Osaka suggests that the party deliberately avoided US territory—for either of the reasons suggested by Banayo and Wenceslao, or for some other reason unknown to us. Stopping at Honolulu also would not have delayed PGMA’s trip to Lima as much as the stopover in Osaka did.
Interior Secretary Ronaldo Puno was quoted as saying that “Six more hours to reach LAX. There was no way we could wait that long. I think the precautions taken were warranted. It is very hard to take risks with anyone’s life.” What risks would there have been in landing in Honolulu , aside from the two given by Banayo and Wenceslao?
Why the presidential party seems to have deliberately avoided US territory should be the subject of a Senate investigation, not to determine if Mr. Arroyo really suffered from diarrhea, but to salvage what is left of our national self-respect.
Is it really true that Mr. Arroyo was about to be arrested by the FBI in LAX for money laundering activities? We have a right to know.
Is it really true that President Arroyo has been black-listed by US authorities and may set foot on US soil only....
Saturday, December 6, 2008
Lee Sustar analyzes the roots of the worst economic crisis since the Great Depression--and shows why Marxism offers the best way of understanding what went wrong.
THERE ARE plenty of people who should be held accountable for turning an ordinary recession that began a year ago into a global catastrophe.
Topping the list is former Federal Reserve Chair Alan Greenspan, who fed the bubble by keeping interest rates at rock-bottom levels, urging home buyers to take on adjustable-rate home loans and refusing to use the Fed's powers to oversee a mortgage industry rife with fraud.
Then there are the former Treasury Secretaries from the Clinton administration, Robert Rubin and Larry Summers, who teamed up with Greenspan to block regulation of so-called derivatives--complex financial instruments based on underlying assets like mortgages.
Backing them up was former Sen. Phil Gramm, the Texas Republican who, as chair of the Senate Banking Committee, pushed through legislation repealing the Depression-era Glass-Steagall Act that restricted commercial banks from entering the high-stakes financial activities of investment banks.
Former President Bill Clinton, who signed Gramm's bill into law, bears responsibility as well.
This Clinton-era deregulation opened the way for operators like former Countrywide Financial CEO Angelo Mozilo, whose company pushed sub-prime loans on people who qualified for better deals.
Countrywide paid mortgage brokers a higher commission on high-interest sub-prime mortgages, since those mortgages were more profitable to sell to Wall Street investment banks--like the now-bankrupt Lehman Brothers, where CEO Dick Fuld pushed the company into the obscure but highly profitable market for collateralized debt obligations (CDOs), which packaged together large numbers of prime and sub-prime loans as investments for Wall Street's biggest players.
And there's Robert Rubin--again. This time, as chair of Citigroup's executive committee, Rubin egged on executives as they plunged the bank ever deeper into the market for CDOs. "According to current and former colleagues, [Rubin] believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman Sachs, and he pushed to bulk up the bank's high-growth fixed-income [bond] trading, including the CDO business," the New York Times reported.
Those assets turned toxic with the housing bust and resulting credit squeeze. Now, Citigroup is the latest financial institution to be bailed out by the Bush administration, with a rescue package that will put $45 billion of government money into Citigroup--and put taxpayers on the hook to insure $306 billion in bad assets.
But back at the start of the decade, with the table set by Clinton's economic policies, Wall Street could gorge itself on an ever-expanding financial menu, as the new Bush administration looked on approvingly.
Even when the financial crisis first broke out in the summer of 2007, Bush and Treasury Secretary Henry Paulson insisted that the problem would be "contained" in the sub-prime mortgage market. It was only after the failure of the investment bank Bear Stearns in March 2008 that Paulson and Federal Reserve Chair Ben Bernanke lurched into action with an array of new lending programs and multibillion-dollar bailouts of Fannie Mae, Freddie Mac, AIG and, now, Citigroup.
According to Bloomberg news service, taxpayers are on the hook (so far) for an astonishing $7.7 trillion--a figure equivalent to more than half the total U.S. economic output, or gross domestic product, for 2007.
But despite this immense sum, the crisis has gotten worse--not least because free-market ideologues like Bush and Paulson delayed taking decisive action before carrying out its series of confused and contradictory "rescues."
So yes, the people who presided over this crisis should be held accountable. But the global scale of the crisis points to a far more fundamental problem--the crisis-prone nature of capitalism itself.
With even the most pro-capitalist analysts and commentators panicked about the prospect of a repeat of the Great Depression, it's important for those on the left to revisit the work of capitalism's first great scientific critic and revolutionary opponent--Karl Marx.
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TO UNDERSTAND the dynamics of today's crisis, it's helpful to look briefly at what Marx's identified as contradictions at the core of the capitalist system.
Marx stressed that a key distinguishing feature of capitalism is its reliance on wage labor. Unlike previous societies, in which most production was carried out by slaves, peasants or small crafts producers, capitalist production relies on workers who have nothing but their labor power to sell to the boss.
Of course, independent producers and small farmers still exist. But the system as a whole is dominated by big capitalists, who own the factories, offices and other "means of production," to use Marx's term. Where the output of pre-capitalist societies was primarily geared to creating "use values"--items that met an immediate human need--capitalists produce for sale on the market, or for "exchange value."
Under capitalism, competing employers command the labor power of workers, who are "free" to work--or starve.
What gives capitalism its dynamism is that workers' labor adds value to the commodities they produce, by transforming raw materials into something that can be sold on the market. The value of a given commodity, Marx argued, is determined by the amount of labor time necessary to produce it. And in this process, Marx said, "surplus value" is created.
What is surplus value? Capitalists can pay workers wages that are sufficient (in boom times, anyway) to cover the costs of food, housing, raising children, etc., and still have a surplus left over when commodities are sold. Essentially, workers are paid for only part of their workday. This is true whether the boss appears to the workers as a "good" or "bad" one.
These basic relationships give capitalism both its dynamism and its propensity to crisis, Marx argued.
In order to compete with one another, rival capitalists are compelled to maximize the productivity of labor--that is, to get more commodities produced from the same expenditure on labor power. They can try to do so by forcing workers to work harder and longer--but the physical limits of (if not resistance by) workers and the length of the day restrict how far this can go.
Real breakthroughs in productivity can only come through the use of labor-saving technology that allows workers to produce the same commodity in less time. Thus, Marx described capitalism as constantly revolutionizing the means of production. Capitalists who invest in technological innovations win out over rivals who are unwilling or unable to do so.
For capitalists, Marx wrote, the motto is, "Accumulate, accumulate! That is Moses and the prophets!...Therefore, save, save, i.e, reconvert the greatest possible portion of surplus value, or surplus product into capital! Accumulation for accumulation's sake, production for production's sake..."
This drive to technological change is the reason why industrial capitalism could start to transform the world in a few decades.
However, the rapid accumulation of capital created a boom-bust cycle. Investment would pour into industries that seemed to be the most profitable. As capitalist enterprises grew larger, they increasingly relied on credit to carry out the years-long investments needed to develop, say, a new steel mill. Since all these investments take place without any overall coordination, there's an inevitable disconnection between production and demand--and when the gap reaches a certain point, the boom turns into a bust.
In Volume III of Capital, Marx described the perverse nature of capitalist crisis this way:
The contradiction of the capitalist mode of production...lies precisely in its tendency towards an absolute development of the productive forces, which continually come into conflict with the specific conditions of production in which capital moves, and alone can move. There are not too many necessities of life produced, in proportion to the existing population. Quite the reverse. Too little is produced to decently and humanely satisfy the wants of the great mass.
This "crisis of overproduction" is the defining feature of a capitalist crisis, according to Marx. Factories are shuttered even as workers look for work. People go hungry while food sits unsold in warehouses or rots in the fields. Homes stand empty although millions lack an affordable place to live.
In 1880, Marx's collaborator Frederick Engels described capitalism's periodic crises in words that could have been written last week:
Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence; bankruptcy follows upon bankruptcy, execution upon execution.
The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again.
Little by little, the pace quickens. It becomes a trot. The industrial trot breaks into a canter, the canter in turn grows into the headlong gallop of a perfect steeplechase of industry, commercial credit and speculation, which finally, after breakneck leaps, ends where it began--in the ditch of a crisis. And so over and over again.
Beyond this destructive boom-slump cycle, capitalism had an even more fundamental tendency toward crisis, Marx argued.
Because capitalists are under constant pressure to invest in ever-greater amounts of machinery, there is a long-term tendency for the rate of profit to fall. The reason: because labor is the source of the surplus value that capitalists keep as profit, a rising proportion of machinery to workers creates a downward pressure on the rate of profit over the long run.
That, however, didn't mean that Marx expected capitalism to collapse of its own accord as profit rates dried up. He identified several countervailing influences--and pointed out that capitalist crises actually clear the way for a revival of growth by bankrupting unproductive capitalists and devaluing capital in general.
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BY THE early 20th century, capital had become concentrated in ever-larger business entities and centralized into fewer ones. These monopolized companies, the forerunners of modern corporations, were increasingly intertwined in their home nation-states.
Military and economic competition between rival countries gave rise to a new, imperialist stage of capitalism and the slaughter of the First World War. Rather than rival capitalists trying to put one another out of business and take over their markets, competing imperial states sought to destroy the economic capacity of their rivals.
The war didn't overcome the underlying economic problems of the world system, however. The boom of the 1920s gave way to capitalism's biggest slump ever--the Great Depression of the 1930s.
The Great Depression confirmed Marxist crisis theory in all its essentials. It was only overcome through another imperialist slaughter--the Second World War. So as the war drew to a close, the allied powers led by the U.S. created a new, American-dominated world economic order (excluding the Eastern bloc controlled by the USSR).
Unlike the prewar era, financial services and capital flows were strictly regulated. But capitalism nevertheless boomed as never before, and the depression was seen as an aberration, the result of poor political leadership. Capitalism, according to its apologists, had overcome its contradictions.
The reality was different. As the late British Marxist writer Mike Kidron explained, the Cold War had given rise to a permanent arms economy that gave the system a constant stimulus. But because these enormously expensive nuclear weapons were never used, arms spending acted as a kind of safety valve for the system: It drained capital away from investment in new machinery that would have increased the tendency of the rate of profit to fall.
By the mid-1970s, however, the picture had changed. Profit rates had fallen sharply across the advanced industrial countries as a revitalized Germany and Japan, the losers in the Second World War, were able to compete with the U.S. Efforts to stimulate the economy led to a combination of inflation and slow growth, known as "stagflation." Marx's theory of the tendency of the rate of profit to fall was validated once more.
The capitalist solution to this crisis was to go back to market fundamentals. Economists like Milton Friedman, for decades seen as a right-wing crank, were suddenly promoted as sages for preaching deregulation of business, privatization of government services and "flexible" labor policies.
Politicians like Ronald Reagan in the U.S. and Margaret Thatcher in Britain turned Friedman's ideas into policies by smashing unions, slashing government spending and turning finance capital loose. The Clinton administration shaved off some of the rough edges of these policies, but basically consolidated what is now known as "neoliberalism."
For U.S. capitalists, neoliberalism was a spectacular success. The deep recession in 1982 gave rise to a boom, and following the relatively mild (for capitalists) recession of 1991, U.S. GDP increased by 49 percent until the slump of 2001. Total non-agricultural employment grew by 22.5 percent in the same period. By the late 1990s, U.S. profit rates approached those of the late 1960s at the peak of the long boom.
Bill Clinton hailed this as the "miracle economy," and once again, capitalist ideologues proclaimed that capitalism had finally cured itself of the tendency to crisis.
The dot-com stock market bust of 2000 and the recession of 2001 threatened to undo that success. The number of corporate bankruptcies soared--with Enron and WorldCom among the highest-profile casualties. In response, Federal Reserve Chair Greenspan cut interest rates to effectively zero to stimulate the economy, repeating measures he had taken in the late 1990s when the East Asian financial crisis threatened to sweep the world.
For business, Greenspan's rock-bottom interest rates allowed them to clean up their balance sheets and begin investing again--but not in the U.S. Even as the economic expansion began in 2002, job growth remained miserable and wages flat--or worse. According to the Economic Policy Institute, real income for the median family fell by 1.1 percent between 2000 and 2006--and wages remained flat during the 2002-2007 expansion.
For the wealthy, however, the 2000s saw continued dramatic increases in income. Between 1989 and 2006, the wealthiest 10 percent got more than 90 percent of all income growth. The richest 1 percent saw their income increase 203.7 percent, while the wealthiest 0.1 percent saw an increase of 425 percent.
By contrast, if workers wanted to maintain, let alone improve, their standard of living, they had to take on debt. Personal debt increased by 159.1 percent since 1997, from about $5.5 trillion to $14.4 trillion. In that same period, the ratio of debt to disposable income increased from 93.4 percent to 139 percent.
By 2006, the average debt owed by every U.S. adult was about $52,000, compared to average yearly pay of less than $31,000 for non-supervisory production workers. Buying a house that would supposedly keep increasing in value seemed like a way out of this dilemma--and the likes of Angelo Mozilo and Robert Rubin engineered the financial system to take full advantage of working people.
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WITH CONSUMER demand sustained by debt, the U.S. economy was able to maintain its role as the importer of last resort into the 2000s.
For China, the prospect of an endlessly expanding U.S. market was the basis for crash investment programs to build steel mills, airports, roads and factories of all sorts. China's industrial revolution, in turn, spurred demand for oil and other raw materials, particularly from Latin America. Japanese and German companies profited by selling machine tools and other goods to rapidly expanding Chinese capitalism. By early 2007, the world economy was growing at its fastest rate in 30 years.
Fueling this expansion was a vast extension of credit from both the $10 trillion traditional banking system and an unregulated shadow banking system of equal size.
But as the U.S. Federal Reserve Bank began to raise interest rates and the economy slowed, the dominoes of debt began to fall. What began in the U.S. sub-prime mortgage market became a global financial credit crunch, as capitalists were forced to reckon with the fact that assets of all types were overvalued.
Here, too, Marx's analysis of capitalism is validated. Credit, he argued, may postpone a capitalist crisis, but it cannot overcome the contradictions created by capitalism's drive toward production for its own sake. "The means--unconditional development of the productive forces of society--come continually into conflict with the limited purpose, the self-expansion of the existing capital," he wrote.
Thus, at some point, a crisis of "overproduction" is inevitable, as capitalists can no longer realize their profits through the sale of goods on the market. At that point, financial instruments of various sorts are depreciated, as are elements of fixed capital.
Next, Marx wrote, "[t]he chain of payment obligations due at specific dates is broken in a hundred places. The confusion is augmented by the attendant collapse of the credit system, which develops simultaneously with capital, and leads to violent and acute crises, to sudden and forcible depreciations, to the actual stagnation and disruption of the process of reproduction, and thus to a real falling off in reproduction."
Such periodic crises have not always been catastrophic for the capitalist system. Today, however, a prolonged slump seems inescapable--both because the U.S. can no longer drive the world economy through debt-financed consumption, and because the world financial system is staggering under the weight of bad debt.
The risk of such a long and deep recession has forced policymakers in the U.S. and Europe to toss free-market orthodoxy aside to try to find a way out. But as Marx showed, capitalism will inevitably generate crises until it is replaced with a socialist alternative.
Friday, October 17, 2008
Monday, October 13, 2008
Sunday, October 12, 2008
Saturday, October 11, 2008
Thursday, October 2, 2008
Saturday, September 27, 2008
Thursday, September 25, 2008
Tuesday, September 23, 2008
For years, as a member of the House Banking Committee and now as a member of the Senate Budget Committee, I have heard the Bush Administration tell us how "robust" our economy was and how strong the "fundamentals" were. That was until a few days ago. Now, we are being told that if Congress does not act immediately and approve the $700 billion Wall Street bailout proposal these "free marketers" have just written up, there will be an unprecedented economic meltdown in the United States and an unraveling of the global economy.
This proposal as presented is an unacceptable attempt to force middle income families (and our children) to pick up the cost of fixing the horrendous economic mess that is the product of the Bush Administration's deregulatory fever and Wall Street's insatiable greed. If the potential danger to our economy was not so dire, this blatant effort to essentially transfer $700 billion up the income ladder to those at the top would be laughable.
Let us be clear. If the economy is on the edge of collapse we need to act. But rescuing the economy does not mean we have to just give away $700 billion of taxpayer money to the banks. (In truth, it could be much more than $700 billion. The bill only says the government is limited to having $700 billion outstanding at any time. By selling the mortgage backed assets it acquires -- even at staggering losses -- the government will be able to buy even more resulting is a virtually limitless financial exposure on the part of taxpayers.) Any proposal must protect middle income and working families from bearing the burden of this bailout.
I have proposed a three part plan to accomplish that goal which includes a five-year, 10% surtax on the income of individuals above $500,000 a year, and $1 million a year for couples; a requirement that the price the government pays for any mortgage assets are discounted appropriately so that government can recover the amount it paid for them; and, finally, the government should receive equity in the companies it bails out so that when the stock of these companies rises after the bailout, taxpayers also have the opportunity to share in the resulting windfall. Taken together, these measures would provide the best guarantee that at the end of five years, the government will have gotten back the money it put out.
Second, in addition to protecting the average American from being saddled with the cost, any serious proposal has to include reforms so that we end the type of behavior that led to this crisis in the first place. Much of this activity can be traced to specific legislation that broke down regulatory safety walls in the financial sector and allowed banks and others to engage in new types of risky transactions that are at the heart of this crisis. That deregulation needs to be repealed. Wall Street has shown it cannot be trusted to police itself. We need to reinstate a strong regulatory system that protects our economy.
Third, we need to address the needs of working families in this country who are today facing very difficult times. If we can bail out Wall Street, we need to respond with equal vigor to their plight. That means, for example, creating millions of jobs through major investments in rebuilding our crumbling infrastructure and creating a new renewable energy system. We must also make certain that the most vulnerable Americans don't freeze in the winter or die because they lack access to primary health care.
Finally, we need to protect ourselves from being at the mercy of giant companies that are "too big to fail," that is, companies who are so large that their failure would cause systemic harm to the economy. We need to assess which companies fall into this category and insist they are broken up. Otherwise, the American taxpayer will continue to be on the financial hook for the risky behavior, the mismanagement, and even the illegal conduct of these companies' executives.
These are the last days of the Bush Administration, the most dishonest and incompetent in modern American history. It is imperative that, at this important moment, Congress stand up for the middle class and for fiscal integrity. The future of our country is at stake.
Sunday, September 21, 2008
In the period leading up to the First World War, then during the war itself, revolutionary Marxists were obliged not only to denounce the imperialist character of the war, but also to show that war was inevitable as long as capitalism remained the dominant mode of production in the world.
Against the pacifists who pined for a capitalism without wars, revolutionaries insisted that it was impossible to prevent imperialist wars without at the same time destroying capitalism itself. Rosa Luxemburg’s The Accumulation of Capital and Junius Pamphlet, as well as Lenin’s Imperialism, The Highest Stage of Capitalism, were written with essentially this objective. The methods of analysis in these works, as well as some of their conclusions, are different, but the underlying concern in them is the same: to hasten the revolutionary action of the international proletariat against capitalist barbarism.
Today, when a new open crisis of capitalism is once again conjuring up the threat of a world imperialist war, while at the same time creating the conditions for a new revolutionary offensive against capital on a world scale, revolutionaries must continue this work of analyzing capitalist society in the same spirit of militant intervention.
Whatever the university professors of marxology might think, Marxism isn’t a branch of political economy: it is the revolutionary critique of political economy. For revolutionaries, the analysis of the present crisis of capitalism can never be an academic speculation floating in the ethereal regions of economic analysis. It is simply a moment in an overall intervention whose aim is to prepare the weapons of the proletarian revolution. It’s not a pure interpretation of the capitalist world, but a weapon for destroying it.
Faced with the growing economic convulsions that capitalism is now going through, revolutionaries must underline that the perspective of revolutionary Marxism has been verified. They must do this by showing:
-- that the present crisis isn’t just a passing problem for capitalism, but a new mortal convulsion after more than half-a-century of decadence;
-- that, as in 1914 and 1939, decadent capitalism’s only ‘solution’ to the crisis is a new world war which, this time, puts the very existence of humanity at risk;
-- that the only way humanity can escape from this apocalyptic impasse is by abandoning and destroying all the relations of production which make up capitalism, and installing a society in which the factors which have led humanity to this situation will have disappeared: a society without commodities or exchange, without profit or wage labor, without nations or the state: a communist society;
-- that the only force capable of taking the initiative in such a transformation is the principal producer class itself: the world working class.
In order to be able to carry out this task, revolutionaries must be able to express the main foundations of the Marxist analysis of the internal contradictions of capitalism in terms that are clear and broadly verifiable through the reality of the crisis which the whole of society is living through, in particular the working class. To defend the idea of the necessity and possibility of destroying capitalism, without being capable of explaining clearly and simply the origins of the crisis of the system, is to condemn ourselves to appearing like university professors of economics, or utopian illuminati. And this necessity is all the more urgent today when everything indicates that, in contrast to the revolutionary movements of 1871, 1905, or 1917-23, the next revolutionary proletarian wave will break out not in the wake of a war but in response to an economic crisis. More and more, the debate on the causes of the crisis of capitalism will take place not just in the theoretical reviews of a few tiny revolutionary groups, but in assemblies of unemployed workers, in factory assemblies, in the very heart of a working class struggling against the growing attacks of a capitalist system that has reached the end of its tether. The task of communists in this domain is to know how to prepare themselves to be effective factors of clarification within this process.
Paradoxically, the question of the foundations of the crisis of capitalism the corner-stone of scientific socialism has been the object of numerous disagreements amongst Marxists, especially since the debate on imperialism.
All communist tendencies generally share the fundamental notion that the installation of a communist society becomes a necessity and a possibility on the historical agenda at the point where capitalist relations of production cease to be indispensable factors in the development of the productive forces, and transform themselves into fetters; or, to use the formulation in the Communist Manifesto, when "the conditions of bourgeois society are too narrow to comprise the wealth created by them."
The disagreements arise when it comes to making more precise how this general contradiction becomes concrete, when it comes to defining the characteristics and timing of the economic phenomenon which transforms these conditions -- wage labor, profit, the nation, etc -- into definite fetters on the development of the productive forces, precipitating capitalism into crisis, bankruptcy, and decline.
These disagreements still exist today; very often they are the same divergences which divided revolutionaries at the beginning of the century. However, the extraordinary weakening of the revolutionary forces under the blows of fifty years of counter-revolution, the almost total organic break with the organizations of the past, as well as the extreme isolation communist groups have had to put up with for decades, all this has reduced the debate between revolutionaries on this question to virtual non-existence.
With the resurgence of proletarian struggle and the emergence of new revolutionary groups over the last ten years, there has been a certain revival in the discussion, spurred on by the need to understand the growing economic difficulties world capitalism is going through. But very often the debate has got going on a basis which makes it difficult for it to result in an enrichment of Marxist analysis.
It’s quite natural that the debate has re-emerged around the discussions left in suspense by the Marxist theoreticians at the beginning of the century and subsequently taken up by, among others groups like Bilan, Internationalisme, or the review Living Marxism. At the centre of the debate is the confrontation between the analysis of Rosa Luxemburg and those who, rejecting this analysis, defend the idea that it is the tendential fall in the rate of profit which provides the fundamental explanation of the contradictions of capitalism. But, unfortunately, up till now this debate has had the unfortunate tendency to get bogged down in an exegesis of the writings of Marx, one side trying to show that the theses of Rosa Luxemburg are "totally alien to Marxism" or at least a very poor interpretation of the works of the founder of scientific socialism, the other side attempting to show the Marxist continuity in the theses of The Accumulation of Capital.
Important as it is to define any ‘Marxist’ analysis in relation to Marx’s work, the debate will be condemned to a total impasse if it restricts itself to this preoccupation alone. It’s only in the confrontation with the reality that it claims to explain that a theory can be confirmed or refuted. Only in the crucible of the criticism of real events can a system of thought develop positively and find the means to become a material force.
If it is to develop with a constructive perspective, the present debate on the foundations of the crisis of capitalism must therefore
-- learn to look at the Marxist analyses of the past, including those of Marx himself, not as sacred books which leave us with the simple task of making an exegesis in order to explain all the economic phenomena of present-day capitalism, but as theoretical efforts which must, if they are to be taken up and understood, be placed in the context of the historic conditions under which they were elaborated;
-- make a concrete analysis of the concrete reality of capitalism’s evolution, confronting the different theories that claim adherence to Marxism with this reality.
It’s then and only then that we will be able to begin to really determine whether it’s Luxemburg or Grossmann-Mattick, to take an example, who have provided us with the most valuable instruments for developing the proletariat’s understanding of the objective conditions for its historic action. It’s in this way that we’ll really be able to contribute to the proletariat’s attempt to widen its consciousness of the general conditions of its revolutionary mission.
It therefore seems essential to us to:
1) place the main works of previous Marxists in their historic context, to get a better appreciation of their relevance to the present period;
2) confront these results with the only thing that can allow us to go forward in the debate, ie. the reality of capitalism both its evolution since the First World War and in its present crisis.
It was at the heart of the economic crisis of 1847-8, and with a view to intervening in the workers’ struggles engendered by that crisis, that Marx developed the main lines of his explanation of the crisis of capitalism, first at the Bruxelles conferences of the Association of German Workers (Wage Labor and Capital) and then in the Communist Manifesto. In a few simple but precise formulae, Marx uncovered the main specificity of the capitalist economic crisis compared to the economic crises of previous societies: in contrast to what happened in pre-capitalist societies where production was immediately geared towards consumption, under capitalism, where the capitalists’ objective is the sale of commodities and the accumulation of capital, and consumption is simply a by-product, the economic crisis doesn’t take the form of a shortage of goods, but of overproduction. The goods needed for subsistence, or the material conditions to produce them exist, but the mass of producers, who only receive from their masters the cost of their labor power, are deprived of the means and the money to buy the goods. What’s more, at the same time as the crisis hurls the producers into poverty and unemployment, the capitalists destroy the means of production that would allow this poverty to be palliated.
At the same time, Marx pointed to the underlying reason for these crises: living in a state of permanent competition amongst themselves, the capitalists can only live by developing their capital, and they can’t develop their capital if they don’t have new outlets at their disposal. This is why the bourgeoisie was compelled to invade the whole surface of the globe in search of new markets. But precisely by continuing this expansion, which was the only way it could overcome its crises, capitalism was narrowing the world market and thus creating the conditions for new, more powerful crises.
To sum up: by the very nature of wage labor and capitalist profit, capital cannot provide the wage-earners with the means of purchasing everything they produce. The buyers of those products that couldn’t be sold to the class it exploited were found by the bourgeoisie in sectors and countries that were not dominated by capitalism. But by selling its production to these sectors, it was forcing them to adopt the bourgeois mode of production, which would eliminate them as outlets and create in turn the need for new markets. As Marx wrote in the 1848 Manifesto:
"For many a decade past the history of industry and commerce is but the history of the revolt of modern productive forces against modern conditions of production, against the property relations that are the conditions for the existence of the bourgeoisie and of its rule. It is enough to mention the commercial crises that by their periodical return put on its trial, each time more threateningly, the existence of the entire bourgeois society. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity -- the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilization, too much means of subsistence, to much industry, too much commerce...."
"And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented." (our emphasis)
What did Marx and Engels mean by "the conquest of new markets"? The Manifesto answers as follows:
"The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere."
"The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilization into their midst, ie, to become bourgeois themselves. In one word, it creates a world after its own image...."
"Just as it has made the country dependent on the towns, so it has made barbarian and semi-barbarian countries dependent on the civilized ones, nations of peasants on nations of bourgeois, the East on the West."
How did this conquest of the world constitute the means whereby the bourgeoisie could overcome its crises while at the same time condemning it to "more extensive and more destructive crises"? In Wage Labor and Capital Marx replies: "as the mass of production grows, and consequently the need for extended markets, the world market becomes more and more contracted, fewer and fewer new markets remain available for exploitation, since every preceding crisis has subjected to world trade a market hitherto unconquered or only superficially exploited" (Our emphasis).
These formulations certainly represent a masterful summary of the Marxist theory of crises. It wasn’t by accident that Marx and Engels formulated them in the documents that they edited with the aim of presenting to the working class the quintessence of a communist analysis. Neither Marx, nor Engels subsequently put these formulations into question -- on the contrary. However, in Marx’s subsequent economic works, we don’t find a systematic and completed expose of these theses. There are two main reasons for this:
-- the first is connected to the way Marx wanted to organize his study of the economy. He always envisaged that the part devoted to the world market and world crises would be dealt with last. As we know, he died before he could complete his work on the economy;
-- the second reason, which partially explains the first, is connected to the historical conditions of the period Marx was living through.
The 19th century was the period in which the movement towards the constitution of the world market reached its zenith. The bourgeoisie was invading "the whole surface of the globe" and creating "a world after its own image" as Marx said. But the movement towards the constitution of the world market was not really completed. The movement through which capital "subjected to world trade a market hitherto unconquered or only superficially exploited", the movement which meant that "the world market becomes more and more contracted", the historic movement which meant that the bourgeoisie was "paving the way for more extensive and destructive crises, and ... diminishing the means whereby crises are prevented", this movement had not yet reached the critical point where the world market was so narrow that the bourgeoisie no longer had any means left to prevent and overcome its crises. The contraction of the world market, the contraction of outlets, had not yet reached the level where the crisis of capitalism would become a permanent phenomenon.
The crises of the 19th century which Marx described were still crises of growth, crises which capitalism came out of strengthened. The commercial crises which, in Marx’s words, "by their periodical return put on its trial, each time more threateningly, the existence of the entire bourgeois society", "were not yet capitalism’s death rattles" -- as Marx himself recognized a few years later in the preface to The Class Struggles in France -- but crises of development. In the 19th century, as Marx said, the bourgeoisie got over these crises "by the conquest of new markets and by the more thorough exploitation of the old ones". This was possible because the world market was still being constituted. After each crisis, there were still new outlets to be conquered by the capitalist countries.
For example, between 1860 and 1900, Britain colonized another 7 million square miles of territory, inhabited by 164 million people (this tripled the surface and doubled the population of its Empire). France expanded its empire by 3.5 million square miles and 53 million inhabitants (this multiplied the extent of its colonies 18 times and of its population 16 times).
Marx was witnessing the evolution of the contradictions of capitalism and he defined the fundamental contradiction which on the one hand impulse this movement and on the other hand condemned it to an impasse. At the zenith of capitalism’s historical power, Marx diagnosed the sickness that would condemn it to death. But this sickness had not yet become mortal. And thus Marx was not able to study all aspects of it.
Just as, when you are measuring the resistance of a given material, you have to push it to breaking point; just as, when you are trying to understand all the effects of a nutritious substance on a living being, you have to deprive the creature of the substance to the point where the consequences of its absence can be seen most clearly, so we had to wait until the world market had contracted to the point of definitively blocking the expansion of capitalism before the fundamental contradictions of the system could be analyzed in all their complexity.
We had to wait until the beginning of the 20th century and the exacerbation of the antagonisms between capitalist countries over the conquest of new markets, up to the point where a world war was on the agenda, before the analysis of the problem could reach a new and higher level of understanding. This is what was done in the debates on imperialism.
All the same, Marx didn’t stop analyzing the internal contradictions of capitalism after the publication of the Manifesto. In Capital, we can find a number of detailed studies of the conditions of capitalist crises. But in nearly all his studies, he explicitly abstracted the world market, referring the reader to a later study that he proposed to make, Rather than drawing a total picture of the capitalist world, he analyzed the internal mechanisms of "the process of capital as a whole," making an abstraction of all those sectors of the world market that he had called "new outlets" in the Manifesto.
This was particularly the case with the famous tendential fall in the rate of profit. This law, which he discovered, pointed to the mechanisms through which, in the absence of a certain number of counter-tendencies, the rise in the organic composition of capital (ie the growth of the productivity of labor through the introduction into the process of production of a growing proportion of dead labor -- machines in particular -- in relation to living labor), would lead to a fall in the capitalist’s rate of profit. It described the economic mechanisms which expressed, at the level of capital’s rate of profit, the contradiction between, on the one hand, the fact that capitalist profit can only be drawn from the exploitation of living labor (the capitalist can only rob the worker, not machines), and, on the other hand, the fact that the proportion of living labor contained in each capitalist commodity is continually diminishing in favor of the proportion of dead labor. In a world without workers where only machines produced, capitalist profit wouldn’t exist. The law of the tendential fall in the rate of profit describes how, by mechanizing and automating production more and more, the capitalist was forced to resort to a series of measures to prevent the tendency of the rate of profit to fall from becoming an effective fall.
Marx made a study of the measures which were aimed at counter-acting this fall, and which made it a tendential law, not an absolute one. Now, the main factors counter-acting this law were themselves dependent on capital’s capacity to extend the scale of its production, and thus on its capacity to procure new outlets.
Whether we are talking about the factors which compensate the fall in the rate of profit by increasing the mass of profit, or about factors which prevent this fall by intensifying the exploitation of the worker (raising the rate of surplus value) thanks to an elevation in social productivity (falling real wages, growing extraction of relative surplus value), these two kind of factors can only be effective if the capitalist is continuously discovering new outlets allowing him to increase the scale of his production and thus
1) augment the mass of profit
2) increase the extraction of relative surplus value.
This is why Marx insisted so much on the tendential and not the absolute character of this law. This is also why, in his expose on this law and the factors which counteracted it, he, on several occasions, refers the reader to a later study.
The law of the tendential fall in the rate of profit describes, in reality, the race between two parallel movements in the life of capitalism: on the one hand, the movement towards the growing mechanization and automation of the productive process, and, on the other hand, capitalism’s movement towards an ever-greater exploitation of the proletariat. If the mechanization of capitalist production develops more rapidly than capital’s capacity to intensify the exploitation of the proletariat, the rate of profit falls. If, on the other hand, the intensification of exploitation develops faster than the rhythm of the mechanization of production, the rate of profit tends to increase.
In describing this contradictory race, the law of the falling rate of profit highlights a real phenomenon. But it doesn’t in itself describe all the elements in this phenomenon, its causes and its limits. Take such questions as: what is it that determines the pace of each of these movements? What is it that engenders and maintains the race to modernize the process of production? What is it that permanently provokes the movement towards the intensification of exploitation? The law of the tendential fall in the rate of profit does not answer these questions and, what’s more, doesn’t pretend to. The response can be found in the basic historical specificity of capitalism: the fact that it is a universal system of commodity production.
Capitalism isn’t the first mode of production in history to have commodity exchange and money. In the slave mode of production as in feudalism, commodity exchange existed, but it only affected certain limited aspects of social production. What is specific to the capitalist system is its tendency to universalize exchange, not only across the whole planet, but also and above all across all the domains of social production, particularly labor power. Neither the slaves nor the serfs sold their labor power. The part of social production which went to them depended, on the one hand, on the amount of production carried out, and, on the other hand, on the prevailing rules regulating the distribution of the products.
Under capitalism the worker sells his labor power. The amount of social production that goes to him is determined by the law of wages, ie by the value of his labor power, which capitalism has transformed into a commodity. His ‘share’ is simply the equivalent of the cost of his labor power to the capitalist, and this only on condition that he is not unemployed (something that never happened to slaves or serfs). This is why capitalism can find itself in a situation unknown in history before: overproduction, ie a situation where the exploiters find themselves stuck with ‘too many’ products, ‘too much’ wealth, wealth that they are unable to reintroduce into the process of production.
This problem doesn’t pose itself to capital as long as it has at its disposal markets other than those made up by its own wage-earners. But this very fact means that the life of each capitalist depends on a permanent race for markets. Competition between capitalist, this essential characteristic of the life of capital, isn’t competition for honor or high ideals, but for markets. A capitalist without markets is a dead capitalist. Even a capitalist who managed to work the biological miracle of getting his workers to produce for nothing (thus realizing an infinitely huge rate of exploitation and so an enormously high rate of profit) would go bankrupt the moment he was unable to sell the commodities made by those he’s exploiting.
That’s why the life of capital is constantly faced with the choice: conquer markets or die.
This is the capitalist competition which no capital can escape from. It’s this competition for markets (those which exist already as well as those still to be conquered) which pitilessly compels each capitalist to try to produce at lower and lower costs. The low price of its commodities isn’t just the "heavy artillery" With which capital "batters down all the Chinese walls" that encircled the pre-capitalist sectors; it’s also the essential economic weapon in the competition between capitalist.
It’s this struggle to lower the price of their commodities in order to maintain or conquer markets which constitutes the motor-force of the two movements whose pace determines the rate of profit. The two principal means capital has at its disposal to lower the costs of its production are:
1) a greater mechanization of the productive apparatus
2) the diminution of labor costs, ie an intensification of exploitation.
A capitalist doesn’t modernize his factories because he has modernizing ideals, but because he’s forced to, on pain of death, by the competition for markets. It’s the same with the obligation to intensify the exploitation of the working class.
Thus, whether we look at the falling rate of profit from the point of view of the forces that provoke it, or whether we look at it from the point of view of the factors which moderate it and counter-act it, we are still dealing with a phenomenon which is dependent on capital’s struggle for new markets.
The economic contradiction expressed by this law, like all the other economic contradictions of the system, always boils down to the fundamental contradiction between, on the one hand, the necessity for capital to enlarge production more and more, and, on the other hand, the fact that it can never create within itself the outlets it needs for this expansion by giving its wage-earners the necessary purchasing power.
This is why, after describing the law of the falling rate of profit, Marx wrote, two sections further on, in the same 3rd volume of Capital:
"The workers’ power of consumption is limited partly by the laws of wages, partly by the fact that they are only employed as long as their labor is profitable to the capitalist class. The ultimate reason for all real crises is always the poverty and restricted consumption of the masses faced with the tendency of the capitalist economy to develop the productive forces as if they had no limit than society’s absolute power of consumption." (Capital III, section 5, our emphasis)
As we have already said, and for the reasons which were already given (the death of Marx before he could complete his studies of the economy, the limits of the historical period he lived in), Marx wasn’t able to develop and systematize "the ultimate reason for all real crises". But from the Manifesto to the 3rd Volume of Capital, his approach remained the same.
An under-consumptionist theory?
In order to make more precise what Marx actually said -- and at the risk of once again making concessions to exegitical discussions -- we should respond to one of the most recent arguments developed by one of the defenders of the idea that the ‘falling rate of profit’ was Marx’s only theory of crisis. According to Paul Mattick, in his book Crise et Theories des crise, Marx’s references to the problems of the market provoked by the inevitably restricted consumption of the workers were either "slips of the pen", or concessions to under-consumptionist theories, especially Sismondi’s.
Marx criticized Sismondi’s under-consumptionist theory. But what Marx rejected in this theory wasn’t the idea that capitalism faced problems of the market because, even while it was enlarging its field of activity, it was permanently restricting the buying-power and consumption of the workers. What Marx rejected in the under-consumptionist theories was:
1) the fact that they envisaged the possibility of avoiding the ‘under-consumption’ of the workers within the framework of capitalism, through wage increases. Marx showed that, in reality, exactly the opposite was the case: the more the capitalists were faced with overproduction and a lack of markets, the more they reduced workers’ wages. For capitalism to be able to resolve its crises by raising wages, the competition which continuously obliged it to reduce its wage costs would have to disappear. In short, capitalism would have to stop being capitalism;
2) Sismondi was in fact an expression of the 19th century petty bourgeoisie, condemned to proletarianization by capitalism. What lay behind his theory was the demand for a capitalism that wouldn’t destroy the petty bourgeoisie. Sismondi’s under-consumptionist theory didn’t try to demonstrate the necessity for humanity to free itself from commodity relations, and thus wage labor, in order to permit the flowering of the productive forces in a communist society, he advocated a return to the past by putting limits on the capitalist growth that was sweeping aside all the pre-capitalist sectors of the petty bourgeoisie. Sismondi said that if capitalism could control its blind thirst for growth, there would be no problem of constantly having to find new markets... and the agricultural, artisan, and commercial petty bourgeoisie would be able to survive. It was this reactionary, utopian vision that Marx rejected, by showing that it ended up denying reality and dreaming of a capitalism that could not exist.
Summarizing Marx’s basic criticism of the underconsumptionists, one could say that he didn’t reject the economic problem they were posing, but 1) the way they posed it 2) the answers they came up with.
Marx’s theory of crisis places at the centre of its analysis the problem of capitalism’s inability to create all the outlets needed for its expansion, and thus the problem of the restricted consumption of the workers. But this doesn’t make it an ‘under-consumptionist’ theory.
From Marx to the debates on imperialism
The last quarter of the 19th century was without doubt the historical apogee of capitalism. Capitalist colonialism dominated practically the whole planet. Capitalism developed at an unprecedented rhythm, both in its outward extension and its internal production. The trade union and parliamentary struggles of the workers’ movement allowed it to wrest real, lasting reforms from capitalism. In the most developed countries the proletariat’s living conditions were substantially improved, while at the same time the formidable expansion of world capitalism seemed to have relegated the great economic crises to mere memories of the past.
This was when the workers’ movement saw the development of ‘revisionism’, ie tendencies which put into question Marx’s idea that capitalism was condemned to go through mortal crises, and which put forward the possibility of peacefully and gradually advancing towards socialism through progressive social reforms. In Bernstein’s words, "the movement is everything, the goal is nothing."
In 1901, one of the principal ‘Marxist’ revisionists, the Russian professor Tugan-Baranowski published a book supporting the idea that the crises of capitalism derived not from a lack of salvable consumption in relation to capitalism’s capacity to extend its production, but simply from disproportionality between different sectors of the economy, a disproportionality that could be avoided through suitable government intervention. This was in fact a revival of one of the fundamental theories of bourgeois economy as formulated by JB Say, according to which capitalism could never have a real markets problem.
This thesis gave rise to a debate which led Social Democracy to return to the question of the cause of crises. It fell to Kautsky, who was then still the most widely recognized spokesman for Marx’s theories in the workers’ movement, to reply to Tugan-Baranowski. We cite here an extract from Kautsky’s reply, which shows that in this period there was still no doubt in the workers’ movement that the cause of capitalist crises resided in its inability to create the outlets needed for its expansion:
"Although capitalists increase their wealth and the number of exploited workers grows, they cannot themselves form a sufficient market for capitalist-produced commodities, as accumulation of capital and productivity grows even faster. They must find a market in those strata and nations which is still non-capitalist. They find this market, and expand it, but still not fast enough, since this additional market hardly has the flexibility and ability to expand of the capitalist process of production. Once capitalist production has developed large-scale industry, as was already the case in England in the nineteenth century, it has the possibility of expanding by such leaps and bounds that it soon overtakes any expansion of the market. Thus, any prosperity which results from a substantial expansion in the market is doomed from the beginning to a short life, and will necessarily end in a crisis.
This, in short, is the theory of crises which, as far as we can see, is generally accepted by ‘orthodox’ Marxists and which was set up by Marx." (Neue Zeit, 1902, Quoted by Luxemburg in the Anti-critique)
Kautsky underlined the political significance of the debate when, in the same article, he wrote:
"It is no mere accident that revisionism attacks Marx’s theory of crises with particular vigor.... (revisionism wants to) change social democracy from a party of proletarian class struggle into a democratic party on the left wing of a democratic party of social reform."
However, although this theory summarized "in short" by Kautsky was "generally accepted" in the Marxist workers’ movement, no one has tried to develop it in a more systematic way, as Marx had intended.
This is what Rosa Luxemburg tried to do during the debates on imperialism at the time of the outbreak of World War One.
The debates on imperialism
The beginning of the 20th century saw the completion of the contradictory tendencies Marx had described. Capital had effectively extended its rule across the whole world. There was hardly a square kilometer on the planet which wasn’t in the hands of one or other of the imperialist metropoles. The process of constituting the world market, ie the integration of all the economies of the world into the same circuit of production and exchange, had reached such a point that the struggle over the last non-capitalist territories had become a life or death question for all countries.
New powers like Germany, Japan, and the USA, were now able to compete with the all-powerful Britain on the industrial level, but at the same time they had little share in the colonial division of the world. In the four corners of the planet, the antagonisms, between all the powers got sharper. Between 1905 and 1913, five times these antagonisms led to incidents which seemed to make generalized war the only way that capitalism could divide up the world market. In the end, the outbreak of World War One, the greatest holocaust humanity had ever been through, showed quite clearly that capitalism couldn’t go on living in the old way. The capitalist nations could no longer go on developing in parallel to each other; letting free exchange and the initiative of explorers determine the extent of their domination. The world had become too narrow for too many capitalist appetites. Free exchange had to give way to war and explorers to cannons. One capitalist nation could only develop at the expense of one or several others. There was no longer any real possibility of enlarging the world market. Now, it could only be re-divided in different ways. Capitalism could therefore only live by wars and by preparing wars for these divisions and re-divisions.
"For the first time, the world is completely divided up, so that in the future only re-division is possible, ie territories can only pass from one ‘owner’ to another, instead of passing as ownerless territories to an ‘owner’" (Lenin -- Imperialism, The Highest Stage of Capitalism)
Without destroying world capitalism, humanity would be condemned to live in a semi-permanent state of war. "Socialism or barbarism" became the watchword of all revolutionaries.
The Third International was constituted in 1919 on the basis of a recognition and understanding of this change, this qualitative historical break. Thus, the first point in the platform of the Communist International declared:
"The contradictions of the capitalist system, which lay concealed within its womb, broke out with colossal force in a gigantic explosion, in the great imperialist world war.
…… A new epoch is born! The epoch of the dissolution of capitalism, of its inner disintegration. The epoch of the communist revolution of the proletariat"
With these formulations, the CI reaffirmed its break with the reformist and patriotic tendencies which had developed within the 2nd International and which had just led the proletariat into the inter-imperialist butchery, using their arguments in favor of the possibility of a continuous development of the productive forces, which would allow a peaceful passage from capitalism to socialism.
The CI clearly affirmed:
1) that the world war wasn’t a choice that capitalism could have avoided but an inevitable consequence of capitalism, the violent revelation of its internal contradictions, "which lay concealed in its womb";
2) that this war wasn’t like previous capitalist wars. It marked the end of an era and the beginning of a new period, "the epoch of the dissolution of capitalism, of its inner disintegration";
3) that the entry of capitalism in to this epoch of decline corresponded historically to the proletarian revolution coming onto the agenda, to the beginning of "the epoch of the communist revolution of the proletariat".
Thus the whole Communist International recognized that the First World War was a manifestation of the fact that the internal contradictions of capitalism had reached a point of historical no-return.
However, while all revolutionary Marxists shared these conclusions, it was different when it came to analyzing the precise nature of these contradictions and of their development.
Within what had been the left of the 2nd International, there had been two main theories of imperialism and the economic contradictions in capitalism which gave rise to it. One was Rosa Luxemburg’s, as developed in The Accumulation of Capital (1912) then in The Crisis of German Social Democracy written in prison during the war; the other was that of Lenin in Imperialism, the Highest Stage of Capitalism (1916).
For these two theories, the analysis of imperialism and the analysis of the fundamental contradictions of capitalism were simply two aspects of the same question. Their works had been aimed at the patriotic Social Democrats who defended a superficial pacifism via the illusion that you could prevent imperialist war and imperialism itself through legal parliamentary struggle that could influence government policy. For Rosa Luxemburg as for Lenin, it was impossible to prevent war without destroying capitalism, because imperialism was simply the consequence of the internal contradictions of capitalism. To answer the question "what is imperialism" therefore implied answering this other question: ‘what is the fundamental contradiction that capitalism is trying to palliate through its imperialist policies?’
Rosa Luxemburg’s response
Rosa Luxemburg’s response saw itself -- correctly, we think -- continuing Marx’s work on the development of capitalism, by looking at it not in the abstract, simplified form of a pure system, operating in a world made up entirely of capitalists and workers, but in its concrete historic form, ie as the integral part of the world market. Her response is a systematic development of Marx’s analysis of crises, as he began to elaborate in the Communist Manifesto and Capital. In The Accumulation of Capital she undertook an analysis of the growth of capitalism in relationship with the rest of the world, the non-capitalist part. Using a thoroughly adept Marxist method, she examined the main historical stages in this growth, and the different theoretical approaches to the problem.
Her response to the question of imperialism was simply an actualization of the analysis in the Communist Manifesto, sixty years on. Capitalism could not create, within itself the outlets needed for its expansion. The workers, the capitalists and their direct agents could only buy a part of the total production. That part of production which they didn’t consume, ie that part of the profit which had to be reinvested in production, capital had to sell to someone outside of the agencies which were subjected to its direct domination, and which capital paid out of its own funds. These buyers could only be found in sectors that were still producing in a pre-capitalist manner.
Capital developed by selling its surplus products first to the feudal lords, then to the backward agricultural and artisan sectors, and finally to the ‘barbaric’ pre-capitalist nations which it colonized.
In so doing, capital eliminated the feudal lords, and transformed the artisans and peasants into proletarians. In the pre-capitalist nations it proletarianized part of the population and reduced the rest to poverty, destroying the old subsistence economies with the low price of its commodities.
For Rosa Luxemburg, imperialism was essentially the form of life that capitalism took on when the extra-capitalist markets were becoming too narrow for the expansion-requirements of a growing number of increasingly developed powers. The latter were thus forced into permanent and more and more violent confrontations to find a place in the division of the world market.
"Modern imperialism … is only the last chapter of its (capital’s) historical process of expansion, it is the period of universally sharpened world competition between the capitalist states for the last remaining non-capitalist areas on earth". (Luxemburg, The Anti-critique)
The fundamental contradiction of capitalism, ie that which in the last instance determined the lines of action and the life of capitalism, was the contradiction between, on the one hand, the permanent need for the expansion of each national capital under the pressure of competition, and, on the other hand, the fact that by its very development, by generalizing wage labor, capitalism was restricting the outlets that were indispensible for this expansion.
"... by this process capital prepares its own destruction in two ways. As it approaches the point where humanity only consists of capitalists and proletarians, further accumulation will become impossible. At the same time, the absolute and undivided rule of capital aggravates class struggle throughout the world and the international economic and political anarchy to such an extent that, long before the last consequences of economic development, it must lead to the rebellion of the international proletariat against the existence of the rule of capital."
Luxemburg points out that the final point of this theoretical contradiction will never be reached, "because capital accumulation is not just an economic but also a political process" (Anti-critique)
"Imperialism is as much a historical method for prolonging capital’s existence as it is the surest way of setting an objective limit to its existence as fast as possible. This is not to say that the final point need actually be attained. The very tendency of capitalist development towards this end is expressed in forms which make the concluding phase of capitalism a period of catastrophes." (Accumulation of Capital)
The exacerbation of inter-imperialist antagonisms over the conquest of colonies at the end of the 19th and beginning of the 20th centuries obliged Luxemburg, more than Marx, to analyze the importance of the non-capitalist sectors in the growth of capitalism. The historical gap and the specificities of the period which separated her from Marx were at the basis of her conviction of the need to pursue the master’s analysis.
However, in developing her analysis, Luxemburg was compelled to make a critique of Marx’s work on enlarged reproduction (particularly the mathematical schemas) in the IInd Volume of Capital. This critique consisted above all in showing that this work was incomplete, despite the tendency to present it as definitive and final. At the same time she tried to show that the theoretical postulate upon which they were based -- studying the conditions for the enlarged reproduction of capital by making an abstraction of the surrounding non-capitalist milieu, ie considering the world as a purely capitalist world -- does not allow us to understand the totality of the problem.
The publication of Rosa Luxemburg’s work on the eve of the world war provoked is extremely violent and energetic reaction inside the official apparatus of German Social Democracy, generally hiding behind the pretext of wanting to ‘safeguard’ Marx’s work. Rosa, they said, had invented a problem where none existed; the problem of the market was a false problem; Marx had ‘demonstrated’ this with his famous schemas of enlarged reproduction etc. And, behind all these ‘official’ critiques, lay the basic thesis of the future patriots: imperialism isn’t inevitable under capitalism.
Lenin’s analysis in Imperialism, The Highest Stage of Capitalism, written in 1916, doesn’t refer to Luxemburg’s work and only deals with the question of the markets in passing. In order to show the inevitable character of imperialism in "decaying" capitalism, Lenin emphasized the phenomenon of the accelerated concentration of capital in the decades leading up to the war. Here his analysis took up Hilferding’s thesis in Finance Capital (1910), according to which this phenomenon of concentration was the essential element in the evolution of capitalism in this period. As Lenin wrote:
"If it were necessary to give the briefest possible definition of imperialism we should have to say that imperialism is the monopoly stage of capitalism."
Lenin defined five fundamental characteristics of imperialism:
"And so, without forgetting the conditional and relative value of all definitions in general, which can never embrace all the concatenations of a phenomenon in its complete development, we must give a definition of imperialism that will include the following five of its basic features: 1) the concentration of production and capital has developed to such a high stage that it has created monopolies which play a decisive role in economic life; 2) the merging of bank capital with industrial capital, and the creation, on the basis of this "finance capital", of a financial oligarchy; 3) the export of capital as distinguished from the export of commodities acquires exceptional importance; 4) the formation of international monopolist capitalist combines which share the world among themselves, and 5) the territorial division of the whole world among the biggest capitalist powers is completed."
Of the five "basic features", three relate to the growing concentration of capital at national and international level. For Lenin, the fundamental contradiction of capitalism, the one that led to the stage of imperialism and "decay", was the contradiction between its tendency towards "monopolism", which made capitalist production become more and more social, and the general conditions of capitalism (private property, commodity production, competition) which contradicted this tendency.
"Capitalism in its imperialist stage leads right up to the most comprehensive socialization of production; it, so to speak, drags the capitalist, against their will and consciousness, into some sort of a new social order, a transitional one from complete free competition to complete socialization. Production becomes social, but appropriation remains private. The social means of production remain the private property of a few. The general framework of formally recognized free competition remains, but the yoke of a few monopolists on the rest of the population becomes a hundred times heavier, more burdensome and intolerable."
Then, in the chapter on "The Parasitism and Decay of Capitalism":
".... the deepest economic foundation of imperialism is monopoly. This is capitalist monopoly, ie monopoly which has grown out of capitalism and exists in the general environment of capitalism, commodity production and competition, in permanent and insoluble contradiction to this general environment."
This contradiction between the increasingly ‘social’ character which capitalist production acquires as it extends and becomes concentrated, and, on the other hand, the persistence of private capitalist appropriation, is a real contradiction of capitalism, which Marx frequently referred to. But in itself it doesn’t come near providing an explanation for imperialism and the collapse of capitalism.
The tendency towards ‘monopolism’ doesn’t explain why, at a certain degree of development, the capitalist countries were compelled to wage a fight to the death for colonies. On the contrary, it is the necessity to prosecute this increasingly bitter war over the colonies which explains the tendency within each capitalist nation towards the unification and concentration of the whole national capital. The capitalist powers which underwent the most rapid and extensive concentration weren’t those which possessed the biggest empires (Britain, France), but those which had to carve out a place on the world market (Germany, Japan).
By neglecting the problem of the markets, Lenin was led into taking for a cause of imperialism what in reality was a consequence -- like imperialism itself -- of the capitalists’ struggle for new outlets. Similarly he was led to see the export of capital as a fundamental phenomenon of imperialism ("as distinguished from the export of commodities"), whereas in reality the export of capital was simply one of the weapons in the struggle between the powers for markets to place their commodities (Lenin himself recognized this elsewhere in his book: "The export of capital abroad thus becomes a means for encouraging the export of commodities". Chapter IV)
By taking as his starting point Hilferding’s work on monopolism, it was difficult to come to conclusions that were coherent with his premises. Hilferding was one of the theoreticians of the reformist wing of the 2nd International; behind the disproportionate emphasis which he gave to the phenomenon of the concentration of capital in finance capital, there was the attempt to show that it was possible to reach socialism by peaceful, gradual methods. (According to Hilferding, the growing concentration imposed by monopolism would make it possible to carry out, within capitalism, a series of measures that would progressively lay the foundations of socialism: elimination of competition, elimination of money, elimination of nations... even unto communism). The whole of Hilferding’s theoretical effort was aimed at trying to prove the falsity of the revolutionary road to communism. The whole of Lenin’s effort had the opposite intention. By borrowing from Hilferding the basis for his theory of imperialism, Lenin could only arrive at revolutionary conclusions by subjecting his theory to contradictory contortions.
The position of the Communist International
In its platform, the CI didn’t really take a position on the basics of the debate. However, its interpretation of the evolution of capitalism towards its "inner disintegration" refers explicitly to the monopolism and anarchy of capitalism, whereas the question of the markets is only mentioned as a partial explanation of imperialism:
"Capitalism tried to overcome its own anarchy by organizing production. Instead of numerous competing businessmen, powerful capitalist associations (syndicates, cartels, trusts) were formed; bank capital united with industrial capital; all economic life was dominated by the finance-capitalist oligarchy, who attained sole dominion by organizing on the basis of this power. Monopoly took the place of free competition. The individual capitalist became a trust-capitalist. Insane anarchy was replaced by organization.
But while in each country the anarchy of the capitalist mode of production was superseded by capitalist organization, the contradictions, the competitive struggle, and the anarchy in world economy grew ever sharper. The struggle between the largest organized robber States led with iron necessity to the monstrous imperialist world war. Greed for profits drove world capital to fight for new markets, new investment openings, new raw material sources, the cheap labor power of colonial slaves. The imperialist changed many millions of African, Asiatic Australian, and American proletarians and peasants into beasts of burden, had sooner or later to expose the true anarchist nature of capital in that tremendous conflict. This was the origin of the greatest of all crimes -- the predatory world war.
It would be difficult to draw from these formulations a really clear idea about the question of imperialism and of the fundamental contradictions of capitalism. To the question of the internal contradictions of the system, the CI replied, following Lenin and thus the influence of Hilferding, by pointing to the evolution of the system towards monopoly. And, like Lenin, it immediately affirmed the impossibility of a continuous evolution to the point where nations would be eliminated by successive international concentrations. Concentration at a national level meant that "the contradictions, the competitive struggle, and the anarchy in world economy grew ever sharper," leaving it as read, as Lenin had done, that this tendency towards concentration was the cause and not the consequence of the exacerbation of "the contradictions, the competitive struggle, and the anarchy" at international level.
As for the imperialist policy of conquests, the CI simply talked about "greed for profits" pushing capital "to fight for new markets, new investment openings, new raw material sources, the cheap labor power of colonial slaves". All this was correct, at the level of denouncing those ideologies which talked about imperialism as a means for spreading ‘civilization’ but at the economic level it’s just a description which doesn’t help you see in what way imperialism is linked to the fundamental contradiction of capitalism.
Finally, in its explanation for the First World War and the reasons for its outbreak, the CI like Lenin and Rosa referred to the fact that "the imperialist states... divided the entire world amongst themselves", but they don’t say why this division, once completed, should lead inevitably to war, why this division could not be accompanied by a parallel development of the different powers.
As to the question of the crises of overproduction, the world market, its contraction, etc, which the Manifesto talked about, the CI didn’t say a word.
The Communist International as a whole was unable to come to an agreement on this question. What’s more, the Communist Parties in 1919 had much more urgent and important questions to discuss: the proletariat held power in Russia, the outbreak of the German revolution had been a confirmation of the communists’ view that the world war would provoke an international revolutionary movement. But the immediate defeat of this first revolutionary offensive in Germany posed the question of the real strength of this international movement. In such a situation, the question of knowing the theoretical reasons for the outbreak of the world war took a back seat. After the barbarism of war and the fires of revolution, history had already taken charge of sweeping aside all the theories about the continuous development of well-being under capitalism, and peaceful passage to socialism.
The war, the most violent form of human misery, was there. It had engendered and international revolutionary movement and it was inevitably the questions that directly related to the revolutionary struggle that came into the foreground.
But this isn’t the only reason why the CI didn’t reach an agreement on the foundations of the economic crisis of capitalism. The First World War took the form of a total war, ie a war which, for the first time, demanded the active participation not only of the soldiers at the front, but also the whole civil population that had become incarcerated in a state apparatus that was now the omnipresent organizer of the march to slaughter and of the industrial production of the instruments of death.
The monstrous reality of the war was based on factories ‘operating at full steam’, on the mass expenditure of human lives, in uniform or not; this made unemployment ‘disappear’. The first world holocaust, which cost humanity 24 million lives, hid beneath the roar of factories producing for destruction the fact that capitalism was no longer capable of producing. The under-production of armaments concealed the overproduction of commodities. The sales to the state for war purposes hid the fact that the capitalists had no other way selling. They had to sell to destroy because they could no longer produce to sell.
This was certainly the major reason behind the surprising fact that the platform of the CI doesn’t take a single comma from the Manifesto on the question of the crises of overproduction and the contraction of the world market.
In conclusion, we can say that the necessity to explain imperialism allowed for a development of the analysis elaborated by Marx. But the very conditions of this crisis (revolutionary proletarian movements which pushed economic-theoretical questions into the background; the recent character of the communists’ break with the 2nd International and the weight of the theories of Social Democratic reformists on the analyses of the revolutionaries; finally the fact that the war hid the fundamental specificities of the crisis of capitalism, in particular overproduction) stood in the way of the revolutionaries of the Communist International coming to an agreement about the causes of the crisis.