The Looming Crisis of World Capitalism

Robert Brenner

MARXIST ECONOMISTS ARE famous for having accurately predicted seven out of the last one international economic crisis.  Perhaps for that reason, many in recent times have been unusually cautious about once again “crying wolf,” even as the evidence of international economic dislocation has mounted around them.

Today, however, prediction is no longer necessary.  The international economy, outside of the United States and Europe—perhaps 50% of the world—is already experiencing an economic downturn that is worse than any that has occurred since the 1930s.

Outside the United States and Europe, stocks fell almost everywhere by 50-75% between July 1997 and July 1998, and emerging market equities fell by another 33% this August and September alone.  In Indonesia, starvation has become a fact of daily life; in Russia, where life expectancy had already fallen by five years, living standards have been cut by 50% or more; in East Asia millions are being laid off and thrown into poverty.

In Latin America, which had only recently started to recover from its disastrous “lost decade” of the 1980s, the same effects have begun to manifest themselves with increasing intensity.

To make matters worse, the U.S. economy, which has provided the main motor for the nascent international cyclical upturn, is in serious trouble.

As recently as June 1998, Alan Greenspan, head of the U.S. Federal Reserve, in testimony before Congress, astounded even business publicists when he allowed that “it is possible that we have .  .  .  moved `beyond history,'”  i.e., transcended the business cycle and achieved perpetual growth.  But by mid-October, that same Alan Greenspan had reduced the interest rate twice in an attempt to counter increasingly powerful international deflationary pressures.

Meanwhile, the Federal Reserve shocked Wall Street by coordinating the bailout of a multibillion dollar hedge fund. It did so, Greenspan explained, because letting the fund collapse would very likely have triggered a world financial meltdown.  The U.S. economy is today sliding toward recession, and, if this is allowed to materialize, it could spell disaster for the world economy.

The question of the day is, of course, what’s behind the growing international economic turmoil?

Until very recently, it must be stressed, neither the mainstream of the economics profession in the United States, nor U.S. business publicists, nor any of the mass media had any answer whatsoever to this question.  This is because they were unwilling to recognize the existence of any really serious problem with the U.S. economy.

This was so, despite the fact that-contrary to media propaganda-U.S. economic performance has, over a long period, been truly dismal.  Over the last quarter century, the average annual growth of U.S. labor productivity—Gross Domestic Product (GDP) per hour—has been less than 1% per annum, that is, well under half its average for the previous century.

Over the same quarter century between 1973 and 1998, real wage growth has been lower than at any other point in U.S. history since the Civil War, including the Great Depression.  In 1997, the hourly real wage for production workers (not including benefits) was at the same level it had been in 1965.

Perhaps most stunning, during the cyclical upturn of the 1990s, when the U.S. economy ostensibly entered a “New Age” and supposedly demonstrated beyond doubt the superiority of the “Anglo-Saxon model” over all others, U.S. economic performance was, by almost every standard macroeconomic indicator—the growth of output, investment, productivity, and wages—worse than in any other cyclical upturn of the postwar epoch.

Economists, business publicists and media were able to avert their eyes from the dreadful performance of the real U.S. economy, because inflation had been brought down in line with the needs of the financial sector, because profit rates had made a significant (if incomplete) comeback after a long period in which they had been severely depressed, and above all because the stock market was breaking all records.

A Break in the Washington Consensus

Nevertheless, during the last several months, there has been an important break from the Washington consensus.  With the Asian crisis catalyzing the Russian collapse and threatening to engulf the world economy, leading economists at the very heart of the U.S. political and economic establishment—including some of the very same ones, like Jeffrey Sachs, who had pushed most strongly for “shock therapy” and across-the-board liberalization—are running for cover.

These economists, rather amazingly, are laying the blame for the runaway conflagration at the door of what has been called the U.S. Treasury-Wall Street-International Monetary Fund (IMF) complex.

They are making two related points.  First, the IMF intervention in East Asia was disastrously counter-productive.  What was needed, they argue, in the wake of the massive flight of capital that catalyzed the crisis in Asia, was an injection of funds to prevent the liquidity crisis from destroying the underlying economies.

This would have been the same sort of large scale injection of cheap money that the U.S. Federal Reserve and the Japanese had provided at the time of the stock market crash of 1987.  But what the IMF supplied was the opposite.  Like Herbert Hoover had in 1929 when he called for balancing the budget in the wake of the stock market crash, the IMF routinely imposed high interest rates and economic austerity.

The result was to further panic international investors, accelerating their flight, and meanwhile assuring that there would be a catastrophic chain reaction of business failures, leading to failure to pay loans and rising unemployment, leading to more business failures, and so forth.

Beyond that, these economists are arguing that de-regulation of short-term capital movements is at the source of the international crisis.  Money poured into East Asia when prospects appeared good, but flew out even more rapidly when the business climate appeared to worsen.  This precipitated a depression in the underlying real economies which now threatens to spread to the rest of the world.

Now it is obvious that, in the longer run, it is the developing crisis itself that will do most to transform neoliberal worldviews, both of intellectuals and the citizenry more generally.  It is equally evident, moreover, that these economists of the establishment are seeing only the tip of the iceberg.  Nevertheless, even their very partial and superficial analysis should not, I think, be ignored by the left.

First, their critique of the free market in short-term lending is correct in so far as it goes. Massive, unregulated short-term capital flows did radically exacerbate the East Asian crisis, even if they were not its ultimate source.

Second, these economists’ criticism of the lending conditions imposed by the IMF in East Asia helps put the spotlight on the straightforwardly imperialist character of the IMF intervention in that region.

This intervention was not only about imposing high interest rates and austerity.  It had the goal, most notably in Korea, of seeking to destroy a system of economic regulation and economic protection, which had helped to make possible one of the most spectacular trajectories of growth in the world history.  [Editors’ Note: We discussed this point in some detail in our editorial “The IMF’s Imperial `Reform,'” ATC 73, March-April 1998.]

But precisely because the East Asian economies had been so successful even by the IMF’s own criteria, the IMF’s so-called reform program exposed the IMF, perhaps more clearly than ever before, as an instrument of international capital, forcefully imposing neoliberal marketization in the interests of opening up the East Asian economies to the penetration of the great banks and multinationals.

Third, and perhaps most important, the critique provided by these economists has a good deal of ideological significance.  This is because they are implicitly, and no doubt unintentionally, challenging what has become the central dogma of our epoch: that allocation through the free market can, in general, be expected to secure the best of all possible outcomes.

These economists are naturally confining their critique of the free market to the market in short-term investments.  Nevertheless, once it ceases to be possible to simply take it for granted as a first principle that free market allocation per se will always yield the best possible outcome, the way is opened up to question the appropriateness of market allocation in all areas of economic life-market allocation of long-term investments, market allocation of commodities and, most centrally of course, market allocation of labor power.

The left, in other words, has been provided a small but important intellectual opening to begin once again the fundamental, but very difficult, task of vindicating our central claim-a claim in which many have lost confidence in the wake of the collapse of Communism and the rise of neoliberalism.

That claim is the indispensability of socialism—i.e.  of democratic, social control over the economy from the bottom up by the working class—for any humane societal order.

The Consensus View of the Left

Now, the consensus response of the left to these mainstream economists would be that the latter, in explaining international economic crisis only by reference to the freedom and irresponsibility of short-term investment, provide a very partial and superficial analysis.

The freedom of short-term capital movements is obviously part and parcel of a much broader neoliberal program, gathering force since the end of the 1970s.  That program is about, on the one hand, making the world as free as possible for the movement of capital and commodities and, on the other hand, destroying the hard-won protections from the market for working people that are provided by the welfare state.

It would be the consensus of the left that this comprehensive neoliberal program is in fact to blame for many of the problems that now plague the world economy, and that the implementation of the neoliberal program is in important ways at the root of the current crisis.

What might be called the left consensus argument would go roughly as follows:

The central trend that we have been witnessing, especially since the end of the 1970s, is the increasing dominance of finance capital.  The rationale of neoliberal policies has therefore been to secure, protect and expand the field of profitmaking for financial capital and the multinationals.  But the policies needed to secure the interests of finance capital have come at the expense of the underlying economy in general and the working class in particular.

In the first place, then, to protect returns on lending from the ravages of inflation, capitalist states have implemented permanently tight macroeconomic policy, tight credit and budget balancing.  But these very policies have been central causes of the slow growth and high unemployment that have gripped the world’s economies since the end of the 1970s.

Second, to make it possible for finance capital to secure the best returns, barriers to capital mobility have been reduced, making for its swift entry and its swift exit from markets.  Nevertheless, this mobility of capital has made it much more difficult to implement national policies for growth, and difficult in particular to adopt stimulus policies of deficit spending and easy money in aid of fighting unemployment.

Third, as even Jeffrey Sachs and company have begun to acknowledge, by making it possible for capital to rapidly enter a field when prospects look good and to exit equally rapidly at the slightest sign of trouble, the freeing of capital markets has made it difficult to sustain any longer-term process of economic development, especially in the third world.

This is because economic development is obviously dependent upon the long-term commitment of productive resources in given lines of production, and cannot withstand the sudden withdrawals of capital that have become a fact of life in the neoliberal order.

Overcapacity and Overproduction

Now, it seem to me that the foregoing approach to the current economic situation makes a lot of sense, as far as it goes. Nevertheless, without certain qualifications—without further context—it could, I think, be potentially be misleading.

To put the point crudely: The rise of finance capital and of neoliberalism should be seen much more as results than as causes of the international economic crisis-even if they have significantly exacerbated that crisis.  In turn, the international economic crisis finds its deep roots in a secular [long-term-ed.] crisis of profitability that has resulted from ongoing overcapacity and overproduction in international manufacturing.

In the first place, then, the major shift of capital into finance has been the consequence of the inability of the real economy, especially the manufacturing sector, to provide an adequate rate of return.  Thus the rise of overcapacity and overproduction, leading to falling profitability in manufacturing from the late 1960s, was the root cause of the accelerating rise of finance capital from the later 1970s.

Secondly, the turn to neoliberalism, which also began at the end of the 1970s, only began to take place after Keynesian policies of demand management had showed themselves unable to restore profitability and reignite capital accumulation.  From the standpoint of capital, monetarism and neoliberalism more broadly were thus a response to the failure of the first option, Keynesian deficit spending.

Thirdly, while the tight credit and balanced budget policies that have highlighted the neoliberal program were motivated in part by the desire to defend the profits of finance capital, their initial and primary rationale was, through reducing the growth of demand, to bring about the recovery of system-wide profitability in two ways: i) by raising unemployment in order to weaken labor and reduce wage growth; ii) by forcing a shakeout from the system of high-cost, low-profit firms in order to leave only low-cost, high-profit firms in control of the markets, thereby raising the average rate of profit.

Finally, however, even if the rise of finance capital and of neoliberalism should be understood more as consequences than as causes of long-term economic stagnation and instability, nonetheless the full adoption of the neoliberal program on a system-wide scale has played a fundamental role in determining the transition from long-term profitability problems and secular stagnation to the current intense crisis.  This did not take place until the 1990s, when the shift from Reagan’s record deficit spending to Clinton’s budget balancing opened the way to much greater problems of growth and instability.

In the remainder of this text, I want to give further substance to the foregoing propositions by offering a schematic account of the rise, persistence and exacerbation of manufacturing overcapacity and overproduction on a world scale, and by sketching its role in the current crisis.

Deep Roots of Stagnation

My argument is that the roots of long-term stagnation and the current crisis lie in the squeeze on manufacturing profits that resulted from the rise of manufacturing overcapacity and overproduction, which was itself the expression of intensified international competition.

Beginning in the second half of the 1960s, later-developing, lower-cost producers in Germany and especially Japan rapidly expanded their output.  By imposing their lower prices on their higher-cost competitors, German and Japanese firms were able at once to increase their shares of international markets in manufacturing and maintain their profit rates, while reducing the market shares and profit rates of their rivals.

The outcome was overcapacity and overproduction in manufacturing, expressed in reduced aggregate profitability in manufacturing for the G-7 economies taken together.  High-cost producers located in the United States originally bore the brunt of this fall, suffering a reduction in profitability of some 40% in manufacturing and 25-30% in the whole economy between 1965 and 1973.

By 1973, however, both Japan and Germany had been forced to shoulder part of the burden of the profitability crisis.  This was because they were obliged to incur sharply rising costs, as a consequence of the severe appreciation of their currencies against the dollar that came at the time of the international monetary crisis and collapse of the Bretton Woods order between 1971 and 1973.

It has been the major fall of profitability in the United States, Germany, Japan and in the advanced capitalist world as a whole—and its failure to recover—that has been responsible for the secularly reduced rates of capital accumulation at the root of long-term economic stagnation over the past quarter century.

Low rates of capital accumulation have brought low rates of growth of output and of productivity; low rates of productivity growth have meant low rates of growth of wages.  Rising unemployment has followed from the slow growth of output and investment.

The fundamental question that immediately imposes itself, however, is what was responsible for the perpetuation of the overcapacity and overproduction that lay behind the secularly reduced profitability.  Put another way: Why, in line with standard expectations, didn’t firms suffering from falling profitability in their lines shift into other lines of production to a sufficient extent to alleviate overcapacity?  To this question, it seems to me there are three general answers.

First, the great corporations of the United States, Germany and Japan that dominated world manufacturing appeared to have much better prospects for maintaining and improving profitability by seeking to improve competitiveness in their own lines than in reallocating into others.

They had great supplies of sunk capital that they had already paid for in their own lines; they had long-established relations with suppliers and customers that could not easily be duplicated in other lines; and they had developed, over a long period, hard-won specialized technological knowledge that was useful only in their own lines.  Thus during the 1970s and after, U.S., German and Japanese corporations did not generally relinquish their positions unless they were forced to, with the result that there was insufficient exit and little alleviation of manufacturing overcapacity.

Second, even despite the reduced profitability in world manufacturing lines, low-cost producers based especially in East Asia found it profitable to enter many of those lines, just as had their predecessors from Japan.  There was therefore too much entry, further exacerbating overcapacity.

Finally, Keynesian policies, which became universal in the 1970s and persisted in the United States into the early 1990s, actually contributed to the perpetuation of overcapacity and overproduction and thus helped to keep down rates of profit in aggregate.

By increasing demand, deficit spending and easy credit thus allowed many high-cost, low-profit firms that would otherwise have gone bankrupt to continue in business and maintain positions that might otherwise have been occupied by low-cost, high-profit producers.  Keynesianism thus unquestionably rendered the long economic downturn milder, but also made it longer, staving off a 1930s-type depression but at the cost of reducing the system’s dynamism by keeping in business firms that made low profits and did little investing.

From Stagnation to Crisis

The conclusive break from Keynesianism, it must be stressed, did not really take place until the 1990s.  When it occurred, however, it appears to have constituted a crucial enabling condition for today’s economic turmoil, opening the way for the international economy’s turn from long-term stagnation to intense crisis.

Reduced profitability, resulting from overcapacity and overproduction, had of course been making for reduced capital accumulation-hence the reduced growth of investment demand from 1973.  From approximately the same time, responding to reduced profitability, employers had been imposing sharply reduced wage growth on their workers, making for the reduced growth of consumer demand also.

When Federal Reserve chief Volcker and Margaret Thatcher had imposed tight money at the end of the 1970s, skyrocketing real interest rates had depressed the economy even further.  Thus, without the increase in government demand that resulted from Ronald Reagan’s massively stepped up military spending, it is doubtful if the world economy could have avoided a real depression in the 1980s, especially at the time of the international debt crisis of 1981-1982 and after.

But with the ascendancy of Bill Clinton, the United States turned to budget balancing, as well as tight money, and this definitive embrace of neoliberalism appears to have marked a turning point.  This is because it put an end to the role that the United States had long played in stabilizing the international economy by increasing demand through incurring large government deficits.

The slowed growth of government demand was now added to already-slowed growth of consumption and investment demand.  Whereas government expenditures in the United States had risen on average by 2.4% per year for the previous thirty years, during the 1990s they have grown on average by just 0.1% per annum.

Since governments in Europe have also been imposing austerity ever more ferociously in the runup to monetary union, the growth of domestic markets throughout the advanced capitalist world has slowed to a crawl.  To compensate, producers everywhere have had little choice but to radically step up their orientation to exports.  But since exports are mostly made up of manufactures, the result has been to very much exacerbate the secular problem of manufacturing overcapacity.

Maturation of the Present Crisis

It is the worsening of manufacturing overcapacity that has prepared the ground for the chain of events through which today’s crisis has come into being.

During most of the 1990s, virtually alone among the leading capitalist economies the United States has prospered, securing in particular a very major, if incomplete recovery of profitability, notably in its long-depressed manufacturing sector.

But the U.S. recovery has come for the most part at great cost to the international economy.  This is because it has been accomplished largely through sharply increased exports, made possible by sharply-increased competitiveness.  The gains of U.S. producers, in the context of slow-growing international demand and in particular oversupplied manufacturing markets, have thus been achieved largely at the expense of their leading rivals in what has become very largely a zero-sum struggle for markets.

In particular, the U.S. manufacturing sector secured its revitalization largely on the basis of the devaluation of the dollar by 40-60% against the mark and yen over a period of a decade.  Thus, while the U.S. economy revived over the first half of the 1990s, German and especially Japanese manufacturers found it difficult to export and experienced their worst crises of the post war epoch.

By 1995, in fact, with the yen at 80 to the dollar, whereas it had been 240 to the dollar just ten years before, the Japanese economy was on the verge of collapse.  Only the agreement of the U.S., German, and Japanese governments in spring 1995 to revalue the dollar and sharply devalue the yen, saved Japan.

Nevertheless the bailout of Japan had unforeseen consequences-most particularly the Asian crisis.  This is because gains for producers from one economy—especially one so large and powerful as Japan—could once again come only by way of losses to others.

The economies of East Asia had been able to boom so spectacularily right through the first half of the 1990s in tandem with that of the United States—and at the expense of producers based in Japan—only because their currencies had been pegged to the dollar and had therefore fallen with the dollar against the yen. Korea in particular had perpetually improved its competitiveness as the dollar, and thus the Korean won, had fallen, and investment in Korea skyrocketed as if there was no limit to the market.

Nevertheless, when the yen finally began to fall precipitously against the won and other East Asian currencies from 1995, the Korean economy and in turn the other economies of southeast Asia turned out to have massively overinvested.  They found themselves with vast amounts of excess capacity and, because of the increase in their costs that resulted from their revalued currencies, facing great difficulty in selling at a profit.

When, during the first half of 1997, international lenders began to notice that the profitability of East Asian producers was plummeting and that their export growth was falling off relative to the increase of imports, they began a rush for the exits.  As a result, the East Asian currencies rapidly lost their value, a particularly disastrous development in view of how deeply indebted to international lenders East Asian producers had become.

At this point, the IMF made everything much worse.  By imposing sharply increased interest rates, it insured that firms’ already-existing problems in covering their debt obligations would be radically exacerbated, opening the way to a downward spiral of failure to honor debts, leading to bankruptcies and layoffs, thus further inability to honor debts and so on. In this way, the East Asian crisis became the East Asian depression.

The rest of the story is tolerably well-known.  In 1996, the East Asian region as a whole had invested as much as did the much larger United States.  Thus, when East Asia went into depression, the results could not help but be momentous.  East Asian markets collapsed, and East Asian exports accelerated.

The Japanese economy, which had sought to extricate itself from its crisis during the 1990s by reorienting to East Asia, found itself at an impasse in the face of contracting East Asian markets, and could hope to revive itself only by means of increasing its exports elsewhere.  Germany, and Europe more generally, were also exporting their way out of their recession.

The focus of all this exporting could only be the one economy that had been growing and expanding its home market, i.e. the U.S. economy.  In 1997, the U.S. economy had finally begun to enjoy accelerating domestic growth, even rising real wages, but it had succeeded in so doing only on the basis of accelerating manufacturing exports.  The maintenance of its dynamism was therefore immediately put in doubt as a consequence of the newly-rising dollar that was the unavoidable concomitant of U.S. economic success.

When, during the first half of 1998, helped by the high dollar, imports began to flood into the United States and, in the same period, hurt by the high dollar, U.S. exports ceased to grow in the face of contracting Asian markets, U.S. manufacturing profits had to fall and the U.S. boom had to end.

It has been the end of the boom in U.S. manufacturing, itself the result of intensifying international competition in the context of ongoing international overcapacity and overproduction, that has been the immediate cause of the U.S. economy’s slipping toward recession or worse.  During the first half of 1998, manufacturing profits, after having grown impressively for a number of years and powered the U.S. boom, have been squeezed, with wide-ranging implications for the economy, the most important of which has been the bursting of the stock market bubble.

Rising stocks, themselves strongly buttressed by rising manufacturing profits, had, along with fast-growing exports, been fueling U.S. growth by underpinning both rising consumer spending and rising investment.  With stocks so high, consumers had thought their wealth so increased that they did not need to save, and by profoundly reducing their savings rate had, in recent years, sharply raised the growth of consumption.  With stocks so high, corporations could much more cheaply raise money by selling shares, so investment had accelerated.  But with the stock market falling, these so-called “wealth effects” have gone into reverse.

The U.S. Federal Reserve estimates that the net loss of wealth in all U.S. financial products since the stock market peak in July 1998 amounts to some $1.5 trillion.  As people see they have significantly less wealth than they thought they had only very recently, they are inevitably saving more and consuming less. As firms’ stock prices fall, they are finding it more expensive to raise money, and their investing is tailing off.

To make matters worse, the end of the stock market bubble has brought a tremendous loss of business confidence, and lenders, doubting the ability of their creditors to repay, are calling in their obligations in panicky drive for liquidity (i.e.  reduced risk and hard money).  A looming “credit crunch” is thus making it hard for companies or individuals to get loans, powerfully undercutting both new production and new consumption.

Nor is there much hope that the crisis of exports, and of the manufacturing sector more generally, which has been the ultimate source of the U.S. slowdown, can be transcended.  On the contrary.  In most regions of the world, production is continuing to slow down, markets are contracting, credit is becoming harder to get, so local producers are themselves ever more dependent on exports to survive.

The fact is that the world economy has for quite awhile looked to the U.S. economy to drive it. With the U.S. expansion coming to an end under the impact of the worldwide flood of manufacturing exports, it is difficult to see where the forces will be found to counter severe recession.
—15 October 1998

---

Robert Brenner is an editor of Against the Current and the author of “The Economics of Global Turbulence” New Left Review 299.  This article is a slightly revised version of the opening address to “The Marx International Congress II: Capitalism, Critique, Resistance, Alternatives,” sponsored by the journal Actuel Marx, with the collaboration of the Centre National de la Recherche Scientifique (CNRS).  It was presented on 30 Septemeber 1998, at the Sorbonne in Paris.

---

ATC 77, November-December 1998