Making Sense of This Economic Crisis

Against the Current, No. 146, May/June 2010

Ismael Hossein-zadeh

WHILE IT NOW generally agreed that the main source of the 2008 financial implosion was the accumulation of too much toxic debt, there is little agreement on the factors that precipitated the buildup of all that unsustainable debt. Whereas neoclassical/neoliberal economists blame the “irrational behavior of the agents” (both lenders and borrowers), Keynesian economists blame financial deregulation and insufficient public policy.

The following study, using the Marxian analysis of “finance capital” (Hilferding), looks beyond the incidental or instrumental roles played by the agents or market players — whether lenders and borrowers or government regulatory agencies and institutions. Instead, it focuses on the built-in dynamics of the accumulation of “finance capital as self-expanding value” (Marx) that transcends the constraints of the production processes and fosters such “irrational behavior of the agents” or the corrupt and unsavory policies of the government.

Mainstream views of the 2008 financial meltdown that precipitated the current economic recession can be divided into two major traditions: neoclassical/neoliberal and Keynesian.

The neoclassical school of economic thought holds that the “self-adjusting power” of the market mechanism is capable of fending off major financial instabilities and/or economic crises. The mechanism may not preclude “regular” business cycles, or small fluctuations, but such fluctuations are easily contained or regulated around a fundamentally smooth path of economic development. Rather than provide an explanation for major economic contractions of the magnitude of the current recession, it puts the blame on “exogenous” factors such as human behavior, natural disasters, wars, revolutions, “supply shocks” or government intervention.

Not surprisingly, in the face of the financial meltdown that triggered the current crisis, the most frequently expressed reaction of the economists of this persuasion has been: “We are shocked!” Why? Because this was not supposed to happen: unregulated “efficient capital markets” were supposed to price securities or financial assets “correctly,” that is, according to the risks and rewards to the underlying real values. In other words, the sum total of fictitious finance capital was not supposed to deviate much from the sum total of productive/industrial capital.

Whereas the neoclassicals perceive financial instability as an expression of the “agents’ irrational behavior,” Keynesians see such financial volatilities as manifestations of rational agents’ inventiveness to take advantage of moneymaking opportunities to maximize their profits, or optimize their bets. There is nothing unusual, irrational or abnormal to the dynamics of this market-driven behavior — and its logical outcome, financial instability.

Accordingly, Keynesian economists argue that instead of blaming the agents’ behavior for financial instability, such behavior must be monitored, disciplined and guided through “appropriate” public policy. Financial instability is, therefore, to be blamed more on insufficient or inappropriate public policy than on the agents’ behavior. Properly managed or regulated, wild financial gyrations can be tempered into no more than small fluctuations.(1)

A Marxian view of financial instability (and of capitalist crises in general) goes beyond simply blaming either the agents’ behavior or the government’s policies. Instead, it focuses on the built-in dynamics of the system that fosters such behavior of the agents or such policies of governments. Accordingly, it views the 2008 financial meltdown as the logical outcome of the over-accumulation of the fictitious finance capital relative to the magnitude of the industrial capital, or more precisely, relative to the amount of surplus value produced by labor in the process of production.

While blaming policies or strategies of deregulation, “securitization” of debt, and other financial innovations as factors that facilitated the financial bubble is not false, it masks the fact that these factors are essentially instruments or vehicles of the accumulation of finance capital. No matter how subtle or complex, they are basically clever tools or strategies for transferring surplus value generated elsewhere by labor, or of creating fictitious value out of thin air. Marx characterized this subtle transfer of value from productive to fictitious capital as “an extreme form of the fetishism of commodities” in which the real source of surplus-value is concealed.

Most critics of the increasing financialization of the U.S. economy lament the disproportionate growth of finance capital relative to industrial capital as an “abnormal” growth, an unfortunate expansion of finance capital beyond its “logical” limits. Finance capital, they argue, is supposed to grease the wheels of production, to serve as the source of investment in industrial or productive capital.

Yet the rise to prominence of finance capital in a mature market economy represents no anomalous development. It is a fundamental characteristic of an advanced stage of capitalism, the stage of finance capital, as the early 20th century theorist Rudolf Hilferding put it. Finance capital is the ideal and quintessential form of capitalist property independent of physical forms, of real activities, and of production processes.

Indeed, as Marx points out, in the circuit of capital in the process of capitalist production/reproduction, productive or commodity forms of capital are essentially incidental to the goal of accumulating finance capital — or “capital as such,” as he put it. This shows the absurdity of arguments or efforts to establish a “reasonable” proportion between industrial and finance capital, between “virtual wealth” and “real wealth,” as if financial wealth were less real than tangible physical wealth.

While paying homage to Karl Marx for his profound analysis of some of the major economic principles of capitalism (such as the labor theory of value, the source of capitalist exploitation and the law of value), most left/radical economists, including many self-syled Marxists, nonetheless argue that this analysis cannot be of much service when it comes to the study of modern banking and big finance, since these are “post-Marx,” post-19th century developments. Yet a careful reading of his work on finance capital (Capital, volume III, chapters 21-33), reveals keen insights into a better understanding of today’s financial turbulence.

Marx prefaces his discussion of the relationship between finance capital, which he calls “loanable money-capital,” and industrial or productive capital by posing this question: “to what extent does the accumulation of capital in the form of loanable money-capital coincide with actual accumulation, i.e., the expansion of the reproduction process?”(2)

The answer, he points out, depends on the stage of the development of capitalism. In the earlier stages of capitalist development, accumulation of finance capital was regulated or determined by the growth/accumulation of industrial capital. Prior to an advanced banking and credit system, the dominant form of credit consisted of commercial credit. In that system, where one person lent the money to another in the reproduction process, finance capital could not deviate much from the industrial capital: “When we examine this credit detached from banker’s credit it is evident that it grows with an increasing volume of industrial capital itself. Loan capital and industrial capital are identical here.”(3)

But at higher stages of capitalist development, where banks centralize and control national or people’s savings, the growth of finance capital is no longer limited by the growth of industrial capital. For, under conditions of advanced banking and credit system, “Profit can be made purely from trading in a variety of financial claims existing only on paper. This is an extreme form of the fetishism of commodities in which the underlying source of surplus-value in exploitation of labour power is disguised. Indeed, profit can be made by using only borrowed capital to engage in (speculative) trade, not backed up by any tangible asset.”(4)

Marx’s theoretical discussions and projections of the rising influence of “loanable capital” were corroborated by actual developments soon after his death (1883), as the economic and political power of modern banks and other financial intermediaries rose drastically by the end of the 19th century. This led a number of other political economists to further elaborate on the expanding role of finance capital in the early 20th century. A most rigorous and systematic of such studies was carried out by the Marxist theoretician Rudolf Hilferding, which culminated in his famous book, Finance Capital.

Hilferding contrasted monopolistic finance capitalism to the earlier competitive capitalism of the liberal era. “With the development of banking…, there is a growing tendency to eliminate competition among the banks…, to concentrate all capital in the form of money capital, and to make it available to producers only through the banks. If this trend were to continue, it would finally result in a single bank or a group of banks establishing control over the entire money capital.”(5)

Drawing heavily upon Hilferding’s Finance Capital (and John Hobson’s Imperialism: a Study), Vladimir Lenin further elaborated on the rise of the power of finance capital, and its increasing extension from more to less-developed regions of the world. He called this global extension of finance capital in search of more profitable investment opportunities imperialism — hence, the title of his book on the subject, Imperialism: the Highest Stage of Capitalism.

The book represents his analysis of imperialism as a force of aggression driven worldwide by the imperatives of finance capital. In light of the fact that the overwhelming majority of today’s world population is literally in the grips of the powerful financial interests, Lenin’s characterization of imperialism as the domination of finance capital can reasonably be described as prophetic:

“Imperialism, or the domination of finance capital, is that highest stage of capitalism in which this separation [of money from its rightful owners] reaches vast proportions. The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy. . . [It also] means that a small number of financially powerful states stand out among all the rest. . . Thus finance capital, literally, one might say, spreads its net over all countries of the world.”(6)

A New Stage, Not Just A Business Cycle

It is increasingly becoming clear that the current economic contraction is more than just another recessionary cycle. More importantly, it seems to represent a structural change, a new phase of concentration and domination of fictitious finance capital — similar to the developments that Hobson, Hilferding and Lenin wrote about nearly a century ago.

A major hallmark of the age of finance capital is domination of the political process by the financial oligarchy. Bank- or finance-friendly government policies have been facilitated largely through generous pouring of money into the election of “favorite” policy makers. For example, extensive deregulations that led to the 2008 financial crisis, the scandalous bank bailout in response to the crisis, and the failure to impose effective restraints on Wall Street after the crisis can all be traced to Wall Street’s political power.

Evidence shows that contrary to Barack Obama’s claims, his presidential campaign was also heavily financed by the Wall Street financial titans and their influential lobbyists. Large Wall Street contributions began pouring into his campaign only after he was thoroughly vetted by the powerful Wall Street interests and deemed a viable (indeed, ideal) candidate for presidency.(7)

Political economist Michael Hudson of the University of Missouri (Kansas City) aptly calls this ominous process of the buying out of policymakers by major contributors to their election “privatization of the political process.”(8) Such sentiments regarding the State’s class character are echoes of Lenin’s characterization of the capitalist State as “the executive committee of the ruling class.”

Lenin was often scoffed at by the capitalist ruling elites when he made this statement over 90 years ago; they deviously dismissed him as having overstated his case. Perhaps it is time to dust off and read old copies of his The State and Revolution, if only to better understand the incestuous politico-business relationship between the State and the financial oligarchy of the present time.

Another hallmark of the stage of finance capital is that, under the influence of the powerful financial interests, government intervention in national economic affairs has come to essentially mean implementation of neoliberal or supply-side restructuring policies.

Government and business leaders have for the last several decades used severe recessionary cycles as opportunities to escalate application of neoliberal economic measures in order to reverse or undermine the New Deal and other subsistence-level reform programs. Naomi Klein has called this sinister strategy “the shock doctrine,” a strategy that takes advantage of the overwhelming crisis times to implement supply-side austerity programs and redistribute national resources from the bottom up.(9)

It is generally believed that neoliberal supply-side economic policies began with the election of Ronald Reagan as the president. Evidence shows, however, that efforts at undermining the New Deal economics in favor of returning to the old-time religion of market fundamentalism began long before Reagan arrived in the White House. As Alan Nasser, emeritus professor at the Evergreen State College in Olympia (Washington), points out, “The foundations of neoliberalism were established in economic theory by liberal Democrats at the Brookings Institution, and in political practice by the Carter administration.”(10)

Indeed, baby-steps backward to pre-Keynesian neoclassicism were taken as early as during the presidency of John F. Kennedy. In 1962, President Kennedy argued that while “most of us are conditioned for many years to have a political viewpoint — Republican or Democrat, liberal, conservative or moderate,” in reality the most pressing government concerns were “technical problems, administrative problems” that “do not lend themselves to the great sort of passionate movements which have stirred this country so often in the past.”(11)

It is almost common knowledge that institution of the New Deal and other economic safety-net programs would not have been possible without the compelling grassroots pressure in response to the Great Depression. Yet, it is obvious that President Kennedy is here trying to reduce economic policies to purely “technical, administrative problems” that “do not lend themselves to…passionate movements” — in effect, to belittle the importance of the politics of “pressure from below.”

President Clinton did not change the neoliberal course of corporate welfare policies, nor is President Obama hesitating to carry out those policies. In the wake of the 2008 financial meltdown, many left/liberal economists envisioned an opportunity: a reversion back to the Keynesian-type economic policies. One year later, it is increasingly becoming clear that such expectations amounted to no more than wishful thinking — a dawning recognition that, regardless of the resident of the White House, economic policies are heavily influenced by the powerful financial interests.

The perception that economic policy would be switched back to the New Deal/Keynesian paradigm by default stems from the rather naïve supposition that policy making is a simple matter of technical expertise or economic know-how, that is, a matter of choice — between good or “regulated capitalism” and bad or “neoliberal capitalism.”(12)

A major reason for such hopes or illusions is a perception of the State that views its power as above economic or class interests. That perception fails to see the fact that national policymaking apparatus is largely dominated by a kleptocratic elite that is guided by the imperatives of big capital, especially finance capital. (Interestingly, the view of a relatively facile alternation between Keynesian and neoliberal economics is also shared by many left/radical economists, especially the proponents of the so-called Social Structure of Accumulation.)(13)

Historical evidence shows, however, that more than anything else the Keynesian or New Deal reforms were a product of the pressure from the people. Economic policymaking is not independent of politics and/or policymakers, who in turn are not independent of the financial interests they are supposed to discipline or regulate.

Stabilization, restructuring or regulatory policies are often subtle products of the balance of social forces, or outcome of the class struggle. Policies of economic restructuring in response to major crises can benefit the masses only if there is compelling pressure from the grassroots. In the absence of an overwhelming pressure from below (similar to that of the 1930s), Keynesian or New Deal economic reforms could remain a (fondly remembered) one-time experience in the history of economic reforms.

Conclusion: The Case for Nationalization

It is a well-established fact that profit-driven commercial banks and other financial intermediaries are major sources of financial instability in advanced market economies. The logical policy implication is to nationalize the destabilizing financial intermediaries. It simply stands to reason that the public, not private, authority should manage people’s money, or national savings.

Contrary to profit-driven private banks that create financial bubbles during expansionary cycles and credit crunch during contractionary ones, state-owned banks can provide steady, reliable financial resources as dictated by industrial and/or commercial needs. Many real-world examples support of this argument. Nineteenth-century neighborhood savings banks, Credit Unions, and Savings and Loan associations in the Unites States, Jusen companies in Japan, Trustee Savings banks in the UK, and the Commonwealth Bank of Australia all served the credit needs of their communities well.

Perhaps a most interesting and instructive example is the “miracle” of the state-owned Bank of North Dakota — widely credited for the state’s budget surplus and its robust economy in the midst of the current economic recession. Since 2000, North Dakota’s “GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year [2009] it has a budget surplus of $1.3 billion, the largest it has ever had.”(14)

The idea of bringing the banking industry under public control is not necessarily socialistic or ideological. It has, indeed, occasionally been used to deliver capitalism from its own systemic crises. For example, in the face of the Great Depression of the 1930s the F.D.R. administration was compelled to declare a “bank holiday” in 1933, pull the plug on the terminally ill banks and (temporarily) take control of the entire financial system.

Likewise, in the face of the collapse of its banking system in early 1992, the Swedish state assumed ownership and control of all the insolvent banks. Not only did it avoid costly redistributive bailouts in favor of the insolvent banks, it also brought taxpayers some benefits once banks returned to profitability.

Yet both in Sweden and the United States, once profitability was returned to insolvent banks their ownership was returned to private hands! It is perhaps this kind of government commitment to powerful financial-corporate interests that has prompted a number of critics to argue that one definition of capitalism is that it is a system of socializing losses and privatizing profits.15

It is necessary to point out that while nationalization of financial intermediaries could mitigate or do away with financial instabilities that are due to manipulative speculation in financial markets, it will not preclude other systemic crises of capitalism — notably, a profitability crisis due to an inordinately high level of capitalization (or the rising “organic composition of capital” a la Marx), an underconsumption and/or overproduction crisis, and perhaps more. Doing away with the systemic crises of capitalism requires more than nationalization of banks; it requires changing the capitalist system itself.


  1. For a detailed discussion of the theories of capitalist economic crises see Anwar Shaikh’s “An Introduction to the History of Crisis Theories,” in U.S. Capitalism in Crisis. New York: U.R.P.E (1978).
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  2. Capital, Vol. III., Chapter 31, available at: <>.
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  3. Capital, Vol. III, Chapter 30, available at: <>.
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  4. Marx on “Speculation and Fictitious Capital,” available at: <>.
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  5. Finance Capital, Chapter 10, available at: <>.
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  6. Imperialism: the Highest Stage of Capitalism, Chapter 3, available at: <>.
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  7. Pam Martens, “The Obama Bubble Agenda,” (May 6, 2008): <>.
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  8. Michael Hudson, “Finance Capitalism v. Industrial Capitalism,” available at: <>.
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  9. Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism, Metropolitan Books (2007).
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  10. Alan Nasser, “New Deal Liberalism Writes Its Obituary,” (21 September 2009): <>.
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  11. As quoted in Nasser, ibid.
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  12. David M. Kotz, “The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism,” Review of Radical Political Economics, Vol. 41, No. 3 (2009), 305-317.
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  13. Terrence McDonough, David M. Kotz, and Michael Reich, Contemporary Capitalism and its Crises: Social Structure of Accumulation for the Twenty-First Century, Cambridge: Cambridge University Press (2009).
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  14. Ellen Brown, “Cutting Wall Street Out,” (November, 2, 2009): <>.
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ATC 146, May-June 2010

1 comment

  1. And how strange, ending this article by saying “changing the capitalist system itself.” yet supporting the most savage, violent, theocratic Capitalist regime Iranian society has ever seen. What gives?

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