Inside the Global Crisis

Against the Current, No. 150, January/February 2011

Tony Smith

Socialists and the Capitalist Recession
(with “Basic Theories of Karl Marx”)
By Raphie De Santos, Michel Husson, Claudio Katz, Ernest Mandel et al
London: Resistance Books, 2009, 213 pages, $12 paper.

Global Capitalism in Crisis:
Karl Marx and the Decay of the Profit System
By Murray E.G. Smith
Halifax and Winnipeg: Fernwood Publishing, 2010, 172 pages, $24.95 paper.

Confronting Global Neoliberalism:
Third World Resistance and Development Strategies
Edited by Richard Westra, Atlanta: Clarity Press, 2010, 276 pages, $21.95 paper.

“THE ROOTS OF the modern financial system lie in developments in the early 1980s when investors of capital could not find avenues where they could obtain reasonable returns after a decline, from the early 1970s onwards, in the profit levels of traditional companies.”(1)

The early years of this century witnessed an insane proliferation of mortgage-backed securities and other financial products. We all know how that turned out. These pieces of paper proved to be wildly misvalued by financial firms, rating agencies, and investors, setting off a global “Great Recession” the likes of which had not been seen for 70 years.

Whole shelves of books have been written about the crisis, hundreds more will follow. In the liberal-vs.-conservative debate on the causes and solutions, liberal authors blame the recession on “predatory lending,” excessive financial speculation and the failure of governments to effectively regulate lenders and speculators effectively, while conservatives blame those who lied on their credit applications and misguided government programs encouraging people to buy homes they couldn’t afford.

Liberals call for stringent financial regulations; conservatives screech that excessive regulations will strangle the financial sector, making it more difficult for firms and households to gain access to needed credit. Liberals call for another round of extensive government stimulus spending to ward off a “double dip” recession; their conservative opponents proclaim that government deficits are already far too large, and that not a penny more should be spent without deep cuts to social entitlement programs.

These differences are not insignificant. But for reasons developed at length in the three books under review here, the gulf separating liberals and conservatives is by no means as vast as the vitriol of talk radio would suggest. Both see the present crisis as the temporary sputtering of capitalism’s prosperity-generating machine, however sharply disagreeing on the (supposedly) contingent causes of the (supposedly) temporary problems.

The works under review, however, present the clear view that the present crisis is rooted in the “deep structure” of the existing social order. More specifically, there is broad agreement among these authors that persisting overproduction began to plague the global economy in the 1970s, manifested in significant overcapacity in all major non-financial sectors.(2) This set off a fall in the rate of profit, bringing to an end the so-called “golden age” immediately following World War Two.

Falling Profit and Capital’s Offensive

The owners and controllers of capital, and the governments that supported them, responded to this slowdown with a vicious class offensive against labor, including speedups, anti-labor legislation, and Central Bank operations designed to bring about high unemployment. “Free” trade agreements provided another powerful weapon, enabling the owners and controllers of capital to play off sectors of the global labor force against each other.

As a direct result of these and other “neoliberal” policies the share of produced wealth going to wages fell by 13 points in Latin America and the Caribbean, 10 points in Asia and the Pacific region, and nine in the so-called advanced economies.(3) In the United States real wages per week declined 15% between 1973 and 2006, even as gross domestic product (GDP) increased in real terms by 90%.(4)

The attack on labor allowed a (partial) recovery in the rate of profit of firms in non-financial sectors. The globalization of trade also provided an opportunity for certain regions in East Asia to grow at very rapid rates (at least for a period of time), if they were fortunate enough to have special ties with the United States, or vast reserves of cheap but relatively skilled labor.(5) But overcapacity problems did not disappear. The rate of growth and investment declined in this period, both on the level of the world economy as a whole and within most countries, as the articles in the Westra collection document in detail.

In these circumstances another dimension of neoliberalism, the explosion of the financial sector, was all but inevitable. Much of the profits of non-financial firms, not reinvested there due to persisting overcapacity problems, found their way to the financial sphere, funding mergers and acquisitions, and stock buy-backs (which benefitted executives with extensive stock options by keeping stock prices high). And credit money created within the financial sector increasingly stayed within that sector, as financial assets with inflated prices were used as collateral for loans used to bid the prices of those assets yet higher (providing yet further collateral for yet further loans, leading to a further inflation of capital assets, and so on and on).

In the years prior to the crash, the financial sector metastasized to the point where financial transactions amounted to more than fifty times the gross domestic product of all the countries in the world combined.(6) It is simply not plausible to think that a phenomenon of this magnitude does not reveal something about the deep structure of capitalism.

It is perfectly appropriate to respond to the folly and greed of financial speculators with disgust, and to the failure of governments to stop them with anger. But to focus on personal vice, or the failure of political will, is to miss the most important point: in a capitalist social order financial speculation is a fully rational activity if there are persisting overproduction difficulties in non-financial sectors.

No set of financial agents can change this state of affairs by a moral conversion. No piece of legislation or state regulation can change this state of affairs with a wave of a magic wand. The financial sector has not perversely betrayed its proper role of serving human ends. Its “proper role,” and the proper role of all sectors in a capitalist economy, is to serve capital’s end, profits. And in an historical context characterized by significant and persisting overproduction difficulties, speculating on financial bubbles serves that end far better than most alternatives.

When participants in mainstream debates about the crisis ignore this point, as they almost invariably do, they are ignoring the most important matter, a mistake the authors of the books under consideration here do not make.

How to Respond?

If neither liberals nor conservatives grasp the root causes of financial crises, they can hardly be expected to provide an adequate response to them. Conservatives call for yet more tax breaks for corporations and the wealthy to encourage them to invest more and thereby create more jobs. They fail to ask why firms would significantly increase their rate of investment when overcapacity problems plague the economy. Publicly traded non-financial U.S. companies, after all, already sit on $1.85 trillion of liquid assets that could be invested, if they wished to do so.(7)

Liberals call for increased government spending to address our aging infrastructure and other social needs. But the scale of spending required to replace the jobs lost in the crisis far exceeds what they are prepared to fight for. This is understandable, since government spending of the magnitude required would profoundly call into question the assumption that an economy directed by private investment is to be preferred above all others.

Both liberals and conservatives have proposed that China and other countries enjoying large trade surpluses increase their rate of domestic consumption and allow their currency to appreciate. These measures would reduce their exports and increase their imports, providing more breathing room for countries with huge trade deficits, like the United States. Expanded Chinese domestic consumption would also provide a spur to growth in the global economy, making up for the retrenchment of the overly indebted U.S. consumer.

Finally, if the domestic markets of economies in surplus expanded, this would lower the reserve funds held by their governments. A vast amount of these funds are held in the form of U.S. Treasury bonds and are in effect extremely low-cost loans to the U.S. economy. They have helped fund recent financial bubbles, and reducing them would supposedly help lessen the danger of financial frenzy in the future.

From a purely mathematical standpoint, expanded domestic markets in surplus countries could in principle replace debt and financial frenzy in the United States as the major “engine of growth” in the world market. But from the standpoint of class relations, matters appear quite different.

For domestic markets to expand significantly, real wages must significantly increase. But the same “divide and conquer” strategies that have limited real wage growth in the Global North put pressures on wage growth in China and other surplus countries as well. Their ruling cliques are well aware that any increase in real wages large enough to replace debt-fueled consumer spending and financial speculation in the world market would be large enough to threaten capital flight in search of regions with less expensive labor.(8)

Rather than encouraging a significant increase in their domestic markets, economic and political elites throughout the planet are attempting to “grow their way out of crisis” by increasing exports, including the implementation of measures to maintain a low value of their currency (what economists call competitive devaluation or “beggar thy neighbor” policies). The more countries implement this strategy, however, the less chance any of them has to succeed. As is so often the case in capitalism, action that is rational from an individual standpoint turns out to have irrational results on the level of the system as a whole.

As Murray Smith reminds us, “The last time there was a crisis of this magnitude the profit system was only restored to ‘health’ through the combined effects of a massive devaluation of assets (the Great Depression) and the physical destruction of capital stocks during the Second World War.”(9) There is no reason to think matters are fundamentally different today.

The Need for Transition

The neoliberalism instituted in response to the slowdown of the 1970s restored something that looked like “health” (at least from the standpoint of those looking down from the top of the social pyramid). The replacement of the gold standard by the dollar standard allowed greater and greater injections of liquidity into the world market, in order to put the depressionary bias associated with overproduction out of play in certain sectors in certain regions for a certain period of time. But this no longer seems to work.

Measures that had checked the depressionary bias at the heart of the world market now appear to have exacerbated it in the long term. Another financial regulation or two will not change this state of affairs, and an additional tax break or two will make matters even worse.

No liberal and or conservative commentator honestly recognizes the enormous scale of devaluation that would have to occur to return global capitalism to “health.” None honestly assesses the level of human misery that would be caused by such devaluations, or recoils in horror from a system whose “recovery” demands a sacrifice of countless humans on the altar of capital. In contrast, all three of the books under review confront the dangers of our historical moment without flinching or indulging in delusional optimism.

In addition to the roots of and responses to the financial crisis, a third issue separating these books from mainstream accounts may well be the most important of all. As Alan Thornett reminds us, the environmental crisis “is ultimately a crisis of much greater significance than that of the economy.”(10) The former may in fact be the greatest challenge the human species has ever confronted.

On environmental issues conservatives inhabit an imaginary dream world where “Don’t Worry, Be Happy” continually plays in the background. Liberals have a better sense of what is at stake. But they too do not appreciate the extent to which the resources lost in the collapse and devoted to corporate recoveries are a damning indictment of the priorities of the present social order. Who knows what advances in environmental sanity could have been made if those same resources had been devoted to that end?

As John Bellamy Foster notes, this makes the present crisis far more tragic for the human species than the Great Depression, as horrific as it was.(11) For a response to the threat of environmental catastrophe to have any hope of success it must institute a massive shift in economic priorities, including high levels of investment in alternative forms of transport and energy, and an extensive retooling of industry and reskilling of labor.

Fundamental changes along these lines likely provide the only plausible alternative to on-going economic stagnation. Such changes, however, would demand direct public control over the domestic financial system.(12) They would require some form of ecosocialism.(13) This point is made repeatedly and forcibly in all three books under review.

Fourth, the books under review take up the world historical challenge that the liberal-vs.-conservative debate excludes: If financial crises occur in capitalism for reasons rooted in its deep structure, if the human costs of these crises are horrific and the proof that capitalism is incapable of addressing our environmental challenges is in front of our eyes, then the reasonable conclusion is that we need to be thinking about how to make a transition to a quite different form of society.

Contributors to Socialism and the Capitalist Recession rightly emphasize the need to develop a transitional program, that is, a set of objectives broadly attractive to participants in the progressive social movements that possess a dynamic pointing towards socialism.(14)

Consider, for example, the demand that if large firms are bailed out, they should not be allowed to continue operating in ways that helped bring about the crisis.(15) Vast numbers of people would affirm that this principle is elementary common sense. Yet once it is accepted, the case for nationalization under workers’ control becomes much easier to make.

Combining the proposals suggested by the authors in this volume with those found in the other two works would generate a fairly comprehensive “transitional program” for our day.(16) Needless to say, nothing comparable can be found in the works of liberal and conservative theorists.

Besides the four common themes just discussed, each of the books being reviewed has its own strengths. A number of the essays in Socialists and the Capitalist Recession were originally written as pamphlets designed to explain financial terminology, the immediate causes of the outbreak of crisis in the financial sphere, the stages in which the financial crisis unfolded and spread to other sectors, the unprecedented scope of the government bailouts, and the costs working men and women will be forced to bear in the absence of effective resistance.

Anyone seeking to understand the ABCs of the meltdown would benefit greatly from reading this collection (although developments after 2008 are not covered). De Santos’s “Sub-Prime Driven Recession: Coming Soon to a Neighborhood Near You” can be recommended especially highly for anyone seeking a clear overview of this most recent bout of financial insanity.

The same collection also includes Ernest Mandel’s “Basic Theories of Karl Marx.” This monograph, originally published two decades ago, is outdated on a few points here and there, but in my view remains the best available short introduction to Marx’s life and work, amazingly comprehensive for an essay of 41 pages. No one has expressed the spirit of revolutionary optimism better than Mandel.

Back to Marx

Murray Smith’s Global Capitalism in Crisis also discusses Marx at great length, examining many of the same core theses examined by Mandel in a bit more technical detail (see below). Smith’s discussion of six of Marx’s central predictions warrants special notice.

Marx predicted that that capitalist development would be characterized by increasing proletarianization; an increasing concentration and centralization of capital; a rise in the technical composition of capital (in other words, a bias towards labor-saving forms of technical change) accompanied by growing numbers of chronically unemployed and underemployed across the globe; a simultaneous expansion of the world market and continued reliance on the nation-state to manage its contradictions; the persistence of periodic crises of overproduction; and the long-term tendency for the rate of profit to fall — all strongly confirmed by subsequent historical developments.

Smith rightly notes that the current situation combines a “conjunctural crisis of overproduction, credit, and finance” with a “deep-seated systemic crisis”.(17) He traces the latter to improvements in labor productivity, which lower the average rate of profit by reducing the “sole source of all new value within the economy as a whole,” living labor.(18)

Smith holds that this account is sufficient to explain the systemic crisis, and devotes a chapter of his book to a critique of Robert Brenner’s alternative perspective. Brenner traces “the deep-seated systemic crisis” to an intensification of inter-capital competition following the rise of new centers of production in the world market. Smith calls this a “disproportionality” theory of crisis that implies that problems in the global economy could be overcome if leading capitalist powers agreed to coordinate production and share markets. Brenner, in Smith’s words, in effect defends “a liberal-reformist program.”(19)

This strikes me as an unfair accusation. Inter-capital competition is an essential determination of capital, and it rules out the degree of coordination that would eliminate the systematic tendency to overaccumulation.

Further, the result of this competition in Brenner’s narrative is that there is a systematic tendency in the capitalist global economy for a greater amount of sunk capital to be accumulated than living labor can valorize. This is the same conclusion Smith reaches, as he himself implicitly concedes when he writes, “when specified in terms of Marx’s value categories, Brenner’s findings with respect to the fall in the output-capital ratio seem to be in accord with theoretical expectations of a rising organic composition of capital.”(20)

Brenner arrives at this result through an analysis of inter-capital relations; Smith through a more orthodox Marxian account of capital/wage labor relations. I do not see any reason why the two positions should not be seen as complementary.

How Capitalism Works

I found Smith’s extended discussion of Marx’s value theory a bit too polemical as well.(21) Once again he wishes to defend a traditional Marxian perspective, stressing that value is produced by abstract labor, and is not generated in circulation. Smith’s target this time is value form theory, whose advocates insist that value does not exist prior to monetary exchange.

Some extreme formulations of value form theory do assert that value can be theorized without reference to labor, and Smith is correct to oppose this view. But there are equally extreme formulations of orthodox theory that, as Marx said, money is the only form in which value can appear, which implies that value has no actuality apart from monetary exchange. This is also a one-sided and therefore inadequate position.

The basis of capitalism is a social division of labor in which “generalized commodity production” is undertaken privately, and must then validate its social necessity through the successful sale of commodities for money. Prior to this social validation, the labor expended in the production process must be categorized as “concrete labor” that may or may not have been socially wasted.

It is theoretically possible to consider concrete labor abstractly, apart from market exchange. We can, for example, attempt to determine the average of the concrete labor times operating in a firm or sector. But concrete labor considered abstractly is not the abstract labor that creates value, which is socially necessary labor. And once again, in generalized commodity production social necessity can only be established through the market.

Labor prior to exchange, in other words, only potentially produces value. As value form theorists rightly stress, we can only affirm that value has actually been produced retroactively, after exchange.(22)

On the other hand, money, the value form, is not a “pure” form like the forms of thought of Hegel’s logic, as some value form theorists believe. It is a social form inseparably tied to a social content, and that social content is what Marxists call abstract labor, privately undertaken labor that has proven to be socially necessary.

Any attempt to consider the role of money in capitalism apart from this social content is inadequate, as orthodox theorists rightly stress. It is more helpful, in my view, to explore how less extreme formulations of orthodox Marxists and value form theorists can be reconciled, than it is to join in the polemics one side hurls at the other.

A more fruitful contribution to theoretical debates in Smith’s book concerns the proper conceptualization of “unproductive” labor. He argues that the wages of unproductive workers should not be treated as part of gross surplus value, as most Marxian economists have done, but rather as part of the flow of constant capital.

“Unproductive labor” refers to costs necessary for the reproduction of social capital as a whole and, Smith asserts, “constant capital” is the name for this category of costs.(23) He shows that when the data are organized in this fashion the empirical case for Marx’s assertion of a tendency for the rate of profit to fall is greatly strengthened. Smith also explores class issues associated with the category of unproductive labor in considerable detail, arguing persuasively that unproductive workers are exploited in exactly the same sense as productive workers.

Surveying the Global Economy

The Westra anthology Confronting Global Neoliberalism begins with a brilliant essay by its editor contrasting orthodox and heterodox accounts of the world market. The central ideas of dependency theory, neoclassical theory, orthodox Marxism, and postcolonial (“postmodern”) theory are concisely presented and accurately analyzed.

One of Westra’s conclusions is that “to fully grasp the world economic totalizing force of what is euphemized as globalization requires precisely the sort of structural theory that postmodernism eschews.”(24) It requires the sort of theory Marxism provides.

The essays that follow provide a superb overview of the global economy outside the Global North. The articles on Brazil, India, China, Cuba, Africa, Venezuela, South Korea, East Asia, Thailand, Egypt and Syria, and Mexico were written by leading specialists on these regions. Each essay presents a detailed overview of recent decades of economic history and social struggles in the region in question, situated in the context of contemporary developments in the world market.

Great attention is paid to the specificity of historical developments in the different regions. South Korea, for example, received massive U.S. economic support due to its strategic position in the Cold War; the story of Africa, needless to say, is quite different.(25) This explains why “Korea is the only example approaching full scale industrialization from the third world as a whole as that world shed the yoke of direct colonialism in the post WWII years.”(26)

Other important topics covered include the decline of employment in the formal sector in India, despite rapid economic growth; ways in which “market reforms” in China and Cuba have been dissimilar; the essential limitations of the so-called “East Asian miracle;” the challenges facing the creation of a “socialism for the 21st century” in Venezuela; and the extent to which China should now be considered capitalist.

No activist engaged in struggles for immigrant rights in the U.S. should overlook DuRand’s account of the horrific economic disruptions the Mexican economy has suffered as a result of NAFTA and other aspects of the neoliberal agenda.

A theme emerges from these particular studies: contrary to all predictions by the ideologues of neoliberalism, lowering barriers to trade and investment did not generally bring higher levels of economic growth in recent decades. Growth rates have declined in all but a handful of regions, while inequality significantly worsened just about everywhere.

These studies confirm a central thesis of Westra’s introduction: Neoliberalism is first and foremost a political project of the Global North to maintain its hegemony in the world market. Anyone concerned with understanding combined and uneven development in the global economy today would profit immensely from reading this superb collection.


  • Raphie de Santos, “Sub-Prime Driven Recession: Coming Soon to a Neighborhood Near You,” in De Santos et al., 51.
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  • See, for example, Claudio Katz, “A Crash Course in Capitalism,” in De Santos et. al., 95-7; Joel Geier, “Capitalism’s Worst Crisis Since the 1930s,” in De Santos et al., 102; and Smith, Chapter 1.
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  • François Sabado, “Taking the Measure of the Crisis,” in De Santos et al., 16.
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  • Geier, op. cit., 106.
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  • See Seongin Jeong and Richard Westra, “”The Chimera of Prosperity in Post-IMF South Korea and the Alter-globalization Movement,” and Minqui Li, “Limits to China’s Capitalist Development: Economic Crisis, Class Struggle, and Peak Energy,” both in Westra. Li points out that the wage rate in China is 5% of the rate in the United States, 6% of South Korea’s rate, 24% of Polish wages and 41% of wage rates in Mexico (95). On the limits of development in “emerging” economies” see John Weeks, “Miracles and Crisis: Boom, Collapse and Recovery in East and Southeast Asia,” in Westra.
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  • Sabado, op. cit., 21.
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  • Bloomberg Businessweek, September 27-October 3, 2010, 12.
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  • Li, op. cit., 93-4. At this point mainstream theorists ritually invoke the need for these regions to move to more “value added” forms of production in order to accommodate a rise in real wages. But the faster this strategy is adopted, the sooner overcapacity problems arise, making these sectors far less “value adding” than before.
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  • Smith, 23.
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  • Alan Thornett, “The Character of the Crisis & Our Response to it,” in De Santos et. al., 199.
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  • John Bellamy Foster, “Ecology and the Transition From Capitalism to Socialism,” in De Santos et. al. See also Thornett, op. cit., 197.
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  • Why can’t green technologies provide a spur to a new “golden age” of capitalist development? Haven’t technological breakthroughs played this role in the past? The spread of effective national innovation systems, I believe, has brought about a new situation in world history. The moment a new cluster of innovations with significant commercial potential emerges today, research expenditures, tax breaks, credit allocations, and a multitude of other direct and indirect subsidies are mobilized in a number of regions more or less simultaneously. In use-value terms technological dynamism is furthered. In value terms, however, things are more complicated. The more national innovation systems are in place across the globe, the sooner overaccumulation difficulties tend to arise in emerging industries and sectors, and the more compressed the period in which high profits can be won from a competitive technological advantage. Under these new circumstances there is reason to think that the odds of a new period of expanded material accumulation in the world market occurring are quite low. If this is correct, there will be no new “golden age” of capitalist development based on the discovery and implementation of new “green technologies” on anything like the scale technically possible and socially necessary, given the risk of environmental catastrophe we face today.
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  • Sean Thompson, “Green Keynesianism and its Limits,” in De Santos et al., 41; Thornett, op. cit., 210. See also the discussion of “ecological debt” in Patrick Bond’s article in the Westra collection, “African Resistance to Global Finance, Free Trade and Corporate Profit Taking,” 161.
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  • See Andy Kilmister, “The Economic Crisis and Its Effects,” in De Santos et al., 34-5; De Santos, op. cit., 70-1; Husson, op. cit., 128-9; Thornett, op. cit., 205-7, 209-10.
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  • Sabado, op. cit., 16.
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  • Bond discusses the important distinction between “reformist reforms” and “non-reformist reforms,” op. cit., 153. Smith develops the same distinction in the course of criticizing political projects that do not go beyond calls to the Democratic Party to return to its New Deal glory days (125 ff.).
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  • Smith, x.
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  • Smith, 6.
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  • Smith, 83.
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  • Smith, 83-4.
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  • Smith, 141-6.
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  • If we assume that supply equals demand, then we can assert that the social average of labor in a sector creates value, and the necessary role of money in the social validation of privately undertaken production can be ignored. Marx did assume that supply and demand are equal throughout much of Capital. But this was a simplifying assumption made provisionally in order to focus on other important issues in the critique of political economy. Marx vehemently rejected “Say’s Law,” the assertion that supply and demand automatically tend to equilibrium in capitalism.
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  • Smith, 28, 152.
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  • Richard Westra, “Introduction: Development Theory and Global Neoliberalism” in Westra, 31.
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  • Bond (op. cit., 150) notes that at least $420 billion (in constant 2004 dollars) were lost in capital flight in Africa between 1970-2004. For every dollar of external loans to Africa in this period, roughly $.60 left in capital flight in the same year (op. cit., 151).
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  • Jeong and Westra, op. cit., 194-5.
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  • ATC 150, January-February 2011