[Zzlist-deux] Looking Back on Five Years of Economic Turmoil: Heart Burn or Heart Attack?

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A new posting -
Looking Back on Five Years of Economic Turmoil: Heart Burn or Heart
Attack?<http://zzs-blg.blogspot.com/2013/12/looking-back-on-five-years-of-economic.html>
- from Zoltan Zigedy is available at:
http://zzs-blg.blogspot.com/

Due to Technical difficulties, two earlier posts:
How “Gotcha” Journalism Mutes the Truth
<http://zzs-blg.blogspot.com/2013/11/how-gotcha-journalism-mutes-truth.html>
Looking Back: 50 Years after the JFK
Assassination<http://zzs-blg.blogspot.com/2013/11/looking-back-50-years-after-jfk.html>were
not sent to subscribers. They, too, are available at the above address.

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ZZ

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When significant US economic markets went haywire in the summer and fall of
2008, a fear, even panic, struck those charged with developing and
implementing economic policy. The prevailing thinking-- unbridled
capitalism with near-religious confidence in market mechanisms-- appeared
to be in irreversible retreat.
 The housing market cooled, home values shrank, and the financial structure
built around home ownership began to collapse. As the stock market fell
freely from previous highs, led by the implosion of bank stocks, investors
withdrew dramatically from the market. Credit froze and consumption slowed.
Thus began a downward spiral of employee layoffs, reduced consumption,
capital hoarding, and retarded growth, followed by more layoffs, etc. etc.
 As fear set in, policy makers scrambled to find an answer to a crisis that
threatened to deepen and spread to the far reaches of the global economy.
With interest rates near zero, they recognized that the monetarist toolbox,
in use since the Carter administration, offered no answer.
 At the end of the Bush administration, bi-partisan leaders approved the
injection of hundreds of billions of public dollars into the financial
system with the hope of stabilizing the collapsing market value of banks, a
move popularly dubbed a “bailout.”
 Early in the Obama administration, Democratic Party administrators crafted
another recovery program totaling about three-quarters of a trillion
dollars, a program involving a mix of tax cuts, public-private
infrastructure projects, and expanded direct relief. Economists generally
viewed this effort as a “stimulus” program designed to trigger a burst of
economic activity to jump-start a stalled economic engine. Dollar estimates
of aggregate US Federal bailouts and stimuli meant to overcome the crisis
rose as high as the value of one year's Gross Domestic Product in the early
years after the initial free fall. The Federal Reserve continues to offer a
$75 billion transfusion every month into the veins of the yet ailing US
economy.
 *Bad Faith*
 The last three decades of the twentieth century brought forth a new
economic consensus of not merely market primacy, but total market
governance of economic life. Regulation of markets was believed to
destabilize markets and not correct them. Public ownership and public
services were seen as inefficient and untenable holdouts from market
forces. Public and private life beyond the economic universe were subjected
to markets, measured by market mechanisms, and analyzed through the lens of
market-thought. Indeed, market-speak became the *lingua franca* unifying
all of the social sciences and humanities in this era. With the fall of the
Soviet Union, capital and its profit-driven processes penetrated every
corner of the world. Only independent, anti-imperialist, market-wary
movements like those led by Hugo Chavez, Evo Morales, and a few others
gained some political success against the unprecedented global dominance of
private ownership and market mechanisms.
 While capitalism in its most unadorned, aggressive form enjoyed the
moments of triumph, forces were at play undermining that celebration. Those
forces crashed the party in 2000 in the form of a serious economic
downturn, the so-called “Dot-com Recession” featuring a $5 trillion stock
market value loss and the disappearance of millions of jobs. Economists
marveled at how slowly the jobs were returning before the US and global
economy were hit with another, more powerful blow in 2008. Clearly, the
first decade of the twenty-first century will be remembered as one of
economic crisis and uncertainty, a turmoil that continues to this day.
 Apart from the human toll-- millions of lost jobs, poverty, homelessness,
lost opportunities, destruction of personal wealth-- the crisis-ridden
twenty-first century challenged the prevailing orthodoxy of unfettered
markets and private ownership. Even such solid and fervent advocates of
that orthodoxy as the *Wall Street Journal*, *The Economist*, and *The
Times *were rocked by the crisis, questioning the soundness of classical
economic principles. *No principle is more dear and essential for the free
marketeers than the idea that markets are self-correcting. *While there may
be short-term economic imbalances or downturns, free-market advocates
believe that market movement always tends towards balance and expansion in
the long run. Thus, a persistent, long term stagnation or decline is
thought to be virtually impossible (with the *caveat* that there are no
restrictions imposed on the market mechanism).
 So when perhaps the greatest era of extensive global open-market economy
experienced the most catastrophic economic collapse since the Great
Depression, serious doubts arose about the fundamental tenets of market
ideology. And during the darkest days of 2008 and 2009, a veritable
ideological panic swept over pundits and experts of the Right and the
“respectable” Left. Some rehabilitated an out-of-fashion economist and
spoke of a “Minsky moment.” Liberals proclaimed the death of neo-liberalism
(the popular term for the return to respectability of classical economics
that began in the late 1970s). And still others foresaw a restoration of
the interventionist economics represented by John Maynard Keynes, the
economic theories that guided the capitalist economy through most of the
post-war period. Even the most conservative economists conceded that market
oversight, if not regulation, was both necessary and forthcoming.
 Yet, change has not come forth. Despite over five years of decline and
stagnation, despite a continued failure of markets to self-correct,
free-market ideology continues to dominate both thinking and policy,
clearly more faith-based than reality-based. In part, the resilience of
open-market philosophy emanates from the shrewd manufacture of debt-fear by
politicians and debt-mongering by financial institutions. By raising the
shrill cry of exploding debt and impending doom, attention was diverted
from the failings of the unfettered market and towards government austerity
and massive debt reduction.
 *Diagnosis?*
 Clearly all the Nobel Prize-winning mathematical economic models thought
to capture economic activity failed to predict and explain the 2008 crash.
No amount of faith could disguise the monumental failure of raw,
unregulated markets and the policies that promoted them. Two competing,
sharply contrasting, and simplistic explanations came forward.
 Defenders of free markets shamelessly, brazenly argue that government
meddling thwarted the full and free operation of market mechanisms, thus,
exacerbating what would have been a painful, but quickly resolved
correction. Following the metaphor alluded to in this article’s title,
heartburn was misdiagnosed, treated with radical surgery, only to create a
life-threatening condition.
 *Of course this is self-serving nonsense. *
 Whatever else we may know about markets, we know this: since the process
of deregulating markets began in earnest in the late 1970s, crises have
only occurred more frequently, with greater amplitude, and harsher human
consequences. Before that, and throughout the earlier post-war period,
government intervention and regulation tended to forestall downturns,
moderate their nadir, and soften the human toll. And a glimpse at an
earlier period of market-friendly policy– the early years of the Great
Depression-- demonstrates the folly of simply waiting for the promised
correction: matters only grew worse. Then, as now, life proved to be a hard
taskmaster; when market mechanisms really go awry, no one can afford to
wait for self-correction.
 Liberal and soft-Left opponents of an unfettered market offer a different
argument. They saw the crisis as, not the *absence* of free markets, but
the failure to oversee and regulate markets adequately. On this view,
shared by nearly all liberals and most of the non-Communist Left, markets
are fundamental economic mechanisms-- essential, if you will-- but best
shepherded by government controls that steer markets back when they
threaten to run amok.
 Thus, the 2008 crisis would have been averted, they believe, if rules and
regulations remained in place that were previously designed and implemented
to protect the economy from market excesses; if we had not loosened the
rules and regulations, we would never have experienced the disaster of 2008.
 *This view is bad history and even worse economics.*
 While liberals would like to believe that regulations and institutions
spawned by the New Deal of the 1930s stabilized capitalism and tamed
markets, the truth is otherwise. The massive war spending initiated
sometime before the US entry into World War II solved the problems of
growth and excess manpower associated with the long decade of stagnation,
hesitant recovery, retreat, and further stagnation that befell the economy
beginning in 1929.
 Capitalism gained new momentum with post-war reconstruction. Productive
forces were restored where they had been destroyed, refreshed where they
were worn, and improved in the face of new challenges. This broad
restructuring of capitalism produced new opportunities for both profit and
growth. At the same time, the lesson of massive socialized, public, and
planned military spending were not lost. New threats were conjured, new
fears constructed. The hot war in Korea and the ever-expanding Cold War
fueled an unprecedented US expansion. It is not inappropriate to
characterize this post-war expansion as a period of
“military-Keynesianism.” That is, it was an era of Keynesian policies of
planned, extensive government spending married to military orders outside
of the market. Insofar as it transferred a significant share of the
capitalist economy to a command, extra-market sector, it marked a new stage
of state-monopoly capitalism, a stage embracing some of the features of
socialism.
 But by the mid-1960s this “adjustment” began to lose its vitality. Profit
growth, the driving force of capitalist expansion, started a persistent
decline (for a graphic depiction of this trend, see the chart on page 103
of Robert Brenner's *The Economics of Global Turbulence* (*New Left Review*,
May/June 1998).
 The falling rate of profit coupled with raging inflation by the middle of
the 1970s. The military-Keynesian solutions to capitalist crisis were
spent, exhausted, proving inadequate to address a new expression of the
instability of capitalism. Perhaps nothing signaled the bankruptcy of the
prevailing (Keynesian) orthodoxy more than the desperate WIN campaign-- *Whip
Inflation Now* of the Gerald Ford presidency, an impotent attempt to stem
the crisis with mass will-power where intervention failed.
 Contrary to the claims of liberals, social democrats and other
reform-minded saviors of capitalism, the resultant shift in orthodoxy *was
not* merely a political coup, a victory of retrograde ideology, but instead
it was an *unwinding* of the failed Keynesian policies of the moment. Thus,
the Thatcher/Reagan “revolution” was only the vehicle for a dramatic
adjustment of the course of capitalism away from a spent, ineffective
paradigm.
 With Paul Volker assuming the chairmanship of the Federal Reserve and the
beginnings of systematic deregulation, the Carter administration planted
the seeds of the retreat from the old prescriptions. Volker, with his
growth-choking interest rates, ensured a recession that would sweep away
any will to resist belt-tightening. But it took the election of the
dogma-driven Ronald Reagan to emulate the UK's Margaret Thatcher and use
the occasion to eviscerate wages and benefits in order to pave the way for
profit growth.
 The cost of restoring life to the moribund capitalist economy was borne by
the working class. Foolishly, the stolid, complacent labor leadership had
banked on the continuation of the tacit Cold War contract: Labor supports
the anti-Communist campaign and the corporations honor labor peace with
consistent wage and benefit growth. Instead, profit growth was restored by
suppressing the living standards of labor-- cutting “costs.” A vicious
anti-labor offensive ensued.
 While the loyal opposition insists on portraying the break with Keynesian
economics as something new (commonly dubbed “neo-liberalism”), it was, in
fact, a surrender to the old. The bankruptcy of bourgeois economics could
offer no new, creative answer to capitalist crisis; it could only cast off
a failed approach and restore profits by relentlessly squeezing the labor
market.
 This response could and only did succeed because of the extraordinary
weakness of the labor movement. As the profit rate began to rebound, labor
lacked the leadership and will to not only secure a share of productivity
increases, but to even defend its previous gains.
 Thus, capitalism caught a second wind by retreating from the post-war
economic consensus and reneging on the implicit labor peace treaty. Profit
growth returned and the system sailed on.
 But the continuing advance of deregulation and privatization brought with
it a return to the unbuffered anarchy of markets. The Savings and Loan
crises of the 1980s and 1990s and the stock market crash of October 1987
were all harbingers of things to come and reflections of deeper instability.
 With the fall of the Soviet Union and Eastern European socialism, a huge
new market was delivered to the global capitalist system, a market that
further energized the opportunities for capital accumulation and expanded
profits. Millions of educated, newly “free” (free of security, safe working
conditions, legal protection, and organization) workers joined reduced-wage
and low-wage workers from the rest of the world to form a vast pool of
cheap labor. From the point of view of the owners of capital, paradise had
truly arrived. Thus, an immense, one-sided class war and the
wage-depressing integration of millions of new workers set capitalism on a
profit-restoring path to health, putting the now impotent Keynesian
orthodoxy in the rear-view mirror. Few would guess that this trip would
endure for less than two decades before capitalism would again encounter
serious crises.
 Significant economic growth in a period of weak labor necessarily produces
galloping inequality. With corporate and wealthy-friendly tax policies,
many government redistribution mechanisms are starved or dismantled. The
flow of wealth accelerates to corporations and the super-rich and away from
those who work for a living. The coffers of the investor class swell with
money anxious for a meaningful, significant return on investment. As the
process of capital accumulation intensifies, fewer and fewer safe,
high-yield productive investment opportunities arise to absorb the vast
pool of ever-expanding wealth concentrated in the hands of a small minority.
 In a mature capitalism, new, riskier avenues-- typically removed from the
productive sector-- emerge to offer a home for capital and promise a
return. Bankers and other financial “wizards” compete ferociously to
construct profit-generating devices that promise more and more. These
instruments grow further and further from productive activity. Moreover,
their resultant “profits” are ever further removed from real, tangible,
material value. Instead, they virtually exist as “hypothetical” capital, or
“counter-factual” capital, or “future-directed” capital, or “contingent”
capital. Some Marxists rush to label this product of speculation as
“fictitious,” but that obscures its ultimate origin in exploitative acts in
the commodity-production process. It is this expansion of promissory
capital that fuels round after round of speculative investment lubricated
with greater and greater debt.
 Metaphors abound for the end game of this process: “bubbles,” “house of
cards,” etc. But the ultimate cause of crisis is the failure to satisfy the
never ending search for return. That is, the cause of crisis resides in the
process of accumulation intrinsic to capitalism and the inability to
sustain a viable return on an ever enlarging pool of capital and promissory
capital. Capitalists measure their success by how their resources are fully
and effectively put to use to generate new surpluses. That is the deepest,
most telling sense of “rate of profit.” It is the gauge guiding the
capitalist-- an effective rate of profit based on accumulated assets. Apart
from official and contrived measures of profit rates, the growth of
accumulated capital, weighed against the available investment
opportunities, drives future investment and determines the course of
economic activity.
 In 1999, the profitability of the technology sector dropped precipitously
as a result of the unrealizable investment of billions of yield-seeking
dollars in marginal Dot.com companies and internet services. As an answer
to the problem of over-accumulation, investing in the fantasies of
20-year-old whiz kids proved to be as irrational as sane observers thought
it to be. The crash followed.
 And again in the heady days of 2005, buying bizarre securities packed with
the flotsam and jetsam of mortgage shenanigans seemed a way of finding a
home for vast sums of “unproductive” capital. After all, capital cannot
remain idle; it must find a way to reproduce itself. But what to do with
the earnings from reselling the demand-driven securities? More of the same?
More risk? More debt? And repeat?
 The portion of US corporate profits “earned” by the financial sector grew
dramatically from 1990 until the 2008 crash, touching nearly 40% in the
mid-2000s and demonstrating the explosion of alternative investment
vehicles occupying idle capital. It is crucial to see a link, an
evolutionary necessity, between the restoration of profitability, intense
capital accumulation, and the tendency for profitability to be challenged
by the lack of promising investment opportunities. It is not the whim of
bankers or the cleverness of entrepreneurs that drives this process, but
the logical imperative of capital to produce and reproduce.
 *Some Comments and Observations*
 There are other theories of crisis offered by the left. One theory,
embraced by many Communist Parties, maintains that crisis emerges from
over-production. Of course, in one sense, over-accumulation is a kind of
overproduction, an overproduction of capital that lacks a productive
investment destination. But many on the left mean something different. They
argue that capitalism produces more commodities in the market place than
impoverished, poorly paid workers can purchase. There are two objections to
this: one theoretical, one ideological.
 First, evidence shows that a slump in consumption or a spike in production
does not, in fact, precede economic decline in our era. If overproduction
or its cousin, under-consumption, were the *cause* of the 2008 downturn,
data would necessarily show some prior deviation from
production/consumption patterns. But there are none. Instead, the reverse
was the case: the crisis itself *caused* a massive gap between production
and consumption, exacerbating the crisis. The threat of oversupply lingers
in the enormous deflationary pressure churning in the global economy.
Despite the fact that consumer spending is such a large component of the US
economy, the effects of its secular stagnation or decline has been largely
muted by the expansion of consumer credit and the existence, though
tenuous, of social welfare programs like unemployment insurance.
 Second, if retarded or inadequate consumption were the cause of crises,
then redistributive policies or tax policies would offer a simple solution
to downturns, both to prevent them and reverse them. Thus, capitalism could
go on its merry way with little fear of crisis. Certainly this is the
ideological attraction of overproduction explanations of crises: they allow
liberals and social democrats to tout their ability to manage capitalism
through government policies.
 *However they cannot manage capitalism because crises are located, not in
the arena of circulation (matching production and consumption), but in the
profit-generating mechanism of capitalism, its veritable soul.*
 Because of the centrality of profit, the over-accumulation explanation has
an affinity with another theory of crisis: Marx's argument for the tendency
of the rate of profit to fall. In fact, it can be viewed as a contemporary
version of the argument without nineteenth-century assumptions.
 Happily, many commentators today have revisited the theory outlined in
Volume III of *Capital*, finding a relevance ignored throughout most of the
twentieth century. Only a handful of admirers of Marx's work kept the
theory alive in that era, writers like Henryk Grossman, John Strachey, and
Paul Mattick. Unfortunately, today's admirers, like the aforementioned
predecessors, share the flaw of uncritically taking Marx's schema to be
Holy Grail. For the most part, Marx used very occasional formalism as an
expository tool and not as the axioms of a formal system. Those trained in
modern economics are prone to leap on these formulae with an undergraduate
zeal. They debate the tenability of a model that depicts the global economy
as a collection of enterprises devouring constant capital at a greater rate
than employment of labor and mechanically depressing the rate of profit.
This is to confuse simplified exposition with robust explanation. Much can
be learned from Marx's exposition without turning it into a scholastic
exercise.
 Among our left friends, it has become popular to speak of the crisis and
era as one of “financialization.” This is most unhelpful. Indeed, the
crisis had much to do with the financial sector; indeed, the financial
sector played and is playing a greater role in the global economy,
especially in the US and UK; but conjuring a new name does nothing to
expose or explain the role of finance. Like “globalization” in an earlier
time, the word “financialization” may be gripping, fashionable, and handy,
but it otherwise hides the mechanisms at work; it’s a lazy word.
 *****
 There is a point to this somewhat lengthy, but sketchy journey through the
history of post-war capitalism. Hopefully, the journey demonstrates or
suggests strongly that past economic events were neither random nor simply
politically driven. Instead, they were the product of capitalism's internal
logic; they sprang from roadblocks to and adjustments of capitalism's
trajectory. As directions proved barren, new directions were taken. While
it is not possible to rule out further maneuvers addressing the inherent
problem of over-accumulation, the problem will not go away. It will return
to haunt any attempt that presumes to conquer it once and for all. And if
capitalism carries this gene, then it would be wise to look to a better
economic system that promises both greater stability and greater social
justice. Of course, finding that alternative begins with revisiting the
two-hundred-year-old idea long favored by the working class movement:
socialism. Affixed to that project is the task of rebuilding the movement,
the political organization needed to achieve socialism.
 As things stand in today's world, there are most often only two meager
options on the regular menu: one, to save and maintain capitalism with the
sacrifices of working people and the other, to save and maintain capitalism
with the sacrifices of working people and a token “fair share” sacrifice on
the part of corporations and the rich. Neither is very nourishing.
 The first option is based on the thin gruel of “trickle down” economics
and the nursery-rhyme wisdom of “a rising tide raises all boats.” It is the
prescription of both of the major US political parties, Japan's Abe, the
European center parties, and UK Labour.
 The second option promises to save capitalism as well, but through a bogus
fair distribution of hardship across all classes. This is the course
offered by most European left parties and even some Communist Parties.
 But a system-- capitalism-- that is genetically disposed to extreme wealth
distribution and persistent crisis does not make for an appetizing meal.
Instead, we need to dispense with programs that promise to better manage
capitalism, as Greek Communists (KKE) like to say. That is for others who
are at peace with capitalism or underestimate its inevitable failings.
 The only answer to the heart failure of capitalism is to change the diet
and put socialism on the menu.

 Zoltan Zigedy
 zoltanzigedy at gmail.com
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