How Monopoly-Finance Capital Leads to Economic Stagnation

Who’s harmed when monopoly-finance capital outpaces real production? Find out why, under the resulting economic stagnation, everyone suffers.
By John Bellamy Foster and Robert W. McChesney
October 2012
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The deepening effects of stagnation in the U.S. economy can be seen here, showing the long-run downward trend in the growth rate of industrial production in the United States. The authors argue that a central worldwide economic policy remains overaccumulation within the Triad, where the United States, despite its declining hegemony, still constitutes the trend-setting force in the world system of accumulation.
Illustration Courtesy Monthly Review Press
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The increasing trend of monolithic companies taking over large shares of industry has created a “financialization-stagnation trap” that’s negatively affecting economies across the world, particularly in the Global South. That’s John Bellamy Foster and Robert W. McChesney’s argument in The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China (Monthly Review Press, 2012). In this excerpt from the book’s introduction, Foster and McChesney explain how understanding the rise of financialization stagnation is essential to understanding global class struggle.  

The Great Financial Crisis and the Great Recession arose in the United States in 2007 and quickly spread around the globe, marking what appears to be a turning point in world history. Although this was followed within two years by a recovery phase, the world economy five years after the onset of the crisis is still in the doldrums. The United States, Europe, and Japan remain caught in a condition of slow growth, high unemployment, and financial instability, with new economic tremors appearing all the time and the effects spreading globally. The one bright spot in the world economy, from a growth standpoint, has been the seemingly unstoppable expansion of a handful of emerging economies, particularly China. Yet the continuing stability of China is now also in question. Hence, the general consensus among informed economic observers is that the world capitalist economy is facing the threat of long-term economic stagnation (complicated by the prospect of further financial deleveraging), sometimes referred to as the problem of “lost decades.” It is this issue, of the stagnation of the capitalist economy, even more than that of financial crisis or recession, that has now emerged as the big question worldwide.

Within the United States dramatic examples of the shift in focus from financial crisis to economic stagnation are not difficult to find. Ben Bernanke, chairman of the Federal Reserve Board, began a 2011 speech in Jackson Hole, Wyoming, entitled “The Near- and Longer-Term Prospects for the U.S. Economy,” with the words: “The financial crisis and the subsequent slow recovery have caused some to question whether the United States…might not now be facing a prolonged period of stagnation, regardless of its public policy choices. Might not the very slow pace of economic expansion of the past few years, not only in the United States but also in a number of other advanced economies, morph into something far more long-lasting?” Bernanke responded that he thought such an outcome unlikely if the right actions were taken: “Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome.” One would of course have expected such a declaration to be followed by a clear statement as to what those “necessary steps” were. Yet this was missing from his analysis; his biggest point simply being that the nation needs to get its fiscal house in order.

Robert E. Hall, then president of the American Economic Association (AEA), provided a different approach in an address to the AEA in January 2011, entitled “The Long Slump.” A “slump,” as Hall defined it, is the period of above-normal unemployment that begins with a sharp contraction of the economy and lasts until normal employment has been restored. The “worst slump in US history,” Hall stated, was “the Great Depression in which the economy contracted from 1929 to 1933 and failed to return to normal until the buildup for World War II.” Hall labeled the period of prolonged slow growth in which the U.S. economy is now trapped “The Great Slump.” With government seemingly unable to provide the economy with the needed stimulus, he observed, there was no visible way out: “The slump may last many years.”

In June 2010, Paul Krugman wrote that the advanced economies were currently caught in what he termed the “Third Depression” (the first two being the Long Depression following the Panic of 1873 and the Great Depression of the 1930s). The defining characteristic of such depressions was not negative economic growth, as in the trough of the business cycle, but rather protracted slow growth once economic recovery had commenced. In such a long, drawn-out recovery “episodes of improvement were never enough to undo the damage of the initial slump, and were followed by relapses.” In November 2011, Krugman referred to “The Return of Secular Stagnation,” resurrecting the secular stagnation hypothesis of the late 1930s to early ’50s (although in this case, according to Krugman, the excess savings inducing stagnation are global rather than national).

Books too have been appearing on the stagnation theme. In 2011, Tyler Cowen published The Great Stagnation, which quickly became a bestseller. For Cowen the U.S. economy has been characterized by a “a multi-decade stagnation…. Even before the financial crisis came along, there was no new net job creation in the last decade….

Around the globe, the populous countries that have been wealthy for some time share one common feature: Their rates of economic growth have slowed down since about 1970.” If creeping stagnation has thus been a problem for the U.S. and other advanced economies for some time, Thomas Palley, in his 2012 book, From Financial Crisis to Stagnation, sees today’s Great Stagnation itself as being set off by the Great Financial Crisis that preceded it, and as representing the failure of neoliberal economic policy.

Such worries are not confined to the United States, given the sluggish economic growth in Japan and Europe as well. Christine Lagarde, managing director of the IMF, gave a speech in Washington in September 2011 in which she stated that the world economy has “entered a dangerous new phase of the crisis…. Overall, global growth is continuing, but slowing down,” taking the form of an “anemic and bumpy recovery.” Fundamental to this dangerous new phase of crisis was “core instability,” or weaknesses in the Triad — North America, Europe, and Japan — along with continuing financial imbalances “sapping growth.” The big concern was the possibility of another “lost decade” for the world economy as a whole. In November 2011 Lagarde singled out China as a potential weak link in the world economic system, rather than a permanent counter to world economic stagnation.

The fact that these rising concerns with respect to the slowing down of the wealthy Triad economies have a real basis, not just in the last two decades but also in long-term trends since the 1960s, can be seen in a chart showing the declining real growth rates of the Triad economies in the decades from the 1960s to the present. The slowdowns were sharpest in Japan and Europe. But the United States too experienced a huge drop in economic growth after the 1960s, and was unable to regain its earlier trend-rate of growth despite the massive stimuli offered by military-spending increases, financial bubbles, a growing sales effort, and continuing exploitation of the privileged position of the dollar as the hegemonic currency. The bursting of the New Economy stock market bubble in 2000 seriously weakened the U.S. economy, which was only saved from a much larger disaster by the rapid rise of the housing bubble in its place. The bursting of the latter in Great Financial Crisis of 2007–09 brought the underlying conditions of stagnation to the surface.

Hence, long-term economic slowdown, as this chart showing the declining real growth rates of the Triad economies indicates, preceded the financial crisis. In the U.S case, the rate of growth for the 1970s (which was slightly higher than that of the two subsequent decades) was 27 percent less than in the 1960s. In 2000–2011 the rate of growth was 63 percent below that of the 1960s. It was this underlying stagnation tendency, as we shall argue in this book, which was the reason the economy became so dependent on financialization — or a decades-long series of ever-larger speculative financial bubbles. In fact, a dangerous feedback loop between stagnation and financial bubbles has now emerged, reflecting the fact that stagnation and financialization are increasingly interdependent phenomena: a problem that we refer to in this book as the stagnation-financialization trap.

The Denial of History

Although the tendency to stagnation or a long period of anemic growth is increasingly recognized even within the economic mainstream as a major issue, broad historical and theoretical understandings of this and its relation to capitalist development are lacking within establishment circles. The reason for this, we believe, can be traced to the fact that neoclassical economists and mainstream social science generally have long abandoned any meaningful historical analysis. Their abstract models, geared more to legitimizing the system than to understanding its laws of motion, have become increasingly otherworldly — constructed around such unreal assumptions as perfect and pure competition, perfect information, perfect rationality (or rational expectations), and the market efficiency hypothesis. The elegant mathematical models developed on the basis of these rarefied constructions often have more to do with beauty, in the sense of ideal perfection, than with the messy world of material reality. The results therefore are about as relevant to today’s reality as the medieval debates on the number of angels that could fit on the end of a pin were to theirs. This is an economics that has gone the way of stark idealism — removed altogether from material conditions. As Krugman put it, “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.”

John Kenneth Galbraith, in The Economics of Innocent Fraud, provided a still stronger condemnation of prevailing economic and social science, arguing that in recent decades the system itself had been fraudulently “renamed” from capitalism to “the market system.” The advantage of the latter term from an establishment perspective was: “There was no adverse history here, in fact no history at all. It would have been hard, indeed, to find a more meaningless designation — this is a reason for the choice…. So it is of the market system we teach the young…. No individual or firm is thus dominant. No economic power is evoked. There is nothing here from Marx or Engels. There is only the impersonal market, a not wholly innocent fraud.” Along with this, “the phrase ‘monopoly capitalism,’ once in common use,” Galbraith charged, “has been dropped from the academic and political lexicon.” Perhaps worst of all, the growing likelihood of a severe crisis and a long-term slowdown in the economy was systematically hidden from view by this fraudulent displacement of the very idea of capitalism (and even of the corporate system).

The continuing influence of Galbraith’s “economics of innocent fraud” and the absurd results it generates can be seen in a 2010 speech by Bernanke at Princeton entitled “Implications of the Financial Crisis for Economics.” The primary reason the “standard [macroeconomic] models” had failed to see the Great Financial Crisis coming, Bernanke admitted, was that these models “were designed for…non-crisis periods” only. In other words, the conventional models employed by orthodox economists were constructed (intentionally or unintentionally) so as to exclude the very possibility of a major crisis or a long-term period of deepening economic stagnation. As long as economic growth appeared robust, Bernanke told his listeners, the models proved “quite useful.” The problem, then, he insisted, was not so much that the models on which economic analysis and policy were based were “irrelevant or at least significantly flawed.” Rather the bursting of the financial bubble and the subsequent crisis represented events that were not supposed to happen, and that the models were never meant to explain. This is similar to a meteorologist who has constructed a model that predicts perpetual sunny days interrupted by the occasional minor shower and when the big storm comes claims in the model’s defense that it was never intended to account for the possibility of such unlikely and unforeseen events.

All of this points to the lack within mainstream economics and social science of a reasoned historical interpretation. “Most of the fundamental errors committed in economic analysis,” Joseph Schumpeter wrote in his History of Economic Analysis, “are due to lack of historical experience” or historical understanding. For Schumpeter, this contrasts sharply with the approach of Marx, who “was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raisonnée.” Today conventional social scientists have all too often become narrow specialists or technicians concerned with one little corner of reality —  or worse still, developers of models that in their extreme abstraction fall prey to Whitehead’s fallacy of misplaced concreteness. They seldom recognize the importance of the old Hegelian adage that “the truth is the whole” — and hence can only be understood genetically in its process of becoming.

These self-imposed blinders of mainstream social science were dramatically evident in the failure of economics and social science generally to recognize even the possibility of economic and social catastrophe in today’s capitalism. In his presidential address to the American Economic Association in 2003, Robert Lucas flatly declared that the “central problem of depression prevention has been solved.” The idea that the economy was now free of major crisis tendencies, due to the advent of new, improved monetary policies, became the conventional macroeconomic wisdom — referred to by none other than Bernanke in 2004 as the coming of the Great Moderation. Yet it took only a few years for the bursting of the housing bubble to prove how illusory these notions of the “end of history” were.

Naturally, not everyone was completely caught off guard by the Great Financial Crisis. As early as 2002, two years before Bernanke coined the term the “Great Moderation,” a substantial number of independent, informed political-economic commentators — ourselves amongst them — had drawn attention to the growth of an enormous real estate or housing bubble. Writing as editors of Monthly Review, we first mentioned the bursting of the real estate/housing bubble as a potential devastating force in the U.S. economy in November 2002. This was followed up with an article the following spring entitled “What Recovery?” in which we contended, “The housing bubble may well be stretched about as thin as it can get without bursting.” As the problem became worse, one of us wrote a piece for the May 2006 issue of Monthly Review on “The Household Debt Bubble” pointing to the unsustainable borrowing on home mortgages, with the greatest burden falling on workers and subprime borrowers. The housing bubble, the article argued, had allowed the U.S. economy to recover from the bursting of the stock market bubble, but this pointed to the likelihood of a further and possibly greater “financial meltdown” a little ways down the road, which could be triggered by increases in interest rates then already beginning. So, while some aspects of the crisis that arose in the summer of 2007 came as a surprise to us, the general course of events did not.

Monthly Review had long focused on the problem of financialization and its relation to underlying stagnation tendencies in the economy. But the realization that a devastating crisis was in the making as a result of the buildup of the housing bubble was not unique to us; rather it was quite widespread among heterodox observers, even penetrating into the business literature. This included, most notably, Dean Baker, Stephen Roach, John Cassidy, Robert Shiller, and Kevin Phillips — while also extending to pragmatic business publications like BusinessWeek and The Economist. In August 2002 Baker wrote a report for the Center for Economic Policy Research entitled “The Run-up in Home Prices: Is It Real or Is It Another Bubble?” The same month BusinessWeek warned: “The investors who buy many of the [mortgage] loans they securitize — may soon decide that enough is enough…. If [interest] rates go higher, the burden of debt service will increase…. Approximately 30 percent of outstanding mortgage debt has adjustable rates…. A credit crunch could set in if a rate rise triggers a wave of defaults by holders of adjustable mortgages.” On September 22, 2002, Stephen Roach wrote an op-ed piece for the New York Times on “The Costs of Bursting Bubbles” in which he stated, “There is good reason to believe that both the property [real estate] and consumer bubbles will burst in the not-so-distant future.” In November 2002, New Yorker economic columnist John Cassidy published an article entitled “The Next Crash: Is the Housing Market a Bubble that’s About to Burst?” The following year, Yale economist Robert Shiller coauthored a prescient Brookings Institution paper entitled “Is There a Bubble in the Housing Market?” The Economist in June 2005 stated: “The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops.” Political commentator Kevin Phillips continually warned of the dangers of financialization, commenting in 2006 that homes had become “tools of speculative finance” and that “the United States had exchanged a stock-market bubble for the larger credit bubble,” presaging financial collapse.

In fact, warnings of a housing bubble and the threat of a severe financial collapse in the four years leading up to the crisis were so numerous as to make it difficult, if not impossible, to catalogue them all. The problem, then, was not that no one saw the Great Financial Crisis coming. Rather the difficulty was that the financial world, driven by their endless desire for more, and orthodox economists, prey to the worship of their increasingly irrelevant models, were simply oblivious to the warnings of heterodox economic observers all around them. Mainstream economists had increasingly retreated back into a Say’s Law view (the notion that supply creates its own demand), which argued that severe economic crises were virtually impossible.

The failure of orthodox economics to perceive the financial bubble prior to the Great Financial Crisis is now well established in the literature. What we are suggesting here, however, is something different: that the same economics of innocent fraud has hindered orthodox economists from perceiving until now an even bigger fault line of the mature capitalist economy, the tendency to long-term economic stagnation. Indeed, it is the slow growth or stagnation that has been festering for decades which explains not only financialization, manifested in a string of financial bubbles, but also the deep economic malaise that has set in during the period of financial deleveraging. A realistic analysis today thus requires close examination of the dangerous feedback loops between stagnation and financialization.

In How Markets Fail Cassidy argues that the two most prescient economic analyses of our current economic malaise, and its relation to the dual phenomena of financialization and stagnation, were provided by: (1) Hyman Minsky, a heterodox, post–Keynesian economist, who developed a theory of financial instability in relation to contemporary capitalism, and (2) Paul Sweezy, a Marxist economist, who saw what he termed the “financialization of the capital accumulation process” as a response to the stagnation tendency of mature monopoly-capitalist economies.

As Cassidy observes about the tradition that grew up around Sweezy:

During the 1980s and ’90s, a diminishing band of Marxist economists, centered around The Monthly Review, a small New York journal that had been eking out an existence since the 1940s, focused on what they termed the “financialization” of U.S. capitalism, pointing out that employment in the financial sector, trading volumes in the speculative markets, and the earnings of Wall Street firms were all rising sharply. Between 1980 and 2000, financial industry profits rose from $32.4 billion to $195.8 billion, according to figures from the Commerce Department, and the financial sector’s share of all domestically produced profits went from 19 percent to 29 percent. Paul Sweezy, a Harvard-trained octogenarian who had emerged from the same Cambridge cohort as Galbraith and Samuelson, and who wrote what is still the best introduction to Marxist economics, was the leader of the left-wing dissidents. To a free market economist, the rise of Wall Street was a natural outgrowth of the U.S. economy’s competitive advantage in the sector. Sweezy said it reflected an increasingly desperate effort to head off economic stagnation. With wages growing slowly, if at all, and with investment opportunities insufficient to soak up all the [actual and potential] profits that corporations were generating, the issuance of debt and the incessant creation of new objects of financial speculation were necessary to keep spending growing. “Is the casino society a significant drag on economic growth?” Sweezy asked in a 1987 article he cowrote with Harry Magdoff. “Again, absolutely not. What growth the economy has experienced in recent years, apart from that attributable to an unprecedented peacetime military build-up, has been almost entirely due to the financial explosion.” 

For Cassidy, it was the reasoned historical analysis of capitalism developed by Minsky and Sweezy that allowed each of them to perceive the dramatic transformations leading up to the early twentyfirst-century crisis. “Minsky and Sweezy didn’t agree on everything, but their highly developed critical faculties allowed them to see, well before many mainstream economists, that a new model of financially driven capitalism had emerged.” Indeed, the “worldwide slump” that had its origins in the United States in 2007 “demonstrated that Minsky and Sweezy had been right when they said the fortunes of the economy at large couldn’t be divorced from what happened on Wall Street.” For Sweezy, in particular, stagnation and financialization represented coevolutionary phenomena caught in a “symbiotic embrace.”

Minsky’s analysis pointed to what has become known as the Minsky moment, or the advent of financial crisis. In contrast, Sweezy’s work on financialization, which he saw as a broad trend encompassing a stream of bubble-bursting events, stressed the causal role of what could be called the “Sweezy normal state” of stagnation in mature monopolycapitalist economies. It is the Sweezy normal state and its relation to financialization with the rise of monopoly-finance capital — together with the globalized impact of these phenomena on the global South, particularly China — which forms the content of this book. 

“Why Stagnation?”

On March 27, 1947, a now legendary debate on the future of capitalism took place at Harvard University between Sweezy and Schumpeter, two of its most popular and influential economists. As Paul Samuelson was to declare decades later, in the early 1970s: “Recent events on college campuses have recalled to my inward eye one of the great happenings in my own lifetime. It took place at Harvard back in the days when giants walked the earth and Harvard Yard. Joseph Schumpeter, Harvard’s brilliant economist and social prophet, was to debate Paul Sweezy on ‘The Future of Capitalism,’ Wassily Leontief was in the chair as the moderator and the Littauer Auditorium could not accommodate the packed house.”

The debate between Sweezy and Schumpeter was part of the larger debate on stagnation in the 1930s through the early ’50s, brought on by the Great Depression. Sweezy argued on the basis of Marx and Keynes that “accumulation is the primary factor” in capitalist development, yet noted that its influence was waning. “There is no mechanism in the system,” he explained, “for adjusting investment opportunities to the way capitalists want to accumulate and no reason to suppose that if investment opportunities are inadequate capitalists will turn to consumption — quite the contrary.” Hence, the motor was removed from the capitalist economy, which tended without some external force, such as “the outside shot in the arm of a war” — toward long-run stagnation. Schumpeter, taking a more conservative and “Austrian” approach, apparently argued that a long cycle (Kondratieff) expansion might commence in the late 1950s, peaking in the late ’80s; and yet the wind was likely to go out of the sails of the U.S. economy due to the waning of the entrepreneurial function and the rise of corporations and the state. Schumpeter did not deny the stagnationist tendency of the economy but thought growth was weighed down rather than stimulated by New Deal-type intrusions in the economy.

Nearly twenty years later, Sweezy, writing with Paul Baran, published their now classic study, Monopoly Capital, which was to have a strong influence on New Left economics in the 1970s. “The normal state of the monopoly capitalist economy,” they declared, “is stagnation.” According to this argument, the rise of the giant monopolistic (or oligopolistic) corporations had led to a tendency for the actual and potential investment-seeking surplus in society to rise. The very conditions of exploitation (or high price markups on unit labor costs) meant both that inequality in society increased and that more and more surplus capital tended to accumulate actually and potentially within the giant firms and in the hands of wealthy investors, who were unable to find profitable investment outlets sufficient to absorb all of the investment-seeking surplus. Hence, the economy became increasingly dependent on external stimuli such as higher government spending (particularly on the military), a rising sales effort, and financial expansion to maintain growth. Such external stimuli, as Sweezy was later to explain, were “not part of the internal logic of the economy itself,” falling “outside the scope of mainstream economics from which historical, political, and sociological considerations are carefully excluded.”

All of these external stimuli were self-limiting, and/or generated further long-run contradictions, leading to the resumption of stagnation tendencies. Sending capital investment abroad did little to abate the problem since the return flow of profits and other business returns, under conditions of unequal exchange between global North and South and U.S. hegemony in general, tended to overwhelm the outward flow. A truly epoch-making innovation, playing the role of the steam engine, the railroad, or the automobile in the nineteenth and early- to mid-twentieth centuries, might alter the situation. But such history-changing innovations of the kind that would alter the entire geography and scale of accumulation were not to be counted on and were probably less likely under mature monopoly-capitalist conditions. The result was that the economy, despite its ordinary ups and downs, tended to sink into a normal state of long-run slow growth, rather than the robust growth assumed by orthodox economics. In essence, an economy in which decisions on savings and investment are made privately tends to fall into a stagnation trap: existing demand is insufficient to absorb all of the actual and potential savings (or surplus) available, output falls, and there is no automatic mechanism that generates full recovery.

Stagnation theory, in this sense, did not mean that strong economic growth for a time was impossible in mature capitalist economies — simply that stagnation was the normal case and that robust growth had to be explained as the result of special historical factors. This reversed the logic characteristic of neoclassical economics, which assumed that rapid growth was natural under capitalism, except when outside forces, such as the state or trade unions, interfered with the smooth operation of the market. Stagnation also did not necessarily mean deep downturns with negative growth, but rather a slowing down of the trend-rate of growth due to overaccumulation. Net investment (i.e., investment beyond that covered by depreciation funds) atrophied, since with rising productivity what little investment was called for could be met through depreciation funds alone. Stagnation thus assumed steady technological progress and rising productivity as its basis. It was not that the economy was not productive enough; rather it was too productive to absorb the entire investment-seeking surplus generated within production.

Baran and Sweezy’s Monopoly Capital was published at the very height of the post–Second War boom and during the Vietnam War period. In the mid–1970s the U.S. economy slowed down drastically, ending a period of rapid expansion that had been fueled by: (1) the buildup of consumer liquidity during the war; (2) the second great wave of automobilization in the United States (including the construction of the interstate highway system); (3) a period of cheap energy based on the massive exploitation of oil; (4) the rebuilding of the war-torn European and Japanese economies; (5) two regional wars in Asia, and Cold War military spending in general; and (6) a period of unrivaled U.S. hegemony. As the external conditions lifting the economy during these years gradually waned, conditions of stagnation reemerged.

However, in the 1970s growing debt and the related casino economy emerged as a means of propping up U.S. capitalism, and by the 1980s the surplus capital from the entire world was drawn into the speculative whirlwind of a new, financialized economy centered in Wall Street. Paul Sweezy and Harry Magdoff were among the earliest and most persistent analysts of this new process of financialization, seeing it not simply in Minsky-like terms of periodic financial crises, but as a drug or stimulant, akin to those sometimes used by athletes, that had emerged within the system to keep the economy going despite what they called “creeping stagnation.” “Finance,” they wrote in 1977, “acts as an accelerator of the business cycle, pushing it farther and faster along on the way up and steepening the decline on the way down.” Agreeing with Minsky on financial instability, they nonetheless argued that “by focusing almost entirely on the financial aspects he overlooks other long-term factors which give a more solid base to the long wave of prosperity, and he likewise ignores the petering out of the boom-sustaining conditions as well as the resurgence of stagnation tendencies.” The underlying problem remained the Sweezy normal state of stagnation, now complicated by an addiction to debt-based stimuli.

On March 22, 1982, almost thirty-five years to the day from his legendary debate with Schumpeter at Harvard, Sweezy delivered a talk at the Harvard Economics Club entitled, “Why Stagnation?” Here he recounted the origins of the great stagnation debate that had arisen at Harvard in the late 1930s, when a deep recession appeared in 1937, before full recovery from the Great Depression had occurred. This raised the question, as Alvin Hansen, Keynes’s leading follower in the United States, posed it in his 1938 book, of Full Recovery or Stagnation? Schumpeter in his 1942 treatise, Capitalism, Socialism, and Democracy, labeled Hansen’s stagnationist analysis “the theory of vanishing investment opportunity” and countered it with his own argument that the real problem preventing full recovery was the New Deal itself. It was this that led to the Sweezy-Schumpeter debate in 1947.

In 1982, speaking three and a half decades after his famous debate with Schumpeter, Sweezy told his listeners at the Harvard Economics Club that the stagnation question arising out of the Great Depression had been “dropped without any satisfactory answer…. Reality is now posing it again,” demonstrating that “the burial of stagnation was, to say the least, premature.” However, what had fundamentally changed things since (beyond the growth in government spending) was the increased reliance on the promotion of credit/debt as a long-term stimulus to counter stagnation:

Let me digress for a moment to point out that the fact that the overall performance of the economy in recent years has not been much worse than it actually has been, or as bad as it was in the 1930s, is largely owing to three causes: (1) the much greater role of government spending and government deficits; (2) the enormous growth of consumer debt, including residential mortgage debt, especially during the 1970s; and (3) the ballooning of the financial sector of the economy which, apart from the growth of debt as such, includes an explosion of all kinds of speculation, old and new, which in turn generates more than a mere trickledown of purchasing power into the “real” economy, mostly in the form of increased demand for luxury goods. These are important forces counteracting stagnation as long as they last, but there is always the danger that if carried too far they will erupt in an old-fashioned panic of a kind we haven’t seen since the 1929–33 period…. 

There could hardly have been a more far-sighted description of the contradictions of U.S. capitalism, pointing ahead to the Great Financial Crisis of 2007–09, and to the conditions of severe economic stagnation that arose in its wake. These warnings, however, went unheeded, and no resurrection of the stagnation debate occurred in the 1980s.

Addressing the failure of younger generations of left economists to take up the question, Magdoff and Sweezy observed in Stagnation and the Financial Explosion in 1987:

We both reached adulthood during the 1930s, and it was then that we received our initiation into the realities of capitalist economics and politics. For us economic stagnation in its most agonizing and pervasive form, including its far-reaching ramifications in every aspect of social life, was an overwhelming personal experience. We know what it is and what it can mean; we do not need elaborate definitions or explanations. But we have gradually learned, not altogether to our surprise of course, that younger people who grew up in the 1940s or later not only do not share but also do not understand these perceptions. The economic environment of the war and postwar periods that played such an important part in shaping their experiences was very different. For them stagnation tends to be a rather vague term, equivalent perhaps to a longer-than-usual recession but with no implications of possible grave political and international repercussions. Under these circumstances, they find it hard to relate to what they are likely to regard as our obsession with the problem of stagnation. They are not quite sure what we are talking about or what all the fuss is over. There is a temptation to say: just wait and see, you’ll find out soon enough. 

Yet, rather than ending with such a pronouncement, Magdoff and Sweezy went on to explain in the remainder of their book why a stagnation tendency was so deeply embedded in mature monopoly-capitalist societies, prone to market saturation, and why financialization had emerged as a desperate and ultimately dangerous savior. In their chapter on “Production and Finance,” they introduced a systematic analysis of the relation of the productive base of the economy to the financial superstructure (or as they also called it the relation of the “real economy” to finance), accounting for the increasingly shaky financial structure on top of a “stagnant productive sector.”

In his final article, “More (or Less) on Globalization,” written in 1997, fifty years after the Sweezy-Schumpeter debate, Sweezy depicted the overaccumulation problem of developed capitalism in terms of three conditions: (1) growing monopolization at the global level with the expansion of multinational corporations, (2) the slowing down (or deepening stagnation) of the Triad economies, and (3) the “financialization of the accumulation process.” For Sweezy, these three trends were “intricately related” and anyone wanting to understand the future of the capitalist economy needed to focus on their interrelation, and their presence within a capitalist system that was more and more globalized.

Monopoly-Finance Capital and the Great Stagnation

Our own analysis in this book begins in many ways where Sweezy (and Harry Magdoff) left off, and carries forward as well the analysis of John Bellamy Foster and Fred Magdoff in The Great Financial Crisis: Causes and Consequences (2009). What Sweezy called the “intricately related” aspects of monopolization, stagnation, financialization, and globalization have produced a new historical phase, which we refer to as “monopoly-finance capital.” In this period the Triad economies are locked in a stagnation-financialization trap, while linked to the growth in the emerging economies via the global labor arbitrage — whereby multinational corporations exploit the differences in wage levels in the world in order to extract surplus profits. The result is the worsening of the overall problem of surplus capital absorption and financial instability in the center of the world economy. In this book we are particularly concerned with how this is working out at the global level, with considerable focus (in the later chapters) on how this is related to the Chinese economy.

Yet the central problem remains overaccumulation within the Triad, where the United States, despite its declining hegemony, still constitutes the trend-setting force in the world system of accumulation. The deepening effects of stagnation in the U.S. economy can be seen in this chart showing the long-run downward trend in the growth rate of industrial production in the United States.

Nor is the United States alone in this respect. Since the 1960s West Germany, France, the United Kingdom, Italy, and Japan have all seen even larger declines, when compared to the United States, in their trend-rates of growth of industrial production. In the case of Japan industrial production rose by 16.7 percent in 1960–70 and by a mere 0.04 percent in 1990–2010.

The story shown in the chart depicting real growth rates is one of deepening stagnation of production — already emphasized by Sweezy and Magdoff in the 1970s and ’80s. A chart showing share of GDP going to finance, insurance, and real estate, in contrast, reveals that this led — especially from the 1980s on — to a shift in the economy from production to speculative finance as the main stimulus to growth. Thus the FIRE (finance, insurance, and real estate) portion of national income expanded from 35 percent of the goods-production share in the early 1980s to over 90 percent in recent years. The so-called economic booms of the 1980s and ’90s were powered by the rapid growth of financial speculation leveraged by increasing debt, primarily in the private sector.

The dramatic rise in the share of income associated with finance relative to goods production industries has not, however, been accompanied by an equally dramatic rise of the share of jobs in financial services as opposed to industrial production. Thus employment in FIRE as a percentage of employment in goods production over the last two decades has remained flat at about 22 percent. This suggests that the big increase in income associated with finance when compared to production has resulted in outsized gains for a relatively few income recipients rather than a corresponding increase in jobs.

The rapid expansion of FIRE in relation to goods production in the U.S. economy is a manifestation of the long-run financialization of the economy, i.e., the shift of the center of gravity of economic activity increasingly from production (and production-related services) to speculative finance. In the face of market saturation and vanishing profitable investment opportunities in the “ real economy,” capital formation or real investment gave way before the increased speculative use of the economic surplus of society in pursuit of capital gains through asset inflation. As Magdoff and Sweezy explained as early as the 1970s, this could have an indirect effect in stimulating the economy, primarily by spurring luxury consumption. This has become known as the “wealth effect,” whereby a portion of the capital gains associated with asset appreciation in the stock market, real estate market, etc., is spent on goods and services for the well-to-do, adding to the effective demand in the economy.

Yet the stimulus provided by financialization has not prevented a multi-decade decline in the role of investment in the U.S. economy. Thus net private nonresidential fixed investment dropped from 4 percent of GDP in the 1970s to 3.8 percent in the ’80s, 3 percent in the ’90s, and 2.4 percent in 2000–2010. At the heart of the matter is the declining long-term growth rate of investment in manufacturing, and more particularly in manufacturing structures (construction of new or refurbished manufacturing plants and facilities).

Even with declining rates of investment growth, productivity increases in industry have continued, leading to the expansion of excess productive capacity (an indication of the overaccumulation of capital). This can be seen in a chart showing the long-term slide in capacity utilization in manufacturing. High and rising levels of unused (or excess) capacity have a negative effect on investment since corporations are naturally reluctant to invest in industries where a large portion of the existing capacity is standing idle. The U.S. automobile industry leading up to and during the Great Recession (like the worldwide industry) was faced with huge amounts of unused capacity — equal to approximately one-third of its total capacity. A 2008 BusinessWeek article underscored the global auto glut: “With sales tanking from Beijing to Boston, automakers find themselves in an embarrassing position. Having indulged in a global orgy of factory-building in recent years, the industry has the capacity to make an astounding 94 million vehicles each year. That’s about 34 million too many based on current sales, according to researcher CSM Worldwide, or the output of about 100 plants.

The decreasing utilization of productive capacity is paralleled by what we referred to in 2004 as “The Stagnation of Employment,” or the growing unemployment and underemployment that characterizes both the U.S. economy and the economies of the Triad in general. According to the alternative labor underutilization measure, U6, of the Bureau of Labor Statistics, a full 14.9 percent of the civilian workforce (plus marginally attached workers) were unemployed or underemployed on a seasonally adjusted basis in the United States in February 2012.

In these circumstances, the U.S. economy, as we have seen, has become chronically dependent on the ballooning of the financial superstructure to keep things going. Industrial corporations themselves have become financialized entities, operating more like banks in financing sales of their products, and often engaging in speculation on commodities and currencies. Today they are more inclined to pursue the immediate, surefire gains available through merger, acquisition, and enhanced monopoly power than to commit their capital to the uncertain exigencies associated with the expansion of productive activity. Political-economic power has followed the financial growth curve of the economy, with the economic base of political hegemony shifting from the real economy of production to the financial world, and increasingly serving the interests of the latter, in what became known as the neoliberal age.

The main key to understanding these developments, however, remains the Sweezy normal state. The long-term trends associated with economic growth, industrial production, investment, financialization, and capacity utilization (as shown in these charts) all point to the same phenomenon of a long-term economic slowdown in the U.S. and the other advanced industrial economies.

A central cause of this stagnation tendency is the high, and today rapidly increasing, price markups of monopolistic corporations, giving rise to growing problems of surplus capital absorption. Taking the nonfarm business sector as a whole, the price markup on unit labor costs (the ratio of prices to unit labor costs) for the U.S. economy over the entire post–Second World War period averaged 1.57, with a low of around 1.50 in the late 1940s. However, from the late 1990s to the present the markup on unit labor costs — what the great Polish economist Michal Kalecki referred to as the “degree of monopoly” — has climbed sharply, to 1.75 in the final quarter of 2011. As stated in The Economic Report of the President, 2012: “The markup has now risen to its highest level in post–World War II history, with much of that increase taking place over the past four years. Because the markup of prices over unit labor costs is the inverse of the labor share of output, saying that an increase in the price markup is the highest in postwar history is equivalent to saying that the labor share of output has fallen to its lowest level.” 

The Ambiguity of Global Competition

In line with the foregoing, the last few decades have seen the intensification of a growing trend today toward monopolization in the U.S. and global economies, reflected in: (1) concentration and centralization of capital on a world scale, (2) growth of monopoly power and profits, (3) the developing global supply chains of multinational corporations, and (4) the rise of monopolistic finance. The total annual revenue of the five hundred largest corporations in the world (known as the Global 500) was equal in 2004–08 to around 40 percent of world income, with sharp increases since the 1990s. This strong monopolization tendency, however, is scarcely perceived today in the face of what is characterized in the conventional wisdom as ever-greater competition between firms, workers, and states.

We call this problem of mistaken identity, in which growing monopolization is misconstrued as growing competition, the “ambiguity of competition.” From the days of Adam Smith to the present the development of monopoly power has always been seen as a constraint on free competition, particularly in the domain of price competition. As Smith put it in The Wealth of Nations, “The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken.” For classical political economists in the nineteenth century competition was only intense if there were numerous small firms. However, Karl Marx had already pointed in Capital to the concentration and centralization of capital, whereby bigger firms beat smaller ones and frequently absorb the latter through mergers and acquisitions. This led to a vast transformation of industry in the last quarter of the nineteenth century and the beginning of the twentieth century, as production came to be dominated by a relatively small number of giant corporations. As John Munkirs wrote in 1985 in The Transformation of American Capitalism, “The genesis of monopoly capitalism (1860s to 1920s) created a stark dichotomy between society’s professed belief in Smith’s competitive market structure capitalism and economic reality.”

In the 1920s and ’30s important innovations in economic theory were introduced designed to account for this new reality, under the rubric of “the theory of imperfect competition.” The three most important pioneering attempts to alter mainstream economic theory to take account of monopoly power were developed by Edward H. Chamberlin in The Theory of Monopolistic Competition (1933), Joan Robinson in The Economics of Imperfect Competition (1933), and Paul Sweezy in “Demand under Conditions of Oligopoly” (1939). As Robinson wrote, “We see on every side a drift toward monopolization under the names of restriction schemes, quota systems, rationalisation, and the growth of giant companies.” In Chamberlin’s terms, “The idea of a purely competitive system is inadmissible; for not only does it ignore the fact that the monopoly influence is felt in varying degrees throughout the system, but it sweeps it aside altogether…. In fact, as will be shown later, if either element [competition or monopoly] is to be omitted from the picture, the assumption of ubiquitous monopoly has much more in its favor.”

These analyses considered a wide variety of monopolistic and semi-monopolistic situations, describing how price competition was diminished with monopoly, how firms were able to set their own prices partly through “product differentiation” (a term coined by Chamberlin), and how industries were increasingly dominated by oligopolies (a few giant firms) with considerable monopoly power.

Chamberlin, who also introduced the concept of oligopoly into economic theory, emphasized its role in the very first chapter of his Theory of Monopolistic Competition. Sweezy’s “Demand under Conditions of Oligopoly” introduced a theory of oligopolistic pricing, which argued that any price-cutting by giant oligopolistic firms was enormously destructive, leading to actual price warfare, in which firms would each lower their prices in order to retain market share and all would see their profits decline. Hence, large firms in mature, concentrated industries soon learned to collude indirectly in raising rather than lowering prices, with the result that prices (and more importantly profit margins) tended to go only one way — up. The most frequent result of monopolistic (including oligopolistic) competition and the constraints on price competition it imposed, according to Chamberlin, was “excess productive capacity, for which there is no automatic corrective…. The surplus capacity is never cast off, and the result is high prices and waste.”

Since these theories of monopolistic competition challenged the notion of a freely competitive system, threatening the whole structure of orthodox economics, they were shunted aside — in an early version of the economics of innocent fraud — into a marginal realm within economics. A set of exceptions to perfect competition was recognized, but this was treated as outside the general model of the economy, which remained a world of perfect and pure competition. At the same time, economists introduced intermediary notions such as “workable competition” (a vague notion that in practice effective competition somehow continued) together with the idea of a new competition geared less to price competition than to innovation, i.e., the perennial gale of Schumpeterian “creative destruction.”

Imperfect competition theory itself was reshaped to conform to the needs of economic orthodoxy. Hence, the notion of “monopolistic competition” was redefined simply to relate to conditions where numerous small firms were able to exploit favorable locations or product differentiation, while excluding oligopoly (the typical case) from the concept.

Chamberlin himself was driven to object that oligopoly had been the starting point for monopolistic competition theory and its exclusion from the theory of monopolistic competition was absurd. “Monopolistic competition,” he complained, was “converted from an almost universal phenomenon, which it surely is…. to the relatively unimportant one of differentiated products in the restricted case of ‘large numbers.’”

Competition was therefore redefined in public discourse to mean “workable competition” as a vague analogue to perfect competition, while economists in their basic models continued to hold on to the abstract notion of perfect and/or pure competition. Instances of oligopolistic rivalry — i.e., the intense battles between quasi-monopolistic firms over markets, product differentiation, and low-cost position (but seldom encompassing price cutting in final consumption markets) — were often erroneously treated as if they exemplified Smithian competition. Orthodox figures such as Milton Friedman meanwhile continued to argue that oligopolistic rivalry was the very antithesis of competition.

It is this confused situation that gives rise to the ambiguity of competition. As Munkirs stated in The Transformation of American Capitalism: “Within the business community and the economics profession, [John Maurice] Clark’s concept of ‘workable competition’ and Schumpeter’s ‘gales of creative destruction’ were christened ‘the new competition.’ Simply by assigning a new meaning to the term competition, the ill effects of monopolistically competitive market structures were defined out of existence. Yet the real world does exist.”

In contrast, radical and Marxian thinkers were dedicated to a realistic historical outlook, and, as they had no reason to hold on to the notion of free competition where it contradicted such reality, continued to analyze the growing role of monopoly in the modern economic system. For early twentieth-century economist Rudolf Hilferding in Austria and Germany, such monopolization was characterized as the growth of “finance capital.” Lenin, following Hilferding, wrote of what he called “the monopoly stage of capitalism” — seeing this as the basis of modern imperialism.63 The iconoclastic U.S. economist Thorstein Veblen developed an early theory of monopoly capitalism as part of his critique of “absentee ownership.”

Within the terrain of critical economics from the 1930s to ’70s, Kalecki and Josef Steindl developed theories of the widening degree of monopoly and its relation to maturity and stagnation. The purpose of Baran and Sweezy’s Monopoly Capital, which drew much of its inspiration from Kalecki and Steindl, was “to begin the process of systematically analyzing monopoly capitalism on the basis of the experience of the most developed monopoly capitalist society” — the United States. Likewise such works as Harry Magdoff’s The Age of Imperialism (1969), James O’Connor’s The Fiscal Crisis of the State (1973), and Harry Braverman’s Labor and Monopoly Capital (1974) relied on the concept of monopoly capital.

Our own line of inquiry in this book builds on such analyses, attempting to understand the current phase of monopoly-finance capital, in which stagnation and financialization have emerged as interrelated trends on a global scale. Here the paradox of an economy where financialization rather than capital accumulation has now become the motor of the system is explored.

The Globalization of Monopoly Capital, U.S. Hegemonic Decline, and the Rise of China

Still, even on the left the role of monopolization is far from universally accepted today, largely because of the changes in perception brought on by increased international competition (or transnational oligopolistic rivalry). In the 1970s core U.S. industries, such as steel and automobiles, began to be affected by international competition, seemingly undermining the power of U.S. monopoly capital. The rise of multinational corporations, primarily in the Triad, was the vehicle for this enhanced world competition. This caused Joan Robinson to quip, “Modern industry is a system not so much of monopolistic competition as of competitive monopolies.”

Some observers saw this process of the creation of global oligopolies, which necessarily involved the amalgamation or destruction of the weaker of the national oligopolistic firms, as a return of the nineteenthcentury- style competitive system. They were mistaken.

The theory of the multinational corporation, as developed by Stephen Hymer (who is still the definitional economic theorist in this area), saw the rise of these globetrotting firms as the product of the growth of the concentration and centralization of capital and monopoly power worldwide. Rather than a competitive market structure, as envisioned in orthodox economics, what was emerging was a system of global oligopolistic rivalry for the domination of world production by a smaller and smaller number of global corporations. Hymer went on to connect this to Marx’s theory of the industrial reserve army of the unemployed, explaining that the monopolistic multinational corporations were in the process of creating a new international division of labor based on the formation of a global reserve army, and the exploitation of wage differentials worldwide (or the global labor arbitrage). This global restructuring of production adopted a divide-and-rule approach to labor worldwide.

These changes were accompanied by a shift of the United States, beginning around 1980, from a massive surplus to a massive deficit country in its current account (the combined balances on trade in goods and services, income, and net unilateral transfers), turning it into the consumption engine of the world economy or “buyer of last resort.” All of this was made possible by U.S. dollar hegemony, coupled with financialization, whereby, as Yanis Varoufakis has argued, the United States became the Global Minotaur, borrowing and consuming out of proportion to its own production while providing markets for the exports of other countries. This can be seen in a chart showing the growth of the U.S. current account deficit (a good part of which results from the deficit in the trade in goods and services) as a percent of GDP. During the last thirty years the United States has turned into the world’s largest borrower, exploiting its position of financial hegemony and drawing in surplus capital from the rest of the world — while ultimately compounding its underlying problem of overaccumulation.

At the same time, the global labor arbitrage promoted by multinational corporations was restructuring the world economy, transferring much of world production to the global South. The giant corporations developed ever more complex supply chains extending to low-wage countries, with the final goods aimed primarily at markets in the global North, and the surplus capital seized in considerable part by the omnipresent multinational firms themselves. In the 1960s 6 percent of total U.S. corporate profits came from abroad. By the 1990s this had risen to 15 percent, and in 2000–2010 to 21 percent.

The biggest question mark generated by this new phase of accumulation today is the rapid growth of a few large emerging economies, particularly China and India. The vagaries of an accumulation system in these countries based on the exploitation of massive reserve armies of workers (in China a “floating population” of peasants) in the hundreds of millions, which cannot be absorbed internally through the standard industrialization process, makes the future of the new Asia uncertain. The imperial rent exacted by multinationals, who also control the global supply chains, means that emerging economies face what may appear to be an open door to the world market, but must proceed along paths controlled from outside. The vast inequality built into a model of export-oriented development based on low-wage labor creates internal fault lines for emerging economies. China is now the site of continual mass protests, occurring on a scale of hundreds of thousands annually. In an article entitled “Is China Ripe for Revolution?” in the February 12, 2012, New York Times, Stephen R. Platt wrote that the Taiping Rebellion of the nineteenth century might stand as a historical reminder of the possibility of another major “revolution from within” in that country (in which case, he notes, Washington would most likely find itself “hoping for that revolution to fail”).

In many ways the world situation, with minor modifications, conforms to the diagnosis provided by Che Guevara at the Afro-Asian Conference in Algeria in 1965: “Ever since monopoly capital took over the world, it has kept the greater part of humanity in poverty, dividing all the profits among the group of the most powerful countries…. There should be no more talk about developing mutually beneficial trade based on prices forced on the backward countries by the law of value and the international relations of unequal exchange that result from the law of value.” If some emerging economies are now developing rapidly, the dominant reality is the global labor arbitrage that is increasing the level of exploitation worldwide, the greatest burden of which is falling on the global South.

An underlying premise throughout our analysis is that imperialist divisions within the world remain and are deep and in many cases deepening, enforcing wide disparities in living conditions. Still, in the age of global monopoly-finance capital working people everywhere are increasingly suffering — a phenomenon that Michael Yates has referred to as “The Great Inequality.” Entrenched and expanding monopolies of wealth, income, and power are aimed at serving the interests of a minuscule portion of the world population, now known as the 1% — or the global ruling classes of contemporary monopoly-finance capital. The world is being subjected to a process of monopolistic capital accumulation so extreme and distorted that not only has it produced the “Great Inequality” and conditions of stagnation and financial instability, but also the entire planet as a place of human habitation is being put in peril in order to sustain this very system. Hence, the future of humanity — if there is to be one at all — now lies with the 99%. “If the system itself is at fault,” Gar Alperovitz observes in his America Beyond Capitalism, “then self-evidently — indeed, by definition — a solution would ultimately require the development of a new system.”

This excerpt has been reprinted with permission from The Endless Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to China, by John Bellamy Foster and Robert W. McChesney, published by Monthly Review Press, 2012.


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