How Monopoly-Finance Capital Leads to Economic Stagnation

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.”