Zombie Capitalism Global Crisis and the Relevance of Marx

Martin Wolf again described what was happening accurately:

The leverage machine is operating in reverse and, as it generated fictitious profits on the way up, so it takes those profits away on the way down. As unwinding continues, highly indebted consumers cut back, corporations retrench and unemployment soars.36

Hence the first moment of truth of August 2007, when some of the hedge funds controlled by banks discovered they could not pay their debts and banks stopped lending to each other out of fear they would not get their money back. Hence the failure of the hundreds of billions poured into national banking systems to prevent the second moment of truth in mid-September 2008 when the collapse of Lehman Brothers was followed within days by the threatened collapse of banks in nearly all the major Western states (AIG in the US, HBOS in Britain, Fortis in Belgium and the Netherlands, Hypo Real Estate in Germany, the three major Irish banks, the Icelandic banks). Hence the way in which in the two months that followed even banks which thought they had gained from the problems of their competitors were in dire trouble-Citibank (the world's biggest) and Bank of America in the US, Lloyds in Britain.

Hence, finally, it was clear the crisis was no longer just one of finance. The vast expansion of finance had created the illusion of a new "long upturn" in productive accumulation; the crisis of finance made that illusion disappear with traumatic effects. There was "a week of living perilously" in November as "panic seized the markets" .37 In the US Chrysler lost millions by the day, General Motors said it needed \$4 billion immediately to avoid bankruptcy and Ford joined in asking for a \$34 billion government handout. In Britain, Woolworths and MFI went bust. The toll of sackings in every sector began to compare with the haemorrhaging of jobs in the crisis of the early 1980s. And the pain was felt not merely on both sides of the Atlantic, but on both sides of the Pacific too.

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In the spring of 2008 the dominant theme in mainstream economic commentary had been that a "decoupling" of different national economies would enable Asia to keep expanding at its old speed while Europe and America suffered. By new year 2009 the recession had spread to Japan, where car output fell at a record rate, to China, where there were thousands of factory closures in the south east,38 and to India, where a business lobby group warned that 10 million manufacturing jobs could be lost as exports collapsed.39 The victims of the Asian crisis of 1997-Thailand, South Korea, Singapore, Malaysia, Indonesia-were battered once again. So too were the victims of the slump which swept the former Eastern bloc from the late 1980s onwards-the Baltic states, Ukraine, Hungary, Bulgaria, Romania. In Russia the collapse of the record world oil prices of only six months before led to a fall in the value of the rouble, escalating inflation and a renewed spread of poverty.

Financialisation and the debt economy had proved incapable of moving world accumulation forward at its old speed in the 1980s, 1990s and mid-2000s. It had faltered every few years and, at the end, threatened to fail completely, leading to a crisis of unpredictable depth. Governments which in words, if not in practice, had insisted that the free market could be left to cure its own faults, were now faced with the grim reality that left to itself capitalism could, as in the 1 930s, threaten to fall into a catastrophic slump, with the collapse of each giant firm ricocheting through the economy and leading to the collapse of others.

Urged on by some of the giant corporations, states saw no alternative but to intervene in the economy on a scale unprecedented except under circumstances of total war. So it was the Bush administration, the most right wing in the US for 75 years, that effectively nationalised the mortgage corporations Fanny Mae and Freddy Mac early in September. There was one last attempt to rely on the market when it allowed Lehman Brothers to go bust-a decision praised by the Financial Times editorial as a "courageous" and a "risk that might well pay off" .40 The disastrous outcome left states with no choice not only to attempt one and half trillion dollar bail-outs, but in effect to partially, and sometimes completely, nationalise not just relatively small banks like Northern Rock and Bradford & Bingley in Britain, but some of the giants. As they did so, their advisers began to ponder whether the only solution to the crisis might be the nationalisation of whole banking systems. State capitalism, and its ideological correlate, Keynesianism, was making a massive comeback after being hidden in an ideological closet for a generation.

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Finance and "financialisation"

The great crisis that erupted in 2007 led those who had rejoiced at the wonders of capitalism during the great delusion to try to pin the blame on something other than capitalism as such. The easiest way to do this was to see the "the banks" and "finance" as detached from the rest of the capitalist system. French president Nicolas Sarkozy went to a G7 meeting in January 2008 declaring that "something seems out of control" with the financial system and calling for increased controls over it. 41 All accounts of the Davos World Economic Forum in 2009 told of the deep unpopularity of the banks with the representatives of multinationals and governments: "The audience cheered in one debate when Nassim Nicholas Taleb, author of The Black Swan, said it was time to punish bankers by forcing them to hand back bonuses" .42

Such arguments led to a simple conclusion: the way to prevent future financial crises was greater regulation of finance. Such was the response of many mainstream economists-former monetarists and moderate Keynesians alike, with repeated discussions in the pages of the Financial Times over the degree of regulation that was possible and necessary. This was also the response of some analysts on the reformist left. Robert Wade of the LSE could provide riveting accounts of the absurdities of finances that led to the crisis and then conclude that greater controls could stop them.43 Larry Elliot and Dan Atkinson in their book The Gods that Failed blamed "the gods of finance", called for increased regulation and a breaking up of the gigantic financial institutions, and then saw some hope in a meeting of G7 policy makers early in 2008 that contemplated "measures to rein in the turbo charged financial interests" . 44

Rather further to the left the rise of finance had already led to the re-emergence of the old notions of Hobson, Hilferding and Kautsky of "finance" or "finance capital" as having distinct interests from productive capital. The French campaigning organisation ATAC had started life in the late 1990s committed to opposition to financial speculation, not to capitalism as such.45 Its central demand was for a "Tobin tax" on movement of financial funds across national borders. This, it was claimed, would counter financial crises. Such "finance is to blame" arguments found a resonance among many radical Marxists. Dumenil and Levy wrote of "neoliberalism" as "the ideological expression of the reasserted power of finance" which "dictates its forms and contents in the new stage of internationalisation.46 James Crotty's tone was very similar, arguing that "financial interests have become much more economically and politically powerful, and . . . these trends have been coterminous with a deterioration in real economic performance" .47 Francois Chesnais wrote of "a globalised regime of financially dominated accumulation" ,48 in which "the movement of money capital has become a fully autonomous force vis-a-vis industrial capital", forcing it either to accept a "deep interpenetration with money capital, or to submit itself to its exigencies" .49 He took up the expression of Mable, Barre and Boyer, according to which "bad capitalism" had been able to chase out "good" .-1° Chesnais as a revolutionary socialist did not himself regard the old form of capitalism as "good" (hence his putting the word between quote marks). But he did argue that finance was to blame for the "mediocre or poor dynamic of investment . . . "1¹ A similar emphasis on finance having interests strongly opposed to those of productive capital was to be found in Peter Gowan's The Global Gamble, a very useful account of US capitalism's attempt to maintain global hegemony. He argued that "some of the sharpest conflicts within capitalist societies have occurred . . . between the financial sector and the rest of society".52

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The accounts of "financialisation" varied considerably in their detail. But they all shared a contention that the "dominance" of "finance" led to a shift in the dynamic of the system. Productive capital, it was argued, was concerned with productive accumulation. In the early post-war years this had occurred across the industrial world, even if it was organised differently in the US and Britain, where industrial corporations had used internally generated profits in order to undertake long-term investments, and in Japan and West Germany, where collaboration with the banks had provided such investment. But the rise of big investment funds and the "dominance" of finance had changed that. The situation now was that all the pressure was on firms to deliver quick returns to shareholders ( "shareholder value" ) through high dividend payments and measures that ensured a high share price (so boosting shareholders' capital gains), and on governments and national banks to keep interest rates high. Versions of this standpoint had been presented by Keynesian writers like Will Hutton and William Keegan in the 1990s to counterpose the "short-termism" of "Anglo-Saxon" capitalism to supposedly long-term, more investment oriented approaches of Japanese and German capitalisms.s3 Now it was extended to all the advanced industrial countrieswith the partial exception of Germany. s4

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Crotty, Gerald Epstein and Arjun Jayadev referred to this as a growth of rentier incomes and "rentier power". They were harking back to Keynes's application of the term rentier to idle "gentlemen" who were receiving interest or dividends payments through the post for doing nothing. But now the rentiers were "mutual funds, public and private pension funds, insurance companies and other institutional investors" .ss

Costas Lapavitsas, who provided excellent factual accounts of the development of the financial crisis of 2007-8, nevertheless put the stress in explaining it on purely financial aspects-in particular the changed behaviour of the banking system, which had shifted its lending from industry to lending to individuals and reliance on new computerised technologies. He argued that the "direct exploitation" of consumers by the banks had become a major new source of surplus value and influenced the dynamics of the system.56 But this form of "exploitation", like that caused by supermarkets forcing up prices,57 is only significant in so far as workers do not fight to protect the buying power of their wages at the point of production-something unions in Britain have usually tried to achieve by demanding wage increases linked to a Retail Price Index that includes mortgage interest payments. Or, as Marx would have put it, there is only increased exploitation in so far as the capitalists who employ workers get away with buying labour power at less than its value.ss It is also worth adding that on Lapavitsas's logic it is it not only workers who are exploited by the banks but also indebted members of the capitalist class and the new middle class-the median debt of households in the US with incomes of more than \$100,000 in 2003 was about four and a half times that of households with incomes in the range of \$25,000-\$50,000.s9

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The "shareholder value" version of the financialisation argument has often been taken for granted. But it contains big gaps. Dick Bryan and Michael Rafferty have pointed out that:

the stock market should not be so heavily emphasised. It is, after all, a relatively minor forum for raising funds. Even in the so-called market-based systems such as the US, UK and Australia, retained earnings, loans and bond issues have been far more important . . .

Furthermore, pension funds etc:

rarely if ever play an active role in the managerial decisions of firms. Institutional shareholder pressure on company boards . . . is the exception rather than the norm . . . 60

The fact that firms hand out a bigger portion of their profits as dividends need not in itself slow down the level of investment. The "rentier" shareholders can themselves lend a portion of their incomes back for further investment-and will do so if they think it is going to be profitable enough to do so. One proponent of the "shareholder value" interpretation, Stockhammer, admits that most economists hold that:

Financial investment is a transfer of assets, not a use of income. Buying stocks transfers liquidity from one economic agent to another, possibly from firms with bad investment opportunities to ones with good opportunities. Thus macroeconomically financial investment cannot substitute for physical investment.61

And Crotty suggests at one point that "financialisation", by increasing competition between firms, brings about more, "coerced", investment.62 Certainly, big financial institutions have nothing in principle against productive investment, even if finance did come to absorb a peak figure of 25 percent of total investment in the US in 1990 as against only 12 percent in the mid-1970s63 and rose to close to half in Britain in the same period.64 This was shown in the late 1990s when the dotcom/new technology boom saw industrial investment in the US financed by borrowing from the institutions as it soared ahead of savings.

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The supposed dominance of finance over production is often traced back to the US Federal Reserve under Paul Volcker raising interest rates sharply in 1979. Boyer, Crotty, Chesnais, Dumenil and Levy all see this "Volcker coup" as a decisive point. Dumenil and Levy regard it as the great victory of finance, and argue this was why high interest rates were "maintained through the 1980s and 1 990s". 65 Implicit in such arguments is the suggestion that somehow finance in general and shareholders in particular had suffered through the decades of the long boom but were only able to express their feelings with the "coup" of the late 1 970s. The argument simply does not fit the historical facts. The post-war decades were ones of enormous self-confidence among all sections of capitalism. The "golden age" for industrial capital was by no means a living hell for its shareholders and financiers. All gained as the growth of profitable productive investment translated into secure long-term capital gains.

There was some change with the crisis of the 1970s. The US's bankers and multinationals did dislike the way the "macroeconomic" "Keynesian" response to the crisis of the 1970s led to inflation and devaluation of the dollar. But, as Robert Brenner points out, had such a policy solved the problems of profitability and industrial overcapacity for the rest of US capitalism, "it is quite conceivable that even the powerful coalition of international and domestic interests arrayed against it would have failed" .66 In fact the Keynesian approach did not achieve these capitalist goals. Limited economic recovery from the recession of 1974-6 increased the level of inflation, which reached 1 3.3 percent. This had two negative consequences for all sections of US capital. It was likely to encourage workers to struggle over wages. And it was undermining the capacity of the US dollar to act as a measuring rod for US capitalists in their transactions with each other. Forcing up interest rates was meant to solve both problems-by reducing the level of economic activity to scare workers into accepting lower wage increases (which it did) and to reduce inflation (which it also did). This enabled some sections of finance to gain and induced a recession that damaged some sections of American productive capital. But it also served the general interests of all US capitalists.

As Marx had noted, capitalism needs money to act as a fairly stable measure of value, even if damage is done to society as a whole in order to achieve it:

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Raising interest rates . . . can be carried more or less to extremes by mistake, based upon false theories of money and enforced on the nation by the interest of money lenders . . . The basis, however, is given with the basis of the mode of production itself. A depreciation of credit money would unsettle all existing relations. Therefore the value of commodities is sacrificed for the purpose of safeguarding the fantastic and independent existence of this value in money . . . For a few million in money, many millions in commodities must be sacrificed. This is inevitable under capitalist production and constitutes one of its beauties.67

The suffering of many hundreds of millions as a result of the Volcker interest rate hike was a price worth paying to restore a relatively stable measure of value as far as US capitalism in its entirely was concerned-and helped cement its control elsewhere in the world. The "coup" by Volcker (and the turn to monetarism under Thatcher in Britain) consisted of turning away from one policy that was supposed to help restore the profitability of productive industry-expanding the money supply so as to allow prices and profits to rise-to another policy, that of encouraging interest rates to rise so as to squeeze out unprofitable firms and to put pressure on workers through unemployment to accept lower pay. Capital-and not just financial capital-was recognising that the Keynesian orthodoxies of the long boom could not cope with the new phase in which capital (including, not least, industrial capital) found itself.

When this manoeuvre produced only minimal results and it became clear that the high interest rates were beginning seriously to hurt US industry, Volcker cut them-not only under pressure from industrialists, but also from sections of finance.68 The trend of real long term interest rates for the next quarter century was down, not up, although they remained above the level of the long boom until the year 2000, after which they fell to around 1 percent in 2003.

The whole claim that there are two distinct sections of capitalfinance capital and industrial capital-is open to challenge. Many important financial institutions not only lend money, but also borrow it, since they are involved in "intermediation" between lenders and borrowers. What matters for them is not the absolute level of interest rates but the gaps that open up between different rates, particularly between long-term and short-term rates. And industrial concerns lend as well as borrow. Typically they accumulate surpluses between bouts of new investment, which they lend out in return for interest (see Chapter Three). They also advance credit to the wholesalers who take their produce off their hands. In short, industrial capital takes on some of the attributes of finance capital. As Makato Itoh and Costas Lapavitsas point out, "Revenue in the form of interest tends also to accrue to industrial and commercial capitalists, and cannot be the exclusive foundation for a social group".69 Thomas Sablowski-who accepts part of the "shareholder value" position-makes the point:

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At the level of the common sense, it seems to be no problem to talk about finance and industry, like they were objects easily to distinguish. However, the definition of the concepts of industrial capital and financial capital is no easy task . . _. 70

But if this is true, then it is difficult to see how the recurrent crises of the last four decades-financial and industrial-could simply be blamed on finance. A coherent explanation of the crises has to look at the system as a whole, and the way in which its different components react on each other. This is what Marx tried to do in a long, if rambling and unfinished, discussion of credit and finance in Volume Three of Capital. It is also what Hilferding attempted to do with the earlier chapters dealing with these questions in Finance Capital. These insights need to be developed to take account of the extraordinary development of finance, of financial institutions and of financial crises in the late 20th and early 21st century.

Ideology and explanation

Any great crisis does not just have economic consequences. It turns capitalist against capitalist as each tries to offload the cost of the crisis on others, just as it creates deep bitterness among the mass of the population. The crisis that began in 2007 fitted this pattern, and putting the blame on the banks was an escape route for all those who had argued so vigorously that neoliberalism and capitalist globalisation promised humanity a glorious future. So Gordon "the end of boom and bust" Brown argued that this was "a completely different sort of crisis" to those of the "previous 60 years", since it was a "global financial crisis caused by irresponsible lending practices, laxity in them and problems of regulation" .7¹ In this way, the reality of 1 80 years of periodic crises was shoved aside, in a desperate attempt to continue to extol the virtues of capitalism.

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Those radical economists who put the stress on financialisation in creating the crisis risk opening the door to such apologies for the system. Their characteristic argument has been to claim that profit rates had recovered in the 1980s and 1990s sufficiently to have brought about a revival of productive investment were it not for the power of financial interests. Such was the argument of the French Marxist Michel Husson, when he claimed in 1999 that there were "high levels of profitability" ,72 and Stockhammer and Dumenil were saying much the same thing in the summer and autumn of 2008 .73 If they were right, the crises which broke in 2001 and on a much bigger scale in 2007-8 would indeed have had causes very different to previous ones, including the inter-war slump, and greater control by the existing state over the behaviour of the financial sector would in the 21st century be sufficient to stop such crises. In accordance with such an approach, Dumenil and Levy described the "Keynesian view" as "very sensible" and looked to "social alliances" to "stop the neoliberal offensive and put to work alternative policies-a different way of managing the crisis" . 74

Yet, as we have seen from the various profit rate calculations in Chapters Eight and Nine, there seems little to justify claims that crises today have different roots to those in the past. The form of the crisis might be different each time to the last, but its impact will be just as devastating. No amount of regulation of finance alone will prevent a recurrence of crisis, and the cost to the capitalist state of trying to stop this can become almost unbearable.

It is true that "financialisation", having risen out of a situation of low rates of profit and accumulation, fed back into both. There was enormous waste as labour and skills went into moving money from one pocket to another; as potentially productive material resources were used to build and equip ever more grandiose office buildings, and as the financial "Masters of the Universe" gorged themselves in conspicuous consumption. It may also be, as Ben Fine has argued, that financialisation had the effect of driving a "wedge . . . between real and fictitious accumulation" ,75 making it difficult for capitalists to see through the fog of the markets and recognise productive investment opportunities. But, ultimately, it was the deeper problems facing the productive sectors of capital that brought this situation about. Finance is a parasite on the back of a parasite, not a problem that can be dealt with in isolation from capitalism as a whole.

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