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Debating the Economic Crisis: Part 1


A correct identification and analysis of the causes of the crisis is important. It is essential for proposing effective solutions. Failure to understand true causes leads to proposing ineffective solutions and, in turn, to adopting wrong strategies.

Allow me to begin this debate with a brief overview of mainstream-bourgeois, left-liberal, and contemporary Marxist explanations of the causes of the crisis, and explain why they are in error. Following that, I will offer a brief outline of my own view of the fundamental causes of the crisis, represented by 20 fundamental propositions.

Contending explanations of the global economic crisis that surfaced in 2007-08 reduce to the key question: what is the relationship between the financial and non-financial (real) sectors of the economy in the origination, precipitation, and continuing evolution of the current global economic crisis? Is the crisis essentially a financial event, that subsequently negatively impacted the real economy; or is the financial crisis just the appearance of a more essential development originating in the real side of the economy.

Simple observation shows that Finance Capital has had something fundamental to do with the current crisis. Nevertheless some argue it is not fundamental and that the originating locus of the crisis resides with variables on the real side of the economy—i.e. profits, wages, private real asset investment (structures, equipment, inventories, etc.). But to argue that such real side forces are solely—or even primarily—responsible for the crisis, and that financial forces (global financial institutions, new liquid markets, new securities creation, exploding credit-debt relationships, etc.) and financial instability (number, frequency and magnitude of financial bubbles and crashes) are merely derivative of those real forces, is as incorrect as to argue that financial forces solely explain the current crisis.

More precisely: to argue that a falling rate of profit is responsible for the crisis of 2007-08 is as simplistically incorrect as to argue the mortgage market bust caused the deep collapse of the real economy post-2007, and the subsequent double and triple dip recessions, and bona fide depressions in the Euro periphery, now beginning to appear globally.

There is no simple linear causal relationship from profits to crisis. Profits are not the sole, or even primary, determinant of investment and the current global crisis is fundamentally about investment—both declining real asset investment and escalating financial asset investment. The fundamental driving force behind the crisis are the changing causal relationships between the two forms of Investment—real asset and financial asset—and the mutually reinforcing transmission mechanisms between them. (A more detailed initial treatment of the relationships between real and financial asset investment is available in my 2010 book, ‘Epic Recession: Prelude to Global Depression’, by Pluto).

The task of analysis therefore is to explain the relationship between the financial and the real forces in the crisis, beginning with the two forms of investment. To explain to what extent financial and real forces are autonomous of each other and to what extent they determine each other. Precisely how do those mutual determinations occur; that is, what exactly are the empirical ‘transmission mechanisms’ that represent the feedback effects between financial and real?

It is unfortunate that much of economic analysis today (left, right and mainstream academic) claiming to have identified causes of the crisis is mostly identification of simple correlation relationships assumed to reflect causal relationships. Moreover, the ‘correlations as causation’ are typically one-directional, from real to financial or financial to real. Nor do the unidirectional ‘correlations as causation’ claims both to explain the transmission mechanisms by which the real side variables determine the financial.

For example: One wing of mainstream economists claim the collapse of the real economy is correlated strongly with central banks’ money supply mismanagement; therefore money supply mismanagement caused both the financial crash and the consequent deep contraction of the real economy. This views the capitalist economy as fundamentally stable and that (monetary) policy makers simply screwed it up. Another wing of mainstream economists argue regulatory policy was the cause of the crisis, as financial deregulation provoked the crisis that began in 2007-08. Similar ‘single correlations’ analyses abound in mainstream economic analyses of the crisis, mostly associated with ‘this or that’ policy error that appears correlated with the crisis and therefore assumed to be causative. Fundamental systemic forces endogenous to the capitalist system are never considered. Neither real nor financial forces are considered primary determinants of crisis. (For my critique of these views, see ‘Obama’s Economy: Recovery for the Few’, 2012, Pluto Books).

Views on the left correctly reject this view that the system is basically stable and crises are due to policy errors. Left views recognizes endogenous forces are responsible for the crisis. However, endogenous forces are always ‘real’ and ‘financial’ forces always derivative, as in the case of mainstream analysis. Correlations are assumed causative and no transmission mechanisms from the real to the financial are described—let alone mechanisms that represent mutual feedbacks and inter-determinations.

For example, the prevailing left-progressive critique of Neoliberalism identifies the compression and stagnation of wages since the 1980s as responsible for the recovery of corporate profits thereafter. Above historical average excess profits obtained at the direct expense of wages consequently fueled the expansion of profits and in turn the financial excesses that followed that eventually caused financial instability.

Disagreement with the Neoliberal critique view on the timing and direction of profits and wage change, but still agreeing with the idea that real forces are primary and financial forces derivative, a variant of contemporary Marxist analysis argues wage and profit decline actually preceded the 1980s by a decade. By means of various convenient redefinitions of what constitutes profits and adopting a very narrow definition of wages, this view argues real wages have not really stagnated and therefore profits from real asset investment have continued to steadily decline since the 1980s. Thus, profits decline on the real side of the economy, not profit expansion, is behind financialization and financial profits as Capitalists have offset the tendency toward real profits decline by turning to financial profits. (For my more detailed critique of this view, readers are referred to the forthcoming article, “The Bifurcation of Marxist Economic Analysis”, in the March 2013 issue of the World Review of Political Economy).

In all the preceding explanations, moreover, terms of analysis are left vague and undefined, on both the real and financial side. On the left, problems of profit definition, global profits data access, and profits under-reporting are ignored. Wages are narrowly defined, excluding various categories of labor and pay. For the mainstream view, explanation occurs in the ‘conceptual ether’ above all reference even to profits, wages, or any other real variables. Money supply mismanagement thus occurs in a theoretical ‘black box’.

Linear correlations passed off as causation, high level generalizations without explanation of ‘transmission mechanisms’ and feedback effects, vague definitions of key terms, reference to insufficient data—all these fundamental errors of analysis characterize bourgeois, left-liberal, and even some contemporary Marxist analyses of the current crisis. The crisis is not viewed as the result of mutually determining real and financial forces. The fundamental variable of investment in its two key elements—real asset and financial asset—and their shifting causal interrelationships are not considered primary. The role of the capitalist price system as a major system destabilizer is not considered in any of the above approaches to ‘real side only’ analysis.

In my follow-up second contribution to this debate, I will review 20 ‘fundamental propositions’ that summarize my alternative perspective on the causes and consequences of the crisis—a perspective that integrates real and financial variables, the price system, and the new realities of 21st century Finance Capital to produce what will be referred to as a growing ‘systemic fragility’ in the global Capitalist System today. A perspective that explains why no sustained recovery has occurred after five years of crisis, why double and triple dip recessions are now appearing globally, and why the current ‘Epic’ recession is drifting toward a bona fide depression. 

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