anwar shaikh, crisis: the punchline of the story (lecture 15 – 12/14)

each of the economists that we've studied have stressed the centrality of profit to the reproduction of the capitalist system.

if you eliminate profitability, then the system contracts sharply. this can happen for various reasons – bad weather events, etc.

that's why we begin, always, with the question—where does profit come from?

1. the aggregate profit (surplus)

2. the rate of profit – all three authors make a distinction between the expectation that profit will be rising absolutely (surplus), and the idea that the rate of profit will be falling. in other words, there is a distinction between 'growth' of the surplus product, and the question of the rate of profit.

Marx, like Smith and Ricardo, argues that the rate of profit falls. he roots his claim in the argument that accumulation undermines itself—the pursuit of profitability itself sets in motion dynamics that undermine profitability. in Smith and Ricardo, this is viewed as a secular trend; there's a debate in the Marxist tradition, about whether this ought to be understood as a secular trend (which Shaikh believes), or more a long-wave type dynamic.

recall that one (conceptual) limit to the growth rate is the profit rate (you can't re-invest more than your profits). this is just a counting identity. at a more concrete level, it obviously also depends on the interest rate – the growth rate will be limited by the difference between the profit rate and the interest rate (the 'risk-free' rate)

Adam Smith says that there's a stable relationship between the interest rate and the profit rate ('in the market, a rule that the interest rate be half the profit rate'). in that case, you would expect that the interest rate follows the profit rate. there's a long discussion that follows, here – Shaikh is alluding to his answer to this question.

wants to put together a concrete history of accumulation, based on the argument that capitalism is driven by the profit rate on enterprise. that's the link to the material that we've done, thus far.

- - - - -

first, a distinction between 'cause' and 'trigger'

a cause is something underlying—something fudamental that predisposes an outcome (for instance, if you have a particular health problem, a weak heart—then it's not very surprising that you get a heart attack. this might be, however, an immediate result of winning the lottery, or something. so the trigger is not the same as the cause).

there's a strong tendency to suggest that the shock is the cause. it might be (asteroids hitting the dinasour), but it could very well not be. in accounts that aren't systemic, of course, they focus on the shocks/triggers.

mortgage crisis as the trigger; immediate cause is the huge credit bubble which preceded it by decades.

deregulation, however, was going on since the 1970s because banks and busineses were pushing it for reasons of profitability (inevitably, the pressure on banks is to make profits, take risks – the trouble is that, you're not telling banks to throw around your gold, that's for investment firms. if they're limited by the State, then they chafe under those limits. some countries resisted this pressure (Canada and India)).

so was it just deregulation? no. it is silly to say had deregulation not happened, the crisis not have happened (we're going to substantiate this, now)

thus, there is a deeper question that needs to be asked here: why was there a huge credit bubble, in the first place?

was the credit bubble just Greenspan's folly, an atmosphere, etc.?

no – what we are experiencing is a structural crisis, part of a recurrent pattern (and what's surprising is that we're remarkably 'on pattern')

Great Depression of 1840s, 1880s, 1930's, and 1970's

some of these were sharp collapses in the real economy (late 1840s and 1930s)

others were protracted declines (1840s and 1970s)

again, profitability is the driver of growth – not by 'sales'

the point where profit stagnates in more than a temporary way is a point of absolute overaccumulation (when the mass of real profit of an enterprise stagnates or falls). individual capitalists may gain, and others may lose – but the capitalist class as a whole is losing.

this triggers a 'phase-change' in the behavior of the system. those that are doing badly start pulling back, etc.

the key point Shaikh is making, is that the phase-change triggers a change in the system's dynamics. the tide that was moving in begins to move out (remember, the future just evaporated – a lot of financial profits are booked on future expectations)

- - - - -

let's begin the story from the last Great Depression (the 1970s)

1. accumulation is driven by profitability

2. accumulation undermines profitability –> rate of profit falls

3. the stagflation crisis of the 1970s and 1980s across the capitalist world was a Great Depression with widespread failures (a lot of this was covered up by inflation – the stock market collapsed in real terms, if you account for this). of course the death-knell for Keynesian theory (loosening labour markets and inflation)

4. it didn't lead to the enormous collapse, recovery was driven by three extraordinary developments

   1. an extraordinary fall in the global interest rate, which raised the profit rate

   2. an historical attack on the welfare state, destroying the standard of living

   3. an extraordinary recourse to debt to fuel the global expansion of capital, and to cover up the declining living standards of workers

in short, Shaikh painting a picture of a crisis postponed.

looking at a graph of the general rate of profit – suggesting that if we get rid of the 'noise' (impact of war, etc), you have a declining rate of profit trend.

the 1982-2005 'boom', moreover, saw more-or-less constant profit rates. how did we get a boom? how did we get accumulation.

key: you have to look at the interest rate. something extraordinary happened to the interest rate.

(question of where the inflation in the 1970s comes – Shaikh referring us to his paper on inflation. if profitability is falling, then even the same rate of accumulation can be inflationary. remember, the difference between the growth rate and the profit rate is a throughput measure, how 'tight'/'loose' the system is)

we tend to think of the interest rate as a 'riskiness' measure, etc. but there's another way to think of it. the interest rate is the 'price' of the money you borrow/lend. if you put it that way, you can think of the 'interest rate' as a natural price – something that gives banks normal profits. if that's the case, then the interest rate will rise with the 'cost of banking'.

so you would expect the interest rate to follow the price level, all else being equal; this is important, because orthodox theory disagrees. they think of this as Gibson's paradox, which is the observation that interest rates rise with the price level (empirically this holds until around the early 1980s, Volcker shock, after which deviation begins); they can't explain this, because of their theoretical apparatus).

you can have two explanations for this: (1) policy; (2) the costs of banking decrease, meaning that the interest rate declines (Shaikh's position)

Shaikh also noting that global interest rates match US interest rates. whatever the explanation, the fact that lower and lower interest rates explain the great credit bubble.

the reason we got out of the Great Depression of the 1970s was not because of a recovery of profit rates, but because of a fall in interest rates.

obviously, though, this has limits. you couldn't offset the profitability problem forever; and we arrive at the 'recovery's' limits.

what happens to labour, in all of this? real wages and productivity are linked until the early 1980s (thanks to the balance of class forces, in short). but after, you have a rise in the rate of exploitation, and workers pile on household debt (from 30% in early 50s to 140% in 2007/2008). about 15% of annual income went to dept repayments, at the peak.

remember, despite this, the profit rate was still constant in this period – despite the fact that the rate of exploitation is rising.

General Implications:

1. occurrence of Great Depressions is an intrinsic outcome, even if it's modified in its path/expression by conjunctural factors

2. Great Depressions have built-in recovery mechanisms: lowering of real wages relative to productivity, global reserve arem of labour, concentration and centralization, etc.

3. shift in hegemonic balance of powers will not alter this intrinsic dynami

what can you do, in periods like this?

well, we have the example of Japan – Japan didn't let the kind of forest fire that the US and England (sort of) let happen. they just let interest rates fall.

what is quite striking is that we've got a quasi-boom, now – the 'recession' is allegedly over.

in 1933 the NBER would have declared the recession over, don't forget. there was a recovery, after the jobs programs, etc. (emphasis that this is a very different kind of stimulus—offering employment, rather than shoring up the liquidity of investment banks, or less stimulatory 'Star-war' wars).

the deficit is only 1% in the early 30s (it'll be 12% in WWII, of course, which tells us something about how class interest and wars) –but this is largely a result of the fact that natural recovery mechanisms were allowed to express themselves (massive unemployment, enormous business failures, etc.)

an important point about stimulus – the contemporary model is the preferred one for capital (shoring up banks, etc.); the second, of course, makes the profit motive subordinate to social goals which is correctly seen as a threat to capitalism (giving to the reserve army).

- - - - -

question: 'natural recovery mechanisms' mean austerity and unemployment, etc. but presumably Shaikh would agree (a) that this doesn't include the kind of austerity that is being discussed, today, given the fact that we're not letting banks collapse, etc. (in other words, is mass unemployment more important, or bank failures, business failures, etc.); (b) are there alternative ways of unleashing 'natural recovery mechanisms,' by sponsoring alternative centers of accumulation, etc. (and/or stimulating job growth?).

Prime Minister George Papandreou has declared the government’s intention of—among other things—reducing the budget deficit to the Maastricht limit of 3 percent of the gross domestic product (GDP) within four years. The budget provides for a new deficit of 9.1 percent of GDP in contrast to 12.7 this year.

david mcnally, from financial crisis to world slump (2009)

(37): feedback loops, of course: "So, if the first phase of the global crisis centred on the financial sector, with a stunning series of bank-collapses, the second phase is concentrated in manufacturing, with a wave of failures, bailouts and massive downsizing ofnon-financial corporations. But downsizing and restructuring will, in turn, trigger big drops in global demand (as laid-off workers cut back consumption and corporate demand retrenches), which, in turn, will hit firms in services (such as hotels and business assistance) and hammer the current-account balances and financial systems of scores of nation-states, sparking yet further banking crises."

(38): this fact will be important to the larger indictment, of course: "Meanwhile, East Asia, which was the heart of the neoliberal wave of expansion (1983–2007), to be discussed below, is now the centre of the overaccumulation storm."

(38-39): China: "The centre of the wave of accumulation of the past twenty-fi ve years,
as global production-chains ran through its manufacturing base, China is now at the nexus of the overaccumulation-crisis. While predictions that Chinese industry is running at only 50 per cent of capacity may be extreme, there can be little doubt that huge numbers of factories have closed, while many are operating at dramatically reduced levels... Trying to manage an economy that needs economic growth rates of eight per cent a year just to absorb the massive fl ows of rural migrants into industrial centres, Chinese offi cials now describe the still worsening employment situation as ‘grim’ and worry openly about social unrest."

(39): the spectre of deflation: "Overaccumulation, asset-defl ation and price-cutting now threaten a downward spiral in prices and profi ts that would spell a seriously prolonged global slump."

(40): the size of the bailout, globally (see FN 18): "And we are very far from the endpoint. Despite a stunning series of bailouts of the banking system in the Global North approaching $20 trillion, or 30 per cent of world GDP, the international fi nancial system continues to stagger."

(40): "More banks will fail, more countries will be forced to turn to the IMF in order to stay afl oat." [what to make of this? especially since it was widely agreed that the IMF's time had passed? is this empirically realistic?]

(41): KEY--"[unlike] the savings-and-loan meltdown of the early 1990s, the collapse of Long Term Capital Management (1998) or the bursting of the dot.com bubble (2000–1) – this one has moved from a fi nancial meltdown to a eneralised economic crisis. And, unlike crises that were regionally confi ned – East Asia (1997), Russia (1998), Argentina (2000–1) – this is a globalising crisis at the heart of the system. We confront, in other words, a generalised global crisis in the reproduction of capital and of the relations between capital and global labour that have characterised the neoliberal period. Th e neoliberal reorganisation of world-capitalism is now undergoing a systemic shock."

(41): this, clearly, he sees as his central contribution: "In what follows, I argue that we need a more dynamic, historical and nuanced account of what has happened to world-capitalism over the past quarter century than has been generally off ered. Too many radical analyses focus either on regulatory frameworks or the crisis of profi tability of the 1970s to explain what is happening today. In so doing, each approach ignores crucial features of the dramatic processes of restructuring and accumulation that ran across the neoliberal period – and that laid the basis for the current crisis. I further argue that this crisis should be analysed in terms of a breakdown in prevailing valueforms, including models of value-measurement, and that this breakdown opens up new spaces for value-struggles – struggles over the very forms for reproducing social relations – that could trace the outlines of a radical and systemic counter-project to that of capital."

(41-42): not, in other words, in these two camps: "On the Left, most analyses of the crisis have tended to fall into one of two camps. On the one hand, we fi nd a series of commentators who view the fi nancial meltdown as just the latest manifestation of a crisis of profi tability that began in the early 1970s, a crisis that has eff ectively persisted since that time. In another camp is a large number of commentators who see the crisis as essentially caused by an explosion of fi nancial transactions and speculation that followed from deregulation of fi nancial markets over the past quarter-century."

(42): absolutely right--"Th ey [the latter approach] confuse policy reactions to the globalisation of production and fi nance with causes of the current crisis. It is, of course, true that fi nancial deregulation is a contributing factor in the current crisis. But, rather than driving the process of fi nancial liberalisation, deregulation followed and responded to structural transformations... proponents of the deregulation-thesis lack an explanation as to why this crisis has not been restricted to fi nancial markets; they are unable to probe its interconnection with problems of global overaccumulation. Secondly, because these commentators are prone to describe the problem in terms of neoliberal policychanges, rather than capitalism, they advocate a return to some sort of Keynesian re-regulation of fi nancial markets."

(42-43): important--i accept this, but we still have to be able to explain generalized stagnation: "Those analyses that eff ectively read the current crisis in terms of a decline in the rate of profi tability from the mid-1960s to early 1970s have the merit of focusing on deeper problems at the level of capitalist accumulation, and, for this reason, I will engage them at considerably more length. For the most part, however, these approaches tend to be amazingly static, ignoring the specifi c dynamics of capitalist restructuring and accumulation in the neoliberal period. Th ere is a particularly unhelpful tendency in many of these analyses to treat the entire thirty-fi ve year period since 1973 as a ‘crisis’, a ‘long downturn’, or even a ‘depression’. Yet, such assessments downplay the dramatic social, technical and spatial restructuring of capitalist production that occurred across the neoliberal period, all of which signifi cantly raised rates of surplus-value and profi tability, and led to a volatile – indeed ‘turbulent’ – but nonetheless real process of sustained capitalist expansion, centred on East Asia."

(43-45): three methodological protocols:

1. "I insist, first, that we need to treat the world-economy as a totality that is more than the sum of its parts... Much discussion of the neoliberal period has focused on a number of capitalistically developed nations – most frequently the US, Germany and Japan – and treated the world-economy as largely an aggregate of these parts."
   
2. "Secondly, it is vital to recognise that an assessment of world-capitalism cannot make its focus the performance of national economies per se. Capital does not invest in order to boost Gross Domestic Product (GDP), national income, or aggregate national employment. It invests in order to expand itself via the capture of shares of global surplus-value (although what individual capitalists attend to are rates of return on total investment)."
3. "Th ird, the unique quarter-century long postwar-boom (1949–73) ought not to be the benchmark against which everything else is deemed a ‘crisis’. Th at great boom was the product of an exceptional set of social-historical circumstances that triggered an unprecedented wave of expansion. But, prolonged expansion with rising levels of output, wages and employment in the core-economies is not the capitalist norm; and the absence of all of these is not invariably a ‘crisis’. It is utterly misleading to imagine that capital is in crisis every time rates of increase in world or national GDP fall below fi ve or six per cent per annum. Indeed, where wage-compression characterises a phase of capitalist expansion, this may be favourable to profi tability while suboptimal in terms of the growth of consumer-demand and annual rates of national economic growth. Yes, capitalist expansion under such conditions throws up limits to itself. But this is what we should expect of all capitalist ‘régimes of accumulation’. Th e capitalist mode of production is inherently contradictory at multiple levels; every pattern of capital-accumulation involves self-generated limits."

(45): My analysis will build upon three main theses:

1. "Following the recessions of 1974–5 and 1980–2 and the ruling-class off ensive against unions and the Global South that took off in this period, severe capitalist restructuring did generate a new wave of capitalist growth, albeit a much more uneven and volatile one than occurred during the great boom of 1949–73... [E. Asia is important to this story, again--see actual text for details...]"
2. "Alongside and interacting with these changes, a wholesale reorganisation of capitalist fi nance occurred, stimulated by a metamorphosis in forms of world-money (analysed in Section 4 below)"
3. [so this crisis has its origins in 1997, rather than in a long, thirty-year downturn] "Th e upward trend in profi t-rates from the early 1980s sustained a wave of capitalist expansion that began to falter in 1997, with the crisis in East Asia. The East-Asian crisis signalled the onset of new problems of overaccumulation that shape the contours of the present crisis."

THESIS ONE

(47): CRITICAL: "Central to my argument is the claim that intense processes of capitalist restructuring throughout the neoliberal period created a new social-spatial reconfi guration of capital and a new, uneven and volatile wave of capitalist expansion (and drove key processes of the phenomenon known as ‘globalisation’). Th rough a dialectic of global restructuring that has reconfi gured labour and capital both within and outside the core, the world-capitalist economy has been decisively remade. I will take diff erent sides of this dialectical process in turn. While some commentary often seems to suggest that very little restructuring of capital has occurred at the core of the system since the crises of 1973–82, it is clear that major re-organisations of work-process and technology have in fact taken place."

(48): "Th e cumulative eff ects of these processes were profound. In the fi rst instance,
they involved a sustained and signifi cant rise in the rate of exploitation... [Secondly,] Th is increase in the rate of surplus-value in the US went hand in hand with major improvements in the productivity of new capital-investment. As both Mohun and Edward Wolff further show, the tendential rise in the organic composition of capital35 that characterised the period 1947–82 was abruptly reversed during the period of vigorous neoliberal expansion (1982–97) and the productivity of new investment rose."

(49): seems important--"In the absence of such powerful class-resistance, crises will serve as moments of reorganisation that create conditions for increases in labour-productivity and rates of profi t – which, in turn, make renewed expansion possible." [in other words, capitalism cannot self-destruct]

(49): tracking the profit-rate (see graph; not from article): "And it is decidedly clear in this regard that, after falling consistently from 1964–82, profi t-rates experienced a signifi cant recovery after 1982, as detailed studies for both the US and Europe have shown. True, profi tability did not return to the levels of the mid-1960s. But sustained recovery at lower levels is still that – sustained recovery that makes possible ongoing accumulation."

(49-50): "Th e mid-1980s are a decisive turning point in this regard, as capital based in Japan and Germany... turned outward in dramatic fashion... " [globalized production chains in E. Asia, etc.]

(51): CRITICAL--"Across the quarter century 1980–2005, the world’s ‘export-weighted’ global labour-force quadrupled. Most of this growth occurred after 1990 and about half of it took place in East Asia, where the working class increased nine-fold – from about 100 million to 900 million workers. South Asia, too, saw significant growth in both industry and the number of industrial workers.45 While the accuracy of these calculations can be debated, more conservative estimates still suggest that the world working class doubled in size over the past two decades."

(52): fair enough, this is one of his interventions (and it's fair, especially because it addresses the lacuna identified by Arrighi, without becoming Arrighi's narrative)--"Th e fact that, by 2002, there were twice as many manufacturing workers in China than in the G-7, where the number has been in a pretty steady decline for decades, is indicative of major structural transformations that have taken place in the global economy throughout the neoliberal period. Without accounting centrally for thesedevelopments – that is, by setting them at the heart of an account of the neoliberal period – we fail to grasp key dynamics of the system in recent decades."

(53): important--"It will not do to say that, for twenty-fi ve years, crisis was ‘postponed’ because credit was pumped into the system... sustained asset-infl ation – the ‘bubble economy’ – takes off from about 1996 on, not from 1982."

(55): "So, while the entire period after 1982 cannot be explained in terms of credit-creation, the postponement of a general crisis after 1997 can. But as the accompanying credit-bubble burst, beginning in the summer of 2007, it generated a major fi nancial crisis. And, because of underlying problems of overaccumulation, this fi nancial crisis necessarily triggered a profound global economic slowdown."

THESIS TWO

(56): "However, in many respects, the term fi nancialisation can be, and has been, highly misleading. To the degree to which it suggests that fi nance-capitalists and their interests dominate contemporary capitalism, it is especially so. And, where it has been taken to imply that late capitalism rests on the circulation rather than the production of goods – as if we could have one without the other – it has contributed to absurd depictions of the world-economy today. Moreover, the lines between industrial and fi nancial capital are, in practice, often quite blurred, with giant fi rms engaging in both forms of appropriating profit."

(56): "What the term ‘fi nancialisation’ should capture, in my view, is that set of transformations through which relations between capitals and between capital and wage-labour have been increasingly fi nancialised – that is, increasingly embedded in interest-paying fi nancial transactions. Understanding this enables us to grasp how it is that fi nancial institutions have appropriated ever larger shares of surplus-value."

(56): refers to three phenomena, in fact:

1. (57-59) the mutation in the form of world-money that occurred in the early
   1970s: "value-forms have been extended at the same time as value-measures (and predictions) have become more volatile. Th is has given neoliberal globalisation a number of distinct characteristics and a propensity to enormous credit-bubbles and fi nancial meltdowns of the sort we are witnessing at the moment...
   
2. (59-62) the financial effects of neoliberal wage-compression over the past thirty
   years: "Five dynamics fi gure especially prominently here: i) the geographic relocation of production, with signifi cant expansion of manufacturing industries in dramatically lower-wage areas of East Asia and, to a lesser degree, India, Mexico, Eastern Europe, and so on; ii) the downward pressure on wages triggered by a huge expansion in the reserve army of global labour resulting from massive dispossession of peasants and agricultural
   labourers, particularly in China and India; iii) the increase in relative surplusvalue brought about by the boosts to labour-productivity (output per worker per hour) resulting from the combined eff ects of lean-production techniques and new technologies; iv) increases in absolute surplus-value triggered by an increase in work-hours, particularly in the United States; v) sharp cuts to real wages brought about by union-busting, two-tiered wage systems, and cuts to the ‘social wage’ in the form of a reduction in non-wage social benefi ts,
   such as health-care, food- and fuel-subsidies, pensions and social-assistance programmes... Just as the wealthiest households demanded a plethora of fi nancial instruments in which to invest, large numbers of working-class people turned to credit-markets – particularly in the context of dramatically lowered interestrates after 2001 – in order to sustain living standards."
   
3. (62-66): the enormous global imbalances (revolving around the US currentaccount defi cit) that have flooded the world-economy with US dollars: "two interconnected phenomena become crucial to postponing a general slump: monumental growth of debt-loads; and the US current-account defi cit (its shortfall in trade in goods and services and interest-payments with the rest of the world), which combined to allow the American economy to operate as the ‘Keynesian engine’ of the global economy over the past decade. And, here too, as we shall see, the new form of world-money played a central role... Having driven down costs through the course of the crisis, East-Asian fi rms were soon exporting their way back to growth, developing huge trade-surpluses and soaring international reserves (mainly dollars). But this export-led growth was sustained overwhelmingly by the growing trade- and current-account defi cits in the US. As commentators have noted, the American economy eff ectively became ‘the consumer of last resort’. By 2000, for instance, US imports accounted for almost one-fi fth of worldexports, and four per cent of world gross domestic product. But this level of consumption of foreign goods could only be sustained by 2006 at the cost of an $857 billion US current-account defi cit... Th e recovery after 1997, in other words, was built on the pillars of exceptio nally low US interestrates, particularly from 2001; steady growth in consumer-indebtedness; and a swelling US current-account defi cit."
   

(60): "Whereas, in 1991, the wealthiest one per cent of Americans owned 38.7 per cent of corporate wealth, by 2003 their share had soared to 57.5 per cent."

(61): wow: "All of these trends led to a quadrupling of private and public debt in US, from slightly more than $10 trillion to $43 trillion, during the period of Alan Greenspan’s tenure as President of the Federal Reserve (1987–2005)"

(62): important to the larger argument: "The investment-boom in East Asia created enormous excess-capacity in computer-chips, autos, semi-conductors, chemicals, steel, and fi bre-optics. ‘A persistent trend to overcapacity’, observed the World Bank at the time, had induced ‘price wars and intense competition’. One key indicator of these problems of overcapacity and price-wars is the consumption defl ator, which measures prices in consumer-goods. Th at index shows that US prices for consumer-durables – electronics, appliances, cars and more – began to decline in the autumn of 1995. Th is signal of rising productivity and overproduction off ers an important clue as to the structural underpinnings of the crisis that broke out in East Asia (the centre of themanufacturing boom of the neoliberal era)."

(64): facts of overcapacity in China: "According to the Chinese government’s National Development and Reform Commission, China’s steel industry had developed an annual capacity of 470 million metric tons at a time when actual output equalled only 350 million metric tons. Th is excess-capacity of 120 million metric tons was greater than the total real output (112.5 million metric tons) of the world’s second-largest steel-producing country, Japan. Even worse, problems of overaccumulation haunted the ironalloy industry, where capacity-utilisation had slumped to a mere 40 per cent by 2005. And significant overcapacity plagued the auto-, aluminium-, cementand coke-industries. Detailed studies suggested, for example, that by 2005 China’s home-appliance market had overcapacity-rates of 30 per cent in washing machines, 40 per cent in refrigerators, 45 per cent in microwave ovens and a mind-blowing 87 per cent in televisions."

(65-66): problem of re-starting, given the problems that set in with American indebtedness and slowdown: "But private capital had spoken. Belief in the US ‘boom’ was evaporating. Th e real-estate bubble began to defl ate, mortgage-backed securities entered their free fall, hedge-funds (fi rst at Bear Stearns) collapsed, followed by investment-banks. Th e rout was on – and it is far from over. In the process, the capacity of whopping US current-account defi cits, underpinned by debtfuelled consumer-spending, to buoy the world-economy appears to be exhausted. Yet, to rebalance the global economy, to eliminate huge US defi cits and enormous East-Asian surpluses, means to destroy the source of demand that enabled growth in a period of overaccumulation – and it would also mean much larger falls in the US dollar. For this reason, short of a long slump that destroys huge amounts of capital, it will be extremely diffi cult for the world-economy to find a new source of demand suffi cient to restart sustained growth..."

(67): "Th is is what it means when Marx says a crisis involves a destruction of capital. Th e ‘values’ of fi ctitious capitals – stocks, bills and all kinds of paperassets – which were previously treated as if they were real assets (and against which fi nancial institutions borrowed), enter a freefall."

(68): explaining credit default swaps: "But, whereas death-rates are relatively constant (at least for those whose lives can actually be insured), in the midst of a fi nancial crisis defauly-rates are not. To make matters worse, any investor can buy a Credit Default Swap, even if they do not own a single share of the company in question. Th is encourages speculators to literally bet on the failure of a particular company. If you think GM will default on its debt, for instance, buying a CDS on GM debt is a great way to get a payout many times higher than what the CDS costs. As a result, as speculative bets build up, the insuring party (the seller of CDSs) is on the hook for a growing number of claims in the event of default. In crisis conditions, however, the insurer can quickly go under, unable to pay out to every claimant. But, in that event, nobody is protected any longer against default of the toxic waste they might be holding. And that means complete and total fi nancial-market panic."

(69-70): the usefulness of derivatives in a floating-exchange rate regime: "After all, the profi ts made by foreign branches of a corporation – say in Korean won or Turkish lira – can be completely wiped out when repatriated to the home offi ce, as a result of drops in the values of those currencies. Derivatives, by allowing corporations to contract to buy a currency at a particular exchange-rate some time in the future – or to purchase the right to borrow at a certain rate of interest in a given currency – have played a crucial role in helping capitalist enterprises manage these risks."

(71): this is another of McNally's specific claims, which he sees as his contribution: "Yet, by deploying reifi ed, mathematical concepts of space and time, the models which guided derived pricing have eff ectively imploded. As a result, a classic crisis of capitalist measurement is manifesting itself, in part in the form of a breakdown in risk-measurement and derivatives-pricing. During every crisis, value-measurement is radically disrupted and destabilised. Pressures of overaccumulation and declining profi tability induce a destruction of values that re-organise the foundations of capitalist production. In the process, existing capitals are de-valued, until a new and relatively stable valuation is found. In fact, for Marx, an essential feature of crises is that they destroy the old value-relations that persisted through a period of boom, overaccumulation and declining profi tability in order to lay the basis – through destruction and devaluation of capital and labour-power – for a new set of value-norms. Today, as we have seen, derivatives off er an indirect way of trying to measure value by way of measuring risk. But, in the midst of this crisis, the risk-measurement models that have guided derivatives-markets have completely and utterly failed."

(72): and labor? -- "crises are also moments in which the subordination of labour to capital must be re-organised, and in which new spaces of resistance can be pried open. Th ey are also moments in which capital violates its own free-market nostrums and uses public resources to bail out the system, thus opening up space for debates about alternative uses of public powers. Systemic crises are, therefore, moments of great danger and opportunity for the world’s workers."

(72): "Debt, of course, is one of the oldest class relations; repayment of loans has been a great mechanism for transferring wealth from direct producers to landlords and moneyed capitalists. In the neoliberal context, debt has become a powerful weapon for disciplining the working class in the Global North."

(73): this needs to be made much more specific, but is still interesting as a general formulation: "As prices plummet for food and raw materials (copper, oil, coff ee, cocoa, timber, rubber and more) dozens of poorer countries will encounter big drops in their export-earnings. Th is will inhibit their capacities to import food, medicine and other essentials, as well as to service existing debts. Moreover, as private-capital fl ows into ‘emerging market economies’ plummet by about two-thirds in 2009, rates of investment and job-creation will turn down sharply. Trade and currency-crises may ensue, driving poor nations into the dreaded hands of the IMF. Already, Iceland, Hungary, the Ukraine, Latvia and Pakistan have had to turn to the IMF. And more will follow. Once again, the IMF will join with governments and banks in the North to set loan-conditions that open countries in the South to plunder of their assets. Th e only alternative
will be to repudiate debts, as Ecuador rightly plans to do, and to mobilise against the imperial order embodied in the domination"

(74): this is interesting, even if it may not dramatically change anything: "However much they can be derailed or diverted, all such struggles implicitly challenge the domination of society by the capitalist value-form. Th ey assert the priority of life-values – for land, water, food, housing, income – over the value-abstraction and the violent economic and social crises it entails. And one
of the tasks of the Left is to highlight this confl ict – between life-values and capitalist imperatives – that comes to the fore dramatically during times of crisis, in order to pose a socialist alternative that speaks directly and eloquently to the most vital needs of the oppressed."

(74): "It is, as we have seen, the logic of the value-abstraction to express utter indiff erence to use-values, notably to the needs of the concrete, sensuous beings who are bearers of labour-power. What matters for capital is not the capacity of a given commodity to satisfy specifi c human needs;"

(75-76): "While that was a paltry sum, even more paltry is the amount that was actually delivered – merely one tenth of what was pledged, or $2.2 billion, according to the UN Food and Agriculture Organisation. Yet, somehow, governments in the Global North have in short order come up with about $20 trillion to bail out financial institutions – nearly 10,000 times as much as they have anted up to feed the world’s poor. Compressed in that simple fact is the most basic case for socialism."

(76-): a few things, he's arguing, are emerging as clear consequences of this crisis:

1. First, the crisis will induce an enormous centralisation of capital... [many examples given in the article, itself]
2. Second, this crisis will also pose again the question of the balance of global
   economic power and the role of the dollar...
3. Third, centralisation of capital and competition between blocs will also be
   played out by way of attempts to spatially re-organise capital, so that economies
   in the Global North can displace the eff ects of crisis onto ‘emerging market
   economies’ and nations in the Global South... Those economies may then encounter their own version of the Asian crisis. And, if the IMF is called in, Western governments will press
   to buy up assets on the cheap, as was done to South Korea in particular in 1997, after IMF loan-conditions facilitated perhaps ‘the biggest peacetime transfer of assets from domestic to foreign owners in the past fi fty years anywhere in the world’.
   
4. Fourth, just as nations at the top of the imperial order will try to infl ict greater hardship on the South, so we can anticipate moves toward even more draconian restrictions on the movement of migrant-labour...
5. Finally, this crisis also puts a premium on left responses that are clearly socialist in character. Th e notion of calling for a ‘leashed capitalism’ in the face of such a colossal failure of the capitalist market-system represents an equally colossal failure of socialist imagination...

the geopolitics of capitalism, david harvey

(313): the logic of the circulation of capital does not explain everything that happens under a capitalist mode of production. but it is the indispensable condition for the existence of the capitalist mode of production, itself.

(313): IMPORTANT--distinction between "infrastructures" being "functional" for the logic of capital, and being "broadly in support of".

(314): class as a loaded term, but one which can be deployed in the simplest sense--the "class relation" that opens up between buyers and sellers of labor power.

(314-315): similarly, "there are… innumerable other sources of tension, conflict, and struggle, not all of which can be directly reduced directly or indirectly to a manifestation of the capital-labor antagonism. But class struggle between capital and labor is so fundamental that it does infect all other aspects of bourgeois life.”

(315): “a central contradiction”—“The system has to expand through the application of living labor whereas the main path of technological change is to supplant living labor…” We can flag, again, the question of what exactly is explaining crisis, in Harvey; because this sounds like the orthodoxy (falling rate of profit), but it leads him directly to enumerate his (derided?) analytic of overaccumulation (twin surpluses of capital and labor as“manifestations” of this crisis). In short, it is not as simply incorrect as I understand it to be.

(316): KEY: “The historical geography of capitalism can best be viewed from the standpoint of the triple imperatives of production, mobilization, and absorption of surpluses of capital and labor power.” (identical to thinking about it through twin imperatives of ‘logic of capital accumulation’ and ‘logic of class struggle’?)

(317): this point is important for his later “accumulation through dispossession argument”—surpluses are, of course, generated from within the production process, but they also require the parasitism of the mode of the production as a whole (obviously recalls Rosa Luxemburg, this).

(318): given conditions of twin surplus (i.e., a crisis), Harvey wants to draw our attention to the effects on accumulation of those “spatial and temporal displacements” which postpone, but fail to permanently resolve crises.

(319): the possibility of “dynamic equilibrium” across time—i.e., investment in areas that take a long time to mature, precisely because they serve to facilitate the speeding up of other parts of the economy. A nice enumeration of the importance of time to his argument (but can pursuit of ‘turnover time’ be subsumed into the ‘pursuit of relative surplus-value’?)

(320): IMPORTANT—very concrete enumeration of the role of “fictitious capital”: “bonds, mortgages, stocks and shares, government debt and the like... What fictitious capital does is to convert a long-drawn-out circulation process… into an annualized rate of return. It does this by facilitating the daily buying and selling of rights and claims to a share in the product of future labor.” In other words, it enables capitalists to make a regular profit off of investments that would otherwise be unattractive (but which are still, from a systemic point of view, critical—both because it helps the absorption problem, but presumably also because it aids in the annihilation of time).

(321): he is saying that, because fictituous capital and credit make it possible for these “long-term” and “short-term” investment options to co-exist, the possibility of a dynamic equilibrium prevails. But does this not neglect the fundamental insight of Marx, in his reflections on Dept. I and Dept. II (which Harvey mentioned, earlier): you could conceive of equilibrium as a ‘theoretical’ possibility, but the fact that it is all being co-ordinated by the pull of profit makes that fanciful.

(322): regardless, he proceeds to focus on the fact that their displacement ultimately fails, simply because it postpones “obligations” into the future: “what happens, in effect, is that present problems are absorbed through contracting future obligations.”

(322-323): there are two forms this crisis can take: (1) the infrastructures help capitalist production, but the excess surpluses produced in the new cycle of reproduction meet with further absorption problems (since all you have done is displace them through time?) (2) the infrastructures proved useless—the relevant investments devalue.

(323): useful contrast between railroad building in the 1800s, and the post-WWII infrastructure boom: in the former, there were periodic bouts of devaluation, which ‘helped’ capitalism restart. In the latter, though, the State postponed the crisis by simply printing more money—this, of course, raised the spectre of inflation (which can, ultimately, only be combated by austerity measures, unless you’re the US of A! he is, of course, writing after the 70s, so when he mentions the difficulty of capitalism finding a way out, which it partly did (though he’s right to anticipate stagnation and devaluation, the latter has not happened at the scale one would have expected—and that’s Bob Brenner’s argument, of course). In sum: we do need to look more carefully at what is (and what was) transpiring). [see also 339]

(324): having considered the temporal fix (debt/fictitious capital formation), we turn to “space,” about which he will conclude: “The end-result… is that crises become more global in scope at the same time that geopolitical conflicts become part and parcel of the processes of crisis formation and resolution.”

(326-327): Lenin's answer to the 'space'-related lacuna in marxism is to add the "State"--but Harvey doesn't believe, rightly, that the questions about space in capitalism can be resolved into the national scale.

(327): important passage, trying to enumerate the specificity of space—“Is it possible to construct a theory of the concrete and the particular in the context of the universal and abstract determinations of Marx’s theory of capitalist accumulation?”

(327-328): critical—we have to be specific about how “space” matters; i.e., we can prioritize “time,” whatever that means, but the real contradiction arises when we see that “spatial organization is necessary” to conquer “space.” It is to see how this unfolds, and its consequences, that we need the methods of a historical-geographical materialism.

(328-329): here, the concept of “structured coherence” enters, includes: forms and technologies of production; technologies, quantities and qualities of consumption, patterns of labor demand; and supply, and physical/social infrastructures—a certain, specific, coherent material-geographical arrangement of the prevailing relations and forces of production, in a given area (an alternative definition is, simply, a labor market/commuter range, it seems). A “regional space.”

(329): FOUR processes that undermine coherence: (1) accumulation/expansion builds pressures on capital to leave, labor to arrive; (2) revolutions in technology; (3) class struggle; (4) revolutions in capitalist forms of organization.

(332-333): “The result can only be a chronic instability to regional and spatial configurations... The inner contradictions of capitalism are expressed through the restless formation and re-formation of geographical landscapes. ”

(333-334): more, then, on the “class alliance” that emerges to protect this “structured coherence.”

(334-335): is there a problem here?—he is trying to problematize the “national question” via his analytic of the “class alliance,” which seems derived from a very specific understanding of developed capitalism. Can we speak of feudal-hari alliance in Sindh in the same way? Maybe.

(337): his analysis of dependency, tested through India-Britain-US. Britain had an interest in tailoring India’s development to the needs of its own industry (but then, it encountered problems precisely because India didn’t work well as a site of surplus absorption). Certainly, there’s a lot missing from the analysis (consciously so, I suspect), but it’s not uninteresting.

(338): Marx’s “theory of overaccumulation-devaluation,” which reveals the “intense destructive power that lurks behind capitalism’s façade…”

(342): from depression to the Marshall Plan: “It was in fact the Second World War that brought full employment and reinvestment, but did so under conditions where vast amounts of capital stood to be physically destroyed, and many idle workers consumed as cannon fodder. And it was precisely the geographical unnevenness of that destruction that opened up new spaces in the postwar period for the absorption of surplus US capital.“

(343): “The bourgeois era has witnessed a growth in destructive force that more than matches the growth of productive force so essential to the survival of capitalism.”

Officially recorded "mass incidents"--a deliberately vague term for strikes, demonstrations and riots numbering from 25 participants to tens of thousands--grew from 10,000 to 87,000 from 1994 to 2005, the year when officials started to keep the tally secret. In 2008, the first year of economic crisis, there were 127,000 mass incidents, according to a leaked report. The pace has nearly redoubled in 2009 as 58,000 incidents broke out in the first three months of the year.
(...) The affected workers are part of the "new working class," just one generation separated from farm life, migrating to boom cities and construction sites at a rate of nearly 10 million per year since market reforms began in 1978. In the export sector's biggest center, Guangdong province, 20,000 factories closed in the last quarter of 2008, according to ChinaWorker.info editor Vincent Kolo.
(...) As long as struggles against national oppression are separated by chauvinist ideology from class struggles--and as long as sharp divisions still exist between workers who are registered as rural or urban--the explosive strength that has developed at China's grassroots will continue to suffer the weaknesses of local and sectional isolation.

Well, the first thing is that, along with this optimistic scenario from the point of view of uniting the conditions of the working class globally, there was a more pessimistic consideration in the essay, pointing to something that I’ve always considered a very serious flaw in Marx and Engels’s Manifesto. There is a logical leap that does not really hold up, intellectually or historically—the idea that, for capital, those things that we would today call gender, ethnicity, nationality, do not matter. That the only thing that matters for capital is the possibility of exploitation; and therefore the most exploitable status group within the working class is the one they will employ, without any discrimination on the basis of race, gender, ethnicity. That’s certainly true. However, it doesn’t follow that the various status groups within the working class will just accept this. In fact, it is precisely at the point when proletarianization becomes generalized, and workers are subjected to this disposition of capital, that they will mobilize whatever status difference they can identify or construct to win a privileged treatment from the capitalists. They will mobilize along gender lines, national lines, ethnicity or whatever, to obtain a privileged treatment from capital.
(...) [Adam Smith:] Substantively, the action of the government in Smith is pro-labour, not pro-capital. He is quite explicit that he is not in favour of making workers compete to reduce wages, but of making capitalists compete, to reduce profits to a minimum acceptable reward for their risks. Current conceptions turn him completely
(...) There is evidence that the Chinese authorities are worried about the environment, as well as about social unrest—but then they do things that are plain stupid. Maybe there is a plan in the works, but I don’t see much awareness of the ecological disasters of car civilizations. The idea of copying the United States from this point of view was already crazy in Europe—it’s even crazier in China. And I’ve always told the Chinese that in the 1990s and 2000s, they went to look at the wrong city. If they want to see how to be wealthy without being ecologically destructive, they should go to Amsterdam rather than Los Angeles. In Amsterdam, everybody goes around on bicycles; there are thousands of bikes parked at the station overnight, because people come in by train, pick up their bicycles in the morning and leave them there again in the evening. Whereas in China, while there were no cars at all the first time I was there in 1970—only a few buses in a sea of bicycles—now, more and more, the bicycles have been crowded out. From that point of view it’s a very mixed picture, very worrying and contradictory. The ideology of modernization is discredited elsewhere but so far is living on, rather naively, in China.
(...) If you look at the way in which China has behaved towards its neighbours historically, there has always been a relationship based more on trade and economic exchanges than on military power; this is still the case. People often misunderstand this: they think I am depicting the Chinese as being softer or better than the West; it’s nothing to do with that. It has to do with the problems of governance of a country like China, which we’ve discussed. China has a tradition of rebellions that no other territory of similar size and density of population has faced. Its rulers are also highly conscious of the possibility of new invaders from the sea—in other words, the us.
(...) So I had the luck—from the point of view of analysing the capitalist business enterprise—of going into successively larger firms, which helped me understand that you cannot talk about capitalist enterprises in general, because the differences between my father’s business, my grandfather’s business and Unilever were incredible.
(...)
(...) First of all, we should not exaggerate the extent to which China has broken the pattern. The level of per capita income in China was so low—and still is low, compared to the wealthy countries—that even major advances need to be qualified. China has doubled its position relative to the rich world, but still that only means going from 2 per cent of the average per capita income of the wealthy countries to 4 per cent. It is true that China has been decisive in producing a reduction in world income inequalities between countries. If you take China out, the South’s position has worsened since the 1980s; if you keep it in, then the South has improved somewhat, due almost exclusively to China’s advance. But of course, there has been a big growth in inequality within the prc, so China has also contributed to the world-scale increase in inequalities within countries in recent decades. Taking the two measures together—inequality between and within countries—statistically China has brought about a reduction in total global inequality. We should not exaggerate this—the world pattern is still one of huge gaps, which are being reduced in small ways. However, it’s important because it changes relationships of power between countries. If it continues, it may even change the global distribution of income from one that is still very polarized to a more normal, Pareto-type distribution.
(...) From the 1980s and 1990s, in particular, the more important development has been the bifurcation of a highly dynamic and upwardly mobile East Asia and a stagnant and downwardly mobile Africa, and particularly southern Africa—‘the Africa of the labour reserves’, again. This bifurcation is the thing that interests me most: why southern Africa and East Asia have moved in such opposite directions. It’s a very important phenomenon to try to understand, because to do so would also modify our understanding of the underpinnings of successful capitalist development, and the extent to which it relies or not on dispossession—the complete proletarianization of the peasantry—as happened in southern Africa, or on the very partial proletarianization that has taken place in East Asia. So the divergence of these two regions brings up a big theoretical question, which once again challenges Brenner’s identification of capitalist development with the full proletarianization of the labour force.
(...) The relationship is very close, because, first of all, contrary to what many people think, the Chinese peasants and workers have a millennial tradition of unrest that has no parallel anywhere else in the world. In fact, many of the dynastic transitions were driven by rebellions, strikes and demonstrations—not just of workers and peasants, but also shopkeepers. This is a tradition that continues down to the present. When Hu Jintao told Bush, a few years ago, ‘Don’t worry about China trying to challenge us dominance; we have too many preoccupations at home’, he was pointing to one of the chief characteristics of Chinese history: how to counter the combination of internal rebellions by the subordinate classes, and external invasions by so-called barbarians—from the Steppes, up to the nineteenth century, and then, since the Opium Wars, from the sea. These have always been the overwhelming concerns of Chinese governments, and they set narrow limits on China’s role in international relations.
(...) Well, not of less relevance, because in fact it is the most serious crisis that historical capitalism has experienced; certainly, it was a decisive turning point. But it also educated the powers-that-be in terms of what they should do so as not to repeat that experience. There are a variety of recognized and less recognized instruments for preventing that type of breakdown from happening again. Even now, though the collapse in the stock exchange is being compared to the 1930s, I think—I may be wrong—that both the monetary authorities and the governments of the states that actually matter in this are going to do all they can to avoid the collapse in the financial markets having similar social effects to the 1930s. They just cannot afford it, politically. And so they will muddle through, do anything they have to. Even Bush—and before him Reagan—for all their free-market ideology, relied on an extreme kind of Keynesian deficit spending. Their ideology is one thing, what they actually do is another, because they are responding to political situations which they cannot allow to deteriorate too much. The financial aspects may be similar to the 1930s, but there is a greater awareness and tighter constraints on the political authorities not to let these processes affect the so-called real economy to the same extent that they did in the 1930s. I’m not saying that the Great Depression is less relevant, but I’m not convinced that it is going to be repeated in the near future. The situation of the world economy is radically different. In the 1930s it was highly segmented, and that may have been a factor in producing the conditions for those breakdowns. Now it’s far more integrated.
(...) Yes. I think that over the last thirty years there has been a change in the nature of the crisis. Up to the early 1980s, the crisis was typically one of falling rate of profits due to intensifying competition among capitalist agencies, and due to circumstances in which labour was much better equipped to protect itself than in the previous depressions—both in the late-nineteenth century and in the 1930s. So that was the situation through the 1970s. The Reagan–Thatcher monetary counter-revolution was actually aimed at undermining this power, this capacity of the working classes to protect themselves—it was not the only objective, but it was one of the main objectives. I think that you quote some adviser of Thatcher, saying that what they did was [to create an industrial reserve army]; what Marx says they should do! That changed the nature of the crisis. In the 1980s and 1990s and now, in the 2000s, we are indeed facing an underlying overproduction crisis, with all its typical characteristics. Incomes have been redistributed in favour of groups and classes that have high liquidity and speculative dispositions; so incomes don’t go back into circulation in the form of effective demand, but they go into speculation, creating bubbles that burst regularly. So, yes, the crisis has been transformed from one of falling rate of profit, due to intensified competition among capitals, to one of overproduction due to a systemic shortage of effective demand, created by the tendencies of capitalist development.
(...) ...What the declining power does is very important, because they have the ability to create chaos. The whole ‘Project for a New American Century’ was a refusal to accept decline. That has been a catastrophe. There has been the military debacle in Iraq and the related financial strain on the us position in the world economy, transforming the United States from a creditor nation into the biggest debtor nation in world history. As a defeat, Iraq is worse than Vietnam, because in Indo-China there was a long tradition of guerrilla warfare: they had a leader of the calibre of Ho Chi Minh; they had already defeated the French. The tragedy for the Americans in Iraq is that, even in the best possible circumstances, they have a hard time winning the war, and now they are just trying to get out with some face-saving device. Their resistance to accommodation has led, first, to an acceleration of their decline, and second, to a lot of suffering and chaos. Iraq is a disaster. The size of the displaced population there is far bigger than in Darfur.
(...) One of the major problems on the left, but also on the right, is to think that there is only one kind of capitalism that reproduces itself historically; whereas capitalism has transformed itself substantively—particularly on a global basis—in unexpected ways. For several centuries capitalism relied on slavery, and seemed so embedded in slavery from all points of view that it could not survive without it; whereas slavery was abolished, and capitalism not only survived but prospered more than ever, now developing on the basis of colonialism and imperialism. At this point it seemed that colonialism and imperialism were essential to capitalism’s operation—but again, after the Second World War, capitalism managed to discard them, and to survive and prosper. World-historically, capitalism has been continually transforming itself, and this is one of its main characteristics; it would be very short-sighted to try to pin down what capitalism is without looking at these crucial transformations. What remains constant through all these adaptations, and defines the essence of capitalism, is best captured by Marx’s formula of capital M–C–M', to which I refer repeatedly in identifying the alternation of material and financial expansions. Looking at present-day China, one can say, maybe it’s capitalism, maybe not—I think it’s still an open question. But assuming that it is capitalism, it’s not the same as that of previous periods; it’s thoroughly transformed. The issue is to identify its specificities, how it differs from previous capitalisms, whether we call it capitalism or something else.
(...) Well, I would have no objections to it being called socialism, except that, unfortunately, socialism has been too much identified with state control of the economy. I never thought that was a good idea. I come from a country where the state is despised and in many ways distrusted. The identification of socialism with the state creates big problems. So, if this world-system was going to be called socialist, it would need to be redefined in terms of a mutual respect between humans and a collective respect for nature. But this may have to be organized through state-regulated market exchanges, so as to empower labour and disempower capital in Smithian fashion, rather than through state ownership and control of the means of production. The problem with the term socialism is that it’s been abused in many different ways, and therefore also discredited. If you ask me what would be a better term, I’ve no idea—I think we should look for one. You are very good at finding new expressions, so you should come up with some suggestions.

It wasn’t only his desire to restore the health of capitalism that set Keynes apart from Marx. His theory of crisis was also fundamentally different. Where Marx saw the driving force of capitalism as accumulation for accumulation’s sake—the constant drive toward profit—Keynes continued to assume that “consumption…is the sole end and object of all economic activity.” The lack of “effective demand” in Keynes’ theory of crises is another way of saying that capital is not being invested; it does not, however, explain why. In short, whereas for Marx the possibility of the separation of purchase and sale that makes crisis a possibility is the starting point for understanding capitalist crisis, for Keynes it is the endpoint. Keynes’ theory of crisis—the lack of aggregate demand—is merely a description of the effects of crisis, not an explanation of why crises take place.
(...) The appeal for some, then, of Keynesian policy is that it calls for some redistribution of wealth from the top to the bottom, and that he pushes for “full employment.” However, Keynes’ perspective on this was strictly a ruling-class one. He supported not higher wages, but rather “the maintenance of a stable general level of money-wages” in order to maintain “equilibrium.” Keynes also thought it important that wages not become too high. In fact, though Keynes criticized the neoclassical theory of wages, he did not completely reject its premises, writing, for example, that, “A reduction in money-wages is quite capable in certain circumstances of affording a stimulus to output, as the classical theory supposes.”
(...) What Keynes added to this understanding was that at times, capitalists might view all other options as money-losing prospects and no matter how low the state moved interest rates, capitalists may still save. Keynes called this a “liquidity trap” and this is exactly the scenario that befell Japanese capitalism in the 1990s. For this reason, Keynes saw manipulating interest rates as only one tool for encouraging investment. The theory is that interest rates can be used to stimulate investment if real interest rates—that is interest rates adjusted for inflation—are cut to a point that they are negative. However, the Japanese experience illustrates that even if interest rates are negative, capitalists won’t invest if there is not a perceived avenue for investment. A similar dynamic is currently playing out within the U.S. economy. Federal Reserve chairman Ben Bernanke has reduced the target for the Federal Funds rate from 5.25 percent to 1 percent. This has failed to induce lending or investment because there is little for capitalists to invest in that is profitable. Furthermore, central banks only have control of the economic policies within their own countries. It makes the system unstable, because central banks can end up working at cross purposes based on national needs as opposed to having a cohesive view of fiscal policy within the global economy as a whole.
(...) Keynes conceptualized something called the “multiplier” effect. That is, by pumping $100 into the system at the right place, it could generate significantly more activity. Giving $100 to a worker might mean they immediately spend it at the local grocer. The grocer might then turn around and spend $90 of it himself on something else and so on and so on. On the flip side, giving $100 to a billionaire might not accomplish the same thing because the billionaire has no immediate need for the $100 and is only to going to spend if he sees investment opportunities with high rates of return.
(...) Neoliberal ideology, for its part, rejects the role of fiscal stimulus and puts greater emphasis on monetary policy, which accounts for the predominant role of the Federal Reserve Bank over the past thirty years in dealing with economic problems. In practice, however, neoliberals do have a fiscal policy—cutting taxes on the rich and increasing defense spending. As a result, during the neoliberal era government spending as a percent of GDP and per capita has risen, not fallen. Theoretically, neoliberalism is opposed to state intervention. In practice, military spending and corporate welfare are not only accepted but welcome. Now that the system is in crisis, ideology is discarded, and those who may have crowed loudest for the state to leave the market alone demand that the state intervene to save it.
(...) A key linchpin in this agenda was the dollar policy. Coming out of Bretton Woods every currency was pegged to the dollar, which, in turn, was pegged to gold. The fixed exchange rate put a dollar at $35 for an ounce of gold. Currencies would move against the dollar based on whether individual nations had balance of payments problems. If you had a deficit, you had to cut imports or else be forced to devalue. This arrangement more or less held until 1971 when the United States pulled the plug on the gold standard.
(...) The Bretton Woods institutions eventually took on much broader mandates than rebuilding capitalism in Europe and Asia, and after the crisis of the 1970s, adopted neoliberal loan conditions requiring nations to privatize and deregulate their economies. As Joel Geier writes,

Under the original Bretton Woods system, IMF loans were aimed at preventing devaluation and propping up demand. U.S. capital accepted these Keynesian measures when the U.S. was the major world exporter, ran large trade surpluses, and the rest of the world depended on its currency to pay for those imports. But in the 1980s, the IMF turned all of its previous policies on their heads: It now deliberately imposed devaluation and forced reductions in national income and demand in order to limit imports—all as a means to guarantee repayment of debt to international finance capital.

(...) The Great Depression played out in two acts. There was an initial drop to the depths in 1932, a recovery from 1933 to 1936, and then a second drop in 1937 and 1938, even after the initial Keynesian salves had been applied. The economy only decisively recovered in 1939, when the United States began war production for the Allies.
(...) The war effort created the rise in effective demand—in reality, government war spending, not consumer demand—that Keynesian measures failed to produce. As a result, employment and production, especially of arms, helped stimulate economic growth and an end of the Depression. Keynes himself saw the stimulating effects of the war effort as a vindication of his theories, having commented before the outbreak of war, “It is, it seems, politically impossible for a capitalist democracy to organize expenditure on the scale necessary to make the grand experiment that would prove my case—except in war conditions.”29 Of course, the cost of this method of recovery—fifty-five million dead—was a brutal price to pay. Moreover, the war played an important role in helping to wipe out and devalue capital and drastically reduce wages, both of which contributed to the restoration of profit rates after the war, but which were not part of Keynes’ remedies for crisis.
(...) Moreover, in adopting these state-led measures, nations were simply returning to the same policies of “war socialism”—“forced savings, controls on money, credit, prices and labor, priorities, rationing, government-borrowings”—that they had put in place during World War I, “despite the ‘orthodox’ approach to economics that prevailed at that time.”30 It was a sleight of hand for Keynes to now promote war—a product of the unplanned, competitive character of the world system—as proof of his theories.
(...) Yet there was never a point, except during the war itself, where the United States, or any European country, reached full employment. Though the term full employment was thrown around, in practice it was adjusted to mean, in the words of the American Economic Association in a 1950 report, the “absence of mass unemployment.” Proceedings of the British Royal Institute for International Affairs in 1946 defined full employment as “avoiding that level of unemployment, whatever it may happen to be, which there is good reason to fear may provoke an inconvenient restlessness among the electorate.”
(...) It was only well into the 1960s that they started to face competitive pressures that unearthed the contradictions. The U.S. was spending huge sums on its arms industry while its most dynamic competitors—Germany and Japan—were reinvesting in new plant and equipment. Those competitors began to outpace the U.S. in the 1970s. In order to retain economic power, the U.S. needed to lower its labor costs relative to Japan and Germany, a difficult task especially important given that it was saddled with heavy arms expenditures when those nations were not. It was this crisis, in which stagnation was accompanied by inflation, that ultimately paved the way for the neoliberal restructuring of capitalism.

(...) In practice, neoliberalism did not produce a full break from Keynesianism; and in some important respects the limitations of a return to full Keynesian economic policy are already clear. First of all, interest rate reductions—the first line of defense recommended by Keynes—have already been used under the Fed chair Alan Greenspan (when the economy was in boom) and now by Ben Bernanke (in response to the financial crisis). In the first instance, easy money helped create the housing bubble that formed the basis of the current crisis; and the more recent cuts aimed at lifting the financial crisis have not unfrozen bank lending. Second, the government has already run up large deficits for the past two decades—the federal debt now stands at $10.6 trillion, and the current deficit is set to go up to a $1 trillion next year as new stimulus plans are brought on line. The question is how far can this go? The government can print more money, as it has already begun to do now that the dollar has rebounded; but there is a long-term danger of runaway inflation, which could force them to raise interest rates that put a halt to growth.

(...) It is a sign of just how much the economic literacy of the left has deteriorated that Keynesianism—born as a reforming ruling-class economic program—today may become the default position when calling for an alternative to neoliberalism. Yet socialists must make a distinction between those measures of state intervention—such as the bank bailouts—that are measures of state monopoly capitalism designed to save the bankers to the detriment of the working-class taxpayer; and those measures of state intervention that will come as a result of popular demands. Socialists are not indifferent to the reforms—or the struggles to achieve them—that will be necessary to reverse the three decades of capitalist assault on the working class.

At the centre of the crisis too is the contradiction between US imperialism and the people of the Third World. This is exemplified by the fact that the consumption of the US, including its gargantuan military expenditure, is being funded from the savings of China, other East Asian countries, and the Gulf oil producers. Though US imperialism is still dominant worldwide, its economic dominance has long been in decline, tending to make this parasitic extraction ever more unsustainable. (Dogged insurgencies in countries under US military occupation have played a significant role in further undermining US hegemony, preventing it from achieving its strategic-economic aims, forcing it to increase its military expenditure abroad, and deepening its dependence on foreign inflows.) The waning of the US’s economic and political power too underlies the current crisis. However, the pattern of trade in recent years (giant US trade deficits, giant trade surpluses of certain Third World countries) and the perverse pattern of financial flows (from the poor to the rich countries) have not been brought about by the US elite on their own, but with the help of the elites of the Third World; and the latter too have flourished unprecedentedly therefrom. These patterns represent, in a sense, a compact between the elites of different worlds against their people, who are the losers in the entire scheme.

For two reasons. One is, it makes you actually very vulnerable if you’re a heavily debt-encumbered homeowner. And actually, the initial legislation was kind of interesting, the debate around it back in the 1930s, when it kind of said debt-encumbered homeowners don’t go on strike, and because it’s—you know, you’ve got to pay your mortgage. And so, this becomes, as it were, a millstone around your neck. And that then makes you very vulnerable to fluctuations in the market like we’re seeing right now, particularly if you have variable rate mortgages, things of that kind, and you can really easily get caught out. So, in effect, what we’ve seen in the housing market is a tremendous plundering of the assets of some of the most vulnerable people in the country. I mean, this has been the biggest loss of asset wealth to the African American population that there’s ever been.
(...) But as soon as the big guns get into trouble, the state bails them out. And this is what we call moral hazard, that actually because you’re bailing out Wall Street all of the time, then Wall Street will take high risks. And they’ve taken immensely high risks over the last thirty years and again and again and again being caught out. And each time they get caught out, the state steps in and saves them. That’s the connection, if you like, between the state and Wall Street. That’s the connection that has to be broken.
(...) I don’t see the neoliberalism as dead, if you say that neoliberalism is about consolidation of class power, because actually we’re seeing the further consolidation of it right now, rather than the lessening of it. And that’s what I—when I talk about the bank bailout, that’s what it was doing. So I’m kind of concerned.

Well, they’re connected, because, you see, one of the great dangers of an economic crisis is it can lead to war. I remember Hitler coming to power very well. There were six million unemployed in Germany, and Hitler said it’s all due to the Jews and the communists and the trade unions. “Give me power,” said Hitler, “and I will give you jobs.” And he did. Half the unemployed, he put in the arms factories. The other half, he put in the German army. And we had another bloody war. And the two European wars from 1914 to 1945, in thirty-one years, cost 105 million lives, were lost in two wars, and that was not unpredicted with the grave economic crisis in the 1930s.

This survey showed that (contrary to popular perception) the oil price shocks of the 1970s were not the major source of the developing countries' external debt crisis, although they greatly accelerated that crisis. To the extent that petrodollars contributed to the debt crisis, the blame lies not with those dollars as such, but with the policy responses to them (i.e., policies of "recycling" those dollars). This included policy responses of the advanced capitalist countries, of the lending institutions, and of the borrowing governments. The survey further showed that the major bulk of the immense Third World debt has snowballed as a result of factors exogenous to their economies. These factors included excessive interest charges by the commercial banks, capital flight from these countries, rise in the value of the dollar and the loss of their export earnings due to the depressed prices of and demand for their exports. Debtor nations are not responsible for this portion of the debt, i.e., the portion that can reasonably be attributed to factors exogenous to their economies, and it should therefore be repudiated as "illegitimate."
(...) Whereas in the earlier part of this period the major bulk of those receipts consisted of official capital flows from industrial countries and international agencies, in the later part, especially after the late 1960s and early 1970s, commercial bank lending became the dominant source of those receipts. For example, in the 1960-78 period the official development assistance (ODA) to developing countries decreased from 58 percent of their total external financial receipts to 30 percent, while private bank lending rose from about two percent to about 33 percent. Contrary to private bank loans, the official capital flows consisted largely of grants, concessional loans, and other official loans that were based on long-term, low-interest, or project-related financing. This shift away from official to private bank lending played a major role in the development of the present crisis of the Third World debt.
(...) No doubt the oil price shocks of the 1970s greatly accelerated the process of private bank lending and the accumulation of Third World debt. But to view this accelerating (or contributory) effect as the cause for commercial bank lending, hence for the debt problem, is challenging the reality of those developments. Evidence shows that the shift away from official financing to private commercial lending--the major culprit in the debt crisis, in our opinion--took place prior to the oil price shocks. That is, the expansion of bank lending as a result of these oil shocks took place within the general context of the expansion of bank lending. For example, Kristin Hallberg, using the official data of the Federal Reserve Board of Governors, shows that "real private bank lending grew 144%" between the years 1970-1973. Citing Charles Kindleberger's private correspondence (a renowned authority on international finance), she further shows that the expansion of commercial lending "coincided with the 'cheap money' push of 1971, when bankers looked to developing countries for riskier investments to maintain their income."
(...) To the extent that the resulting petrodollars from those price hikes contributed to the debt crisis, the blame lies not with those dollars per se, but with the policy responses to them, the so-called "recycling" policies of petrodollars. In fact, with policies concerned with the health of global economy those massive petrodollars could be viewed as a blessing in disguise: the tens of billions of dollars that were generated as a result of the oil price hikes of the 1970s constituted the potential for the largest primitive accumulation of capital to date which could be used for the industrialization and development of developing countries. That potential could be realized through a combination of measures: (a) direct equity investment from "surplus" countries in "deficit" countries--industrialized countries could provide the necessary technology for this strategy and thus make it a truly trilateral cooperation; (b) development grants from "surplus" countries to "deficit" countries, and (c) recycling the surplus not through the commercial banks but through independent international agencies that would grant long-term, low-interest, development-related loans to non-oil developing countries. Instead, the massive amounts of petrodollars (along with Eurodollars and the so-called "cheap money" of the early 1970s) found their way into the coffers of the big commercial banks and the pockets of corrupt "leaders" of the borrowing countries, which triggered their external debt problem.
(...) Several factors prompted the switch away from multilateral, official lending to commercial bank lending. Most significant among these factors was what might be called a weakening of Bretton Woods objectives... [WHY OFFICIAL LENDING, EARLIER?] Under these circumstances, where the Third World seemed at a cross-roads between capitalism and socialism (or something other than capitalism), the United States set out to block the latter road and coax, coerce, or force these countries to move along the former road. [Of course, this does not mean that the U.S. has now abandoned this policy, but that the policy was more urgent at that time.] Thus its financial assistance to the Third World during this period was primarily based on geo-political and long-term economic considerations rather than short-term, cost-benefit calculations. And this is why the financial flows to these countries at that time were largely in the form of grants, concessionary loans, and other forms of "soft" or development-related loans. The fate of Third World economies at this stage was too precarious to be entrusted to commercial banks...
(...) [WHY COMMERCIAL LENDING, LATER?] By the late 1960s and early 1970s, this pattern of Third World financing changed as private banks began to lend to these countries on a commercial basis. A number of factors precipitated this switch: (a) the Cold war atmosphere and the fierce "East-West" rivalry in the Third World had subsided by this time, (b) most of the socio-political upheavals in the former colonies and other less developed countries had also ebbed by the late 1960s, and (c) most of the developing countries had by now adopted a capitalist path of development. Whereas prior to this time private banks were reluctant to lend to developing countries because their economies were considered too volatile and their financial markets too unstructured, and thus unworthy of credit, these banks now began to lend as most of these countries emerged as sovereign nations whose economies and financial markets appeared capable of absorbing substantial debt on a commercial basis. These favorable economic conditions for private bank lending were further reinforced by favorable political and legislative conditions as OECD countries relaxed barriers that previously hampered commercial lending to developing countries. "Bank lending could [now] be expanded fairly rapidly, without the need to go through the legislative and budgetary processes of national governments."
(...) Commercial bank lending was further accelerated by a "natural" or "evolutionary" process of the accumulation of huge sums of finance capital in the coffers of Western big banks during the three decades of economic expansion and stability since WW II. This accumulation of bank capital was a culmination of several developments: the post-war expansionary cycle of the advanced capitalist economies; the Korean and Vietnam wars, which led to the flow of huge sums of dollars and/or Eurodollars into the hands of banks; the U.S. inflationary monetary policy that began under President Johnson, which led to the emergence of the so-called "cheap money" in the early 1970s; and, finally, the petrodollars of the 1970s. Part of the massive finance capital that resulted from these developments was bound to find its way to foreign lending, especially from the United States, where the Glass-Stegal Act prevented commercial banks from underwriting and selling corporate securities at home. (This also explains why commercial banks there have expanded into all kinds of consumer loans, be they mortgages or credit card.)
(...) As these developments led to bank loan officers roaming the Third World pressing their wares, they also created favorable conditions and big appetites for borrowing in the non-oil developing countries. For the inflationary/expansionary cycle and the accompanying "cheap money," mentioned above, positively affected the economies of these countries: On the one hand, it raised the volume and the price of their exports, on the other, it reduced the cost of their borrowing. "Dollars borrowed today could be paid back tomorrow in cheaper dollars, as inflation ate away their value."
(...) This brief overview refutes the claim that the oil price shocks of the 1970s were the major cause for the global debt problem--although it does not deny their contributory or accelerating impact--as it shows that the process of commercial bank lending and the proliferation of Third World debt started before those shocks took place.
(...) Although the oil price shocks contained the potential for an immense international financial imbalance, and hence the debt crisis, this crisis was not inevitable. The policy responses to the oil price hikes contributed more to the crisis than did the price hikes as such. As far as the policies of the OECD countries are concerned, the flip-flop character of those policies was more responsible for the crisis than the policies themselves. Policy responses of these countries to the first oil shock (1973-74) were diametrically opposed to their reactions to the second oil shock (1979-80).
(...) [RESPONSE TO 1973-1974 SHOCK] The first major concern of these countries in the face of the 1973-74 oil shock was to maintain economic expansion "through joint expansionary policies which would maintain growth....This argument reached its peak in the Bonn summit of July 1978 when the summit countries decided to adopt a locomotive theory of growth, with the major OECD countries agreeing to take action to help stimulate demand." The second major concern was that the surplus resulting from the oil price hikes should be recycled toward the "deficit countries" so that their growth, started since the late 1960's, could also be maintained...To be sure, there was some opposition to the involvement of private banks on the grounds that these banks were not trustworthy in the matters of international trade and finance, and that therefore the recycling of the surplus ought to be accomplished through official, multilateral financing. But the views that favored the involvement of commercial banks prevailed. These included the views of most OECD countries and the international organizations under their control, as expressed through the voices of their finance ministers or central bank officials.
(...) Not surprisingly, the decision to expand the role of private banks and Eurocurrency markets led to an immediate and rapid expansion of both the share of commercial bank lending and of the Eurocurrency markets. Eurocurrency markets expanded in the 1973-82 period by almost six times, from $295 billion in 1973 to 1,689 in 1982. And by 1984, "commercial banks' share of the total guaranteed medium-and long-term debt owed by non-oil developing countries to private creditors had risen to 86 percent." [ The remaining 14 percent consisted of the traditional private debt sources such as bonds and supplier's credits.]
(...) As a result of this easy monetary policy and vigorous expansion effort, the expansionary cycle that had started before the 1973-74 oil shock continued unhampered despite the recessionary or hindering effects exerted by the oil price shocks. The expansionary monetary policies (based on the locomotive theory) in the OECD countries, especially in the United States, positively affected the economies of the developing countries, even the non-oil ones. On the one hand, it kept the real interest rate very low, hence their borrowing cost very low, on the other, it raised their export earnings, both in terms of volume and prices. True, their debt was gradually building up, but there was no danger of a default as the steady growth in income, exports, and higher prices of primary goods during this period were reducing the external debt burden on these countries. Indeed, because of low real interest rates and healthy export growth their debt service ratio (the ratio of interest and amortization payments to export earnings) showed only a moderate rise, from 16% in 1973 to 23% in 1980. [CRITICAL: THE FIRST OIL SHOCK DID NOT GIVE RISE TO THE "DEBT CRISIS"] Thus, the 1973-79 period, the period between the two oil shocks, witnessed a healthy annual growth rate in the OECD countries, ranging on the average from 3.6 to 6.1 percent; in the non-oil developing countries, from 5 to 6.1 percent; and in international trade, an annual average growth of 5.5 percent.
(...) [VOLKER'S RESPONSE TO 1979 SHOCK, AND GENERAL INFLATION] As noted earlier, the policy response of the OECD countries to the 1979-80 oil price hikes was diametrically opposed to their response in 1973-74. Instead of maintaining expansionary monetary policy in order to maintain the level of growth, of income and of world trade, these countries now resorted to tight monetary policy to control inflation. The pronounced, or even dramatic, expression of this new policy was Paul Volker's departure from the 1979 Belgrade IMF/IBRD conference before it was officially over in order to prepare the new monetary policy in October. The new policy created a ripple effect in the opposite direction of the previous period: interest rates shot up, growth slowed down and the recessionary cycle (of 1980-82) set in, and the export earnings of deficit countries began to drop. Interest rates were further increased by (a) the larger U.S. budget deficits, and (b) the introduction of so-called floating rates of interest for commercial lending. The effects of the new policy on international interest rates and world economic growth are shown in Table 1. It is obvious from this Table that while this contractionary policy more than doubled the international average interest rate, it reduced the world economic growth to less than a quarter by the end of 1982.
(...) The trade deficit of the developing countries was further aggravated by the shortening of the maturity period of their debt, on the one hand, and the protectionist policies of the OECD countries (prompted by high unemployment rates), on the other. There has been no alleviation of these factors that negatively affect Third World debt: the OECD countries' protectionist policies continues, the U.S. budget and trade deficits continue, and the demand for and price of debtor nations' primary goods also continues to be very low.
(...) The cumulative effect of these factors was a jump in the debt service ratio of these countries from 20% in 1979 to 33% percent in 1982. The absolute amount of their foreign debt rose from $220 billion at the end of 1979 to 326 at the end of 1982 and 343 in 1983. Despite all the talk about solutions to the debt problem, this snowballing process of debt has continued unabated, and it now stands at about $1.3 trillion. [ARTICLE IS WRITTEN IN 1991]

(...) Only a small portion of the massive Third World debt has actually been received by (and spent in ) these countries. The rest has accumulated due to factors exogenous to the economies of these countries. These factors include the rise in the international rate of interest, the rise in the value of the dollar, the decline in foreign demand for their exports, the fall of the price of their primary goods, and, perhaps most importantly, the flight of huge sums of capital from these countries.
(...) According to Jacobo Schatan's calculations, about two-thirds of the entire Latin American debt in 1985--roughly $450 billion--could be attributed to these exogenous factors, which he appropriately calls the "illegitimate" part of the debt.
(...) The remaining, "legitimate," part of the debt includes what has actually been borrowed (but not fled back overseas), plus the concomitant interest based on the pre-1976 fixed rate of 6 percent. (As pointed out earlier, after 1976 the lending institutions abandoned the previously-agreed-upon fixed rate in favor of floating rates, which ushered in the double-digit interest rates of the early1980s.)
(...) Peter Nunnenkamp's estimates of the effects of external factors on the Third World debt are equally shocking. According to his calculations, the combined effects of external factors on Third World debt in the 1974-81 period amounted to $570 billion, of which interest rate effects accounted for $133.49 billion, lost revenues due to depressed demand for their exports constituted $104.41 billion, and the terms of trade effect accounted for the remaining $297.45 billion--Nunnenkamp attributes about half of the terms of trade effect, i.e., half of the $297.45 billion, to the effects of oil price hikes.
(...) [CAPITAL FLIGHT] A big chunk of the loan money was sent back out of the debtor countries to be deposited, invested, or used to acquire real estate abroad. This has been done by both government and military officials, as well as by private middlemen and businesspersons who usually gain access to foreign currency (through government channels) in the name of project investment. According to an IMF estimate, some $200 billion may have flown out of debtor counties by the end of 1985. Time Magazine estimated that the amount of capital that flew out of three Latin American countries between 1979 and 1984 was about $63 billion (28 billion from Mexico, 23 billion from Venezuela, and 12 billion from Argentina).
(...) [USE OF LOAN MONEY, IN-COUNTRY] Data from the U.S. Federal Reserve Board show that "more than one-third of the combined debt increment of Argentina, Brazil, Chile, Mexico and Venezuela between 1974 and 1982, i.e. about $85 billion, was devoted to purchases of real estate and to banking deposits abroad."
(...) But even excluding the part of the debt that is due to external factors, the remaining part, the part that was actually borrowed and somehow spent domestically, was quite substantial, amounting to tens of billions of dollars. What happened to it? How was it spent? What are its impacts on the economic development of these countries? A major part of this money has been spent on consumption, often wasteful consumption of the military and luxury or unessential type, rather than investment and/or production. Borrowing from abroad is not good or bad per se; it all depends on how it is spent. If it is invested in development projects that will yield a rate of return higher than the rate of interest paid for the borrowed capital, then borrowing can play the positive role of initial capital formation for productive investment, without the problem of repayment. This is a pivotal point in understanding the present crisis of the Third World debt: the borrowed funds were viewed not as capital to be invested productively, but as income to be used for consumption, or for financing the government's operating deficits. To the extent that some of these funds were formally invested in development projects, investment priorities and development policies were often perverse: building huge stadiums and sports complexes, buying synfuel plants to supply depressed oil markets, buying national airlines where citizens travel on the back of animals or ox-driven carts, and so on. Some of these pompous, grandiose, show-case projects--often undertaken in the name of building economic infrastructure, or as symbols of "national pride"--went as far as building whole new cities from scratch, such as Brasilia in Brazil and Abuja in Nigeria. "Nigeria is building itself a capital, Abuja, from scratch. The cost, by some estimates exceeds the nation's total sovereign debt of about $20 billion. Yet Nigeria has trouble making interest payments."
(...) A substantial amount of these countries' resources, borrowed or otherwise, is devoted to subsidizing "national" industries and enterprises, largely in the state sector but also occasionally in the private sector. While this policy is pursued in the name of promoting "national" industries, import-substitution, and economic self-reliance, in practice it falls short of achieving these objectives. Instead, by providing easy credit and windfall finances for inefficient and unprofitable enterprises, it aggravates the pattern of inefficiency and perpetuates the lack of competitiveness. It spoils the mismanaged "national" enterprises and their corrupt and inefficient managers by financial crutches. Import tariffs, credit controls, exchange controls and similar restrictions are also often justified by this misguided (or, perhaps, hypocritical) nationalism.
(...) While the purported goal of these nationalizations is that the state sector will play a pioneering role in bringing about a speedy industrialization program, experience shows that other objectives can be detected behind the nationalization thrust: to couple or supplement the political and military power of the state with economic power, to broaden the social base of the state by vesting the interests of broad social layers in the state (through consumer subsidies as well as through employment in the state sector), to provide the state bureaucracy with the opportunity of accumulating their personal fortunes and becoming capitalists in the shadow of the public sector and state capitalism.

(...) Interest payments are devouring a big chunk of the debtors' national income, leaving very little for growth and development. In Mexico, for example, interest payments consumed 46.23% of the government's entire expenditure in 1986 and 56.20% in 1987.
(...) [IN COMES THE IMF, WITH A PLAN!] Debtor countries facing interest payments and balance of payments problems often turn to the IMF for funds--if not for its own funds, then for its mediation to obtain money from other sources, usually from commercial banks. To obtain favorable response to their request for funds, these countries pay the price of allowing their socio-economic objectives to be shaped to meet the policy objectives of the IMF: reducing the size and the role of the public sector in these economies and shifting productive resources from industries that serve the domestic needs to those that serve the needs for foreign exchange to make interest payments. To achieve these objectives, severe austerity programs are usually put into effect in debtor countries: while government subsidies, real wages, and consumer imports are reduced, income taxes and prices are raised. Other IMF-sponsored measures include dismantling of controls that inhibit the export of foreign exchange, especially the payment abroad of interest and dividends to foreign capital, and devaluation of the currency to raise the cost of imports and reduce the price of exports. Instead of alleviating the developing countries' debt burden and other economic problems, the IMF-initiated policies have more often than not aggravated these problems. Efforts to gear national resources to meet the debt obligations have eroded both the standard of living of the majority of population of debtor nations and the industrialization aspirations and development plans of these nations. While many of the burgeoning industries of the 1960s and early 1970s are stalled because of the curtailment of the import of the necessary technology and inputs, a new emphasis is placed on the traditional export industries whose output is largely raw materials and primary goods. This policy, designed to earn maximum foreign exchange in the shortest possible time, is reviving and reinforcing the old pattern of monoculture and rapidly eating away at the natural resources of the debtor nations. Public-sector cutbacks, far from freeing space for private initiative, as the IMF argues they would, has hampered business investment by forcing governments to cut down on essential infrastructure: roads, schools for training a skilled labor force, investment in public health, and so on. Those cutbacks help generate waves of social and political unrest that encourage yet more capital flight.
(...) [INTERESTING REFLECTIONS ON RESPONSIBILITY] As noted, there are individuals and groups on the left who also disagree with the idea of responsibility and "legitimacy" as measures for debt relief, though for a different reason. Their reason is that the "peripheral" countries have for a long time been exploited by the "core" countries of the world capitalist market , and that therefore the entire debt must be repudiated. Our answer to this reasoning is that although the argument of "core-periphery" exploitation is a powerful argument for total repudiation of Third World debt under radically-changed world circumstances, it is not a good one under the present world circumstances (i.e., under the rules of world capitalist market and of the court of bourgeois justice). Under these circumstances, advocates of debtor nations need to show precisely how the debt was generated and accumulated. That is, they need to analyze the debt, to dissect it and break it down into its component parts and identify exactly the source of proliferation of each of these parts. Only in this way can they show the bourgeois judges the illegitimate parts of the debt even by their own standards (i.e., by the standards of their banking regulations and antitrust laws.

While the "core-periphery" exploitation argument correctly points out the transfer of economic surplus and resources from the "periphery" to the "core" of the world capitalist market, it suffers from a number of theoretical and empirical problems. To begin with, it is a class obfuscationist argument. Second (and for this reason) it also obfuscates the question of responsibility and accountability, and thus easily plays into the hands of demagogic national bourgeoisie who frequently point to foreign/external factors to justify their own blunders and mismanagement of the economies under their control (e.g., in the case of the debt it has provided a protective shield for the corrupt "leaders" of a number of debtor countries who are accomplices in the debt crisis). Third, this argument often fails to explain the industrialization and technological impact of the "core" on the "periphery" that takes place under the whip of capitalist accumulation on a world scale--proponents of this argument, largely associated with the Dependency School, either dismiss any such an impact altogether, or trivialize it as simply the development of underdevelopment.
(...) Schatan estimates that if "prices of raw materials had stayed at their 1980 level, export earnings for the 1976-85 period would have been some $25-30 billion higher than they actually were ; had this been the case, Latin America's borrowing needs would have declined by the same amount."