This diary is a recap and condensation of a lecture by probably the world's leading Marxist thinker, David Harvey. Professor Harvey has a PHD in Geography from Cambridge, and has taught at Oxford and Johns Hopkins before becoming Distinguished Professor of Anthropology at CCNY, where he has taught the foremost class on Marx's Capital that I am aware of for 20 years. www.davidharvey.org One main strength is his ability to take broad swaths of complex economic and geopolitical history and synthesize it into a seamless, accurate narrative of the origin of the crisis. The main secret is his deep understanding of Marxist theory, which allows him to decipher the information that really matters. I highly recommend that kossacks either take the time to watch the full video, or read my recap of its main points, because this man has a better grasp on the real dynamics of the global financial crisis than probably anyone right now, and this is the most thorough and clear explanation that I've ever heard him give for the roots and current nature of the crisis and why it's a crisis of capitalism. I've heard Professor Harvey speak in person many times, and he's always brilliant, totally off the cuff, but however is usually too constrained for time to make this stunning argument in full. The video and my condensed version are below.
In 2004-2005 a large upsurge in foreclosures occurred, but was largely ignored due to the fact that these were mainly in African American and Hispanic, low-income neighborhoods of old cities such as Detroit, Cleveland, and Pittsburgh. Therefore the politicians paid very little attention, as well as the media. This is tragic because had there been more attention paid, it would have been much easier to control and mitigate the crisis at this early stage in the game. Professor Harvey compares it to the HIV-AIDS crisis in not only its unnecessary magnitude but also its race and class components, noting that Reagan never once mentioned the term HIV or AIDS publicly throughout his entire time in office.
By 2007 a real epidemic of foreclosures had spread beyond the old cities to other places, particularly the American southwest, Florida, and California; because these places had high concentrations of white, middle class, republican communities, there began to be some real attention paid. It was too late. In 2008 the "containable problem" had become a catastrophe, and we saw the phenomenon of several investment banks going under, with the notable Hindenburg moment of Lehman Brothers going bankrupt, which instantaneously caused the crisis to go global, in a series of domino effects, or an avalanche, of financial crisis contagion.
In Latin America, people had initially been sort of smug before the bankruptcy of Lehman... after all, they had a similar thing happen to them in Argentina in 2001. But after the bankruptcy of Lehman that tune changed as they too felt the effects of the crisis.
China lost 20 million jobs in a couple of months, and Taiwan saw a marked decrease in exports, resulting in massive layoffs. The Japanese economy went negative. Germany and the stronger European economies got hit as Ireland and Spain had already been, having been more actively involved in property development.
One of the forces that is now having big impact is the drop in the flow of remmitances from the United states (Gulf states, Haiti, Mexico, etc, are all becoming wildly impoverished).
Professor Harvey is careful to point out the geographical aspect and choreography or pathways of this crisis, in order to think about it's point of origins (the US), why it spread so contagiously, and why it's so hard to find a pathway out of it.
Now these crises are not new, but they have increased in frequency, dramatically after 1975 (6 fold or so), due to the radical transformation in the global economy known as the "neoliberal turn"
Many of these crises were contained, for example the Mexican crisis of 1982 + 1995, Argentina in 2000, east and southeast asia in 1997 and 1998, The Japanese crisis of 1998, and the Swedish crisis of 1992; etc. The interesting thing is that these crises were all led by a problem in the property market, a problem of urbanization. Macroeconomics ignore urbanization, but there is a real correlation. Look at each of the above crises, and you will find a crash in the property markets, and there is a previous example in America as well known as the Savings And Loan crisis. The reason for this is that all this development and urban development has been largely debt financed. The only difference between the speculation on property markets in the Neoliberal era and previous crises is that it used to be speculation on Railroad projects and the like. SO this phenomenon is far from new. In fact it is estimated to have happened nearly 400 times around the world since 1945.
The only new feature is that this crisis is bigger and more global than ever before.. the east and southeast asia crisis had a contagion effect on Russia and Brazil that was largely contained. Harvey believes that this crisis was worse because it started in the Nexus of financial controll, the United States. He also asks a very interesting question:
Why was Lehman allowed to fail? Could it have been an intentional decision on the part of the Federal Reserve to sort of globally socialize the losses and expenditures of getting ourselves out of this financial crisis, a sort of offensive realist form of economic statecraft to protect our national interests? Or was it simply a mistake? Harvey posits that it is highly unlikely that such a massive error that is nevertheless so key to maintaining our relative global power could ever have been made.
The history of capitalims, at any rate, is crisis prone, and Harvey states that crises have an important role to play in the survival of capitalims, because they reconfigure class relations (what he calls accumulation by dispossession). It allows the ruling class to move things around from one problematic to another problematic, and the big question is what the next crisis will be, and of course whether we like it (think cap and trade bubbles, any other theories, and think of this as a kind of proposed organizing tool).
The problem is basically that capitalists make money on investment, and then, due to what Marx calls the "coercive laws of competition", they can not consume and enjoy that profit, or they will quickly fall behind and no longer be capitalists. This, according to Angus Madison, has resulted in an overall growth rate of 2.25% per year... just short of the acceptable 3% rate of growth that economists talk about. Both Obama and Gordon Brown set that as their target for recovery.
Thus the global economy is now 56 trillion in normalized 1990 dollars, whereas in 1750 it was 165 billion, and in 1950 it was 5.3 trillion dollars, again according to Angus Madison, who's made the best calculations that anyone has on the matter.
So the problem becomes that you now need to find 1.5 trillion dollars in investment opportunities... This is where the cause for bubbles, speculation, and crises has always come from. And with 3% compound rates of growth forever, there is sure to be a ratcheting up of the magnitude of each successive crisis to the extent that capitalism continues in its present form indefinitely.
The banks and Economists refer to this problem as "surplus liquidity", which Harvey argues has been a problem since the 1950's but became exponentially worse after 1975. And when faced with these limited investment opportunities, banks start lending to just about anyone and that's how you got the subprime boom. And there is a diabolical aspect to it as well, which is that one of the purposes of making all these bad loans is to actually destroy the surplus liquidity through a financial crisis. Thus we find out that 56 trillion dollars in asset values have been wiped out in this crisis, or roughly the entire yearly value of all the world's GDP's added together. This includes 7.1 trillion in the United States being wiped out.
So these crises that result from games in the financial markets actually play quite useful dual roles of reconfiguring class relations and destroying surplus liquidity to allow capitalism to escape from grinding to a halt do to the excess of liquidity gumming up the system, with nowhere to go but towards socialism.
Each crisis had its own root cause of course that tipped off the internal dynamics in different ways. In the 1930's, for example, everyone realized that the problem was a lack of effective demand, and though Keynesian debt financing of social projects began to stimulate demand, Roosevelt was to scared of driving up the debt and it was ultimately WWII that got us out of the great depression.
After the war ended, we had to find another way to deal with the problem. But the big solution came after 1945 in the form of the suburbanization of the united states (again, through debt financing). This led to all sorts of effective demand in the form of not only two cars and the house and the roads, but also the new demand for things like lawnmowers, for example. SO a slew of new industries were created, but almost all of them were dependant on cheap oil, and this was disastrous not only for our national security but also for the environment. Harvey also notes that until people give up their suburban lifestyles, there is no way we're going to solve the environmental crisis.
The problem then became, however, that for effective demand to increase enough to fuel all this growth, you had to raise wages and that meant a strengthening of the organized labor sector. Not only that, but with rising wages came rising prices, and this tipped off an inflationary problem in the late 1970's that ended up driving down the profitability of firms, setting them up for a big period of violent confrontation with well organized, powerful organized labor as they sought to decrease wages to gain back their profitability. Capitalists didn't like this at all. harvey calls it a capitalist class crisis.
The way that the capitalist governments addressed the labor problem was to
- Open up the country to immigrants. Thus we had the major immigration reform in the US 1965. The Germans brought in the Turks, the French brought in the Magrebbians. The Brittish drew upon their former empire. The Swedes brought in people from Yugoslavia... etc.
- You could take your production overseas. This required a revolution in transportation known as "containerization" in the mid-1960's.
- You could invent people like Reagan, Thatcher, Cole and Pinochet to attack labor under the philosophy that labor was causing the inflationary problem and by mid 1980 this three-pronged attack had largely succeeded.
Now you're back into the 1930's story, where with the discipline of labor, we've had 30 years of global wage repression. Even China has had offshoring to cheaper labor markets in Vietnam and Cambodia. But back in the 1930's we tried Keynsian methods to stimulate demand. This time around that solution wouldn't fit the dynamics of wage repression (as opposed to unemployment. So what do you do to pay for your lawn mower? The answer is that you get out your credit card. This leads to the first serious problem underlying the roots of the latest crisis: that effective demand is almost completely debt financed by private consumers.
The second serious problem comes from what the capitalist class chose to do under the neoliberal regime now that it controlled vastly larger amounts of the world's resources, as CEO wages are 350/1 as compared to their average workers. This was supposed to create jobs and prosperity as the rich invested. However, what did they invest in?
At first, in the early 80's, they invested in production. But heightened Global competition caused profitability and wages to both be low in production. Harvey uses the example of the Detroit auto industry, where you had about three major manufacturers that used to engage in price leading (de facto collusion), but then Japanese and Italian companies moved their factories to our shores, and they of course chose the most labor-unfriendly states to do business in... thus Detroit had to compete with those low prices and shoddy working conditions, and the whole thing is a race to the bottom.
So the capitalists, by the mid-1980's, chose instead to start investing their surplus capital in asset values. This is quite simply due to the bubble-based nature of the stock market, which means that you can make a lot more return on your investment by investing in something that goes up every time you invest in it. You know how a bubble works. That's why the theory of trickle down economics never quite worked out.
Then they found there were other channels called derivatives that allowed even higher return on your investment. Derivatives on currencies, credit, etc. The troubled Japanese economy in the 1990's was lending money at 0% interest. You could take that money to London and lend it at 6%. So why bother doing anything else? But the problem became the question of currency exchange. This is a big part of where the massive industry of hedging originally came from... you could take a derivative bet on whether you were going to lose that 6% profit do to the exchange rate, and if you were right, you'd recoop all your losses. So this in turn led to the massive creation of fictional capital that had no real work whatsoever to underpin it. It happened much more in our current crisis.
But it happened in a very particular way, because the gap between what real wages were and what the magnitude of the derivatives markets were was becoming unsustainable. The derivatives market was circulating far more than the actual size of the economy: in 2004 someone calculated the derivatives market at 340 trillion dollars, as opposed to the world economy of 56 trillion. That number has now increased to 600 trillion dollars; a radical rate of growth. Real money was coming from these fake trades, based on real work, and Harvey asks the salient question:
Who's labor was paying these enormous CEO bonuses. His theory is that we should look at the 2 million homes that have been lost in the past year, which Harvey reminds us included the largest loss of assets in the African American community ever. And yet no one is talking about that because that starts to sound like "class warfare" discussion, which somehow doesn't fly in this country.
As to the question of the future of the neoliberal project; there were 2 pragmatic principles, and Harvey looks to the example of the Mexican Debt crisis of 1982 for guidance, where the IMF said Mexico could get a bail out for its banks in exchange for socking it to the Mexican people. Sound familiar? So Harvey thinks that what we actually have so far has been a wild extension of the neoliberal project, that after all left four banks on Wall Street better off than before. Increasing monopolization on the part of a very powerful capitalist class, continuing the politics of the neoliberal era, minus all the wonderful Raegonomic explanations.
Thus the system has a very serious "Legitimation Problem." Now there are obvious signs of what harm 3% compound growth forever can do, Environmentally, socially, and financially.
But the capitalists are not going to reconfigure any of this unless there is a political awareness and a political movement to reject their rehashing of the same old neoliberal schemes, booms and busts, privatizing of gains and socialization of the losses, etc. He suggests that now is an opportune time for the left to pressure the capitalists to give us a political economy that's much more sustainable if we can muster the pressure that it would take. The opening is that there are no longer any real "free market" arguments that are still credible after this current crisis. And China seems to be rejecting those principles now and encouraging their own effective demand, which Harvey thinks will result in the loss of US Global financial Hegemony in the world and will highly discredit the right in the US. But In the US so far, unemployment has not reached a stage yet where people are ready to take the streets, there is no mass movement, and the capitalist University system has been completely saturated with neoliberals at every level (many of them well meaning), so that very few people are able to understand the dynamics of the crisis and thus get a sense of what the real possibilities are, and thus what we can actually fight for. We need to be listening to Dr. Harvey very, very closely in the next few years.
Thanks for reading this far. If you feel the spirit move you, hit the rec button and leave a comment; all feedback, good or bad, and all opinions are welcome here. This comes from my recent decision to support single payer health care in August and September, which I diaried about yesterday and which Socialists are at the center of the debate about right now.