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Review of The Great Financial Crisis: Causes & Consequences, by John Bellamy Foster & Fred Magdoff

category international | economy | review author Monday June 01, 2009 12:21author by Wayne Price - Personal opinionauthor email drwdprice at aol dot com Report this post to the editors

Summary and critque of book on the economic crisis by Monthly Review theorists.

Books about the worldwide capitalist crisis have been rolling off the presses and pouring into bookstores. They cover the political range from conservative to liberal, and somewhat further left. So it is worthwhile to review a book on the topic by radicals from the Marxist tradition of the Monthly Review magazine. The authors (Foster is the current editor of MR) root their theorizing in the 1966 work, Monopoly Capital by Paul Baran and Paul Sweezy, from 1966. The Great Financial Crisis is composed of essays written for MR over two years, just before and during the full crisis in Fall 2008, sandwiched between two new essays. The book is short (156 pages) and, for a book on economics, clearly and nontechnically written.

The authors raise key concepts which could be accepted by a libertarian (autonomist) Marxist, or, in my case, a Marxist-influenced anarchist. They write that since the beginning of the twentieth century, more or less, capitalism ceased being composed mostly of small businesses which were dominated by the market in which they competed. Instead, the economy is dominated by very large businesses, of nation-wide or international scale, with a small number of these monopolies (really semi-monopolies or oligopolies) dominating each industry. This by no means has ended competition, since the giant firms compete with each other (when they do not make deals) and with other industries and with giants from other countries, and there are still many small and medium-sized firms. But the markets are distorted and compromised by the existence of these giant semi-monopolies.

The coming of (semi-)monopoly capitalism has resulted in a loss of capitalism’s dynamism, they claim. The long-term trend is toward stagnation. This appears in slow growth, high unemployment and underemployment, surplus capacity in industry, frequent recessions, alternating inflation and deflation, poverty even in wealthy nations, the failure to industrialize the poorer nations (except in an unbalanced way), and other ills. As they note, the bourgeois economist John Maynard Keynes demonstrated that it was possible for capitalism to stabilize itself at a stagnant level of high unemployment; radical Keynesians argued that this was the tendency for a mature capitalism. They quote an earlier work by Sweezy and Harry Magdoff, “The tendency to stagnation is inherent in the system, deeply rooted and in continuous operation. The counter-tendencies, on the other hand, are varied, intermittent, and (most importantly) self-limiting.” (on p. 41)

It is not hard to see that this was true for the period from 1914 to 1946. This included the destruction of World War I, the shallow prosperity of the 20s and the Great Depression of the 30s. 10 years after the 1929 stock market crash in the U.S., there was still almost 20% unemployment. Politically there were waves of revolutions in Russia, Germany, Italy and Eastern Europe, as well as in China, Turkey, etc. These were countered by the transformation of the Russian Revolution into Stalinist totalitarianism and the rise of fascism in Italy, Germany, Spain, and elsewhere, followed by World War II. It was clear to millions just why revolutionary theorists, such as Rosa Luxemburg, Lenin, and Trotsky, among others, regarded this as the epoch of imperialism and capitalist decay.

The Post-World War II Prosperity

However, World War II was not followed by a return to depression conditions, but by the long boom of the 50s and 60s, apparently a “Golden Age” for capitalism. To many, this seemed to refute the idea that there still was an epoch of capitalist decline. But the authors argue that the (relative) prosperity was due to self-limiting counter-tendencies, which wore out by the end of the 60s, more or less.

Of the counter-tendencies, Foster and Magdoff first cite imperialism, the drain of wealth from other countries into the imperial nations. World War II had permitted the reorganization of world imperialism to benefit the U.S. capitalists primarily. They note that profits from foreign investments went from approximately 6 % of total U.S. business profits in the 1960s to 18 % for 2000 to 2004. International trade has benefited U.S. capitalism, as the U.S. went from being a creditor nation to a debtor, being subsidized, in effect, by the rest of the world. However, they do not discuss this much in this book.

They focus on overall government spending to stimulate the economy, in particular on military spending. State spending on socially useful goods would compete with corporate profits and, anyway, implicitly challenges the virtues of private production (an exception being the production of highways, which could only be done by the state, and was necessary for the automobile industry). But military spending does not compete with private industry; instead it subsidizes capitalist firms while providing incomes to workers. They note that even before the Iraqi and Afghan wars, military spending was equal to a third of overall business investment and a quarter of gross private investment.

These and other factors all had their limits. By the mid-1960s to 1970, the economy began to slide downhill, through the ups and downs of business cycles. Economic events since then have included the debt crisis of the “third world” beginning in the 1980s, the 1987 U.S. stock market crash, the late 1980s and early 90s savings and loan crisis, the financial crisis and Lost Decade of Japan in the 1990s, the financial crisis of 1997 to 1998 of Asia, and the 2000 dot-com crash, leading up to the much worse current Great Recession. Wages have been declining, social benefits have been cut drastically, and unions have shrunk, all part of a growing inequality between the very rich and the working class.

This is not to say that there has been no growth at all. But growth has been limited and lopsided, gains in one area being offset by losses elsewhere. Cell phones, while convenient, do not make up for global warming or the decay of Africa. Compared to the economically stimulating effects of automobiles in the 50s, “The new information technologies (computers, softwar, the Internet)…do not appear to providing a similar epoch-making, long-term economic stimulus….” (p. 42)

What has happened over the last decades is the “financialization” of the economy. There is a “real economy”, as it is called by economists, which produces real goods and services. And there is a “virtual” or “paper economy,” which consists of stocks and bonds and other financial instruments which are not real goods and services but which are claims on wealth. Instead of investing in the real economy (which has remained stagnant), capitalists have invested heavily in the paper economy (which has boomed), including speculation in real estate, commodities markets, and securities. While this had always been a trend, it really accelerated in the1980s and afterwards. Financiers became extremely creative in thinking up new financial instruments with the very slightest of bases in actual industry. A mountain of debt (what Marx called “fictitious capital”) overlay stagnating real production.

This also appeared to counteract the attack on the living standards of the “middle class” and the better off working class. While wages had gone down, people lived beyond their means. They used credit cards and took out mortages on their houses, which always seemed to be going up in value--even though there was no new production of wealth. (Also, wives going to work kept up family incomes, despite the fall in wages.) So everyone seemed to benefit—until the whole thing collapsed.

In the earlier epoch of capitalism, the business cycle tended to expand debt and financialization during the boom part of the cycle, which would then be mostly squeezed out in the following bust part of the cycle. But now, the growth of debt continued throughout the cycles, never being cleared up. Apparently prosperous, the economy became increasingly shaky and vulnerable. Sooner or later there must be a collapse, when all these claims to wealth will try to actually claim their share of the limited real goods.

Foster and Magdoff call this “monopoly-finance capital,” because of its dependence on financialization. They specially distinguish this from the theory of “finance capitalism” of Lenin and Hilferding which saw banks as taking over control of the monopolistic industries. While this may bave been true for a period, banks are not the masters of today’s economy. They are another set of semi-monopolies integrated with the other giant corporations (which often make their own loans and investments).

“The financial explosion in the U.S. and other advanced capitalist economies since the 1960s, we argue, is symptomatic of the underlying stagnation tendency that has its roots in the whole pattern of accumulation under monopoly finance capital. It is this and not the financialization (or even today’s crisis of financialization) that is the real problem.” (Foster & Magdoff, 2009; p. 20)

They do not predict that this is a final crisis which will bring down capitalism. There may be an upturn from the worst of the recession. But they do not expect an end to the long-term stagnation of the system, the financialization of virtual wealth, and the vulnerability toward increasingly greater crises. They also doubt the possibility of Obama or anyone else carrying out a “new New Deal,” with large scale public works to provide jobs, social benefits, and economic stimulation. This would lessen the suffering of the working class and the poor, but it would be too much of a challenge to the private capitalist system and would arouse too much antagonism from the ruling class. The last New Deal did not end the Great Depression, they note; it ended with World War II. What is needed, they say, is a revolutionary reconstruction of the economy, which they call “socialism.”

The Weaknesses of the MR Theorists

I have summarized what I agree with in this book, which is most of what it says: the epoch of semi-monopoly finance capitalism, its long-term tendency toward stagnation, its counter-tendencies which produced the apparent boom after World War II, the decline since, hidden by the financial explosion, and its tendency toward ever deeper crises.

There are aspects of their analysis with which I disagree. In particular, they have a dubious theory (going back to Baran and Sweezy’s Monopoly Capital), about the cause of the long-term stagnation. They claim that the monopolies produce too much of a “surplus” for the system to absorb in investments, which clogs up the system and causes stagnation. The problem is lack of “effective demand” for products. Since the “surplus” cannot be invested, it is, therefore, not produced. (Therefore there is not really a surplus but a potential surplus, actually a shortage. )

The problem with this is that it makes the problem one of circulation of commodities, not one of production, which is where the clash of classes occurs most fundamentally. If the capitalists could produce profitably then they would be able to invest in profitable enterprises. If they could produce profitably, they would be able to buy from each other’s companies and to hire enough workers to expand the consumer market; there would be no difficulty finding “effective demand.” The problem,then is one of production, in particular, of the capitalists being able to pump out enough surplus labor from their workers for profitable production.

The MR theorists, despite calling themselves Marxists, specifically rejected Marx’s most basic “economic” concepts of value and surplus value, and his theory of long term stagnation related to the tendency of the rate of profit to fall. As can be seen by the references in the book to those who influenced them, they were mostly indebted to the bourgeois economist Keynes and the left Keynesians, rather than to Marx. (A Marxist criticism of Baran and Sweezy’s Monoply Capital was made by Paul Mattick [1978/2007], the council communist [anti-Leninist Marxist].)

This lead the MR theorists (Sweezy, Baran, Harry Magdoff, and now Foster and Fred Magdoff) to misunderstand the post-World War II boom. At the time they seemed to expect it to drag on forever, without any significant internal conflicts (that is, class conflicts). They did not understand that military expenditures were creating fictitious capital, due to government borrowing on the one hand in order to pay for it, while, on the other hand, military products did not re-enter the cycle of production. (That is, while making tractors led to growing food and bulldozers to building buildings, production of tanks was used for nothing, except destruction.)

Nor did they understand that ecologically, capitalism was looting the future, like a business which did not put aside part of its earnings for the time when worn out machinery would have to be replaced—but instead counts this as both part of the its profits and as part of the wages to buy off some of the workers. So the capitalist class has not been using real wealth to clean the air, or preserve the seas, or to transition to noncarbon-using energy sources. Eventually these will have to be paid for, but meanwhile the wealth has been counted as profits and (somewhat) as wages.

The authors admit that Baran and Sweezy’s original analysis was “deeply flawed in one respect: the failure to envision the financial take off that began in the 1970s and accelerated in the 1980s.” (p. 66) They claim that MR writers caught up with the financialization explosion empirically, after it happened, but admit they still do not understand it theoretically. “There is still no existing economic theory that adequately explains the phase of monopoly-finance capital.” (p. 76)

Perhaps the starting point for such a theory would be with Capital, vol. III, where Marx wrote, “If the rate of profit falls…there appears swindling and a general promotion of swindling by recourse to frenzied ventures with new methods of production, new investments of capital, new adventures, all for the sake of securing a shred of extra profit….As soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out.” (1967; p. 258-9)

Their theoretical limitations are related to the inadequacies of their program, and to their inability to confront the Stalinist history of the MR tendency, with its one time support for the Soviet Union, and then for Maoism, and for “their friend Che,” (p. 76) to whom they dedicated Monopoly Capital. It is a curious comment on a tendency which opposes monopoly capitalism that its programmatic alternative, which it names “socialism,” has actually been state capitalism, the extreme version of monopoly capitalism.


Foster, John Bellamy, & Magdoff, Fred (2009). The Great Financial Crisis: Causes and Consequences. NY: Monthly Review.

Marx, Karl (1967). Capital; A Critique of Political Economy: Vol. III. NY: International Publishers.

Mattick, Paul (1978). Anti-Bolshevik Communism. Monmouth, Wales, UK: Merlin Press.

author by Ilan S. - AAtW; ainfos; Matzpen;publication date Tue Jun 02, 2009 00:47author address Tel Avivauthor phone Report this post to the editors

On the margin of obsolete Marxist speculations

Some people make things more complicated than what it is really happening.

They also tend to see part of the factors in the system and jump to conclusions.

They also mix between problems of ownership and problem of production.

The famous decline in the rate of profits inbuilt in the capitalist production is false.

It is deduced from the investment of capital in innovations and automation, but fail to take into consideration that Capital not only accumulate but partly destroyed. (Machinery become obsolete when modern ones are built - like the replacement of huge main frame computers by the PC.) Whole factories are garbaged when competitors succeed to produce a better quality in a chipper way....

As the states are producing lot of fictitious "capital" by printing money and bonds that are allocated part of the surplus values from the "real" economy [and taxes reduce the rate of profit], the dynamics of changes in the rate of surplus value/capital become meaningless in the assessment of production by itself.

The old polemics that relate the unemployment to surplus production is false as we had seen in the pre crisis low unemployment in US. The fluctuation in the system cause fluctuation in the rate of unemployment, but the main reason for unemployment is its role in the class war. Thus, the US with working class less militant have usually lower unemployment rate than Western Europa.

The main reason for the relative stagnation in modern capitalism is the concentration of capital and reduction of competition between producers of the same products.

The diminishing of the "middle class" and the part of the working class in the values produced is related to the decline in the military competition between the main capitalist states - no need to bribe the would be soldiers.
The neo liberal end of the well fare state, and the diminishing of protection of markets from cheap imports are related to it.

The financial domination of the system and the resulting frauds and crisis is mainly the result of the flooding of the system by huge printing of money by states. Gradually, the ownership of the real means of production move to the finance system, and thus, the crisis in the finance markets aggravate the crash in the production system.

The capitalist system can easily get over the "surplus production" when there is high rate of surplus value and too low wages - the system and state just increase the credit for the working class so they will be able to buy the "surplus" houses, cars, services, and other products.

author by toddpublication date Tue Jun 02, 2009 04:44author address author phone Report this post to the editors

"the main reason for unemployment is its role in the class war."

I don't understand this comment. The US has had lower rates of unemployment for a number of reasons (i.e. lower wages, less social welfare provisions, greater poverty, etc). Other countries have low levels of class struggle and huge unemployment, and vice versa. It seems like they are related but it isn't the main factor.

author by Waynepublication date Wed Jun 03, 2009 10:15author address author phone Report this post to the editors

Ilan thinks that the growth of giant firms, semi-monopolies, is a cause of the tendency toward stagnation. On this, he and I are in agreement, as is Foster & Magdoff, as well as Marx (in my quotation above).

But Ilan rejects the Marxist concepts of the labor theory of value, surplus value as underlying profit, and the tendency of the rate of profit to fall. In this, he disagrees with me...and Marx, but agrees with Foster & Magdoff and almost all current bourgeois economic theorists.

To argue these theoretical issues would take too much time and space right now. Let us be content with what we can agree on.

The rate of unemployment is partly due to the fluctuations in the economy, beyond anyone's control. But it is also deliberately manipulated by central bankers and policy makers, who deliberately promote unemployment to be in a balance with the rate of growth, in order to prevent "too much" inflation. In general, the "reserve army of labor" (Marx) is deliberately maintained by the capitalist class to hold back the working class and hold down wage rates. This is why a "guaranteed income," (which the system could technically afford) will never be accepted by the capitalist parties.

author by Ilan S. - ainfospublication date Sat Jun 06, 2009 05:36author address Tel Avivauthor phone Report this post to the editors

"But Ilan rejects the Marxist concepts of the labor theory of value, surplus value as underlying profit, and the tendency of the rate of profit to fall".

I first learned about labor theory of value, surplus value as underlying profit from Marx capital part one 58 years ago... I am not sure he was the first to discover that the source of profits is the surplus value, but my contest of the sole or main reason for the decline of profits due to the increase in the ratio of capital/work is of two main reasons:

First, in the very dynamic development of technology, the destruction of capital due to the throwing to garbage of machines before time, and because producers were taken out of markets, and because less and less capital is invested in stock, the increase of moving of capital to cheap wages countries.... the change in the rate in the capital/work, is not as predicted by Marx according to the technology of his time.

Second, increase in the percentage of workers in the services that vave low ratio of capital/work, the total capital/work ratio may not be as predicted by Marx.

In addition, a bigger factor responsible to the decrease of the rate of profit due to the huge amount of bonds the states sell (which pay dividends by taxes levied on the real economy) Marx analyses of capital and its dynamics are outdated.

Just in the last crisis we have seen how a huge part of the capital of capitalists was destroyed. If the state will not print and sell equivalent or higher sum of bonds, the rate of capital/work may even temporarily decrease and rate of profit increase...

The "Marxists" who count on the decrease of the rate of profits to explode one day the capitalist system, are just pipe dreamers. The revolution will be ignited because of delegitimating of the capitalist system for more obvious reasons.

Related Link:
author by Manuel Baptistapublication date Sat Jun 06, 2009 07:57author address author phone Report this post to the editors

The Marxist theory was an appropriate approach to the problem of explaining capitalist exploitation mechanism, but no longer now.

Appart from Ilan's arguments, which I subscribe, I would add that the amount of money (mainly electronic money) worldwide is about 7 times higher than all the things that actually or potentially could be transacted!
This makes the owners of banks and the ones that decide in central banks, governments, etc the ones that control in a way how much money flows to the consumers pockets, and not the workers direct bosses alone. They control the rate at which the non-capitalists can consume, in variety of ways; not only deciding on wages, but also how much credit, it's cost... and other means!
Capital cannot be seen as «frozen work», as Marx and the Marxists view it. The most powerfull capital is (since a very long while) the financial branch, dominanting the industrial. The finance is in command, because it disposes the credit.

author by Waynepublication date Tue Jun 09, 2009 06:12author address author phone Report this post to the editors

As I already said, I am not going to get into an argument, here and now, with Ilan about the labor theory of value or the the tendency of the rate of profit to fall. But to be clear about a political point, I do not agree with anyone who "counts on the decrease of the rate of profits to explode one day the capitalist system." There is no automatic, mechanical, end to capitalism (except maybe a world nuclear war). I do think that the fall in the rate of profit--which is reflected in the long term stagnation of the real economy--does create an unstable system, vulnerable to crises, and that THIS contributes to "delegitimating the capitalist system." If concious revolutionaries will spread their ideas.

Manual Baptista apparently has not bothered to read my original essay. (I hate these kind of comments.) If he had, he would have seen that I (and many others) distinguish the real economy, which produces real goods and services, from the paper or financial economy. The real economy has been stagnating for some time, failing to produce enough surplus value, while the financial economy has been booming, serving to paper over the stagnation in actual production.

author by Manuel Baptistapublication date Wed Jun 10, 2009 09:47author address author phone Report this post to the editors

Dear Wayne,
Shouldn't be angry with me!
I did read you and I found (and find) sensible what I commented.

I believe one can explain in a relatively simple argument why Marxism is no longer an appropriate economic theory: nowadays it's clear that some fundamental aspects of capitalism are in deep contradiction with Marxist analysis (these were not easy to devise in Marx's time).
I think this is an important topic because many people in the anti-authoritarian revolutionary camp still believe there are some fundamental aspects which can be useful in Marxist analyis.
Me and others, we think that Marxist analysis is not a relevant theory any more; that it lacks any real insight for explaining todays world. Many concepts Marx used are still usefull, but these were never discovered by Marx . It's namely the case with plus-value and with class society. Marxist mythomania attributes them to Marx. But Proudhon and many others used them currently before Marx.
To discuss Marxist theories nowadays is only relevant to point out that we need a fresh approach to theory.

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