Notes on Fetishism, History and Uncertainty: Beyond the Critique of Austerity

Werner Bonefeld

‘What divides these gentlemen [the French socialists] from the bourgeois apologist is, on the one side, their sensitivity to the contradictions included in the system; on the other, the utopian inability to grasp the necessary difference between the real and the ideal form of bourgeois society, which is the cause of their desire to undertake the superfluous business of realizing the ideal expression again, which is in fact only the inverted projection [Lichtbild] of this reality’ (Marx, 1973, pp. 248-49).


We live at a time that resounds with misery. The headlines have changed from war and terror to what seems like a never-ending global economic crisis. Against the background of debt, default and sluggish rates of economic growth at best, accumulation by dispossession is back en vogue, a whole generation of workers appears redundant, and a whole mass of people have been cut off from the means of subsistence, struggling to survive – and despite appearances to the contrary, war and terror continue unabated. In this context, the notion that capitalism produces deplorable situations is a most optimistic point of view. Deplorable conditions (Zustände) are not the same as deplorable situations (Mißstände). The one says that poverty is a capitalist condition. Challenging it requires a fundamental change in the social relations of production. On the other hand, deplorable situations describe entirely avoidable socio-economic circumstances, be they the result of a chance development, government incompetence, or hard-nosed class-politics. As such it can be rectified by well-meaning political interventions and political programmes that benefit society at large.[1] Instead of capitalist profit, miserable situations require resolution by political means that hold the economy accountable to the democratic aspirations for a freedom from want. Deplorable situations require thus a social activism that challenges This misery and That outrage, seeking to alleviate and rectify This and That. What however are the social preconditions that constitute the necessity of This poverty and That misery? After all, what is needed is a praxis that fights the underlying conditions of misery. Adorno (1972) therefore condemns activism for its own sake, and rejects it as a pseudo-praxis that fights this and that but leaves the conditions that render this and that entirely untouched. In this way, ‘activism’ is not only affirmative of existing society but also regressive – it deludes itself that however bad the situation, it can be rectified by this or that policy, by this or that technical means. The activism of the given situation feels the pain of the world and offers its own programme as the means of salvation. The activism against this or that is delusional in its conception of society. It deceives those whose interests it pretends to represent by making them believe that a resolution to their plight is really just a matter of proper government. In its essence, activism for this cause or that cause is a political advertisement for some alternative party of government. It transforms the protest against a really existing misery that blights the life of a whole class of individuals into a selling point for political gain.

On Society and Economic Nature

Critical thought is none other than the cunning of reason when confronted with a social reality in which the poor and miserable are required to subsidise the financial system for the sake of sustaining the illusion of fictitious wealth. Yet, this subsidy is entirely necessary in existing society, to prevent its implosion. This rational irrationality of a capitalistically organised mode of social reproduction is at the centre of the critique of political economy. Its critique is subversive. It asks why human social reproduction takes this irrational form. Subversion focuses on human conditions and focuses on essentials: ‘Free labour contains the pauper’ (Marx, 1973, p. 604) and capitalist wealth entails the poverty of dispossessed labour in its conception. Its focus on essentials entails intransigence towards the existent patterns of the world. It demands that all relations ‘in which man is a debased, enslaved, forsaken, despicably being have to be overthrown’ (Marx, 1975, p. 182). Debasement subsists as society unaware of itself; a society that is, in which human sensuous practice exists, say, in the form of a movement of coins that impose themselves with seemingly irresistible force on the acting subjects as if the world of coins were a world apart. The fetishism of commodities makes the human world appear as one that is governed by natural, immutable economic laws. Yet, nature has nothing to do with it. What appears as an objective force of economic nature is and remains a socially constituted force. Society is governed by economic abstractions that appear as forces of nature. Economic nature is a socially constituted nature. Society asserts itself in the form of a relationship between things and thus exists in and through the movement of socially constituted things.

Society is ‘objective’ insofar as and ‘because’ its ‘own subjectivity is not transparent’. Society is subjective ‘in that it refers back to human beings which form it’ (Adorno, 1993a, p. 43). Objectivity ‘realises itself only through individuals’. Society as a mere object comprises the socially necessary delusion that the social structures and social laws are innately natural. ‘The thesis that society is subject to natural laws is ideology’ (Adorno, 1973, p. 355). Social objectivity does not posit itself – it is ‘the posited universal of the social individuals that constitute it’ (1993b, p. 127). What this means is well brought out by Marx (1973, p. 239) when he writes, in the money fetish ‘a social relation, a definite relation between individuals … appears as a metal, a stone, as a purely physical external thing which can be found, as such, in nature, and which is indistinguishable in form from its natural existence’. That is, social objectivity ‘does not lead a life of its own’ (Adorno, 1993b, p. 127). It is a socially constituted objectivity – social relations vanish in their appearance as a metal or a stone, and this appearance is real. There is only one world, and that is the world of appearance. What appears in the appearance of society as a ‘stone’, or a ‘coin’, is however a definite social relationship between individuals subsisting as a relationship between ‘coins’. Society appears as some transcendental thing that governs by means of the ‘invisible hand’, which takes ‘care of both the beggar and the king’ (Adorno, 1973, p. 251). Its transcendent character is real: Money makes the world go round; yet, it does so only because, in capitalism, social individuals are governed by the product of their own hand. In short, the world does indeed manifest itself behind the backs of acting individuals, and society is indeed governed by real abstractions; yet, it is their own world (cf. Marcuse, 1988, p. 151).

Marx’s critique of fetishism amounts thus to a judgement on existence. That is, the critique of political economy amounts to a conceptualised praxis (begriffenden Praxis) of definite social relations in their appearance as relations, say, between coins (Schmidt, 1974, p. 207). It holds that theoretical mysteries find their rational explanation in human practice and in the comprehension of this practice, and argues that this practice exists against itself in the form of relations of economic objectivity. The limit to reification is reified Man, and in the face of reified Man, the critique of fetishism is an attempt at making society conscious of its own ‘monstrous’ world. In short, the meaning of objectivity excludes the possibility that it can also be a subject. However, to be an object is part of the meaning of subjectivity. Subjectivity means objectification. In its capitalist form it appears in the logic of things. Appearance [Schein] “is the enchantment of the subject in its own world” (Adorno 1969: 159). The circumstance that objectification [Gegenständlichkeit] exists in the form of a relationship between coins does thus not imply that there is an as yet undiscovered, and indeed undiscoverable, logic that lies solely within the thing itself. Only as a socially determinate object can the object be an object (see Adorno 1969: 157). Reason exists – but in irrational form. The irrational world is a rational world.

Marx’s work focuses on forms, at first on forms of consciousness (i.e., religion and law), then later on the forms of political economy. This focus on forms entails a critique of social relations that subsist in an inverted form of society– one that is governed not by the social individuals themselves but, rather, one that is governed by ‘product’ of their own hand. That is to say, every social ‘form’, even the most simple form like, for example, the commodity, ‘is already an inversion and causes relations between people to appear as attributes of things’ (Marx, 1972, p. 508) or, more emphatically, each form is a ‘perverted form’ (Marx, 1979, p. 90)[2]. The critique of economic categories as perverted social forms subverts the economic idea of cash, price and profit by revealing their social constitution. The movement of ‘coins’ does not express some abstractly conceived economic matter. It expresses a definite social relationship between individuals subsisting as a relationship between things and coins. In capitalism individuals are really governed by the movement of coins – they carry their relationship with society, and therewith their access to the means of subsistence, in their pockets. Although coins tend to inflate or become depressed, they are not subjects.  Yet, they impose themselves on, and also in and through, the person to the point of madness and disaster, from the socially necessary consciousness of cash and product, money and profit, to poverty and famine, and bloodshed and war. The bourgeois conception of wealth is money as more money, and this idea of more money objectifies itself in the persons as mere ‘agents of value’ (Adorno, 173, p. 311) who depend for their life on the manner in which the ‘logic of economic things’ unfolds – access to the means of subsistence appears to be governed by fate and fate appears in the form of economic growth, which if money does not posit itself as more money cuts off a whole class of people from the means of subsistence. What a monstrosity! An economic thing, this coin, that in its nature really is nothing more than a piece of metal manifests itself as a power by which ‘the life of all men hangs by’ (Adorno, 1973, p. 320). However, this is not a monstrosity of economic nature nor is it one of reified things. That is, the mythological idea of fate becomes no less mythical when it is demythologised “into a secular ‘logic of things’” (ibid., p. 319) or into an abstract system-logic that structures the economic behaviours by means of price signals, which comprises the freedom to wealth and the freedom to starve. Its economic nature is in its entirety a socially constituted nature.

On Society and Praxis

There is, says Adorno, a need for a ‘practice that fights barbarism’, and yet, he argues rightly, there can be no such practice (Adorno, 1962, p. 30). Barbarism cannot be fought in a direct and immediate manner – what really does it mean to struggle against money, resist the movement of coins, combat the law of value, and fight poverty in a society that contains poverty in its concept of wealth? A ‘practice that fights barbarism’ is about the social preconditions that render barbarism. To put this point in entirely different manner: The struggle for humanisation points the struggle against constituted relations of misery in the right direction; the humanisation of social relations is the purpose and end of the struggle for the human emancipation from reified economic relations, from relations in which an increase in social wealth manifests itself to the class that is tied to work in the form of a constant struggle for access to the means of subsistence. However, the effort of humanising inhuman conditions is confronted by the paradox that it presupposes as eternal those same inhuman conditions that provoke the effort of humanisation in the first place. Inhuman conditions are not just an impediment to humanisation but a premise of its concept. What then does it mean to say ‘no’?

It is not the independence of economic categories of cash and coin, value and money, as forces over and above, and also in and through, the social individuals that require explanation. Rather, what requires explanation is the social relations of production that manifest themselves as a relationship between economic things, which assert themselves behind the backs of those same individuals that comprise and sustain society. Adorno’s notion that the ‘total movement of society’ is ‘antagonistic from the outset’ (Adorno, 1970, p. 304) entails therefore more than it first seems. Not only does the fetishism of commodities presuppose antagonistic social relations but society exists also by virtue of the class antagonism. That is to say, ‘society stays alive, not despite its antagonism, but by means of it’ (Adorno, 1973, 320). The struggle against capitalism is therefore not a struggle for the working class. Whichever way one looks at it, to be a member of the working class is a great ‘misfortune’ (Marx, 1983, p. 477). That is to say, class is not a positive category. It is a critical concept of the false society. The critique of class society finds its positive resolution not in better paid workers or conditions of full-employment, etc. It finds its positive resolution only in the classless society, in which mankind has rid itself of ‘all the muck of ages and found itself anew’ (Marx and Engels 1976: 53). – as a commune of ‘communist individuals’ (Marcuse 1958: 127).

In a world governed by the movement of coins, the critique of class society is entirely negative. A constructive critique of class society does not amount to a critical practice. It amounts, argue Horkheimer and Adorno (1972) and Adorno (1970), to ‘ticket thinking’. Such thinking is ‘one-dimensional’. It argues in interests of the wage labourer with a claim to power. That is, rather than understanding capital as a social relationship, it takes capital to be an economic thing that given the right balance of class forces, can be made to work for the benefit of workers. Ticket thinking proclaims ‘falseness’ (Adorno 2008a: 28). Instead of the ‘optimism of the left’ that puts forth a programme of capitalist transformation which does ‘not talk about the devil but looks on the bright side’ (Adorno 1978: 114), there is therefore need to understand the capitalist conceptuality of social labour.

Affirmative conceptions of class, however well-meaning and benevolent in their intensions, presuppose the working class as productive force that deserves a better, a new deal. What is a fair wage? Marx made the point that ‘”price of labour” is just as irrational as a yellow logarithm’ (Marx, 1966, p. 818). The demand for fair wages and fair labour conditions abstracts from the very conditions of ‘fairness’ in capitalism, which is founded on the divorce of social labour from the means of subsistence, and instead of overcoming this divorce which is the foundation of capital and labour, it proclaims that dispossessed workers be paid better. That is, the divorce of social labour from the means of subsistence transforms labour into a proletarian who is ‘the slave of other individuals who have made themselves the owners of the means of human existence’ (Marx, 1970, p. 13, translation amended). Why does this content, that is, human social reproduction, take the form of an equivalent exchange between the owners of the means of subsistence and the dispossessed seller of labour power, and how can it be that wealth expands by means of an exchange between equivalent values? The seller of labour power is fundamentally a human factor of surplus labour time, which is the foundation of surplus value and thus profit. The equivalence of an exchange between quantitatively different values has thus to do with the transformation of labour into a surplus value producing labour activity which expands social wealth, allowing money to lay golden eggs. Even on the assumption that when hiring labour, equivalent is exchanged for equivalent, this transaction between the seller and buyer of labour ‘is all that only the old dodge of every conqueror who buys commodities from the conquered with the money he has robbed them of’ (1983, p. 456). That is to say, theory on behalf of the working class affirms the existence of a class of people tied to surplus value production. Chapter 48 of Volume Three of Capital provides Marx’s critique of the theory of class proposed by classical political economy (and shared by modern social science), according to which class interests are determined by the revenue sources (or, in Weberian terms, market situation) of social groups, rather than being founded in the social relations of production as Marx argues (on this see Clarke, 1992). Political Economy is indeed a scholarly dispute over how the booty pumped out of the labourer may be divided and distributed amongst the component classes of society (Marx, 1983, p. 559) – and clearly, the more the labourer gets, the better. After all, it is her social labour that produces the ‘wealth of nations’.

However, the critique of political economy is not political economy. In distinction to political economy’s focus on the distribution of wealth, it asks about the conceptuality of social wealth, that is wealth in the form of value, and it asks how this wealth if produced, by whom, and for what purpose. According to Marx, wealth is produced by labour for the sake of greater wealth in the form of value, and value is value in exchange that becomes visible in the form of money. Value is wealth as valorised value. Time is money. The critique of political amounts thus to a conceptualised practice of capitalist form of social wealth as one that is founded on the transformation of the workers’ life time into labour time. There is no time to waste and there is always more time to catch. This, then, is the ‘nibbling and cribbling at meal times’ as ‘moments are the elements of profit’ (Marx, 1983, pp, 232, 233). The time of value is the time of socially necessary labour time. Work that is not completed within this time is wasted, valueless, regardless of the labour time that went into it, the sweat and tears of its productive efforts, the usefulness of the material wealth that was created, and the needs that it could satisfy. From the appropriation of unpaid labour time to the endless struggle over the division between necessary labour time and surplus labour time, from the ‘imposition‘ of labour-time by time-theft, this ‘petty pilferings of minutes’, ‘snatching a few minutes’ (ibid., p. 232), to the stealing from the worker of atoms of additional unpaid labour time by means of great labour flexibility and ‘systematic robbery of what is necessary for the life of the workman’ (Marx, 1983, p. 402), the life-time of the worker is labour-time. The worker then appears as ‘nothing more than personified labour-time’ (Marx, 1983, p. 233) – a ‘time’s carcase’ (on this, see Bonefeld, 2010b).

The notion, then, that the hell of a class ridden society can be reformed for the sake of workers is regressive in that it projects a ‘conformist rebellion’ (Horkheimer 1985), that, say, instead of ending slavery, seeks a new deal for slaves. Although ‘the world contains opportunities enough for success [communism] …everything is bewitched’ (Adorno and Horkheimer 2011: 20). That is, there is only one social reality, and this is the reality of the ‘enchanted and perverted’ world of capital (Marx 1966: 830), which reproduces itself not despite the class struggle but rather by virtue of it. Sensuous human activity subsists through the world of economic things, and thus appears ‘as a thing’ (Marx 1973, p. 157).

In capitalism, every progress turns into a calamity

Capitalist social relations have produced a staggering expansion in social wealth and phenomenal increase in labour productivity. Within a miniscule historical period of time, it has transformed human society beyond recognition. Nevertheless, despite this unprecedented expansion of human productive power, the time of labour has not diminished. In capitalism, every social progress turns into a calamity. Every increase in labour productivity shortens the hours of labour but in its capitalist form, it lengthens them. The introduction of sophisticated machinery lightens labour but in its capitalist form, it heightens the intensity of labour. Every increase in the productivity of labour increases the material wealth of the producers but in its capitalist form makes them paupers. Most importantly of all, greater labour productivity sets labour free, makes labour redundant. But rather than shortening the hours of work and thus absorbing all labour into production on the basis of a shorter working day, freeing life-time from the ‘realm of necessity’, those in employment are exploited more intensively, while those made redundant find themselves on the scrap heap of a mode of production that sacrifices ‘“human machines” on the pyramids of accumulation’ (Gambino, 2003, p. 104).[3]

Capitalist wealth is wealth in value. Value is category of constant expansion, on the pain of ruin and by means of ruin. Value is wealth in the form of restless expansion of abstract wealth qua destruction. Concealed in the concept of capital as self-valorising value lies the conceptuality of social labour. The necessity of its affirmation qua destruction – discussed by Marx at times as the dialectic between the forces and the relations of production – belongs to the constituted existence of social labour in the form of capital.

Destruction is the constituted nightmare of the capitalist mode of social reproduction:

‘Society suddenly finds itself put back into a state of momentary barbarism; it appears as if famine, a universal war of devastation had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence; too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder into the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does bourgeois society get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones.’ (Marx and Engels 1996: 18–19)

This commentary on globalisation by the 29-year-old Marx is not a brilliant anticipation, which after all turned out to be far too optimistic. Rather, it conceptualises the critical subject and, in doing so, shows what lies within it. What lies within the concept of capitalist wealth are its determinate necessities. These belong to the critical subject of society unaware of itself and constitute its conceptuality. Creation qua destruction is a valid necessity of capitalist social relations – it belongs to its conceptuality [Begrifflichkeit]. “Conceptuality expresses the fact that, no matter how much blame may attach to the subject’s contribution, the conceived world is not its own but a world hostile to the subject” (Adorno 1973: 167). Man vanishes in her own world and exists against herself as a personification of economic categories – an “alienated subject” (see Backhaus 1992) that constitutes the world of things and is invisible, lost and denied in its own world – the expansion of wealth entails the disappearance of wealth as a whole class of people tied to work is cut off from the means of subsistence as if the social metabolism really is governed by the mythical idea of fate.

There is only one human measure that cannot be modified. It can only be lost (Max Frisch)

Marx conceives of communism as the real movement of the working class (Marx and Engels 1976) and argues that history is a history of class struggle (Marx and Engels 1996). This argument recognises that history has been a history of rulers and ruled, and this is the only history that has been – a bad-universality of transition from one mode of domination to another. The universality of history is, however, both real and false. In the history of the victors the victims of history are invisible, and it is their invisibility that makes history appear as a universal history that akin to a sequence of events, records the times of glorious rule, from which the memory of struggle and insubordination is necessarily expunged. The courage, cunning, and suffering of the dead disappears twice, once in a defeat in which ‘even the dead will not be safe’ from an enemy that ‘has not ceased to be victorious’ (Benjamin 1999: 247), and then again in the present, which either denies that the dead ever existed or ritualises their struggles as an heroic act that culminated in the present as the unrivalled manifestation of their bravery (Tischler, 2005). The struggles of the past transform into a monument of history, erected in celebration of the present mode of domination, for which the dead perform the role of legitimising fodder. It is true, says Benjamin, that ‘all the rulers are the heirs of those who conquered before them’. There is thus no ‘document of civilisation’ that is ‘not at the same time a document of barbarism’ (Benjamin 1999: 248). History though universal in its appearance, is not some automatic thing that unfolds on behalf of the masters of the world by force of its own objectively unfolding victorious logic. ‘Whoever has emerged victorious participates to this day in the triumphal procession, in which the present rulers step over those who are lying prostrate’ (Benjamin 1999: 248). Nevertheless, however universal the progress of history might appear, the future has not already been written, class struggles have to be fought, and their outcomes are uncertain, unpredictable, and fundamentally open, then and now. What appears linear to us was contested, uncertain and unpredictable at its own time. Its progress towards the present appears logical in its directional dynamic because the time of the present eliminates any doubt in its own historical veracity as a pre-determined outcome of a sequence of recorded events that dated the time of the present in the past.

What alternatives might there have been in the past and how many struggles have been at the knife’s edge and could have led to a course of history that would be unrecognisable to us? There is no inevitability in history, nor is history an irresistible force. It is made by the acting subjects themselves and what is made by Man can be changed by Man. History appears inevitable and irresistible only afterwards, which gives history the appearance of some objective force and directional dynamic, a telos of becoming and achievement, towards which it seemingly strives. For the proponents of present society, history has been concluded. Others say that it is still continuing towards some assumed socialist or communist destiny, at which point it will conclude. History does however not make history. That is to say, ‘[h]istory does nothing, does not “possess vast wealth”, does not “fight battles”! It is Man, rather, the real, living Man who does all that, who does possess and fight, it is not “history” that uses Man [Mensch] as a means to pursue its ends, as if it were a person apart. History is nothing but the activity of Man pursuing its ends’ (Marx 1980: 98). Historical materialism is not the dogma indicated by clever opponents and unthinking proponents alike, but a critique of things understood dogmatically. That is to say, the ‘human anatomy contains a key to the anatomy of the ape’, but not conversely, the anatomy of the ape does not explain the anatomy of Man (Marx 1973: 105). If the anatomy of the ape would really explain the anatomy of Man then the ape would already possess Man as the innate necessity of its evolution – a natural teleology or an already written future.[4] The future, however, has not already been written. Nor will it be the result of some abstractly conceived objective logic of historical development. History does not unfold, as if it were a person apart. History has to be made, and will be made, by Man pursuing her ends. These ends themselves are not theologically determined, naturally founded, or historically active. The purpose of capitalism is the profitable accumulation of abstract wealth. The commune of human purpose is not an existing human purpose. Its reality is a negative one. That is to say, linear conceptions of history do not reveal abstract historical laws. They reveal accommodation of thought and practice to the existing ‘objective conditions’. Linear conceptions of history conceive of it as a continuum of progress of the present into its own future.

The political left claims that history is on the side of the oppressed and that the struggle of the oppressed therefore moving with the current of history’s forward march. This proclamation of progress makes ‘dogmatic claims’ (Benjamin 1999: 252) about a future of freed proletarians. How might one conceive of a liberated future that is not also a future present? Benjamin calls the conception of history that conceives of existing reality as transition towards communism, the ‘bordello’ (ibid.: 253) of historical thought. It criticises capitalism with a claim to power, envisages progress as a matter of party political success, advertises itself as the theory and practice of progress of a history that ‘runs its course…according to its own dialectic’ (Lukacs, in Pinkus 1975: 74). At its best this idea of history as imminent progress represents the sentimentality of the epoch, at worst it believes in itself, asserting a dogmatic claim to power for the sake of power.

On the Critique of Progress

History has no independent reality. It appears as a sequence of events, from one battle to another and from this division of labour to that division of labour. This appearance is real but by itself, devoid of meaning. What does it really mean to say that history is a sequence of events? Events of what and what was so eventful? Its appearance as an objectively unfolding force towards the present conceptuality of social wealth is deceptive. It gives rise to the idea of the coming of the society of human purposes as an ‘event’ of historical becoming towards which history somewhat strives. This view of history makes it appear as if the society of the free and equal derives from existing society, demeaning the very idea of the society of human purposes. The difficulty of conceiving of such a society independently from capitalism, has to do with its very idea. In distinction to the pursuit of profit, seizure of the state, pursuit and preservation of political power, and economic value and human resource, it follows a completely different entelechy of human development – on in which wealth is free time, the purpose of humanity its own purpose, and one in which equality is an equality of individuals human needs. For the sake of human emancipation, the idea of history as a force of relentless progress has to be abandoned – the idea of progress is tied to existing society, which legitimises the existence of poverty as a condition of future wealth. History appears as a transcendent force of progress only when one abstracts from it, leading to its description of a sequence of historical events, for which the terms ‘historicity’ provides the name. That is to say, in order to comprehend history, one needs to ‘crack the continuum of history’.[5] One needs thus to think out of history, out of the battles, out of the struggles of the Levellers and Diggers, slave insurrections, peasant revolts, the struggles of Les Enragés, working class strikes, riots, insurrections, and revolutions, including St. Petersburg (1917) and Kronstadt  (1921), and Barcelona (1936) [6], to appreciate the traditions of the oppressed, recognise the smell of danger and the stench of death, gain a sense of the courage and cunning of struggle, grasp the spirit of sacrifice, comprehend however fleetingly the density of a time at which history almost came to a standstill.[7]  History does not lead anywhere; it has no telos, no objectives, no purpose, and it does not take sides. At its worst, it continues on the path of victorious progress under darkened clouds and smoke filled skies. History is made. At best, its progress will be stopped. Such history has not been made yet, though it has often been attempted. In our time, this attempt is called communism – this attempt at negation that seeks to rid the world of ‘all the muck of ages’.

What is cannot be

The true picture of the past, says Benjamin (1999: 247) ‘flits by’. When? How? It flits by ‘at a moment of danger’, at moments of courageous struggle when the time of the present appears to have come to a hold, a time at which everything seems possible, and where everything is up in the air, a time of great unpredictability and uncertainty, and thus a time at which the ‘bloody grimace’ (Adorno 1975: 43) of progress attains actual force in the experience of struggle. Thus the true picture of the past flits by at a time of greatest uncertainty, a time at which the certainty of tomorrow dissolves and at which the monuments of the past crack to reveal their hidden secret. This is the time of historical comprehension, in which the mass produced view of a glorious history transforms form a historicity of events into an experienced history of death and destruction, pillage and rape, enslavement and dispossession. This then is the time of intense uncertainty that reveals the bloody grimace of the past struggles, which up-to-now had hidden in the seemingly civilised forms of rule and power. This then is the time at which the dead victims of history step off the monument built by the state in its role as memory entrepreneur (see Tischler 2005). There is no redemption. There is only the realisation that history was not what it seemed, and there is a sudden understanding of the earlier sacrifice and deadly struggle. The experience of a time at a standstill is intoxicating, and full of danger. It is this experience that allows a glimpse of the past to take hold in the present, revealing a deadly certainty. That is, redemption is a matter of staying alive at a time when the certainty of tomorrow is no more: for ‘even the dead will not be safe’ if ‘the enemy’ wins (Benjamin 1999: 247).

The time of human emancipation is akin to pulling the emergency-break on a run-away train – here and now so that the continuum of history ‘come[s] to a stop’ (Benjamin 1999: 254). Another way of putting this is to say: the future present is both a present in transition towards its own future and a now-time that explodes this continuum of history. The time for pulling the emergency break is not tomorrow. It is now. Compared with the time of the present, Now-Time appears as a myth. The present is the time of seeming certainty and predictability. Now time says that now is the time of uncertainty.  Now is the time to stop the forward march of the time of the clock, adding units of time to units of time, ticking and tacking according to the rhythm of a world in which time is money and money is wealth. Now time appears as a myth because its acuity is a time that does not add to itself (Bonefeld 2010b). It does not move forward in relentless pursuit of abstract wealth, accumulating living labour on the pyramids of abstract wealth, appropriating additional atoms of unpaid labour time for the sake of an accumulation of abstract wealth alone. In Now time, time is courage and cunning. Now is the time for taking aim ‘at the clocks’ so that their ticking and tacking stops, and time ceases to be money and instead becomes a time ‘for enjoyment’ (Marx 1972, p. 252). Now time is not the time of the present. It is a time against the present, seeking to stop it in its tracks. Conceived as a present time, now time ceases as a time that fights barbarism. Instead it converts the ‘no’ of Now Time into a ‘conformist rebellion’ for existing conditions, which it defends with doctrinaire belief in the progress of the present, according to which all will be well in the future once the communist bead of the rosary of history has slipped through our hands.[8]

Towards a Conclusion without Promise

Only a reified consciousness can declare that it is in possession of the requisite knowledge, political capacity, and technical expertise not only for resolving capitalist crises but, also, to do so in the interests of workers. Its world-view describes capitalist economy as an irrationally organised practice of labour, and proposes socialism as a rationally organised practice of labour by means of conscious planning by public authority. The anti-capitalism of central economic planning is abstract in its negation of the capitalistically organised mode of social reproduction. ‘Abstract negativity’ (Adorno 2008a: 25) barks in perpetuity and without bite. Instead, it sniffs out the miserable world, from the outside as it were, and puts itself forward as having the capacity, ability, insight, and means for resolving the crisis of capitalist economy ‘for the workers’ (see ibid.). Abstract negativity describes the theology of anti-capitalism. Theologically conceived, anti-capitalism is devoid of Now-Time. Instead of rupturing the continuum of history, it promises deliverance from misery amidst ‘a pile of debris’ that ‘grows skyward’ (Benjamin 1999: 249). Benjamin’s thesis on the Angel of History says that the poor and miserable will not be liberated unless they liberate themselves, by their own effort, courage, and cunning. Herbert Marcuse focuses the conundrum of this argument most succinctly when he argues that the workers have to be free for their liberation so that they are able to become free (Marcuse 1964). In his view, workers can free themselves only insofar as they are not workers, on the basis of their non-identity. Marcuse’s argument is to the point: to stop the progress of capitalism requires a non-capitalist identity, and the difficulty of its conception is a simple one: such an identity does not belong to the present, which is a capitalist present. What really does it mean to say ‘no’ to a capitalistically organised mode of human subsistence? To say ‘no’ to capitalism is simple. But to say what the ‘no’ is, is difficult. For one, the ‘no’ is not external to but operates within that same society which it opposes. Like Marx’s summons of class struggle as the motor of history, the ‘no’ drives the negative world forward. It is its dynamic force. Furthermore, to say what the ‘no’ is compromises the ‘no’ insofar as it becomes positive in its affirmative yes to something that has no valid content except the very society that is opposes. The ‘no’ is immanent to bourgeois society and gives it its dynamic.

There is thus need for a realistic conception of the struggle for the society of human purposes. Class struggle has to be rediscovered as the laboratory of human emancipation. This struggle does not follow some abstract idea. It is a struggle for access to ‘crude and material things without which no refined and spiritual things could exist’ (Benjamin 1999: 246). What then is the working class ‘in-itself’ struggling for? ‘In-itself’ the working class struggles for better wages and conditions, and defends wage levels and conditions. It struggles against capital’s ‘were-wolf’s hunger for surplus labour’ and its destructive conquest for additional atoms of labour time, and thus against its reduction to a mere time’s carcass. It struggles against a life constituting solely of labour-time and thus against a reduction of her human life to a mere economic resource. It struggles for respect, education, and recognition of human significance, and above all it struggles for food, shelter, clothing, warmth, love, affection, knowledge, and dignity. It struggles against the reduction of its life-time to labour-time, of its humanity to an economic resource, of its living existence to personified labour-time. Its struggle as a class ‘in-itself’ really is a struggle ‘for-itself’: for life, human distinction, life-time, and above all, satisfaction of basic human needs. It does all of this in conditions (Zustände) in which the increase in material wealth that it has produced, pushes beyond the limits of the capitalist form of wealth. Every so-called trickle-down effect that capitalist accumulation might bring forth presupposes a prior and sustained trickle up in the capitalist accumulation of wealth. And then society ‘suddenly finds itself put back into a state of momentary barbarism; it appears as if famine, a universal war of devastation had cut off the supply of every means of subsistence’ (Marx and Engels 1996: 18-19). For Benjamin and Marx, the experience of being cut off from the means of subsistence makes the oppressed class the depository of historical knowledge. It is the class struggle that ‘supplies a unique experience with the past’, and understanding of the present (Benjamin 1999: 254). Whether this experience ‘turns concrete in the changing forms of repression as resistance to repression’ (Adorno 1973: 265) or whether it turns concrete in forms of repression is a matter of experienced history. Critically understood, and in distinction to the classical tradition, historical materialism is not only a critique of things understood dogmatically. That is, at its best it thinks against the flow of history and, as such, it really ‘brush[es] history against the grain’ (Benjamin 1999: 248) so that the critical reason of human emancipation does not become ‘a piece of the politics it was supposed to lead out of’ (Adorno 1973: 143).

The existence of human labour as an economic factor of production does not entail reduction of consciousness to economic consciousness. It entails the concept of economy as an experienced concept, and economic consciousness as an experienced consciousness. At the very least, economic consciousness is an unhappy consciousness. It is this consciousness that demands reconciliation. In sum, ‘freedom is a hollow delusion for as long as one class of humans can starve another with impunity. Equality is a hollow delusion for as long as the rich exercise the right to decide over the life and death of others’ (Roux 1985: 147).


Where is the positive? The society of human purposes can be defined in negation only. History holds no promise at all. History does nothing. It is made. In the struggle against a negative world nothing is certain, except misery itself. Nevertheless, uncertainty is also an experienced concept of struggle (Bonefeld 2004). Historically, it has assumed the form of the ‘council’, the Commune, the Raete, the assemblies: this democracy of the street, which, despite appearance to the contrary, manifests no impasse at all. It is the laboratory of the society of free and equal  – its validity is its own uncertainty.


[1] On the distinction between deplorable situations and deplorable conditions, see Bonefeld (2000).

[2] Adapted from the German original that uses the phrase ‘verrueckte’ Form. In German verrueckt has a double meaning: man and displaced. I translate this as ‘perverted’.

[3] The social calamity of capitalist development is taken from Karl Marx (1983: 416).

[4] On this see Schmidt (1983) and Bonefeld (2010a).

[5] I use this phrase in reference to Holloway’s (2010) negative theory of capitalism.

[6] On the connection between St. Petersburg and Kronstadt, see Brendel (2002).

[7] The notion of thinking out of history, rather than about history, derives from Adorno’s (1973) negative dialectics which argues that for thought to decipher capitalist society, it needs to think out of society. For him, thinking about society, or about history, amounts to an argument based on hypothetical judgements that treat the world as an ‘as if’, leaving reality itself untouched and leading to dogmatic claims about its character. Critical theory, at least this is its critical intent, deciphers society from within, seeking its dissolution as a continuum of inevitable and irresistible social forces, political events, economic laws (of scarcity), and empirical data. On this, see Bonefeld (2012).

[8] The ‘rosary that slips through our hands’ refers to Benjamin’s critique of an historical materialism that has slipped into the theoretical method of historicism, which conceives of history as a sequence of events.


Adorno, T. (1962) Einleitung zur Musiksoziologie, Suhrkamp, Frankfurt.

Adorno, T. (1969) ‘Marginalien zu Theorie und Praxis’, in Stichworte Kritische Modelle 2, Suhrkamp, Frankfurt.

Adorno, T. (1970), Ästhetische Theorie, Suhrkamp, Frankfurt.

Adorno, T. (1972), Soziologische Schriften I, in Gesammelte Werke, vol. 8, Suhrkamp, Frankfurt.

Adorno, T. (1973) Negative Dialectics, Routledge, London.

Adorno, T. (1975) Gesellschaftstheorie und Kulturkritik, Suhrkamp, Frankfurt.

Adorno, T. (1978) Minima Moralia: Reflections from Damaged Life, Verso, London.

Adorno, T. (1993a) ‘Einleitung’, Der Positivismusstreit in der deutschen Soziologie, dtv, Munich.

Adorno, T. (1993b) ‘Zur Logik der Sozialwissenschaften‘, in Der Positivismusstreit in der deutschen Soziologie, dtv, Munich.

Adorno, T. (2008a) Lectures on History and Freedom, Polity, Cambridge.

Adorno, T. (2008b) Lectures on Negative Dialectics, Polity, Cambridge.

Adorno, T. and M. Horkheimer (2011) Towards a New Manifesto, Verso, London.

Backhaus, H.G. (1992) ‘Between Philosophy and Science: Marxian Social Economy as Critical Theory’, in W. Bonefeld, R. Gunn and K. Psychopedis (eds.) Open Marxism, vol. I, Pluto, London.

Benjamin, W. (1999) Illuminations, Pimlico, London.

Bonefeld, W. (2000) ‘Die Betroffenheit und die Vernunft der Kritik’, in Bruhn J, M Dahlmann, and C Nachmann (eds) Kritik der Politik, Ca Ira, Freiburg.

Bonefeld, W. (2004) ‘Uncertainty and Social Autonomy’, The Commoner no 8, Winter 2004, pp. 1-6.

Bonefeld, W. (2010a) ‘History and Human Emancipation’, Critique, 38/1, pp. 61-73.

Bonefeld, W. (2010b) ‘Abstract Labour: Against its Nature and on its Time’, Capital & Class, vol. 34/2, pp. 257-276.

Bonefeld, W. (2012) ‘Negative Dialectics in Miserable Times: Notes on Adorno and Social Praxis’, in Journal of Classical Sociology 12 (1), pp. 122-34.

Brendel, C. (2002) ‘Kronstadt: Proletarian Spin-Off of the Russian Revolution’, in W. Bonefeld and S. Tischler (eds) What is to be Done?, Aldershot: Ashgate.

Clarke, S. (1992) Marx, Marginalism and Modern Sociology, 2nd ed., Palgrave, London.

Gambino, F (2003) ‘A Critique of the Fordism of the Regulation School’, in W. Bonefeld (ed.), Revolutionary Writing, Autonomedia, New York, 2003.

Holloway, J. (2010) Crack Capitalism, Pluto, London.

Horkheimer, M. (1985) The Eclipse of Reason, Continuum, New York.

Horkheimer, M. and T. Adorno (1972) Dialectics of Enlightenment, Verso, London.

Marcuse, H. (1958) Soviet Marxism: A Critical Analysis, Roudledge & Kegan Paul, London.

Marcuse, H. (1964) One Dimensional Man, Routledge & Kegan Paul, London.

Marcuse, H. (1988), ‘Philosophy and Critical Theory’, in ibid. Negations, Free Association Press, London.

Marx, K. (1970) Critique of the Gotha Programme, in Marx/Engels, Selected Works, vol. 3, Progress Publishers, Moscow.

Marx, K. (1972) Theorien des Mehrwerts, MEW 26.3, Dietz, Berlin.

Marx, K (1973) Grundrisse, Penguin, London.

Marx, K. (1975) Contribution to the Critique of Hegel’s ‘Philosophy of Right’. Introduction, in Collected Works, vol. 3, Lawrence & Wishart, London.

Marx, K. (1966) Capital, vol. III, Lawrence & Wishart, London.

Marx, K. (1979) Das Kapital, MEW 23, Dietz, Berlin.

Marx, K. (1980) Die heilige Familie, in MEW 2, Dietz, Berlin.

Marx, K. (1983) Capital, vol. I, Lawrence & Wishart, London.

Marx, K. and F. Engels (1996) The Communist Manifesto, Pluto, London.

Marx, K. and F. Engels (1976) The German Ideology, in Collected Works, vol 5, International Publishers, New York.

Pinkus, T. (ed.) (1975) Conversations with Lukacs, MIT Press, Cambridge, MA.

Roux, J. (1985) ‘Das “Manifest der Enragés”’, in ibid, Freiheit wird die Welt erobern, Reden und Schriften, Röderberg, Frankfurt.

Schmidt, A. (1974) ‘Praxis’, Gesellschaft: Beiträge zur Marxschen Theorie 2, Suhrkamp, Frankfurt.

Schmidt, A. (1983) History and Structure, MIT Press, Cambridge MA.

Tischler, S. (2005) ‘Time of Reification and Time of Insubordination. Some Notes’ in Bonefeld, W and K Psychopedis (eds) Human Dignity, Ashgate, Aldershot.

Seminar: Global Economic Crisis and Revolts and Protests of the Masses (Delhi, Dec 2)

on 2nd December 2012
Time : 10 AM to 8 PM

at Gandhi Peace Foundation, Deen Dayal Upadhya Marg, near ITO, New Delhi

The last five years have seen a Global Economic Crisis which is most severe in its scope and depth since the Great Depression. While the United States’ economic situation enters this prolonged slump, the European Union project flounders on the shoals of debt and various kinds of ‘austerity measures’. The turmoil still goes on, notwithstanding the over thirty trillion dollars that have been spent on various recovery efforts. While the ruling class tries to pass the burden of the crisis on the working class, the toiling masses are rising in revolt. 2011 and 2012 have witnessed increasingly widespread eruption of mass rage, particularly across Europe, US and even toppling long standing dictatorial regimes in West Asia/North Africa.

It is of immense importance in this situation, especially for those placed in and concerned with the revolutionary transformation of society, to ponder over the emerging political economic scenario, so as to equip ourselves to face the challenges of these tumultuous insurgent times.

Towards this, Inqlabi Mazdoor Kendra and Krantikari Naujawan Sabha are jointly organizing a day-long seminar on the implications and import of the Global Economic Crisis and the nature, constraints and possibilities of these mass popular struggles. A number of political organisations and individuals reflecting different political tendencies in the left revolutionary camp in India will participate and discuss their points of view, to deepen the understanding of these recent mass popular movements across the world, and sharpening our own practices while we do so.

Download the Concept Note

The Faltering Miracle Story of India

Anjan Chakrabarti

Last time Indian economy ran into a major systemic crisis was in the late 1980s; it was a result of and also the final nail in the coffin of state sponsored planned economy. Along with the collapse of Soviet style command economies, it signalled the unsustainability of economic system built on absolute or near total control of state over the economy. That crisis helped spread the philosophy of neoliberalism in India which led to this lesson from the experience of centralized planning: for the goals of rapid economic growth and poverty reduction, state control over the market economy does not work and hence should be abandoned. Since then, structural adjustment program evolved in a gradual process of two decades, giving rise to a competitive market economy that is integrated into the global economy; as against the privileged position of planners, this new paradigm also protracted the supremacy of the mass of homoeconomicus (optimizing economic man, whether as consumers or producers) whose decision making transpiring in and through this global competitive market regime are supposed to generate the economy wide outcomes that are efficient. A connection between macroeconomics and microeconomics is thus made whereby the macroeconomic outcomes were seen as result of microeconomic behaviour in a competitive market economy1; it was believed that such a connection will produce high growth rate regime, stable and reasonable inflation and rapid employment in the industrialized sector (inclusive of manufacturing and services). Among the microeconomic decision makers were, of course, the global capitalist enterprises which, like the homoeconomicus as consumers, were taken as privileged for they were seen as essential instruments of generating high value and hence growth. Evidently, this competitive market economy helped create and facilitate global capitalism in the Indian economy. It is to this structural change that we move next.

Problem over Sharing the Indian Growth Miracle

As it has evolved gradually through an assortment of reforms, this paradigm shift produced a structural remapping of Indian economy taking the shape of circuits-camp of global capital qua global capitalism and its outside world of the third2. This changing map of Indian economy was driven by, among other things, the primacy accorded to global capitalist performance, appropriation and distribution of surplus which, via high growth rate, resulted in the expansion of the circuits-camp of global capitalism; this expansion, not surprisingly, meant a war on, or primitive accumulation of, world of the third3. In other words, process of primitive accumulation ensured that growth has been exclusionary (that is, devoid of trickle down effects), where the exclusion has taken two forms: one, by excluding a vast section of the population from the benefits of rising income growth, a phenomenon symbolized by worsening Gini coefficient, and two, further exacerbating existing social inequities (based on caste, ethnicity, gender, etc.). In fact, the dual phenomena of income equality and social inequity compensated, complemented and reinforced one another to exclude a large section of Indian population (residing in the margins of the circuits-camp of global capital and world of the third) from the benefits of economic growth; while due to measurement problems there is some controversy over the exact trend of income poverty, there is a strong indication that non-income factors of poverty (captured by the statistics of malnutrition, health, education, etc.) may have stagnated or worsened. The overall picture is that of a country of increased prosperity (concentrated in the hub of the circuits-camp of global capital) but growing divide as well.

The event of exclusionary growth was acknowledged and internalized by the policy circle and many economists after the disaster of ‘Shining India’ in the 2004 elections; it was agreed that exclusionary growth must be tempered by an attempt to include the left out population through redistribution of benefits of economic growth; inclusive development aspires to become the new national trope supposedly uniting Indians, notwithstanding their other differences, into a single national project of development in which all are participants and beneficiaries4. Rather than being in conflict, this imagery sees growth and redistribution as complementarity; high growth (that is, a bigger pie) sustains greater redistribution and greater redistribution in the form of more productive investment among the poor is supposed to secure and propel further growth. Global capitalism (circuits-camp of global capital), working via the competitive market economy, is thus not only good in itself because it rapidly expands growth. It also has instrumental value by delivering direct benefits of growth (the trickle-down effect) and indirect benefit of growth (through redistribution) to reduce poverty; the former will function through market (which, in Indian case, even the policy makers agree is weak) and latter through the intervention of the state. At another level we can interpret this imagery and its underlying policy paradigm as trying to combine the capitalist performance, appropriation, distribution and surplus in a global setting that is fundamentally private-centric and the domain of redistribution which is fundamentally state-centric. Thus, Indian state now encapsulates two rationales, one liberal (minimal interference in the competitive market economy, that is, in the circuits-camp of global capital) and the other dirigiste (directly intervening and controlling the redistribution process to world of the third); it combines these to secure the modernization process via the expansion of global capitalism (or, circuits-camp of global capital). This is projected as a truly win-win situation which is a result of the gift of globalization and the benefits derived from it in the form of enhanced wealth creation that the integration of Indian economy into a globalized world has enabled. Not only has the Indian growth miracle permanently arrived, but inclusive development enables the entire country – all population – to share and be a partner in this miracle. It is of course another matter that rulers at different times spare no effort in producing and disseminating pictures (in which nothing can seemingly go wrong) that in the end turn out to be delusional; previously, the picture of ‘Garibi Hatao’ and ‘Shining India’ were two such pictures. As in all case of delusional pictures that promise everything to everybody, this imagery is now in a state of crisis in more than one ways. We discuss one axis of that crisis here.

Microfoundation of Macroeconomics: A recipe to end depression or to begin one

Critical to this imagery is the assumption of high growth; an assumption bolstered no doubt by the actual realization of high growth rate regime which in turn is traced to the creation of a competitive market economy. This in turn has led to a sacrosanct belief and robust defence of the competitive market economy as against state intervention/control, and global capitalism as against national capitalism. However, since 2007, that growth story is in serious danger which in turn forces our attention to areas taken thus far as immune from discussion. In fact, Indian economy’s trouble expands well beyond the faltering growth story. In the last five years, Indian economy has slowly moved into a terrain of a deep crisis, perhaps in the same scale as the earlier one; in the sense that it is threatening to take the semblance of a systemic crisis. This time though, with a drastically truncated role of state vis a vis market and weak trade union opposition, the blame for this crisis can only fall on the combined effects of neoliberal globalization and global capitalism or the mechanism of global capitalist centred production, distribution and consumption of goods and services functioning through the conduit of competitive market economy. Is it then the case that the source of the systemic crisis resides in the illness of competitive market economy? This though is not the accepted position; nor is it yet the point of debate in India.

The Prime Minister Manmohan Singh insists that Indian economy’s fundamentals are robust, and hence its growth story, while faltering in the short run, is protected in the long run. If we accept Keynes’ dictum that ‘in the long run we are all dead’ (by the way, five years is not a very short period either) which in no small part is substantiated by the overdetermined and contradictory processes pulling and pushing the Indian economy into who knows where, then a question crops up. What is meant by saying that the fundamentals of the economy are strong?

Now, surely the Prime Minister is not referring to the macroeconomic fundamentals. A cursory glance at the basic indicators tells a sorry story in that front: growth rate is falling, inflation rate is resiliently high (transpiring, says RBI, mostly from supply side factors which keeps accumulating the problem), falling private saving and investment, growing current account deficit driven mainly by worsening trade deficit, pressure on capital account, declining rupee value and at times volatile exchange rate movement, and increasing fiscal deficit. This is indeed a case of fundamentals gone haywire and, as we are witness to, seem to be resiliently invariant to policy changes (pertaining to fiscal, monetary and exchange rate regimes), that are transpiring rapidly, being fired from all possible directions; this trouble is in fact finding further fodder through the global inter-linkages that is exporting the global problems into India in plentiful forms (the deleterious effects from Europe being the latest addition) thereby aggravating an already difficult situation. The trouble is not merely that the economy is faltering, but that the process is transpiring in a dynamic environment that is private (competitive market economy) and global, in which many processes/variables are not under the control of the policy makers if they are at all known to them in the first place. So much has been talked about the benefits India has garnered from its integration into the global economy; our mainstream friends would like us to be held captive by that picture. Yet, the last five years have shown that there is a cost of this integration too which now can hardly be left unquestioned. A lesson: there is no win-win harvesting from globalization. Like all other entities, the process of globalization is beset with overdetermination and contradiction, throwing up unpredictable outcomes and harbouring unknown possibilities, and for a competitive market economy integrated into a globalized world thus suggests the existence and the need to not only accept the possibility of business cycles, but also of breakdowns.5

If not macroeconomics, it then appeals to reason that the Prime Minister must be referring to the strong fundamentals pertaining to microeconomic environment; this can only mean the competitive market economy materializing from the liberalization policies of the last two decades. The suggestion here is that creating such an economy has succeeded in producing a level effect meaning that the minimum bar on the growth rate has been permanently raised as compared to that of the planning era. As a justification of this position, the high growth rate in the previous decade is presented as a proof. If this is accepted then it follows that the neoliberal policies by creating this competitive market economy have done a service to India. Because of the level of high growth rate, India stands a better chance not only to become richer but also reduce its poverty sharply.6 But then, if we are to accept this, how do we reconcile a sound microeconomic environment with a disturbing macroeconomic picture? How could the two set of fundamentals be moving in opposite directions? Can they in the first place do so? This leads to a deeper issue as the following argues. Let us begin by positing the position of neoliberal economics.

That sound microeconomic picture can co-exist with a systemic failure at the macro level is contrary to the neoliberal dictum which theorizes a picture of macro economy emanating from microeconomics; this is now the consensus of mainstream neo-classical economics. In addition to this frame as being methodologically robust in the sense of capturing the concrete reality, it is further held that a competitive market economy functioning with a supporting but non-intervening state7 will produce better macroeconomic outcomes than otherwise. And, to cap it all, such an economic system rules out systemic failures such as depression; any state interference here will produce an inferior outcome or worse; the role of state is only to ensure that competitive market economy is created, facilitated and secured from outside interference (such as anti-competitive practices, trade union activities, expropriation, etc.) and its own discretionary behaviour (following rules is better than discretionary policies). The confidence entrusted in this new paradigm can be gauged from the following quote in a Nobel Prize acceptable speech by Robert Lucas.

Macroeconomics was born as a distinct field in the 1940’s, as part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and save, not from better fine-tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from between long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management. (Robert E. Lucas, JR. 2003)

Coming from arguably the chief architect of modern macroeconomics and the economist principally responsible for demolishing Keynesian macroeconomics, the claim that depression – the term mainstream economics uses to signify economic breakdown as opposed to business cycle or fluctuations around trend which is regular – is over was a colossal claim8; colossal but also one which fell flat with the appearance of the global economic crisis. It showed that macroeconomics has still not solved its self-proclaimed central problem of depression and by corollary that what some such as Paul Krugman calls the ‘voodoo’ economics of supply-side is, to put it mildly, deeply problematical. Paraphrasing Lucas from our vantage point it appears that Marx’s observation of capitalist economic system containing the seeds of its breakdown was true in 1940s as it is now. The trouble is that the ‘voodoo’ economics continue to be the dominant economics, whereby its influence is deeply rooted in the currently policy making circles; even as depression can no longer be denied, the theoretical consensus that had resulted from the anti-Keynesian revolution enacted by supply side macroeconomics continue to hold considerable sway. And this theoretical consensus presents a deeper trouble. It lies in the inherent claim that a global capitalist regime under the conditions of free agents functioning in a competitive market economy with minimal state interference will lead to the disappearance of systemic failure such as that epitomized by depression.

If evidence is any proof (and economists revel in it), then we can conclude that there must be something fundamentally wrong with the axiom of Cartesian methodological individualism in a competitive market economy producing a depression free system. This hypothesis evidently rules out any autonomy to the economic structure which is specified in neoclassical economics as general equilibrium economy. If autonomy of structure is granted then that could carry the possibility of effects and outcomes irreducible exclusively to the optimizing behaviour of the agents interacting through market.9 However, unless we agree that this autonomy exists, it becomes difficult to locate and explain the appearance of the current economic crisis that is now global. That being the case, one of the central hypotheses of neoliberal economics – if individuals are free decision-makers, markets are self-regulating and hence sufficient for the system – becomes moot. Markets do have unique features and effects, but to enable a depression free economy is certainly not its forte. In short, the framework of neo-liberalism or its economic discipline of neoclassical economics cannot explain systemic collapse. In contrast, Keynes and Marx, in their own different ways, insisted on the relative autonomy of the structure, a relative autonomy that can be traced to the structure and, at times, the non-optimizing behaviour of the agents. It has also been suggested by others that parts do not add up to the whole; that the whole also needs to be specified and analysed in terms of its unique features and effects.10 This is not to say that individual decisions and market do not influence the structure (we believe that they certain do), but that structure cannot be seen as mere sum total of individual decisions.

If, in contrast, we accept that indeed microeconomic foundations produce macro economy or even go with our milder proposition that microeconomics do partially, but not totally, influence macroeconomics, then one must confer some quarter of blame (and if we are to follow the framework of neoclassical economics) to the kind of basic economy that constitutes microeconomics. Merely blaming the Indian economic crisis on the global economic crisis (a common refrain among Indian policy makers now) sidesteps the issue we are raising here.11 Since the 1980s, the neo-liberalization of global economy has produced a transformation towards a competitive market economy, a move that was propelled by developed countries (Harvey 2007). But it is precisely in the latter that the globalness of the current crisis originated and spread.12 If indeed we accept that macroeconomic outcomes are a result of agents’ decision-action in a competitive market economy, then surely it is that economy which must be held accountable for the outcome. In other words, instead of the fundamentals of microeconomics being good, they must be seen as deeply problematical and could be held as containing seeds of instability and destruction at a broader level.

The above underscores that microeconomic environment constituted by the competitive market economy populated by free agents can and does produce economic and social disasters, as it has; far from being self-regulating, markets may produce, as it has, self-annihilation leaving people, regions and even nations struggling to survive. Therefore, not only do we get the insufficiency of the neoliberal qua neoclassical framework in locating and explaining depression (as we argued earlier), but we additionally also find its chief logical conduit of explaining the functioning of economic system faltering. Surely, there is something wrong with this microeconomic environment which in turn calls for a rethinking of the basic economic system itself, the way production, distribution and consumption of goods and services materialize under capitalist form. One the other hand, if one still maintains that microeconomic fundamentals are sound, then one will have to concede that there is a dissonance between micro and macro, that macro economy has relative autonomy including possibilities of structural failure. This realization entails the role of state including active policy ones pertaining to control of the economy, if prevention of economic crisis or disaster (or, what Lucas called depression) is considered as desirable objective. Perhaps, the current economic crisis in India shows that both the aspects are true: there is a problem with the basic economic system produced by global capitalism functioning through a competitive market economy and that a role of the state as an active and intervening player in the economy is necessitated. The importance of the first was argued for by Marx whereby he related the macroeconomic crisis (the crisis of capitalism as such) to the contradiction, convulsion and failure of the competitive market economy functioning through capitalist organization of surplus and suggested the abortion of capitalism as a recipe for resolving the macro crisis. He thus favoured a systemic transformation. The second issue was taken up by Keynes when he suggested the role of the state in overcoming recession and ensuring smoothening of business cycles by actively intervening in and influencing the market economic outcomes, a point we saw was fiercely opposed by Lucas and his acolytes. This also shows that while both Marx and Keynes appreciated the relation between macro and micro (albeit in very different ways), Marx argued that systemic instability and disaster cannot be averted except by replacing capitalism as a system and Keynes suggested that the same can be averted, that is, capitalism saved with the active role of state preventing business cycles from turning into possible depression. Not surprising, neoliberalism as an economic-politico philosophy is not just hostile to Marxism, but also to Keynesianism (even as Keynes’ objective was to save capitalism).  Leaving aside their differences, it is perhaps more pertinent to realize that the current economic crisis has demonstrated that the suggestions of both Marx and Keynes, in tandem, need to be taken seriously. Notwithstanding the Prime Minister’s allusion to strong microeconomic fundamentals which is tantamount to taking the competitive market economy as sacrosanct that in turn demands a thin role of state, it is perhaps time to seriously question this conjecture and begin a debate on both the nature of economic system and state; to debate them not distinctly, but in tandem as in overdetermination. It is my position that in the current climate of India, this is not happening, either from the Right or Left.


Policy paralysis appears in a different way here. The policy paralysis is a paralysis of thinking that shuts out any solution other than what is the ‘consensus.’ Competitive market economy with capitalist appropriation and distribution of surplus in a global setting is the consensus in this historical episode that, however, also continues to burden us with a growing set of changes or ‘reforms’ that deepen the very processes and system which are responsible for this crisis. How and in what manner these so-called ‘reforms’ are going to put the Indian economy back on track are issues not touched upon? How they are going to put some sanity into our present unstable and volatile systemic regime is left untouched? Indeed, in a scenario where the malaise is systemic encompassing both the micro and macro, it is hardly surprisingly that the policies are not working. The debate from the radical side is disturbing too, being stuck on the need for the enhanced role of state which is, at times, combined with the nationalist trope of self-reliance. There is hardly any questioning of, and debate on, the issue of systemic transformation and the politics of producing it. Well, we have moved from a state sponsored development paradigm to a private market economy driven paradigm, and found both to be wanting. Changing the role of state (say moving towards a strong state) without challenging the economic system is unsustainable as history has shown us; in fact, both must be addressed together. To put it somewhat differently, both the micro and macro, in tandem, must be made the object of questioning and transformation.

Anjan Chakrabarti is Professor of Economics, Calcutta University. He can be reached at



Chakrabarti, A and Dhar, A. 2009. Dislocation and Resettlement in Development: From Third World to World of the Third. Routledge: London.

Chakrabarti, A and A.K. Dhar. 2012. “Gravel in the Shoe: Nationalism and World of the Third,” Rethinking Marxism, 24 (1).

Chakrabarti A, A.K. Dhar and Cullenberg, S. 2012. Global Capitalism and World of the Third. World View Press: New Delhi.

Harvey, D. 2007. A Brief History of Neoliberalism. Oxford University Press, USA

Lucas, Robert, JR. 1976. “Econometric policy evaluation: A critique”. Carnegie-Rochester Conference Series on Public Policy 1 (1): 19-46.

Lucas, Robert, JR. 2003. “Macroeconomics Priorities”, American Economic Review, Vol. 93, No.1.

Resnick, S. and R, Wolff. 2010. “The Economic Crisis: A Marxian Interpretation”, Rethinking Marxism, 22(2).



[1] Under mainstream economics, Microeconomics is the study of choices of individual decision-makers (not matter how large) to fulfil their wants (satisfaction or profit) in the face of scarcity of resources, while Macroeconomics is the study of economic aggregates intending to capture the overall health and behaviour of entire economy (no matter how small). In the former, the emphasis moves to resource allocation and income distribution which in case of the latter is on economic growth, inflation and unemployment.

[2] Our usage of the terms such as circuits or camp of global capital and world of the third follows the theoretical insights of Chakrabarti, Dhar and Cullenberg (2012) and Chakrabarti and Dhar (2009, 2012) who produce a unique frame to analyse the historical phenomenon of modernization in the Southern setting. In the context of our current issue, these terms can be roughly put in the following way. Following liberalization policies in India, spurred by its wide industrial base (paradoxically, a gift of its previous import substitution policy) and fairly advanced higher education system (also paradoxically courtesy of its erstwhile planning system), Indian industries, particularly the big business houses, gradually adjusted to the rules and demands of global competition and, along with new enterprises, mutated into global capitalist enterprises. Through outsourcing and sub-contracting, they forged relation with local enterprises procreating and circumscribed within a nation’s border (the local market) and with enterprises outside the nation’s border (the global market); it is the symbiotic relation through local-global market that allowed the formation of circuits. Specifically, via the local-global market, global capital was linked to the ancillary local enterprises (big and small scale, local capitalist and non-capitalist) and other institutions (banking enterprise, trading enterprise, transport enterprise, etc.) and together they formed the circuits of global capital. Rapid growth of Indian economy propelled by the expansion of the circuits of global capital (inclusive of manufacturing and services) is feeding an explosive process of urbanization, and producing along the way a culture of individualization and consumerism. It is being complemented by new-fangled notions of success, entrepreneurship and consumerism, of ways of judging performance and conduct, of changing gender and caste relations, customs and mores, etc. Resultantly, what appears is a social cluster of practices, activities and relationships capturing literally the production of an encampment: we name it as the camp of global capital. This camp, especially its hub, is becoming the nursery ground of a new nationalist culture bent on dismantling extant meanings of good life in India and replacing it with the tooth and claw model that emphasizes competition, possession and accumulation. We refer to circuits-camp of global capital as global capitalism. Evidently, in the formation, global capital is taken as the privileged centre.

World of the third, on the other hand, is conceptualized as an overdetermined space of capitalist and non-capitalist class processes that procreate outside the circuits of global capital. A large number of these ‘non-capitalist’ class processes are independent, feudal, communitic, slave and communist as also capitalist class enterprises of simple reproduction type. World of the third is thus a space that is conceptually never part of global negotiations; it is outside, if we may borrow a term from Gayatri Spivak Chakravarty, the Empire-Nation exchange, which refers to exchanges within the local-global market connected to the circuits of global capital. In short, world of the third embrace an overdetermined cluster of class and non-class processes procreating outside the circuits of global capital and are knotted to markets as well as to non-market exchanges. Social cluster of practices, activities and relationships connected to the language-experience-logic-ethos of this space constitutes the camp of world of the third. It may be recalled that what for us is world of the third is for modernist discourses (like colonialism, development, and so on) third world: this is the Orientalist moment through which the modern emerges as the privileged centre. Third world supposedly contains inefficient practices and activities; as nurturing excess labour, labour that is presumed to be unproductive and hence a burden on society; as harbouring a large reserve army of the unemployed/underemployed. In short, it is re-presented as a figure of lack. The foregrounding of category of third world then provides an angularity to world of the third thereby foreclosing its language-experience-ethos-logic and discursively producing a deformation of its practices, activities and relationships. One does not get to appreciate the possibility of an outside to the circuits of global capital; one thus loses sight of the world of the third. Instead, what awaits us is a devalued space, a lacking underside – third world – that needs to be transgressed–transformed–mutilated-included. Thus, world of the third is brought into the discursive register and worked upon, but without taking cognizance of its language-logic-experience-ethos. Critically, this foreclosure of world of the third through the foregrounding of third world (or, by substitute signifiers such as social capital, community, etc.) helps secure and facilitate the hegemony of (global) capital and modernity over world of the third. Taken together, a knowledge formation emerges in which global capital and modern emerges as the privileged centres. Chakrabarti et al unravels and critiques this knowledge formation and through the return of the foreclosed world of the third lays down the contour of a contesting way to theorize the Southern context.     

[3] Chakrabarti and Dhar (2009).

[4] Chakrabarti and Dhar (2012).

[5] On being quizzed as to whether India’s integration into global economy has made it more prone to shocks and instabilities, a friend of mine holding a senior position in a financial institution suggested a few years back that one reason why competitive market economy is good is because it enhances the ability of the economic system to absorb and internalize shocks; this is by no means a very uncommon refrain, at least till a few years ago. In short, breakdowns can never happen. I wonder what he has to say now.

[6] Of course, as we have seen, the question of ‘who is exactly becoming richer or becoming richer much faster than others’ has raised a few hackles and is on its own a question of some importance.

[7] Unlike a robust state (of command economies or welfare capitalism) which believes in ‘more governance is good governance’, neoliberalism believes in, at the level of political philosophy at least, ‘less governance is good governance.’ Of course, given the astonishing quantum of plunder, violence and destruction produced in the name of ‘freedom’ that is neoliberal in nature, one must take this refrain with a grain of salt. But then we are discussing its logical conduit here.

[8] It is notable that macroeconomics not only originated in the West, but its central problem is fundamentally that of the modern market economy as well. USA and Europe have been the theatre of macroeconomics and developments there influenced the macroeconomics discipline and the policy paradigm of state not only in Europe but all over the world. In this sense, macroeconomics has been imperial in nature or should we say it is an indispensable component of any imperialist policies bent on modernization. Interestingly, three episodes of systemic breakdown or depression produced three turns in macroeconomics in the West that in turn enforced a switch in macroeconomic understanding and management across the world. The first was the depression of the 1930s that saw the collapse of the classical paradigm (emphasizing the dichotomy between nominal variables such as money and real variables such as output) which disparaged state intervention; this collapse saw the concurrent rise of Keynesianism (emphasizing that the classical dichotomy is wrong, at least in the short run) which maintained that state intervention and active stabilization policy is necessary to prevent depression and this could be done since there is a tradeoff between inflation rate and unemployment and between unemployment and output. The second episode of depression was marked by stagflation in USA (high inflation and stagnating output) in the late 1960s which even in the face of active stabilization policy to exploit the mentioned trade off failed to get the economy out of depression; this failure of stabilization policies saw the collapse of Keynesian economics and the rise of supply side or new classical economics that once again reiterated the classical dichotomy and the inherent inability of the state to improve welfare in the face of active and enterprising individuals. It was shown that not only did the state led stabilization policy fail to improve the welfare, but also that such interventions created inefficiencies of all kinds. Important in this attack was the paper of Lucas (1976) that showed that there is something methodologically wrong in the way Keynesianism poses its own macroeconomic structure; it does so, he claims, by treating the individuals as docile, passive who would not react to changes in the stabilization policies, precisely what the liberals have condemned as contravening the principle of freedom. Arguing that it is fundamentally wrong to treat the individuals as bereft of agency, he showed that with the introduction of stabilization policies, rather than being passive to the changes brought about by the state, the agents will internalize that information and change their behaviour which in totally will produce an outcome very different from (and inferior to) the case in which it is presumed (as under Keynesianism) that individuals behaviour will remain invariant to change in policies. The Keynesians, contrary to what the liberals would emphasize, took the structure as primary and tried to fit in the individual to this structure (the attempt of what came to known as Keynesian-neoclassical synthesis) when the liberal economists such as Lucas and Edward Prescott were emphasizing the method to be the other way round: individual was to be the primary unit from which the structure is to be derived; not surprisingly then, for the neoliberal economists (the new classical/real business cycle school) the neoclassical micro structure became that fundamental ground and (macro)economy was the derived general equilibrium structure over which macroeconomic analysis and policies are to be examined. The invariance principle and inability to posit the microfoundation of macroeconomics constituted the basis on which Keynesian macroeconomics was attacked and the stabilization role of state found wanting; the macroeconomics that developed through this attack and reconstruction via microfoundation become the missile head of neoliberalism in the field of economics and policy making. The third episode of systemic crisis or depression is the global economic crash since 2007 which has turned the table on neoliberal macroeconomics which has claimed that it has solved the problem of depression by legitimizing the creation of a competitive market economy made of private players and in which stabilization policy of state is not encouraged; a systemic crisis that rose not because of state or any third party intervention (since, in the last three decades they were heavily discouraged) but through the very mechanics of the private competitive market economy certainly did not do the reputation of neoliberal macroeconomics any good. What will come out of this crisis in the field of macroeconomics is yet to be seen though no doubt it has exploded the myth of the fundamental proposition of neo-liberal macroeconomics. As it stands now, macroeconomics lie in tatters.

[9] In modern macroeconomics, general equilibrium is after all the point of reference and departure (even in case of New Keynesian economics where markets are shown to be failing to clear as a result of the behaviour of agents in a free market environment).

[10] Micro and Macro divisions are typical of mainstream economics and not of Marx or Marxism. Accepting the importance of not reading or writing on Marx by reducing him to this structure, in this presentation at least, we invoke Marx with reference to this division of micro and macro for the sake of organization that includes an encounter with neoclassical economics. Rather than reducing Marx to neoclassical economics, it is to highlight the uniqueness of Marx’s contribution.

[11] This comes on top of the fact that this blaming is hardly stopping the policy makers from taking ‘reform’ policies that deepen India’s integration into the global economy and hence, by their own confession, must be taken as increasing the possibilities of transporting global crisis into Indian economy. In other words, the ammunition that they are supplying with the intent to overcome the crisis may end up deepening it. At least, the policy makers need to spell out clearly as to why this would not happen.

[12] For a superb analysis of US economic crisis, see Resnick and Wolff (2010).

Is ‘It’ Over? A Look at the Current Economic Crisis


Hyman Minsky, an American Economist, had written a book titled ‘Can It Happen Again’ with ‘it’ standing for the Great Depression of the 1930s, the biggest and the longest economic crisis in the history of capitalism. The answer to this question today seems to be in the affirmative if one takes a deeper look at the events that have unfolded in the financial markets in the United States and the other advanced countries over more than two years. The extent of this crisis, in particular in the US, has led the economic pundits to describe the present financial crisis as something similar to what happened during the 1930s. Despite all the signs of recovery, we believe it is too early and erroneous to assume that the crisis is over and that the government should withdraw the stimulus package.

Theoretical Overview

To place the issues in perspective, it is important to reflect upon the economic ideas that developed regarding growth and crisis under capitalism since the 1930s. In the aftermath of the Great Depression, John Maynard Keynes, a British economist and Michal Kalecki, a Polish economist, had written extensively on its causes as well as its remedies. Though their political orientation was very different (Kalecki was a Marxist while Keynes was not), both argued that it was the absence of direct intervention of the government in the working of the economy and financial markets that led to the Great Depression. The remedy that Keynes suggested was a categorical rebuttal of the principles of Laissez faire since he asked not only for a regulation of the financial markets but for a direct government intervention to boost the demand in the economy through positive fiscal stimulus. The fiscal management (1) on the lines of the Keynes-Kalecki produced the Golden Age of capitalism in the 1950s and the 1960s in the advanced capitalist countries which saw the longest period of booms in these countries and distribution of income moving partially in favour of the working class.

In the early 1970s, this model broke down and there was a resurrection of the old ideology of free market and finance. It is interesting to note the complete reversal in economic ideas as well as policies despite having learnt the lesson the hard way in the 1930s. It seems almost as if the Keynes-Kalecki were erased from history. But the real answer to this reversal comes out quite clearly in Kalecki’s writings. Kalecki, unlike Keynes, looked at capitalism as fundamentally an antagonistic system. Kalecki (1943) argued that even though it is theoreticallypossible to attain high levels of employment and growth through government spending, it cannot go on in the long run. He argued that a prolonged period of low unemployment increases the bargaining power of the workers due to the declining reserve army of labour. Why this would lead to problems in maintaining such a growth process is for the following reason,

“[T]o maintain the high level of employment. . . in the subsequent boom, a strong opposition of ‘business leaders’ is likely to be encountered. . . lasting full employment is not at all to their liking. The workers would ‘get out of hand’ and the ‘captains of industry’ would be anxious ‘to teach them a lesson’.

[U]nder a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure. The social position of the boss would be undermined and the self assurance and class consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. . . ‘discipline in the factories’ and ‘political stability’ are more appreciated by business leaders than profits. Their class interest tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the normal capitalist system.”

So, the reserve army of labour is a necessity under capitalism to maintain the correlation of class forces in favour of the capitalists and rentiers. Accordingly, one could argue that the so-called golden age of capitalism was more of an aberration than a rule under capitalism. Seen in light of this argument, the present crisis, its severity notwithstanding, is actually not an exception but a rule under capitalism. We would like to argue, therefore, that this crisis should not be seen only in the light of the failure of the financial system for it could actually be just a signal of deeper malaise in the real economy. This distinction between real and financial crisis is very important because a sizeable majority in the academia and policy circles are arguing that if only the financial markets could be controlled, such crises would not take place. In other words, capitalism otherwise is a stable system provided the financial markets are regulated. Our argument is that crises of this nature can and do take place under capitalism independent of whether the latter were regulated or not. Unregulated financial markets add to the severity of the crisis.

Let us concentrate on the sources of malaise in the real economy. Unfettered development of capitalism leads to greater monopolisation by big business. Greater monopolisation of the market ensures a downward rigidity in prices and, therefore, a guaranteed profit margin. On the other hand, there are continuous efforts to improve labour productivity so as to keep the wage costs low. Downward rigidity in prices and continuous increase in labour productivity results in a tendency towards increasing profit share in the total output. While this strategy sounds good for an individual capitalist, it has seeds of its own destruction inbuilt into it.

A higher profit share for the economy as a whole leads to a decline in the domestic market. This is so because workers consume a higher proportion of their income than the capitalists and any shift of total income away from workers would ipso facto lead to a decline in overall consumption demand in the economy (2). Since private investment is the main source of growth under capitalism, such a signal of declining consumption in the market exerts a downward pressure on the rate of growth. This is the typical realisation crisis in Marxian terminology. This is an imminent tendency under capitalism because there is no spontaneous mechanism of coordination of investment decisions of the capitalists to avert such a crisis. The reasons for why the system is not underperpetual crisis but faces it only intermittently have to be found elsewhere but this tendency exists all the time. The factors which counter this tendency could be state intervention, export-led growth, capitalists’ consumption led growth. Each of these factors has different consequences on the trajectory of the growth process, some of which we would focus on later in this article.

Just as the pre-Golden Age, the current period is also not fundamentally different. Inequalities in income and wealth have been rising dramatically since the late 1970s across the world, except for the possible exception of France and Japan, creating conditions for realisation crisis. The genesis of the present crisis lies precisely in the factors which had kept the growth going even when such a tendency existed. Therefore, to understand the present crisis, we need to analyse the economic booms that the US has witnessed in the present decade and the previous one.

Growing Inequality

There has been a dramatic increase in inequality in the US since the early 1980s. What the US is witnessing today in terms of inequality has only one parallel in its history i.e., the period during the Great Depression (see fig 1). The inequality is such that the top 10 % of the population earns close to 40% of the total income. The inequality has increased in the US since the early 1980s primarily because of two reasons. On the one hand, the income of the poor has got squeezed due to a decline in the legal minimum wages, unionisation rates and increased globalisation, all of which have decreased their bargaining strength. On the other hand, the payrolls of the top executives, especially CEOs, has increased manifold in the absence of either the wage controls of the World War II or the social norms of the Golden Age period which restricted the growth of high-end wages.

Figure 1

The increase in equality is not restricted to income alone but there is a growth in wealth inequality too as shown in Table 1. While the top 1% of the population owned 33.8% of the total wealth of the economy, the bottom 40% of the population owned less than 1% of the total wealth in 1983. The wealth inequality increased by 1995 to such an extent that the top 1% owned close to 40% of the wealth while the bottom 40% owned a mere 0.2%.


A major part of the increase in the wealth of the rich during this period has been through the increase in the stock market prices of the financial assets that they own. Since the ownership of stock market assets itself is extremely skewed in favour of the rich, an increase in the prices of the shares has an asymmetric effect in favour of the wealth of the rich.

 The Boom of the 1990s  

From the point of view of classical political economy, such a growth in inequality should have led to stagnation in the economy instead of a boom as witnessed both in the late 90s and the present decade (prior to the current crisis). If that is the case, then why did the growth of inequality lead to an increase in the growth rate in the US in the late 90s and 2000s?

As mentioned above, at least theoretically, there could be three ways which can help avert this tendency towards stagnation into becoming a reality. First, the government could prop up the domestic demand through fiscal management. But this route was practically unavailable given the right-wing dominance in the policy circles which wanted to restrict the role of the government in the real economy (3).

Second, the stress of growth could divert in favour of export-oriented strategy. Again to do that, one needs to be internationally competitive both in terms of technology as well as wage costs, neither of which was in favour of the US. The US had been left far behind in terms of technology by its European counterparts, especially Germany and Japan in Asia.

Third, consumption of the rich could more than compensate for the declining share of workers’ consumption through injection of consumption demand independent of the current stream of income, say through the wealth effect coming from the asset price markets. Furthermore, new methods of enticing even the workers to consume through credit financing could also act as a counter to this tendency. It is the third route which the US has adopted in the last two booms which we focus upon in the rest of the paper.

The way this third route worked is the following. Stock or housing market booms led to a growth in the ‘notional’ wealth of the rich which had a positive effect on the consumption of the rich, a phenomenon called the ‘wealth effect’. Increase in consumption due to wealth effect was an external injection of demand into the economy independent of the redistribution of income between the rich and the poor. Though the exact effect of an increase in wealth on consumption in the US has been estimated to be not more than 3 cents per dollar, i.e., out of every dollar increase in wealth only 3 cents are spent on consumption, the sheer magnitude of the wealth increase due to the stock market boom of the late 1990s was such that it had a huge impact on the overall consumption. The argument can be better understood if we look at the exact increase in the wealth of households which increased by 50 percent within a span of five years between 1995 and 2000. The increase in consumption as a proportion of GDP was close to 1.5 percent during these years. Therefore, this increase in wealth alone explains the increase in consumption of the household during this period.

A more interesting question, however, is not why the consumption increased but how was this consumptionfinanced? To understand that, we need to explain how the increase in the wealth was ‘notional’? It was purely ‘notional’ to the extent that its value had increased due to higher valuation in the stock market so that the increased wealth could not be realised from the stock market by all the stock holders at the same time. Any attempt to ‘realise’ the increased value of the wealth in the stock market by selling the stocks at their higher prices by all the investors at the same time would have meant a collapse in the stock market itself. Thus, the increase in wealth was merely notional. That being the case, any increase in expenditure on consumption based on this increase in wealth had to be financed by taking more debt based on the increased collateral in the form of enhanced value of wealth. It is here that the debt spiral began in the US. Therefore, the debt spiral became a necessity for the economy to compensate for the imbalances in the real economy.

During the 1990s, the household debt stood at 95.6 percent of the total disposable income of that sector (see table 2). In other words, the household debt was almost equivalent to the total income of the sector as a whole in the 1990s. Such high levels of debt-income ratio were ominous signs for the US but the Federal Reserve did not pay heed to the dangerous growth in the debt-income ratios, instead they were busy propagating the argument that the US economy had entered a new phase of ‘new economy’ where business cycles were a thing of past.


Such sleight of hand by the mainstream economics, however, had to face the reality when the economy witnessed the Dotcom bubble go burst in 2001. The business cycle was back as indeed it is a part of the working of any normal capitalist economy, contrary to the claims of the new economy enthusiasts. A decline in the stock market meant a decline in the wealth of the households too and the increased wealth effect was bound to reverse but the debt taken against the increased wealth earlier remained nonetheless.

 The Mortgage Boom of the 2000s and the seeds of destruction

In the event of the stock market meltdown in 2000, the financial speculators moved away from the stock market to some other avenues where they could make a quick buck and the best opportunity they found was in the housing market. Such a huge diversion of funds from the Dotcom bubble to the housing market had a positive effect on the housing prices just as it had on the stock prices of the IT sector during the late 90s.

An increase in the housing prices made housing into a profitable venture for the household sector because in common perception it was thought to be a safer asset that the stocks, little was it known that it was merely a shifting of one bubble to another. As happens in the stock market, the increase in buyers of houses led to a further increase in prices of housing much beyond its cost of manufacture.

The policy of the government in the post-2001 phase was multi–pronged to provide a boost to the household demand (either in consumer durables or expenditure on housing) which had been responsible for the growth in the 1990s. First, there was a major tax cut by George W. Bush announced on June 7, 2001. Bush, in his remarks in Tax Cut Bill Signing Ceremony, argued that the magnitude of the tax cut that his administration was announcing can only be comparable to the Reagan Tax cut of the 80s or the Kennedy Tax cut of the 60s. This tax cut had a definite impact on increasing the consumption of the rich because they were the biggest beneficiary of the Bush Tax Cut. That is why despite the meltdown in the stock market which had driven the consumption during the 90s, consumption of the household did not decline as would be expected based on the wealth effect (after increasing for over two decades, the consumption share after 2001 remained stagnant instead of declining despite the meltdown in the stock market). The declining wealth effect was compensated to an extent by the easing tax effect during this period.

Second, after the stock market crash of 2000, which had its repercussions well into 2002, the Fed was looking for other ways of stimulating consumption demand because that had been the bedrock of growth in the late 90s. In the absence of another equity price bubble, the housing market provided an opportunity of such an alternative. The prices in the real estate market had been increasing since the mid–90s but it was still a sideshow to the stock market boom of the 90s. It was only in the early years of the present decade that they started picking up. The reason for this housing market run was quite obvious. The stock market crash led the investors to look for alternative measures of keeping their money and real estate seemed a good opportunity because its demand was going high so there was always a potential of making capital gains (p.92, Pollin (2005)). A Special Report (2005) of The Economist had the following to say about the magnitude of the housing market boom in the US or perhaps the entire developed world,

“[T]he total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries’ combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stock market bubble in the late 1990s (an increase over five years of 80% of GDP) or America’s stock market bubble in the late 1920s (55% of GDP). In other words, it looks like the biggest bubble in history.” [Emphasis added]

The extent of speculation in the housing market can be measured by the ratio of the housing prices to the rental applicable to the houses. This is similar to the Price-equity (P/E) ratio of stocks because the income that can be imputed from owning a house comes from the rental that it would fetch in future. Let us see what happened to this ratio. Weller (2006) presents the data comparing the Housing Price Index to Rental and the CPI (see fig. 2).


While the ratio of HPI to rentals remained stable for more than two decades since 1975 (as shown by the dashed line in fig. 2), there was a sharp increase in it since 2000. This is further corroborated by the fact that in 2004, 23 percent of the homes bought were purely for investment purposes while 13 percent were bought as second homes. ‘Investors [were] prepared to buy houses they [would] rent out at a loss, just because they [thought] prices will keep rising–the very definition of a financial bubble.’ (Report (2005)). In Miami, nearly half of the original buyers resold their apartments in an attempt to make capital gains.

In such a situation of high speculation, the Fed pushed aggressively for an easy monetary policy which meant a drastic decline in the federal funds rate (short term interest rate set by the Fed) even below the rate of inflation resulting in negative real funds rate. The real federal funds rate remained negative from the mid-2002 to early 2006 which meant a real heavy dose of easy money for more than three years. This kind of monetary policy has not been seen in the recent past in the US. The household sector responded very positively to this easy credit policy because the mortgage rates also declined. They increased their expenditure on housing which further increased its prices and the spiral started building up. This was the other bubble building up as Pollin (2005) writes (p.92),

“As the upward price momentum continued through the middle of 2002, the Wall Street Journal, among other observers, began warning of the dangers of a housing “market bubble” in which “stretched buyers push mortgages to the limit.”

The “limits” to which the buyers were “pushed” can be estimated by the growth in the Financial Obligation Ratio (FOR) and the Debt Service Ratio (DSR) of the household sector during this period.  Debt Service Ratio (DSR) is the ratio of debt payments on outstanding mortgages and consumer debt to the disposable income of the household sector. We also present data of a more inclusive concept of the debt obligation that the household sector holds. This measure is called the Financial Obligation Ratio (FOR) which, apart from the repayment of interest charges on outstanding mortgage and consumer debt, includes the automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance, and property tax payments.


Some important conclusions can be drawn about the financial condition of the household sector based on these two ratios. In panel (a) of fig. 3, it clearly shows that both DSR and FOR have been rising since the early to mid–1990s. If we differentiate between the debt payments on account of home mortgages and consumer durables, we get panel (b), which tells us another interesting story behind this debt growth. As expected, for the 1990s, which is characterized by stock market boom, it is the consumer durables debt payments that play a central role in driving the FOR up whereas the home mortgage debt payments were declining for that decade. After 2000, however, when the real estate boom replaced the stock market boom, it is the home mortgage payments which determine the FOR for the households.

The Federal Reserve during this period had its priorities chalked out pretty well which was to give a boost to the housing prices, just as in the 90s, it was most interested in maintaining the stock market boom. This can be seen from the minutes of the Federal Open market Committee (FOMC) meeting of this period. Minutes of the FOMC (2004) meeting held in June say,

“The members continued to report a high level of housing demand in numerous parts of the country, with housing construction described as a notably robust sector in many regional economies. The strong performance of the housing industry continued to be attributed in large measure to the lowest mortgage interest rates in several decades.” [Emphasis added]

Third, given that the growth of the economy now was driven by the growth in residential investment financed primarily by debt, there was an increasing tendency by the lenders to indulge in predatory lending practices. The norms of lending were broken at will to keep the real estate boom alive and the Fed, despite being aware of the precariousness of the situation, allowed it to happen under its nose just as it did not intervene during the speculative run in the stock market boom of the 90s.

Lending norms were twisted in myriad ways, especially in the Sub-prime mortgage market (4). First, the norm of mortgage was changed for rich borrowers who could use up to 50 percent of their income for their mortgage payment whereas earlier the norm was only 28–32 percent (p.92, Pollin (2005)). Second, new forms of loans were introduced which had no requirement for down payments. As high as 42 percent of the first time borrowers and 25 percent of all borrowers were exempted from making any down payment (Report (2005)). Third, a new form of financing was introduced which was the Adjustable Rate of Mortgage (ARMs), according to which the overall interest payment could be spread over years so that the initial interest payments might seem very low but the debt burden would increase as you go further into future. This was used to sell loans with ‘hidden costs’. Fourth, the borrowers could get up to 105 percent of the buying cost as loan and no documentation of borrower’s income or employment was required (Report (2005)). Fifth, the borrowers were allowed to pay only a part of the interest amount due while their unpaid interest amount and the principal get added as debt, a form of loan which has been termed as ‘negative amortization loans’. One third of the total loans in the US in 2002 were either interest–only loans or negative amortization loans (Report (2005)).

The housing market boom had a logic of its own which was in some ways similar to a stock market boom. Since the housing prices were increasing, it provided a good opportunity to make money at the margin by buying low and selling high, just as in the case of equities. Moreover, increasing prices of houses also increase the net worth of the owners of the houses which further increases their capacity to borrow and hence to speculate even more, which was reflected in people buying more than one house. But since all the buy is financed through debt, it puts the household sector on a knife–edge position. On the one hand, if the prices of the houses declined then the value of their collateral declines and further borrowing becomes less likely. In the worst situation, if the prices fell drastically, even the possibility of repaying the debt by selling the house might itself disappear leading to foreclosures. On the other hand, if the interest rates increase eventually, they would increase the debt burden in future, especially if the loans have been taken under the ARM scheme. In effect, it is the real mortgage rate that matters which is the difference between the nominal mortgage rate and the capital gain through a housing price rise (Weller (2006)).

Even though it was obvious that the housing prices were primarily speculative in nature, Alan Greenspan, the then Chairman of the Federal Reserve, while addressing the Joint Economic Committee on June 9, 2005, had rubbished all claims about the housing boom being a speculative bubble by arguing that,

“[T]here can be little doubt that exceptionally low interest rates on ten-year Treasury notes, and hence on home mortgages, have been a major factor in the recent surge of homebuilding and home turnover, and especially in the steep climb in home prices. Although a “bubble” in home prices for the nation as a whole doesnot appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels…

Transactions in second homes … suggest that speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past.

The apparent froth in housing markets may have spilled over into mortgage markets. The dramatic increases in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.

The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. In part, this is explained by an underlying uptrend in home prices…

Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications.” [Emphasis added]

It would be really surprising to note that the same Greenspan had an altogether different take on the Depression of the 1930s. Greenspan (1966) wrote,

“When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage… The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.” [Emphasis added]

If we say that ‘the excess credit which the Fed pumped into the economy spilled over into the housing market–triggering a fantastic speculative boom’, then how different would that be from what his argument is? If not, then it sounds puzzling as to why he did not apply his own argument about the Great Depression to the policy of the Fed under his chairmanship. Whitney (2005) writes the following about the policy of the Fed and its former chairman,

“Greenspan knows all about “irrational exuberance”; he’s its primary champion. The Fed seduces the public with cheap money, so that credit spending increases and, then, “presto”, millions of Americans slip inexorably into indentured servitude.”

Given the delicate balance that the household sector was maintaining vis-à-vis the housing market, it was obvious that any meltdown in these markets would be disastrous not only for the US economy but for the world economy as well. This possibility was further precipitated by the fact that dual pressure fell on the borrowers. On the one hand, the Fed decided to increase the federal fund rate, which increased the interest burdens especially for consumers who had opted for ARMs or negatively amortized loans. On the other hand, decline in housing prices decreased the value of their collateral and thus increased the possibility of bankruptcy which indeed were quite high in this period. This would especially have serious consequences for the US economy, as can be seen today, because 90 percent of the growth witnessed during 2001-05 was due to increased consumption and residential investment of the households.

Till now we have presented a macroeconomic picture of the housing market but it is obvious that such a market has the potential of having an asymmetric effect on households depending on their income category. For the poorer households, the effect of an increase in the real mortgage rate would be more severe than a richer household.

Some broad pattern can be drawn about the different categories of households (see table 3). First, the bottom quintile was not a part of the recent run in the housing market since 2001. The value of home as a proportion of income increases the most for the middle quintile. Second, contrary to the general perception, the main customers of ARMs appear to be the richest households and not the poorer ones. This could be because of the fact that the rich were buying the house only for the purposes of selling it later and were financing it through ARMs. A housing market meltdown would, thus, have an asymmetric effect on these categories depending on their relative exposure to the credit market.


The fact that the growth process in the last two decades was dependent on asset price markets can be substantiated if we plot the movements in economic activity with respect to these markets. We attempt to plot the business cycle of the 1990s and 2000s against the cycle in the stock market and the housing marker respectively in figure 4.


It can be seen that in both the cycles the movement of GDP is closely linked to the movement in these markets. In fact, the GDP cycle follows the asset price cycles. This gives us some empirical evidence on the theoretical proposition made above. In Keynes’ words, the growth processes had become ‘bubble in the whirlpool of speculation’.

 Is ‘it’ over?

A lot is being written about the end of the crisis or at least ‘the worst is over’. But we believe, given the magnitude of the crisis, it is premature to think so. When we say the crisis, we do not mean the subprime crisisper se. By end of the crisis, we mean the delinking of the growth process’ dependence on the speculative booms in the asset price markets. It is very possible that in the short term we have another asset price bubble which will provide some respite to the economy but only to aggravate the systemic problem in the long run.

Let us first examine the economic variables which can tell us about the present recovery process. To examine the extent of recovery, we have to first examine the components of the recovery. Since the US economy is facing a crisis of inadequate aggregate demand in the economy, the path of recovery has to somehow solve this problem. Its failure to do so would not only prolong the crisis but any premature withdrawal of the government stimulus would further aggravate the very problem it is seeking to address. Aggregate demand in any economy comprises of the consumption of the household sector, investment made by the household sector (residential investment), investment made by the corporations (non-residential investment), government expenditure and net exports (trade surplus).

Not only has the residential market plummeted seriously, there has been a decline in the share of consumption too in the present crisis for reasons well known. Together they form a deadly combination of declining investment and the income multiplier. Therefore, the path to recovery has to be dependent on the last three components of aggregate demand, i.e., non-residential investment, government expenditure and trade surplus. Let us look at what is happening to these three factors at present (see figure 5).


Non-residential investment or the corporate investment in ‘real’ capital continues to decline as a proportion of GDP, which itself is serious because it means a lower rate of growth in investment than the GDP. But this is a general trend during the periods of crisis. In any crisis, the first factor that is affected is the corporate investment precisely because of the crisis of confidence of the capitalists. So, this by itself is not novel to this crisis, especially if we see it in the light of the magnitude of the present crisis.

The stimulus package that Obama administration has injected into the economy has led to increase in the second factor mentioned above, i.e., government expenditure. This automatically has the effect of propping up demand and thus, the GDP. But its magnitude is crucial, especially in crises like these. First, it has to compensate for the decline both in residential and non-residential investment. Second, even if that is taken care of, the net effect of that increase would be dampened if the income multiplier is decreasing as a result of declining share of consumption (as explained above). Therefore, the increase in government expenditure has to take care of both these factors which demands far more than what President Obama has announced so far.

Finally, the third factor, i.e., the trade balance, can also play a role in the recovery. In fact, as we will see below, the most crucial factor contributing to whatever little recovery that the US is witnessing today is directly linked to what is happening in their current account. Though it might seem contrary to common perception that current account balance in the US, which has been running record deficits for the last two decades, could actually be a catalyst to recovery. But if one looks carefully, if the rate of increase of trade deficit is low compared to the rate of decline in growth of GDP, it could actually play a positive role in recovery. In other words, if the ‘leakage’ of income from the economy in the form of net imports declines during the crisis, it will put less downward pressure on the rate of growth. This is what seems to be happening in the US. The share of trade deficit in the GDP has declined during the period of the crisis giving a positive impetus to an otherwise declining rate of growth.

A decline in the trade deficits could happen if there is an increase in the share of exports in the GDP or a decline in the share of imports or both. Or, at least the decrease in the share of exports in the GDP is lower than that of imports if both are decreasing. Declining trade deficit has taken place during this period in the US due to a sharper rate of decline in imports than exports. Further categorization of imports reveals that two factors, namely, industrial supplies and materials (except petroleum and products) and automotive vehicles, engines, and parts together have accounted for more than half the decline in imports in these quarters. This nature of decline in the share of imports in the GDP seems more to be of a short term character than a policy response by the US to increasing trade deficits, which makes this component of recovery even for a medium term suspect.

After analysing various components of demand and their behaviour during the ‘recovery period’, we can say that the increased government expenditure in the US through the fiscal package has still not been able to stimulate the economy to the extent of alleviating the problem at hand. On the one hand, consumption has stagnated, thereby, terminating the route to recovery through an increase in the multiplier. On the other hand, neither the residential investment nor the non-residential investment is showing any sign of recovery, especially, since the level of confidence of the corporations to invest is still quite bleak. Therefore, to withdraw the stimulus package now would be far from prudent. The lessons of the Great Depression remind us that the decision to withdraw the stimulus, on the basis of initial signs of recovery, ended up prolonging the crisis to almost a decade.


We have argued in this paper that growth in the US economy in the recent past has entirely been driven by either consumption spending or residential investment. Both of these were driven by asset price inflation of one kind or the other. While consumption was driven by the stock market boom of the 90s, residential investment was driven by the housing price boom. Such a growth path, however, has serious problems as already being witnessed in the US. First, it would require asset price inflation of one or the other kind to sustain the wealth driven growth. Second, it would be a highly volatile growth path because it would be dependent on the vagaries of these asset price markets. Third, it would invariably force the government to act in the interests of the finance capital because they hold the key to growth in the economy as happened in the bailout package endorsed by the US Congress earlier. The monetary as well as fiscal policy would have to be tethered to the developments in the asset price markets.

The current economic crisis that capitalism is faced with is of far greater magnitude than was envisaged even a few months back precisely because of the extent to which the machinations of the globalized finance capital has spread across the world. This is the time to categorically reject ‘there is no alternative’ (TINA) paradigm of the neo-liberalism and reassert alternative policy prescriptions which would be beneficial to common people.


(1) It is another matter that the nature of state intervention was militarist in nature. Therefore, it would be simplistic to argue that the state intervention was primarily pro-people. In fact, the initial reversal in the economic activity after the prolonged period of Great Depression came after the World War II started. This led to increased fiscal expenditure on part of the government, which pushed the growth up. It is important to note that this growth was purely militaristic in nature. But post-1950s, there was an attempt to pop up the growth and employment by what was later came to be known as ‘welfare capitalism’. It is of course a contentious issue as to how much of the growth even in this period was welfare oriented.

(2) The argument underlying the negative linkage between growth and inequality can be found even in Marx when he talks about the underconsumption crisis. Josef Steindl, Baran and Sweezy and Kalecki revived this view in the field of Economics.

(3)This policy response was best exemplified by Ronald Reagan in the US and Margaret Thatcher in the UK where they proposed small governments to allow free markets to functions uninhibitedly. It should be kept in mind, however, that despite the opposition to government intervention in social sectors, they did not have any problems with burgeoning military expenditure. So, the argument effectively was to keep the ‘unnecessary’ government expenditure under check.

(4) With every passing day results of the investigations into the financial sector are getting murkier. A recent example of this is the recent case against the Golman Sachs (NY Times Editorial, 17 April 2010). Goldman Sachs Group Inc has been charged with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product. It argued that Goldman Sachs was involved in malicious practice of creating and selling mortgage-backed investments and then placing financial bets that those investments would fail.


FOMC (2004): “Meeting of the Federal Open Market Committee,” Discussion paper, Board of the Governors of the Federal Reserve System.

Greenspan, A. (1966): “Gold and Economic Freedom,” The Objectivist.

Kalecki, M. (1943): “Political Aspects of Full Employment” in Selected Essays on the Dynamics of The Capitalist Economy, Cambridge University Press, 1971

New York Times Editorial: “Watch This Case”, April 16, 2010 available at, accessed on April 17, 2010

Piketty, T., and E. Saez (2003): “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118, 1–39.

Pollin, Robert (2005): Contours of Descent: US Economic Fractures and the Landscape of Global Austerity. Verso.

Report (2005): “In Come the Waves: The Global Housing Boom,” The Economist.

Weller, C. E. (2006): “The End of the Great American Housing Boom: What it Means for You, Me and the U.S. Economy,” Discussion paper, Center for American Progress.

Whitney, M. (2005): “Pop Goes the Weasel: Greenspan and the Housing Bubble,” Monthly Review.

The Eurozone Crisis: Macroeconomics and Class Struggle

Deepankar Basu


The Eurozone seems to have temporarily averted a serious sovereign debt crisis in its periphery – which had the potential to quickly spread from Greece to Portugal to Spain and possibly even wider afield and to morph into a full-blown banking and financial crisis – with a nearly 750 billion euro bail-out plan. The plan requires European governments to commit about 500 billion euros for emergency loans through a special purpose vehicle (SPV), the IMF to promise another 250 billion euros if the need arises, countries receiving emergency loans to agree to harsh “austerity measures” and the European Central Bank to agree to purchase bonds of member countries. With the real fear of contagion spreading across the Atlantic, the US Federal Reserve has reopened swap lines to provide dollar funding to European banks, again, if needed.

Will these extraordinary set of measures be adequate to the task of dealing with the crisis? The answer is not at all clear. There are reports that credit markets in Europe have started tightening up, especially in the periphery, with small businesses taking the first hit. The average cost of borrowing dollars in Europe (usually done by banks) has started inching up; the spread between the three month dollar LIBOR (London Interbank Offered Rate) and the Overnight Indexed Swap (OIS) rate has also risen over the last few weeks, providing tell tale signs of growing stress in financial markets. Financial markets around the world tumbled on May 20 amid fears that not only will the Eurozone debt crisis not be “solved” by the bail-out package but will instead spread to the US and halt the fragile recovery currently underway. Things are moving fast and it is difficult to arrive at a conclusive answer at this point, but the debt crisis in Europe might very well be the start of the next phase of the global structural crisis of capitalism that started in 2007 in the US.

While it would be interesting, and possibly even useful, to speculate on the future path of the European, and US, economies, in this article I would like to focus on some other, but related, questions. How did the sovereign debt crisis in the Eurozone area come to pass? What are the underlying causes of the crisis? What are the possible exit routes? Who bears the costs of adjustment?

Crucial Sequence of Events

To set the ball rolling, let us quickly go over the sequence of crucial events. The sovereign debt crisis in the European periphery started in October 2009 when it came to light that the budget deficit of the Greek government was much higher than what had been previously reported, both in the press and in government documents. Figures for the Greek budget deficit were rapidly revised upwards to about 13 percent of GDP, much higher than the 3.7 percent figure released earlier in the year. By the beginning of 2010 it became clear that government statistics were highly unreliable and that there had been deliberate attempts to massage the books, drawing inspiration perhaps from the now infamous examples of Enron and Lehman Brothers. What was especially striking was the heavy involvement of sophisticated Wall Street investment banks like Goldman Sachs in assisting the Greece government fudge its accounts with the use of complex financial instruments.

Financial interdependence

With a large budget deficit and a mounting sovereign debt, ratings agencies like Standard & Poor’s downgraded Greek government debt, first in late 2009 and then in April 2010 to junk bond status. The yield and credit default swap (CDS) rates on Greek government bonds increased rapidly, reflecting financial market participants’ expectations of an increased probability of default. Interest rates increased, increasing the debt burden even further, thereby worsening matters for Greece. Because of the complex web of financial interdependence among the countries in the Eurozone area (see Figure 1), and especially the countries in the so-called European periphery, real fears of contagion spread rapidly through European financial markets. Bond markets in Portugal, Spain, Ireland and even Italy were badly hit, with Spain’s government debt downgraded.

Underlying Causes

What caused this crisis in the European periphery? From a macroeconomic perspective, there seems to have been two major causes behind the current build-up of sovereign debt in the European periphery: (a) the dynamics of Germany’s growth process in the 2000s, and (b) the loss of policy options, for the countries in the European periphery, resulting from participation in the European Monetary Union (EMU). Let us investigate each of these in turn.

Germany is the largest economy in the EMU – accounting for about a quarter of its GDP – and its growth process is bound to have profound impacts on the European periphery. In the 2000s, Germany’s growth was fueled not by internal demand but by running persistent trade surpluses with the rest of the world, including countries in the European periphery. Sluggish or non-existent real wage growth, enforced by a strong German neoliberal regime, hampered growth of aggregate demand and kept inflation rates low. Low inflation in the context of a monetary union meant high real interest rates in Germany and, going hand in hand with low aggregate demand growth, had a negative impact on private investment expenditure. But, the slow real wage growth relative to countries in the European periphery, at the same time, gave Germany a competitive advantage in the internal markets of the periphery countries. Recall that the raison d’etre of the monetary union was the closer integration of the economies through the unfettered cross-border movement of goods, services, capital and labour. German firms took full advantage of this integration; building on the advantage of lower wage growth, they moved in to capture markets in the periphery; the persistent trade surplus of the German economy largely drove its GDP growth through the 2000s.

But persistent German trade surpluses meant persistent trade deficits for its trading partners, including some of the countries of the European periphery; this feature of the German growth process gave rise to severe and persistent imbalances in the countries of the Eurozone. Right through the 2000s, countries like Greece, Portugal, Spain, and Italy were forced to accept huge and growing current account deficits (see Figure 2).

External Balance

Current account deficits entail net borrowing from the rest of the world and can show up either as private or public sector debts. If the difference between private sector savings and investment remains more or less stable, as seems to have happened in several Eurozone countries during the 2000s, persistent current account deficits would entail deficits of the public sector. This is what seems to have happened in several countries of the periphery, where persistent current account deficits fed already ballooning government budget deficits, leading, in the case of Greece, to a historically high build-up of sovereign debt.(1)

This is not to suggest that government expenditure and revenue, and hence the government budget deficit, have no autonomy; they do. While governments can increase their budget deficits for countercyclical policy action, as seems necessary during recessions, the existence and persistence of trade (and current account) deficits might add to the growth of the government’s budget deficit in the following way: persistent trade deficits negatively impact on aggregate demand ceteris paribus and, through the multiplier, reduce aggregate output and income; while countercyclical government welfare spending increases as a result, the fall in aggregate output reduces tax revenues; while aggregate savings decline with the fall in aggregate income so does private sector investment expenditures, keeping the saving-investment gap more or less unchanged; the net result, therefore, is a widening budget deficit. As can be seen from a comparison between Figure 2 and Figure 3, apart from Spain, trade deficits, for the most part, were contributing to high budget deficits.(2)

Government Budget

But how were the persistent deficits financed? Along expected lines and following the logic of financial integration entailed by a monetary union, a large part of the government budget deficit in the periphery was financed by capital outflows from Germany (and France); large financial institutions emerged as major players in the market for government debt in the European periphery. The structural imbalance at the heart of the monetary union, whereby Germany’s growth is supported by persistent trade surpluses, which in turn finances persistent trade deficits in the periphery, therefore seems to be one of the most basic causes of the current sovereign debt crisis in Europe.

The second cause of the current crisis is the severe loss of policy options of the countries in the periphery due to their participation in the EMU. Being part of a monetary union with a common currency, countries in the periphery have lost two crucial policy tools: (a) exchange rate policy, and (b) monetary policy (understood either as the ability to set key short-term interest rates or to control some measure of the quantity of money, however measured, in the aggregate economy). Thus, faced with a growing trade deficit, countries like Greece, Portugal, Ireland, Italy and Spain could not devalue to stem the tide; neither could they tamper with interest rates to deal with the recession and high official unemployment rates that came with the global economic crisis of 2007.

Thus, while the export-oriented German growth process, leading to a severe and persistent trade imbalance in the countries of the EMU, contributed to the build-up of sovereign debt in the European periphery, participation in the EMU by these same countries severely restricted their ability to deal with the imbalance. Thus when the global economic crisis of 2007 hit these economies as massive negative demand shocks, leading to precipitous fall in export earnings, the underlying decade-long structural imbalance was rapidly augmented by an accelerating trade deficit. Attempts by the government’s in the peripheral countries to counter some of the adverse impacts of the global recession with stimulus spending and falling tax revenues due to the recession, increased the already high deficits even further. The result was the build-up towards the sovereign debt crisis that Europe is currently reeling under.

Which Way Out?

How could the current crisis be resolved? Without dismantling the monetary union, there are two broad ways to deal with the crisis, one that imposes the lion’s share of the cost of adjustment on the working class of the European periphery, and the other that ensures that part of the cost to be borne by European finance capital as well. It is therefore obvious, given the differential distribution of the costs of adjustment across social classes, that the balance of class forces will ultimately decide which is chosen.

The first option, the one favored by European finance capital, is to advance emergency loans to Greece, and if necessary to the other countries too, and enforce Structural Adjustment Program (SAP)-type conditionalities. The logic behind this option – roughly what has been adopted with the 750 billion euro bail-out package – is as follows: loans will allow Greece to continue to service its debts (most of which is owed to banks and other financial institutions in Germany, France, and other advanced capitalist countries) so that bondholders do not incur any losses. The conditionalities – reduction of government spending on social sectors, freezing of public sector jobs, reduction in wages, privatisation of the pensions sector, labour market reform, tax increases, and other such measures – will  serve two related purposes.(3) First, it will severely contract the level of aggregate demand in the Greek economy and thereby push it into a prolonged and deep recession; this will ensure a disinflation or even a deflation in the Greek economy relative to Germany, leading to a possible reduction in the Greek trade deficit.(4) This is how, in this option, the basic imbalance in the EMU will be addressed.

Second, since a crisis always opens up channels to alter the balance of class forces, this occasion will be used to weaken the European working class further – by pushing up unemployment rates to historically unprecedented high levels – and push through a slew of neoliberal reforms like privatisation of pensions, education, health care and insurance. All in all, this option will bail-out financial interests and impose the costs of adjustment on the working people. It is not clear whether this option will work even on its own terms. Most realistic assessments of the situation assert the necessity of debt-restructuring; the question is not whether it will take place but when and at what terms. Additionally, the deeply recessionary implications of the “austerity measures” will, in all probability, slow down the whole eurozone economy and militate against efforts to get the core countries of global capitalism growing again.

The second option, the one that should be favored by the working class in Greece and other countries, including Germany, is to work out a sensible debt-restructuring program with bondholders and force the German economy to reflate. The logic behind this option is as follows: debt-restructuring would ensure that some of the cost of re-adjustment is borne by finance capital, the same finance capital that had recklessly lent to the periphery when profits were flowing, the same finance capital which helped the Greek government massage its books. Increasing aggregate demand in the German economy through a mix of fiscal and monetary policy would revive aggregate demand, push up inflation, drive down real interest rates and thereby boost private investment expenditures; through the multiplier, this would lead to robust output growth. The resultant inflation, in the German economy, relative to the countries in the periphery, would increase the German real exchange rate, reducing its trade surplus thereby addressing the basic imbalance in the EMU.(5) The growth is aggregate demand and output can, in turn, allow real wage growth, something in the interests of the German working class reeling under the burden of neoliberalism. This option, therefore, has the potential to forge an alliance between the working classes of the European periphery and the center.

Thus, while the first option addresses the basic cause of the crisis – the persistent trade imbalances in the countries of the European periphery – by forcing a painful deflation in the periphery, the second option addresses the same issue by enforcing, instead, a reflation of the German economy, the largest constituent of the EMU. The secondary problem of sovereign debt is addressed, in the second option, by a sensible re-structuring program to avoid financial chaos and contagion, while in the first option that problem is ignored altogether. On both counts, the second option is, therefore, what the working class should push for even when the first is presented, with a 750 billion euro bail-out package and adequate media support, as a fait accompli. Of course, other options will open up if Greece and other countries in the periphery decide to opt out of the eurozone altogether.

Acknowledgement: I would like to thank Debarshi Das and David Kotz for helpful comments.

Deepankar Basu teaches in the Department of Economics, University of Massachusetts. He is associated with Sanhati, an international solidarity group committed to fighting neoliberalism in India. He has been a regular contributor to Radical Notes, and has authored The US Financial Crisis (Aakar Books, 2009)


(1) As a matter of ex post identity, the budget deficit (BD) is the sum of (a) the difference between private sector savings (S) and investment (I) and (b) the trade deficit (TD), i.e., BD = (S-I) + TD; thus, an increase in the trade deficit, with the savings-investment gap remaining unchanged, will contribute to an increasing budget deficit possibly through a reduction in tax revenues and increase in government welfare expenditures.

(2) Spain, as is well known, had witnessed a massive property bubble financed by capital flows from Germany; hence, in the case of Spain, the savings-investment gap was fed by the current account deficit while the government’s budget deficit remained relatively small until the beginning of the global economic crisis of 2007.

(3) For details of the Greek austerity package see:

(4) Not only Ireland and Greece, even Spain, followed by Portugal, has announced its self-imposed “austerity” measures; for details, see

(5) If the inflation spreads to the countries of the periphery it might even reduce the debt burden in real terms and help in efforts to deal with the debt problem.

Crisis and Class Struggle: The American Way

Pratyush Chandra

If we have to name a single industry prototypical of post-second world war capitalism, which to a large extent defined the nature and range of economic activities in this period, the choice would undoubtedly be the automobile industry. With the financial crisis finally taking its toll over this industry (especially the Detroit Three – GM, Chrysler and Ford), the crisis has almost acquired a general character. The most interesting aspect of this long impending collapse in the automobile industry is its bearing for the industrial regime that will evolve out of the present crisis – this will largely depend on the balance between the forces (classes and their agencies) which will see through this process of restructuring. The bailout package has already been declared and it aims to completely disarm the workers, that too with the assent of their own unions.

A foremost business magazine, The Economist (‘A Giant Falls’, June 4 2009) while assessing “where did it all go wrong”, found the “insupportable burden” of its commitments to workers (that they wrested through decades of their struggle) as the single most important factor that led to the bankruptcy of General Motors, the collapse of the American pride. So obviously the general consensus is being created that these commitments were not justified. It was a case of “mismanagement and decline”. Thus, “the auto unions, themselves once emblematic of what workers could achieve within capitalism, have been reduced to lobbying to save “their” companies, and a decades-long trend in private-sector labor negotiations has now confirmed collective bargaining as having shifted from demands by workers to demands on workers.” (Herman Rosenfeld, ‘The North American Auto Industry in Crisis’, Monthly Review, June 2009)

General Motors (GM), that shaped the American way of life and economy for so many decades, is bankrupt, now, and Obama has alighted to save it. The bankrupt capitalists hid themselves behind the State which is determined to save the “American way of life”. Such determination can be fruitful only under the condition of some sort of social corporatism – through the state-sponsored or negotiated peace among capitalists, and between workers and capitalists. The first reproduces a capitalist-class-for-itself, while the second submits the workers to the logic of capital accumulation and the competitive needs of “their” employers. Didn’t Gramsci teach us that corporatism (or consensus) is the only alternative, besides coercion, for dealing with the crisis of legitimation and accumulation in capitalism?

Around 90 years back, in October 1920, a crisis had struck another giant automobile company, Fiat, in Turin (Italy). To counter the militancy of Italian workers, evident in the tremendous Workers’ Councils and factory occupation movements, the Fiat management had offered a scheme of co-operation, which the workers summarily rejected. Gramsci and his comrades understood the designs of the State and Fiat behind their ideology of co-operation – to get the workers at their mercy. The Turin Communists understood that within this scheme, “[t]he workforce will necessarily have to bind itself to the State … through the activity of working class deputies…. The Turin proletariat will no longer exist as an independent class, but simply as an appendage of the bourgeois State. Class corporatism will have triumphed, but the proletariat will have lost its position and role as leader and guide.” (Quoted in Antonio Gramsci, ‘Some Aspects of the Southern Question’, Pre-Prison Writings, Cambridge University Press, 1994, 325-326)

Where Italian premier Giolitti could not succeed, Obama has succeeded. The “working class deputies” in the US have ultimately bound the workforce to the State and the bourgeoisie, right at the time of a crisis, a moment that Marx and Engels acknowledged as “one of the most powerful levers in political upheavals”. Crisis indeed is a moment for heightening class struggle. Why not? If capitalism itself is shaped through open and hidden struggle between capital and labour, then should the moment of crisis be left out from this fight? At least capitalists are not going to do that; they know the meaning of the crisis – now or never! And in the absence of any strong labour movement, they know it is an opportunity not to be lost.

There are diagnoses and recipes going around to save the ‘economy’ from the deepening crisis, as if the economy in itself is something neutral, and we can struggle over its colour once it is saved. Even when capitalism is blamed (taking into consideration the growing interest in Marx throughout the First World) for its own ailments, the revival is recommended through various interventionist measures. There are many Keynesian quacks nowadays roaming and gossiping around irritating the capitalists – “we told you so”. But the capitalist knows what to do. Yes, intervention, if it’s must, but on whose cost – capital’s or labour’s? The capitalist must be bailed out, and the labourer must be reined in. Social corporatism is not at all bad, if it subjugates labour to the ‘general interests’ of the economy.

Capital doesn’t want to mess up with labour. It has tried to evade the very circuit in which labour-power has to be bought in, but every time it does that destiny reminds it of its painful bond with labour. This time capital had almost created a world of its own without the nuisance of labour. But these consumers and debtors, on whom it relied so much, betrayed it – it suddenly realised that these were in fact the same little urchins – those children of labour, whose devilish smell and smile it wanted to forget.

Time and again, the capitalist class is reminded of the basic lesson in political economy that ultimately profit generates in the productive sector, through engagement with labour. But this class which is composed of competing entities – individuals or groups – relapses into amnesia once prosperity steps in, as they compete to “accumulate, accumulate…”. Ultimately, they all find it ideal to directly jump from M(oney) to M'(oney) without going through the strenuous process of production where they must deal with labour, which simply cannot behave like another dumb ‘factor of production’.

Once capital comes to its senses, and realises its inevitable bond with labour, it tries very hard (and every means) to sterilize labour – alienating it from its creativity (hence, its destructivity) and thus, its humanity. Whoever – capital or labour – mobilises its class and community first during the crisis commands the post-crisis phase. Here labour is always at a disadvantage, it has to make an enormous extra effort and prior preparation to come to command. If it arrives late, it gives enough time for capital and its agents to put themselves in their headquarters. They don’t meet in the streets (only leaving their dogs and watchdogs for the street-fights) but in lavish boardrooms and in the offices of national and international agencies. The labouring multitude is reduced to its representatives, who are b(r)ought in these offices to negotiate a deal. Thus, the social compact is attained.

This is what has happened in the auto industry and will probably happen in many other cases until and unless the working class too realises that crisis is a moment of class struggle, not of negotiation and compromise. In fact, what is a compromise, but an institutionalisation of class struggle under the conditions of capital, in which the defeat of labour is immanent!