Articles published in The Brooklyn Rail about the Economic Crisis

Paul Mattick Jr.

Up in Smoke
What a difference a few days make! As recently as early September we were being reassured, not only by politicians but by experts everywhere, from the halls of academe to newspaper financial pages, thatserious though things might becomparisons to the Great Depression were uncalled for. By the official end of summer, as I am writing this, that comparison is everywhere, if only as background for insistence that this time the downward spiral can be controlledprovided that the government does the right thing, and does it fast. (Otherwise, as the current leader of the free world put it, This suckers going down.) Commentators argue about what that thing is, of course, though everyone agrees that it will involve huge wads of money.

The proposal on the table at the moment, the $700 billion U.S.government rescue operation, seems poised to turn into a gravy train, with financial operators of all sorts, not just the holders of failing mortgage securities, jostling to unload their deflating paper on the taxpayer, that donor of last resort (generally left unidentified but, when you think about it, clearly an abstraction of the lower income people to whom the tax burden has been shifted further since the 1980s). If the House finally knuckles under and passes it, one thing is clear: the trillion dollars or so that you might have fantasized would some day pay for new schools, healthcare, or even just bridges that dont fall down, is going to flow instead into financial-institutional coffers, affecting nothing but the ability of those institutions to keep afloat (and pay their executives, employees, and investors). This will be money spent not for things or services but simply to replace some other money, now departed from this world of woe. Or, more accurately, money that people thought was real has turned out to be imaginary; to deal with this, more imaginary moneymoney that future economic activity is supposed to generatewill take its place. Such a radical detachment of money from anything but itself may be hard to grasp, but its the key to understanding whats going on.

Photo of "Cash for Trash" rally (9-25-08) by Miller Oberlin

Everyone agrees on the immediate origin of the current crisis. Alan S. Blinder, former Federal Reserve Bank governor and now economics professor at Princeton, put it this way: Its easy to forget amid all the fancy stuffcredit derivatives, swapsthat the root cause of all this is declining house prices. People, from humble homeowners to Wall Street Masters of the Universe, imagined that house prices would climb forever. When they started to fall, the institutions that bought mortgages and borrowed against them, treating them as the equivalent of high-valued houses, suddenly found themselves unable to meet their obligations. They could now neither lend money nor borrow it; attempts to raise cash by selling assets drove prices down faster. Investors panicked. And it turned out that the economy really is global: the American meltdown was quickly transmitted around the world, deepening the Japanese depression, shoving down the Russian stock market, threatening Chinese growth (if not yet driving the communist-capitalist miracle into near extinction along with the Irish Tiger), and damaging German banks. One result was the pressure from European and Asian central bankers that forced the American government to save insurance giant AIG, at a cost of $85 billion; another is the arrival of foreign banks doing business in the US lining up at the promised governmental trough. But why did housing prices go up and up? For that matter, why did they stop? Can it just be that what goes up must come down? Economic writers like to treat the economy as if it were ruled by natural forces. But where once the call was for nature, in the form of the market principle, to be left free to work its wondrous best, now everyone has decided that it requires regulationlevees, as it were, against the hurricane-force winds of individual greedto preserve the natural tendency towards growth. What is much less noticed (or admitted) is that it was precisely the lack of regulation that created the prosperity, such as it was, of the last decade, as well as the meltdown of the last two years.

The tight controls put on finance by New Deal legislation were undone, starting in the late 1970s, by presidents Carter, Reagan, and Clinton. In addition to this deregulation, along with banking innovations to get around remaining regulations, a shift in banking activity from managing deposits to earning fees by selling financial investments, and changes in the tax code, led to an astounding growth of financial activity. By 2007 financial services earned an historically high 28.3% of total corporate profits. It was, in fact, largely this growth in financial activity that appeared both as globalization and as American prosperity. That prosperity, however, merited more skepticism than it got, punctuated as it was by market collapses and recessions. The 1980s saw a wave of corporate mergers and takeovers, much of it highly leveraged (financed by borrowing). Those happy greed is good days were, however, darkened by the collapse of the savings and loan banks at the end of the decade. Enjoying their newly deregulated status to invest heavily in real estate, they ran up a loss of $160.1 billion, which the U.S. government (that is, those taxpayers, again) obligingly offset with a gift of $124.6 billion. Similarly, the dot-com bubble of the 1990s burst into a 30% drop in share prices in 2000 and a general collapse of investment. In response to the weakened economy, the Fed cut interest rates between 2001 and 2003 from 6.5% to 1%. This led, as intended, to a massive increase of debt, personal and corporate. In particular mortgage lending took off, from $385 billion in 2000 to $963 billion in 2005. This, together with the refinancing of homes, was the basis for the post-2002 expansion of the Americanand so, to some extentof the world economy, along with the massive inflow of foreign funds in exchange forU.S. Treasury securities. A technical innovation of this post-1980s debt-financed expansion was the securitization of mortgagestheir grouping together into bundles sold as bonds. In this way the bank that makes the loans doesnt tie up its money in an actual piece of property, waiting for the loan to be repaid, but sells the right to collect the interest on those mortgages to investorsother banks, pension funds, etc.in complexly structured packages called collateralized debt obligations. The investors, of course, can sell these CDOs to others, or use them as collateral to take out giant loans to buy more securities or to gamble in the rapidly expanding field of derivatives (a type of investment well described recently in the Financial Timesas like putting a mirror in front of another

mirror, allowing a physical object to be reflected into infinity; about $62 trillion in credit-default swap derivatives is now floating around.) By January 2007, U.S. mortgage-based bonds at the base of this pyramid of financial instruments, rising far from the actual houses and the money to be paid for them, had a total value of $5.8 trillion. Of this, 14% represented sub-prime mortgages, entered into by people with poor financial resources. In 2006 these people began to have a hard time making their payments.

The foreclosure wave is not surprising, as the real wages of non-supervisory workers had reached their peak in the early 1970s and stagnated since then (the years after 2000 saw in particular a rapid decline in employer-financed health insurance), along with employment. When variable mortgage payments jumped, more and more people couldnt make them. Meanwhile, the Fed raised interest rates starting in 2004. This made mortgages more expensive and lowered house prices. These developments in turn made it difficult, or impossible, to refinance, as many home-buyers had been assured by lenders they would be able to do. By December 2007 nearly 1,000,000 households were facing foreclosure. Housing prices began to fall more rapidly; the mortgage market collapsed, taking with it the whole structure of securitized investments, now a massive part of the financial structure in the U.S. and around the world. Re-regulation will not solve the problem of claims on investment income far exceeding the actual money flowing to meet them, any more than pouring more freshly-printed dollars into the bank vaults will. Its true that bailing out investment firms will help unfortunates like Treasury Secretary Paulsen, whose Goldman Sachs stock, valued at $809 million in January, had fallen to a paltry $523 million by September 19. But aside from helping out the occasional deserving millionaire, it is far from clear how freeing up the wheels of finance is going to save the world economy. What will the financiers invest in, if they become solvent again? This is the big question that is neither asked nor answered. Its just assumed that the natural course of prosperous events will resume. If debt expansion could bring prosperity, however, wed already be living in a golden age. The problem is that all the money that has sloshed around the world for the last thirty years has led less to growth in what economists, in times like these, like to call the real economythe economy of production, distribution, and consumption of actual goods and servicesthan

to the expansion of the imaginary economy whose real nature is currently becoming visible. How did fictional investment come to have so dominant a place in economic reality? And how far is the depressionary wolf from the door? My next article, in the November Rail, will explore the roots of the current crisis in the development of the world economy since World War II; a third, in December, will examine that development in relation to the cycle of prosperity and depression that has characterized the capitalist economy since the early nineteenth century.

Risky Business
According to the lead editorial in the October 19th New York Times, which illustrated the papers currently tough tone on this subject, By now everyone knows that reckless and even predatory mortgage lending provoked the financial meltdown. Bad though the subprime mortgage disaster is, the Times continued, even more serious is the fact that the easy money also fed a corporate buyout binge, resulting in a potentially sharp increase in corporate bankruptcies. The paper of record called on Congress to prepare for the consequences by extending unemployment benefits and by figuring out what reforms are needed to make sure these disasters dont happen again.

During the Great Depression preceding the passage of the Social Security Act, soup kitchens provided the only meals some unemployed Americans had. This particular soup kitchen was sponsored by the Chicago gangster Al Capone. Source: http://www.ssa.gov/history/acoffee.html.

This viewtypical of economic commentary in its explanation of the current financial crisis as stemming from a toxic mix of reckless greed and insufficient regulationis a step in the direction of realism; it takes us beyond the early

19th-century view that a general crisis of the economic system is simply impossible. That outlook was revived in recent decades by theorists of the rationality of markets like Nobel laureates Milton Friedman and Robert Lucas, and made the foundation of regulatory practice by former Fedmeister Alan Greenspan. But that was yesterday. Todays call for reinvigorated government action is, of course, only a retreading of the step already taken by J.M. Keynes in his General Theory of Employment, Interest, and Money of 1936, in which the celebrated economist both argued the theoretical possibility of the crisis by then underway for seven years and asserted that proper governmental response could counteract it. But the current neo-Keynesian critiques fall well short of facing up to the actual state of affairs facing global capitalism. That state of affairs is generally referred to as a global financial crisis. But the financial crisis, though as real as can be, is only a manifestation of other problems that have yet to emerge clearly into public view. As I pointed out in the first of these articles (see www.brooklynrail.org/2008/10/express/up-insmoke), the subprime mortgage meltdown that appeared with the deflation of the housing bubble is not unrelated to stagnant or falling wages and rising unemployment. These phenomena have been a common subject for wonder in economic commentary in recent yearshow can so many people be doing so badly in prosperous times? Such questions are born both of a narrow conception of prosperity (if the stock market is still up, all must be well) and of a short attention span: in fact, an adequate comprehension of what is going on in the economy today requires a look back in history. Even a brief review of the past sixty years will show not only the recurrent difficulties generated by the capitalist economy, but also the limited ability of governmental action to offset them.

The most recent worldwide Great Depression (the moniker was earlier applied to the international downturn of 1873-96), conventionally reckoned to have begun with the crash of the U.S. stock market in October 1929, came to an end soon after World War II. While the coming of the war had returned the United States to full employment, this was only by way of government deficit-financed spending for war production, not because of the revival of the privateenterprise economy. The same was true of Japan and Germany, which in any case, along with the rest of Europe, ended the war in a state of economic ruin. Leaving a fuller discussion of the cycle of crisis and prosperity for the third essay in this series, I will note here only that the revival of the capitalist

economy after this lengthy period of economic depression and physical destruction followed, in broad outline, the pattern set in previous episodes of economic collapse and regeneration. In the words of Angus Madissons report on The World Economy in the Twentieth Century (1989), written for the OECD, the club of advanced capitalist nations, The years 1950 to 1973 were a golden age [which saw] a growth of GDP [Gross Domestic Product, i.e., the total value of goods and services produced in a given year, expressed as a sum of money prices] and GPD per capita on an unprecedented scale in all parts of the world economy, a rapid growth of world trade, a reopening of world capital markets and possibilities for international [labor] migration. This is not an idiosyncratic view: all commentators agree on describing this period as a golden age of capitalism. However, the success story is less straightforward than may appear (even if we leave out of view the years of economic misery and the war, with its tens of millions dead, that form its foundation). To quote Madisson again, A major feature of the golden age was the substantial growth in the ratio of government spending to GDP, which rose from 27 per cent of GDP in OECD countries in 1950 to 37 per cent in 1973. In most countries this was due largely to increases in welfare-state spending on such matters as social security, education, and health care. In the United States it included sizeable sums spent on war and preparations for war. In the words of economist Philip A. Klein, writing for the conservative American Enterprise Institute, Americas longest peacetime expansionfrom 1961 to 1969was influenced greatly by the redefinition of the term peacetime to include the Vietnam War and the increase in defense spending from $50 billion in fiscal year 1965 to $80 billion in fiscal year 1968. It was this American expansion that, in turn, helped power global growth, notably by way of the revival of Japan and the takeoff of Korea, particularly stimulated in the Vietnam War period. In other words, the capitalist economy properthe private enterprise system was not by itself able to produce a level of well-being sufficient, in the eyes of state decision-makers, to achieve a politically desirable level of social contentment. Thus, for example, when a Republican government, acting on its anti-spending, pro-free enterprise ideology, cut defense spending after the Korean War without offsetting increases in domestic expenditure, the United States experienced a sharp drop in production and a correspondingly sharp

increase in unemployment. Despite its wishes, the Eisenhower administration quickly acted to lower interest rates and increase government spending, including public works (on the scale of the interstate highway system) as well as military projects. In the United States, in fact, political economist Joyce Kolko noted in 1988, roughly half of all [U.S.] new employment after 1950 was created by state expenditures, and a comparable shift occurred in the other OECD nations. Keyness idea had been that the government would borrow money in times of depression to get the economy moving again; when national income expanded in response, it could then be harmlessly taxed to pay back the debt. In reality, crisis management turned into a permanent state-private mixed economy and the national debt, far from being repaid, grew steadily, both absolutely and in relation to GDP. The growing national debt made itself felt in a tendency towards inflation, as businesses increased prices (and workers tried to catch up) to offset the rising chunk of national income taken by government, and as the Treasury printed dollars to finance American government operations. Under the postwar arrangement entered into by the worlds capitalist nations, the dollar, representing a fixed amount of gold, served as a standard against which the value of other currencies could be measured, thus facilitating international trade and investment. By 1971, so many dollars had been created that the U.S. had to sever the dollars tie with gold, to avoid the possibility that Fort Knox might be emptied as other nations cashed in their greenbacks. While this move, contrary to the opinion of many, did not basically alter the nature of money, it did signal how far the world economy had moved from the selfregulating mechanism imagined by free-market enthusiasts towards a system dependent on constant management by governmental authoritiesand one in which the relaxation of management would make way for dire developments. The golden age was real, whatever its limits. This is visible in the fact that it came to an end around 1973, when world growth slowed dramatically. At the time this was blamed on the shock of a rapid rise in oil prices, engineered by the OPECcountries, in collusion with oil companies, in an effort to increase their share of the worlds profits and to offset the fall in the value of the dollar, the currency in which oil prices are set. But the fact that growth on the earlier scale did not resume when the world economy adjusted to this change (and even when oil prices declined again) indicates that some more fundamental change in the global economy was at work. Warning signs had been visible for a while. As economist William Nordhaus observed in an article published by the

Brookings Institution in 1974, by most reckonings corporate profits have taken a dive since 1966, even taking into account the record profits of the oil companies in 1973. The poor performance of corporate profits is not limited to the United States, he continued. A secular [long-term] decline in the share of profits has also occurred in most of Western Europe. Capitalist business enterprise is oriented towards profit. It is the expectation of future profit that drives the level of investment and the forms that investment takes. With the decline in profitability it is not surprising that corporations used the funds available to them less for building new factories to produce more goods than for squeezing more profit out of existing production by investing in labor and energy-saving equipment and setting up assembly plants in low-wage areas. (Results included a sharp rise in unemployment in Western Europe and in what became the Rust Belt of the U.S., as factories became more efficient and were moved south and abroad.) In addition, the widely observed speedup, dismantling of occupational safety measures, and extension of the work week, along with increasing employment of part-time and temporary workers, also helped lower the average wage and so increase profitability. Especially in the U.S., the steadily increasing facilitation of consumer debt, from credit card financing to easy-to-get mortgages, was another means, like inflation, to lower wages by raising prices: the additional cost of items is collected by financial institutions under the name of interest. Pension plans made part of workers earnings available for use by brokerage firms, banks, and other financial institutions; their replacement by 401(k)s, like the weakening or elimination of health-care plans, further diminished labor costs. At the same time, corporations began to spend vast sums they might earlier have used to expand production to buy up and reconfigure existing companies, selling off parts of them for quick profits and manipulating stock prices to make money on the stock market. In the late 1980s, it has been calculated, about 70 per cent of the rise in the Standard & Poor index of stock values was due to the effects of takeovers and buyouts; over the next twenty years the excess of stock prices over the underlying values of the companies they represent continued to grow. Thus the merger and acquisitions boom of the 1980s shaded into a larger pattern of speculating in financial markets rather than investing in productive enterprises. To take just one area of speculation, the value of funds involved in currency tradingbuying and selling different national moneys to take advantage of small shifts in exchange ratesrose from $20 billion in 1973 to $1.25 trillion in 2000, an increase far greater than the

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growth in trade of actual goods and services. To explain the rise of debtfinanced acquisitions and other modes of speculation as the effect of greed, as is often done today, is doubly silly: not only does it leave unexplained the sudden increase of greediness in recent decades, it also ignores the basic motive of capitalist investment decisions, which must always be guided by the expected maximum profits achievable in a reasonably short term. Similar to the way that playing the lottery, despite its multimillion-to-one odds, represents the most probable path to wealth for the average worker, speculation simply came to offer business-people better chances for higher profits than productive investment. The globalization of capital is part of this pattern. While often imagined to consist in a worldwide expansion of production and trade, it has consisted largely in trade and financial flows among the OECD countries, together with the relocation of some production operations to a few low-wage areas. The United States remained the worlds top manufacturing nation in 2006, producing almost a quarter of global output (although increasingly plants in the U.S. are owned by foreign companies). To take the latest focus of economic excitement for contrast, Chinas output is still less than half of the U.S.s, and largely consists of the final assembly of components manufactured elsewhere. Like domestic investment, the export of capitalwhich in any case has remained overwhelmingly within the capitalistically developed economies of the OECDhas been driven, in the words of economic analyst Paolo Giussani, by sectors more or less directly tied to finance and short-term speculation. And all of this activity came to rest increasingly on debt. In general, an inflationary economic environment encourages borrowing, since the falling value of money acts to lower interest costs. As the golden age came to an end, the slowdown in productive investment meant an increased availability of money to be loaned for other purposes. In the United States, companies had traditionally financed expansion out of their own profits, but in 1973 corporate borrowing exceeded internal financing and this was only the beginning. (Around the same time France saw a U.S.-style move to borrowing, the traditional mode of corporate financing in Germany.) The increasing uncertainty of economic affairs led in particular to a growth in short-term debt, though this in itself helped produce a rising rate of corporate bankruptcies, as sudden fluctuations of fortune could make it impossible to repay loans in short order. Increasingly, money was borrowed to finance mergers and acquisitions and to speculate on the various financial markets. Avenues for speculation

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were multiplied by the invention of new financial instruments, such as derivatives, swaps, and the now infamous securitization of various forms of debt, including home mortgages. For an idea of how far the imaginative mirroring of actual invested money by the creation of new saleable claims to it went, consider the fact that by the time of the crisis of mid-September, the worlds estimated $167 trillion in financial assets had given rise to $596 trillion in derivatives, basically bets on the future movements of asset prices. The 1970s had seen rapid growth in lending to underdeveloped countries, as commercial banks replaced governmental and international agencies as the main sources of borrowed money. Between 1975 and 1982, for example, Latin American debt to commercial banks grew at over 20 percent a year. Debt service grew even faster, as refinancing piled interest charges on interest charges. The result was a series of debt crises that wracked Latin America after the early 1980s. Eventually it became apparent that these debts could simply not be repaid; one consequence was the abandonment of internal economic development projects in these countries in favor of the export-oriented economic strategies demanded by the international economic authorities (the World Bank and International Monetary Fund) that oversaw the restructuring of debt. A similar fate was in store for loans advanced to the centrally planned economies of Eastern Europe. Their disastrous entanglement in debt, which seemed originally to provide a way out of the declining fortunes of the state-run systems, was an important step towards the integration of the former communist world into the global capitalist system. (I remember, fifteen years ago, suggesting to a Hungarian dissident, Gyrgy Konrd, who had just finished extolling integration into the world market as a solution for his countrys problems, that the East might be joining the West just as the capitalist economys happy days were over; he replied that he had finally met in me someone more pessimistic than a Hungarian.) By 1984, America joined this club, taking in more foreign investment than it exported, and a year later the U.S. became a net debtor. It gradually turned into the worlds largest recipient of investment and the worlds largest debtor, seriously dependent on foreign lending to finance both its wars and its unhinged consumption of much of the worlds production. In all these ways, then, debtpromises to pay sometime in the futuretook the place of the money the slowing capitalist economy failed to generate. Such a state of affairs is necessarily unstable, open to disruption by forces ranging from the speculative activities of individuals, such as when George Soros forced

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a devaluation of the British pound in 1992 (earning an estimated $1.1 billion in the process); and to the decisions of scores of businesses to move money in and out of national and regional economies, as when the weakening of the Thai real estate market in 1997 led to the collapse of the Thai currency, the baht, and then to credit crises in places as distant as Brazil and Russia. Meanwhile, the deeper reality at the bottom of the wild swings of speculative fortunethe insufficient profits earned by money invested in production, relative to the level of economic growth required to incorporate the worlds population into a prosperous capitalismhad multiple repercussions. These included the depression, born of the fizzling of a real-estate bubble, that has afflicted Japan since 1990; the continuing high unemployment in relatively prosperous Europe; the stagnation of the American economy, with falling wages, rising poverty levels, and dependence on constantly increasing debtpersonal, corporate, and nationalto maintain even a simulacrum of the fabled American standard of living; the continual slipping back into economic difficulties of the nations of Central and South America, despite periodic (though uneven) successes in mastering them; the relegation of most of Africa, despite its vast natural resources, to unrelenting misery except for the handful of rulers salting away the proceeds from oil and mineral sales in Swiss banks; the analogous limitation of Russian and Chinese capitalism to the machinations of former party apparatchiks-turned-millionaires; and the historically unprecedented accumulation of hundreds of millions of un- or under-employed people in the gigantic slums in which the majority of the worlds population now live. This is the reality that has persisted beneath the alternating contractions and expansions, the debt crises and their temporary resolutions, the currency collapses and financial panics that have shuttled from one part of the world to another over the last thirty years. And this is the reality that finally claimed the attention of Americans this September. Americans were taken aback by Al-Qaedas successful attack on the World Trade Center seven years ago, but the surprise at learning that the United States has enemies intent and able enough to do some real damage soon faded, for all practical purposes. The current threat is a more serious one and it will have a bigger impact, because it comes not from without, from some inscrutable foreign enemy that hates our values, but from withinfrom those values themselves, from the love of freedom, at least the freedom to do business.

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For this very reason, the nature of the problem is difficult to understand, even for those who might wish to understand it. Hence the constant railing, by politicians, pundits, economic writers, and plain citizens, at greed, corporate irresponsibility, inadequate government regulation. Our survey of the postwar economy confirms the point made in the first of these articles, that the dismantling of the regulations put in place during the Great Depression to limit financial hijinksat the behest of the largest banks, with the intention of controlling marginal but competitive operatorswas what made possible the level of well-being achieved, along with its increasingly unequal distribution, over the last two decades. Without the exuberant expansion of credit during these years, we would long before now have been brought uncomfortably face to face with the economic decline that showed itself in the mid-1970s. Today, the economic gains of yesteryear are melting away like glaciers under the impact of global warming, as trillions of dollars vanish from stock markets around the world, while the nine largest U.S. banks have lost more money in three weeks than they made in profit during the three years after 2004. But despite the surprising readiness of publications like The Economist (whose October 18, 2008 issue featured a story on Capitalism at Bay) to consider the economic system as truly imperiled by its current disorder (not to mention the horror with which true-believing Republican politicians discover socialism in government aid to the banking establishment), it is still difficult for people to understand that the current crisis is a result not of greed and deregulation but of the long-term dynamic of capitalism itself. The next and last article in this series will explore that dynamic, as an aid to grasping the situation in which we find ourselvesa situation that brings both danger and the possibility of change for the better.

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Ups and Downs: The Economic Crisis

As last years economic slowdown turned into a financial crisis, and the financial crisis into a global recession, there has been more and more reference to the Great Depression of the 1930s, as well as to the less severe downturns that have punctuated the decades since World War II. There is little mention, however, of the fact that business depressions have been a recurrent feature of the capitalist economy since the early nineteenth century, inspiring a vast literature of theoretical attempts to understand them and statistical materials for identifying and tracking them. Perhaps the venerable concept of the business cycle makes few appearances in current economic commentary in part because post-war downturns were mild and short in comparison to earlier ones (economic history from the early 1800s to the late 1930s was about equally divided between prosperity and depressions, which became deeper and longer over time). The claims of Keynesian economists, after 1945, to have ended the business cycle by finetuning the economy with governmental controls did not survive the combination of inflation and stagnation that set in the 1970s. Yet the ability of the economy to bounce back quickly from hard times led newly confident neoliberal economists to insist that capitalism is simply prosperous by nature. In reality, the current worldwide slump, far from a mysterious anomaly, represents the return of the capitalist economy to the dark side of its pre-World War II history.

Photos of Bushwick by Miller Oberlin.

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The boom-bust cycle started up as soon as the growth of a money-centered economy and the Industrial Revolution led to the establishment of capitalism in wide enough swaths of territory for it to become the dominant social system. Before that, of course, economic life was disrupted by a variety of disturbances: war, plague, bad harvests. But the coming of capitalism brought something new: starvation alongside good harvests and mountains of food; idle factories and unemployed workers in peacetime despite need for the goods they produced. Such breakdowns in the normal process of production, distribution, and consumption were now due not to natural or political but to specifically economic factors: lack of money to purchase needed goods, profits too low to make production worthwhile. Major downturns have been identified in every decade from the 1820s forward, increasing steadily in seriousness up to the Big One in 1929. All of these moments saw declines in industrial production, sharp rises in unemployment, falling wages (and other prices), and failures of financial institutions, preceded or followed by financial panics and credit crunches. In every case, the downturn was eventually followed by a return to greater levels of production (and employment) than before. At first only the most capitalistically developed nations were affected (the 1825 crisis took in only Great Britain and the United States). But over the next hundred years, as capitalism spread across the world and countries were increasingly linked by trade and capital movements, the cycle of crisis and recovery took in ever more areas, although not all experienced these phases in the same way, to the same extent, or at the same moment. While early-19th century champions of the free marketthe ancestors of todays neoliberalsinsisted that a general crisis of the economic system (as opposed to temporary disequilibria) is simply impossible, other economists responded to the evidence by speculating as to the causes of the cyclical pattern. The fact that in a market economy decisions about where to invest money and so about what is produced, and in what quantities, are made prior to finding out what quantities of particular goods are actually wanted by consumers, and at what price, seems obviously relevant to recurrent fluctuations in economic activity, in which different parts of a complex system adjust to each other over time. Another basic aspect of capitalismthat the total money value of goods produced must be greater than the total money paid out in wages in order for profit to existsuggests an inherent imbalance between production and eventual consumption. As both of these are constant features of this society, however, it is hard to see how they can explain the alternation between periods of growth and collapses serious enough, on

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occasion, to give large numbers of people the idea that the system was actually breaking down. Economists searched for explanations lying outside the economy proper, such as sunspots, whose cyclical increase and diminution seemed to match the economic data closely, and might conceivably affect the economy through effects on agriculture. Other theories looked at waves of optimism and pessimism, perhaps caused by changes in death rates, to explain increases and decreases in business investment. A more plausible explanation of the cyclical pattern, in terms of the changing profitability of investment, emerged from the major survey of economic data carried out over many decades at the National Bureau of Economic Research in Washington by economist Wesley C. Mitchell and his associates. ProfitI quote Mitchells words, but it is a commonplace conceptis the difference between the prices which an enterprise pays for all the things it must buy, and the prices which the enterprise receives for all the things it sells. Since a business enterprise must regularly turn a profit to continue to prosper, the making of profits is of necessity the controlling aim of business management and decisions about where to invest and so what to produce are regulated by the quest for profit. At some times businesses do better across the economy as a whole, earning more profit on the average, than at other times. And when average profits are high society enjoys prosperity, but declining profits can lead to depression. What determines these changes in the profitability of capital investment? This questionwhich Mitchell did not really answerbears not only on capitalists expectations and so their willingness to invest funds, but also on their ability to invest, since the money available for investment is either drawn from existing profits or borrowed against future profits, which must then come into existence if loans are to be repaid. The question as to the average size of profits produced at any time, just because it is so basic, takes us to the heart of the economic system. As Mitchell explained the regulation of business decisions by the need for profit, industry is subordinated to business, the making of goods to the making of money. But what determines the size of the difference between money costs and sales prices that is collected as profit? To quote Mitchell once more, in a modern business economy, most economic activities have taken on the form of making and spending money. We are so used to this state of affairs that we hardly notice its historical peculiarity and forget that in the pastin much of the world, even the very

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recent pastmost people produced much or most of their own food, clothing, and other necessities of life. So it is worth while remembering that, while money appears in many types of society, capitalism is the only one in which it plays a central role in the production and distribution of goods and services, so that nearly every object and service that we make use of in the course of a day has had to be purchased for money.

Money is basic to capitalism because this is the first social system in which most productive activityapart from the few tasks that people still perform for themselves, like (sometimes) cooking dinner, brushing their teeth, or hobbies is wage labor, performed in exchange for money. Most people, lacking access to land, tools, and raw materials, or enough money to purchase these, cannot produce the goodshousing, clothes, foodthey need; they must work for others who have the money to hire them as well as to supply materials and tools. This money flows back to the employers when employees purchase goods theyas a classhave produced. Meanwhile, employers buy and sell goods raw materials, machinery, consumer goodsfrom and to each other. Thus flows of money connect all the individuals involved in one social system. The people who produce goods for a business have no direct relationship with the people who will buy and consume those goods or services, even though it is ultimately for these consumers that they are producing. The workers in bakeries and automobile factories do not know who will buy the bread and the cars they make, or what quantities they want and can afford. The same is true of their employers. Though capitalist businesses produce to meet the needs of anyone who can pay, as the property of individuals or corporations they are linked to the rest of society only by the exchange of goods for money, when they buy materials and labor and when they sell their products. This is why each business only finds out from its success or failure in selling its products, at sufficiently high prices to make a profit, to what extent it is meeting the needs

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of customers. It is only when products are sold and consumed that the labor that has made them counts as part of the total work performed under the employer-employee system that is the dominant form of production. If the goods arent sold, the work done to produce them might as well not have been done, for they will not be used. It is thus the network of exchanges against money that binds all forms of work together into an economic system. Money is central to modern society, a society based on the principle of individual ownership (even though the vast majority of people dont own very much) because it represents the social character of productive activity in a formbits of metal, paper symbols, or electronic pulsespossessable by individuals. Like all forms of representation, money is an abstracting device: by being exchangeable for any kind of product, money transforms the different kinds of work that make these products into elements of an abstraction, social productive activity. The abstract character of modern production is not only an idea, but has social reality: for businesses, the particular product they sell is of interest only as a means to acquire money that, as a representation of social productive activity in general, can be exchanged for any sort of thing. Executives move capital from one area of business to another not because they care more about automobiles than soybeans or stuffed animals, but to make money. This is what capital is: money used to make money. A business that does not make a profit will cease to exist, so the ability to make moneyto increase the quantity owned of the representation of social productive activityconstrains what goods are produced, or even whether money is invested in the production of goods at all. The fact that money is the most important practical way in which the social aspect of productive activity is represented allows it to misrepresent social reality as well. By being exchanged for money, natural resources like land and oil deposits are represented in the same termsas worth sums of moneyas humanly produced things. Interestmore moneymust be paid for the use of someone elses money. Things that are simply symbols of money, like IOUs, including complicated IOUs like banknotes and stocks and bonds issued by companies, can be bought and sold, since they entitle their owners to money incomes and so can be treated as if they were saleable products. And since goods must be priced so that their sale allows businesses to make a profit, even in the case of actual products the amount something costs is affected by the amount people are able and willing to spend on it.

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As a result, profit, as a portion of the sales price, misleadingly appears to be generated by the activities of particular firms, especially because it is appropriated by individual businesses, who compete with each other to get as much of it as possible. In reality, profitbecause it exists in the abstract form of money, rather than in that of particular kinds of productmust be produced by the whole network of productive activities held together by the exchange of goods for money. It is with the goal of making money that employers buy equipment and materials from each other and labor from employees, who in turn buy back the portion of their product not used to replace or expand the productive apparatus andlets not forgetto provide the employers with their own, generally expensive, consumables. The capitalistically-desired output of this whole process, profit, is the money-representation of the labor performed beyond that required to reproduce the class of employees (paid in the form of wages) and to provide the goods required for production. It is the whole social system that produces profit, though individual companies get to keep it.

The social character of profit can be seen in the very fact that the level of profitability on capital investment alters over time, independently of the wishes of businessmen, who, like everyone else, must adapt to the price movements that determine how well they do (it is this that gives rise to the idea of the economy as a set of impersonal forces like the laws of nature.) Competition for profit forces businesses to charge similar prices for similar products; since they must themselves buy goods (labor and materials), their ability to compete by lowering prices depends on the production techniques they employ. In this way, the social character of the system asserts itself through pressure on individual firms to raise productivity, insofar as this leads to higher profits. Historically, this has led to a strong tendency towards decreasing the labor force in comparison to the amount it produces (while, of course, increasing the number of workers absolutely as the system grew). Employers first made labor

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more productive by assembling workers into large workshops, within which their work was divided into smaller and smaller tasks. This led to the substitution of machines for people, whenever this raised profitability, and to the invention of the modern assembly line, whose speed enforced high levels of labor intensity. By the end of the twentieth century, most production had become mechanized mass production, requiring less and less labor relative to a growing quantity of machinery and, of course, raw materials. This shift has obvious consequences for the profitability of capital. If profit is the money-representation of the labor performed by employees of all of societys businesses in excess of the work required to replace raw materials, tools, and those employees themselves, then it will decline relative to total investment if businesses increasingly invest more of their money in machines and materials than in labor. Karl Marx, who first figured this out, called it the most important law of modern political economy: the tendency of the rate of profit to fall. Marxs explanation of the tendency to declining profits, noticed well before him by nineteenth-century economists, is a controversial one, to say the least. But it led to a prediction that has proved all too correct: that the history of capitalism would take the form of a cycle of depressions and prosperities. And it explains the correlation Mitchell demonstrated between changes in profitability and the business cycle. Marx pointed out that the growth of capitalism, with its bias towards mechanization, led to an increase in the amount of money needed to continue to expand production, and so to the increasing size of individual companies. For the largest 100 firms in the United States, for instance, in real terms the amount of money invested in equipment per worker doubled between 1949 and 1962. And, of course, as increasing mechanization raised labor productivity, growing amounts of raw materials must be paid for. One consequence of this is that if the profitability of capital falls, at some point the amount of profit will be inadequate for further expansion of the system. (The General Motors factory in Lordstown, Ohio, then the most automated automobile factory in the world, cost $100 million to build in 1966; in 2002, GM spent $500 million to modernize the plant, which permitted reducing the workforce from 7000 to 2500. Only seven years later, GM is begging for a government handout to avoid going out of business.) Slowing or stagnant investment means a shrinking market for produced goods. Employers neither invest capital in the purchase of buildings, machinery, and

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raw materials nor pay the wages which workers would have spent on consumer goods. A slowdown in investment, that is, is experienced by workers as a rise in unemployment and by businessmen as a contraction of markets. This is a selfmagnifying process, as declining demand causes business failures, higher unemployment, and further contraction of demand. At the same time, since businessmen (and other borrowers) are increasingly unable to meet financial obligations, the various forms of IOUs issued by banks and brokerage houses become increasingly valueless, causing a financial crisis, while falling stock prices reflect the declining value of business enterprises. Individuals and institutions hoard money, rather than invest it. In short, capitalism finds itself in a depression. But in a capitalist economy, what causes suffering for individuals can be good for the system. As firms go bankrupt and production goods of all sorts go unsold, the surviving companies can buy up buildings, machinery and raw materials at bargain prices, while land values fall. There is market pressure for the design of new, more efficient and cheaper machinery. As a result, the cost of capital investment declines. At the same time, rising unemployment drives down wages. Capitalists costs are thus lower while the labor they employ is more productive than before, as people are made to work harder and on newer equipment. The result is a revival in the rate of profit, which makes possible a new round of investment and therefore an expansion of markets for production goods and consumer goods alike. A depression, that is, is the cure for insufficient profits; it is what makes the next period of prosperity possible, even as that prosperity will in turn generate the conditions for a new depression. Given this pattern, what is unusual about the current situation is not the decline of profits visible in the global economy in the late 1960s or the serious downturn of the early 1970s, but the fact that a real depression did not materialize until 2008. Like earlier crises, the Great Depression of the 1930s, together with the enormous destructive force of the Second World War, laid the foundations for the new prosperity that came to life in the postwar Golden Age see Part 2: Risky Business. It was not surprising, in view of the history of the business cycle, that this new prosperity began to decline by the end of the 1960s. But if capitalism remained at base the same system, the economic policy practiced by governments had changed. On the one hand, the political dangers threatened by the mass social movements unleashed by the previous depression, as mass unemployment radicalized the population, were

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unacceptable to the governing elite of the capitalist states, especially in the context of what was believed to be an epic confrontation with Communism. On the other hand, it was also imagined that Keynesian methods of deficit financing could control the ravages of the business cycle. And in fact the continuously growing level of government spending on military and civilian projects after 1945, which increased the demand for goods and services beyond that produced by the capitalist economy proper, created prosperous conditions despite declining profitability. In addition, the money that governmentsthe U.S. above allprinted to pay for all this spending, together with the credit private financial establishments were encouraged by central banks to extend to corporate and individual borrowers, made possible the debt expansion that underwrote individual consumption, corporate acquisitions and, especially from the 1980s on, ever more forms of speculation, in real estate, the stock market, and (with the refinement of derivatives) the ups and downs of speculation itself. This everincreasing public, business, and individual debt appeared on bank and other business balance sheets as profits, despite their missing foundation in real productive enterprise. Meanwhile, just as in earlier periods of economic decline, pressure was put on workers to work harder, while labor costs were lowered by moving plants from high wage to low wage areas or simply by using the threat of such moves to cut wages and benefits. Starting in the 1980s, spending on the socialized wage payments constituted by welfare-state programs was cut, freeing up money for corporate use. As it was supposed to, all this contributed to an actual increase in profits by lowering production costs, but evidently not by enough, given the costs of production goods, to make possible a new round of capital investment on a scale able to challenge the charms of speculations short-run high returns. The result was the economic situation which has arrived so shockingly during the last year, though for several decades the warning signsdebt crises, recessions, bank collapses, stock market failureswere clear enough. Generally ascribed to lax regulation, greed, or bad central-bank policy, the current economic collapse is in line with the whole history of capitalism as a system. What we are faced with today is, more or less, the depression that should have come much earlier, but which political-economic policy was able to delayin part by displacing it to poor parts of the world, but largely by an historically unprecedented creation of debt in the rich partsfor thirty-odd years.

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Now the crisis is here. What form will it take? And what can be done about it? I will turn to these questions in the next (and last) article in this series.

What Is to Be Done?
The March 1, 2009 edition of the New York Times Week in Review included a page of opinions from noted economists on the prospects for the economy, given the ongoing crisis and the various attemptsTARP, bailouts, stimulus, budget planmade so far to deal with it. Most more or less shared the forecast of todays official gloomster, Professor Nouriel Rubini of New York University, that the recession will not end until sometime in 2011. The most optimistic (like Fed chairman Ben Bernanke himself a few days earlier) thought that it would all be over in a year, while financier and author George Cooper saw a possible two or more decades of readjustment. Most were careful to hedge their bets by adding a proviso that a near-term recovery can be expected only if (to use Rubinis phrasing) appropriate policies are put in place. Not specifying what those policies are, of course, only strengthened the prediction safety factor. Then again, no one based his or her predictions on any serious analysis of the nature and causes of the crisis or the efficacy of the various remedies.

Photos courtesy of Michael Short.

In fact, its hard to imagine a more stunning demonstration of the theoretical bankruptcy of economics as a putative science than the ongoing discussion of the current economic situation. No deeper explanation has been offered for the last years catastrophic events than that they are the fallout from a credit crisis

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caused by excessive, and excessively risky, debt peddled by, and to, financial institutions around the world. As a result, no cure has been proposed for what is commonly described as an illness gripping the economy other than the continued intravenous feeding of the financial system with government money, along with subsidization of the failing U.S. automobile industry, modest amounts of public works spending, extended unemployment benefits, and increasing access to minimal health insurance. Despite collapsing economies in Europe, as well as the rest of the world, European governments are so far unwilling to add significant stimulus plans to those set in motion in the U.S. by the previous and current administrations. Finding this especially puzzling, a Times editorial cited Obama economic adviser Christina Romers assertion of an important lesson from the depression of the 1930s: fiscal stimulus works. If the lesson of history is this clear, the European response is indeed puzzling, as is the inadequate scale of the American stimulus according to the judgment of the same editorial, along with Professor Krugman and many others. In fact, what history demonstrates, if anything, is the failure of the New Deal to end the Great Depression. It is true that by 1935 the panoply of measures set in motion by the Roosevelt administrationfrom banking subsidies and regulation to industrial price controls, subsidization of agribusiness, unemployment and old-age insurance, federal make-work programs, and support for unionizationhad helped arrest the downward trend that began in the late 1920s. Yet two years later investment and production fell again, unemployment increased (there were ten million unemployed by 1938), and at best stagnation seemed to be the order of the day. Only with the coming of the Second World War, and the dedication of resources to preparing for war, did fiscal stimulus finally produce something like full employment, based not on increased consumption but on its restriction in favor of increased production of armaments. So, one may ask, what are the appropriate policies? What, exactly, is to be done? In 1936 John Maynard Keynes published The General Theory of Employment, Interest, and Money, in which he observed that the insistence of orthodox economics on the self-regulated nature of the capitalist economy had failed to recognize that the system could regulate itself into a state of less than full employment. Sharing with orthodoxy the basic assumption that the point of the economy is the utilization of resources, natural and human, to produce

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goods for consumption, Keynes proposed that the state should intervene at such moments, borrowing money against future tax receipts to hire workers, thus increasing the number of consumers and so calling forth new investment to meet their needs. That is, he provided a theoretical rationale for the policies already implemented by Hitler, Roosevelt, and the leaders of other capitalist nations. The failure of the New Deal to end the depressionlike the later failure of the promised end of the business cycle after the warcould now be explained by the failure to go far enough in applying the Keynesian prescription, as Roosevelts program was limited by the Supreme Courts finding of the national price-fixing system unconstitutional as well as by businesss opposition to increasing taxes and budget deficits. Others, meanwhile, blamed government spending itself for continued stagnation: resistance to the stimulus idea, in fact, has as long a history as the idea itself. While neither economists nor businessmen have an adequate theoretical understanding of capitalism, the latter at least have a practical sense of how it works. Economists, including Keynes, think of profit-making as a mechanism for getting people with money to invest in production, but businessmen know that profit itself, not consumption, is the goal of business activity. Goods that cannot be sold at a profit will not be produced, or may be destroyed if they have been produced, like the tons of food burned and buried during the Great Depression while millions went without sufficient nutrition. And government-financed production does not produce profit. This is hard to grasp, not only because it violates a basic presupposition of the past seventyfive years of economic policy, but because a company that sells goods to the state, as when Boeing provides bombers for the Air Force, does receive a profit, and usually a good one, on its investment. But the money paid to Boeing represents a deduction from the profit produced by the economy as a whole. For the government has no money of its own; it pays with tax money or with borrowed funds that will eventually have to be repaid out of taxes.

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Tax money appears to be paid by everyone. But despite the appearance that business is undertaxed, only business actually pays taxes. To understand this, think of the total income produced in a year as the money available for all social purposes. Some of this money must go to replace producers goods used up in the previous year; some must go as wages to buy consumer goods so that the labor force can reproduce itself; the rest appears as profit, interest, rent and taxes. The money workers actually get is their after tax income; from this perspective, tax increases on employee income are just a way of lowering wages. The money deducted from paychecks, as well as from dividends, capital gains, and other forms of business income, could appear as business profits which, let us remember, is basically the money generated by workers activity that they do not receive as wagesif it didnt flow through paychecks (or other income) into government coffers. So when the government buys goods or services from a corporation (or simpler yet, hands agribusiness a subsidy or a bank a bailout) it is just giving a portion of its cut of profits back to business, collecting it from all and giving it to some. The money paid to Boeing has simply been redistributed by the state from other businesses to the aircraft producer. This is why government spending cannot solve the problem of depression, though it can alleviate the suffering it causes, at least in the short run, by providing jobs or money to those out of work, or create infrastructure useful for future profitable production. The problem of depressioninsufficient profits for business expansioncan only be solved by the depression itself (aided, perhaps, by a large-scale war), which increases profitability by lowering capital and labor costs, increasing productivity through technological advances, and concentrating capital ownership in larger, more efficient units (for a fuller explanation, see part three of this series in the February issue of the Rail). Thus governments find themselves today between a rock and a hard place. The rock: a continuing descent into depression will bring enormous risks for social

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stability, as large numbers of people find that the existing social institutions are unable to take care of their most basic needs. Last winters riots in Greece have already demonstrated a high level of opposition to the political and economic status quo; France has already seen two nationwide demonstrations of nearly three million workers protesting job cuts and proposed changes in pension laws, and demanding government action. Popular protests drove the bankrupt Icelandic government from power, while angry workers have occupied closed factories in Ireland, Ukraine, and even the normally quiescent United States, where local organizations have also prevented housing foreclosures or occupied vacant buildings in a number of cities. True, the most publicized expression of popular anger so far has been that directed at financial executives rewarded with bonuses paid out of government funds issued to their near-bankrupt companiesanger rising from people earlier unfazed, so far as we know, by the astoundingly unequal distribution of income achieved by the wealthy, with government aid, over the last 25 years. But even this was enough to alarm a writer in the Times Style section on March 22, who found something scary about all this rage and suggested finding constructive ways to channel the anger theyve been feelingoutlets that quell the instinct to throw a rock through the window of somebodys mansion. If that anger gets channeled away from particular instances or individuals to a social system based on inequality and oppression, things could get quite constructive indeed. Hence the need to keep government funds flowing to prop up business institutions. The hard place: the idea that companies like A.I.G., the Bank of America, or Citicorp are too big to fail amounts to a declaration of the failure of the market economythat is, of capitalism in its classical, or ideal, form. Competition was supposed to eliminate the weak, leaving the most productive (of profits) to prosper, thereby optimizing social well-being. Blocking competitions operation amounts to admitting the obsolescence of capitalism itself. Even more important, government action in the form of stimulus plans, bailouts, or nationalizations threatens the private enterprise system not only symbolically but practically, as money is taken from the circuits of the capitalist market and used by the state for objectives defined politically rather than by the criterion of profitability. Furthermore, the situation today is rather different from that at the outset of the last depression. The United States had a government debt of $16 billion in 1930; today it is $11 trillion and climbing. In terms of percentage of GDP, the federal debt had already reached 37.9% by 1970; in 2004 it was 63.9%. The

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federal government is already responsible for about 35% of economic output (as measured by GDP, the value of all goods and services produced in a year). When this number hit 50% at the height of the Second World War, the growth of private capital came more or less to a halt. All of which is to say, the Keynesian means for depression-fighting have been largely used up, unless the state is to displace private enterprise completely to create a state-run economy like that of the old Soviet Union, a goal favored by no actual political force (despite Newsweeks early February cover story declaring that We Are All Socialists Now). Its only twenty years since Russia and its satellites embraced the free market, or at least some highly restricted version of it, but even those governments show no interest in returning to the centrally-planned system of yore. The Chinese state too has clearly thrown in its lot with the market, even while its economy is being dragged down by the global collapse. And even Sweden, long the Western standard-bearer for socialism in the eyes of American conservatives, is letting Saab go broke with the announcement from enterprise minister Maud Olofsson that The Swedish state is not prepared to own car factories. The upshot is that governments will continue to be largely paralyzed, just hopingbolstered by economists psychic predictionsthat it will all be over in a year or two. Hence, in the U.S., the unwillingness of the Congress, so far, to allocate more than a fraction of the estimated $2 trillion in troubled assets held by American banks; hence the immediate opposition of Democratic as well as Republican politicians to the proposal of the Obama government to limit tax deductions for the wealthiest 1.2% of taxpayers, limit climate-changing gas emissions, or cut subsidies to agribusiness; hence the Treasury Departments unwillingness to interfere seriously with bankers decision-making about the funds shoveled in their direction; hence the seeming schizophrenia of Obamas statement to reporters on March 14 that weve got to see worldwide concerted action to make sure that the massive contraction in demand [in consumer spending] is dealt with while signaling to Congress, as he was reported doing a day later, that he could support taxing some employee health benefits, thus decreasing wages and contracting demand. And hence the unwillingness of European governments even to follow the Americans very far down their halfhearted road, leaving the stimulus exercise (with its hoped-for benefits to European exporters) to the United States while concentrating on limiting their budget deficits and tightening their citizens belts.

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But if, as I have been arguing, we are now in the opening stages of a Greater Depression, its hard to expect anything but worsening economic conditions for decades to come, requiring increased assaults on the earnings and working conditions of those who are still lucky enough to be wage earners around the world, waves of bankruptcies and business consolidations throughout the economy, and increasingly serious conflicts over just who is going to pay for all this. Which automobile companies, in which countries, will survive, while others take over their assets and markets? Which financial institutions will be crushed by uncollectible debts, and which will survive to take over larger chunks of the world market for money? What struggles will develop for control of raw materials, such as oil or water for irrigation and drinking, or agricultural land? All governments attack protectionism today (or at least they did yesterday) and call for mutual support and free trade, but in practice even a relatively integrated economic union like Europe is breaking down under the strain of divergent interests, while yesteryears global cheerleaders today solemnly intone the need to Buy American. The biggest unknown, however, is the tolerance that the worlds population will show for the havoc that resolving capitalisms difficulties will inflict on their lives. Whatever mix of stimulus and respect for market freedom governments decide upon, the working-class majority will pay for it, with greater unemployment or lower wages and benefitsin fact, as we can already see, it will be with both. Will people be willing to march off to war again, as in the last great crises, to secure better terms for national businesses? Europeans, whatever their governments may be planning, show every sign of having finally learned their lesson in this regard, while the American popular acquiescence in war seems to have been weakened by the series of defeats and stalemates suffered in Korea, Vietnam, and Iraq, and soon in Afghanistan. Will people instead turn their attention to bettering their own conditions of life in the concrete, immediate ways an unraveling economy will require? Will newly homeless millions look at newly foreclosed, empty houses, unsaleable consumer goods, and stockpiled government foodstuffs and see a way to sustain life? No doubt, as in the past, Americans will demand that industry or government provide them with jobs, but as such demands come up against economic limits, perhaps it will also occur to people that the factories, offices, farms, and other workplaces will still exist, even if they cannot be run profitably, and can be set into motion to produce goods that people need. Even if there are not enough jobspaid employment, working for business or the

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statethere is work aplenty to be done if people organize production and distribution for themselves, outside the constraints of the business economy.

When the financial shit hit the fan last fall, everyone with access to the media, from the President to left-wing commentators like Doug Henwood of the Left Business Observer, agreed that it was necessary to save the banks with infusions of government cash lest the whole economy collapse. But, aside from the fact that the economy is collapsing anyway, the opposite is closer to the truth: if the whole financial system fell away, and money ceased to be the power source turning the wheels of production, the whole productive apparatus of societymachines, raw materials, and above all working peoplewould still be there, along with the human needs it can be made to serve. The fewer years of suffering and confusion it takes for people to figure this out, the better.

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