Tuesday, October 07, 2008


Anyone who has actually read Karl Marx, especially "Kapital" knows the man knew of what he spoke. I'm not going to tell you everything Karl had to say was perfectly correct, but I am here to tell you that considering he was writing all his stuff back in the middle 1800s, he was pretty damn right on.

Marx, of course, has been largely hooted at by all those supposedly in the know. However, every so often, just as he suggested, the capitalist system insists on proving Karl right...irregardless of what the capitalist themselves think.

Of course, its happening again.

No doubt capitalism has proven more durable than old Karl might have imagined - or maybe it's just those of us who considered ourselves Marxists who assumed that capitalism couldn't last so long. After all Karl never said when, he only described what and how.

Karl Marx knew more about capitalism then any bourgeois economist of his time, or any time. His works have withstood the test of history. Their works just keep changing from decade to decade or, as now, from day to day.

To paraphrase Archie Bunker, "Mister, we could use a man like Karl Marx again."

What follows are two sections of the article "World capitalism in crisis" written by Alan Woods. To read the entire article go to

Alan Woods (born in Swansea, Wales in 1944) is a Trotskyist politician and writer. He is one of the leading members of the International Marxist Tendency and editor of 'the "In Defence of Marxism" website, "Marxist.com.

Marx on fictitious capital

It is not a lack of money that causes a crisis, but on the contrary, it is the crisis that causes a lack of money. The bourgeois economists, with their banker's mentality, confuse cause with effect, appearance with essence. When the economy enters into crisis, credit dries up and people demand hard cash instead. This is the effect of the crisis, but in turn it becomes cause, pushing down demand and creating a downward spiral.

The bankers and their friends in government insist that the cause of the crisis is the fact that the financial system has too little capital. This is an astonishing statement to make. For the last two decades there was a vast moneymaking carnival in which the banks made huge profits. Now they claim they do not have enough capital! Actually, there was a huge amount of loan capital in circulation during the boom and this superabundance of capital itself showed the limitations of capitalist production. These were vast sums of capital available for speculation that could not find an outlet and the bourgeois had to find other ways of using it.

Marx pointed out long ago that the ideal of the bourgeois was to make money out of money, without going through the painful process of production. In the last period they appeared to have achieved this idea (except in China where there has been a real development of the productive forces). In the USA, Britain, Spain, Ireland and many other countries, the banks invested trillions in speculation, especially in the housing sector. This was the basis upon which the sub prime mortgage scandal arose and flourished, generating unimaginable amounts of fictitious capital.

Already in Marx's day there were huge amounts of circulating capital; this is capital which forms the basis of fictitious capital. In those days there were credit swindles - the equivalent of derivatives today. However, when compared to the position today, all the speculation in the past pales into insignificance. The total amount of speculation on a global scale is staggering. Let us take just one example: the credit default swap industry. This market allows two parties to bet on the likelihood of a company defaulting on its debt. It has grown to about $90 trillion in notional amounts insured. That is to say, probably more than double the total outstanding credit in the world. But contracts are registered nowhere but in the books of the partners. Nobody knows the real volume of trading, which therefore exposes the world economy to a huge risk. That explains the panic on Wall Street and in the White House. They fear - correctly - that any severe shock can bring the whole unstable edifice of international finance crashing down, with unforeseen consequences.

Even in the 19th century, at the height of the boom, when credit was easy and confidence was growing, most transactions were done without any real money. There is an abundance of capital at the beginning of the cycle and the rate of interest is low. The low rate of interest boosts the profits of enterprises early on in the cycle and stimulates growth. Later on the rate of interest reaches its average level during the height of prosperity. There is an increased demand for credit and therefore interest rates ought to rise at the peak of the boom. But in the last boom this did not occur.

In recent years the Federal Reserve pursued a policy of deliberately keeping interest rates low (they were even negative in real terms at one stage, considering the level of inflation). This was irresponsible from an orthodox capitalist point of view. It created the housing bubble and thus laid the basis for the present crisis. But as long as vast profits were being made and investors were happy, nobody cared. They all merrily joined in this mad carnival of moneymaking. The most respectable bankers and the most learned economists joined hands and danced to the chorus of: "Eat, drink and be merry, for tomorrow we die!"

The reason why they now complain they have insufficient capital is that a large part of their assets are fictitious - the result of unprecedented swindling throughout the financial sector. As long as the boom continued, nobody minded. But now that boom has turned to bust, all these assets come under scrutiny. The bankers, who yesterday were prepared to buy large amounts of debt from each other, are no longer prepared to do so. Distrust and suspicion has become general. The old easy-going optimism has been replaced by a miserly attitude to borrowing and lending. The entire banking system, upon which the circulation of capital depends, is grinding to a halt.

Unless and until all the bad assets are removed, many institutions will still lack sufficient capital to extend fresh credit to the economy. Marx described this stage in the economic cycle long ago:

"It is clear that there is a shortage of means of payment during a period of crisis. The convertibility of bills of exchange replaces the metamorphosis of commodities themselves, and so much more so exactly at such times the more a portion of the firms operates on pure credit. Ignorant and mistaken bank legislation, such as that of 1844-45, can intensify this money crisis. But no kind of bank legislation can eliminate a crisis.

"In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur - a tremendous rush for means of payment - when credit suddenly ceases and only cash payments have validity. At first glance, therefore, the whole crisis seems to be merely a credit and money crisis. And in fact it is only a question of the convertibility of bills of exchange into money. But the majority of these bills represent actual sales and purchases, whose extension far beyond the needs of society is, after all, the basis of the whole crisis. At the same time, an enormous quantity of these bills of exchange represents plain swindle, which now reaches the light of day and collapses; furthermore, unsuccessful speculation with the capital of other people; finally, commodity-capital which has depreciated or is completely unsaleable, or returns that can never more be realized again. The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values. Incidentally, everything here appears distorted, since in this paper world, the real price and its real basis appear nowhere, but only bullion, metal coin, notes, bills of exchange, securities. Particularly in centres where the entire money business of the country is concentrated, like London, does this distortion become apparent; the entire process becomes incomprehensible; it is less so in centres of production." (Capital, Volume 3, Chapter 30, Money-Capital and Real Capital, I. pp. 478-9, my emphasis, AW)

The capitalists must now squeeze all this fictitious capital out of the system. Like a man whose body has been poisoned, or a drug addict who is struggling against the ill effects of his addiction, they must expel the poison from the organism or perish. But this is a painful process and creates new dangers to the organism. As the system shrinks and credit dries up, the capitalists call in their debts. Those who cannot pay will go bankrupt. Unemployment grows as a result, and this in turn reduces demand, causing new bankruptcies and new debts that cannot be paid. In this way, all the factors that pushed the economy upwards in the last period turn into their opposite.

What we predicted

Let us compare the perspectives of the Marxists with those of the bourgeois. In contrast to the bourgeois economists who committed the grave error of believing their own propaganda, the Marxist tendency explained the reality of the situation. In the Document On a Knife's Edge: Perspectives for the world economy written in 1999 we wrote the following:

"In the past it was said that the role of the Fed was to take away the punch bowl just when the party was getting into its swing. But this is no longer the case. While publicly paying lip service to financial probity and austerity, Alan Greenspan has been prepared to tolerate the creation of the biggest orgy of financial speculation in history, although he must realise the dangers involved. He is like the emperor Nero fiddling while Rome burned. In fact, by raising interest rates by a paltry quarter of a percent, he has poured petrol on the flames. Thus the old motto is shown to be true: ‘Whom the gods wish to destroy, they first make mad.'"

In the same document we read:

"The fundamental barriers to the development of the productive forces in the modern epoch are private ownership of the means of production and the nation state. However, for a time, capitalism can partially get round these barriers by a series of means, such as the development of world trade and the expansion of credit. Marx long ago explained the role of credit in the capitalist system. It is a means whereby the market can be taken beyond its normal limits. In the same way, the expansion of world trade can provide a way out for a time, but only at the cost of preparing even more catastrophic crises in the future:
" ‘Capitalist production is continually engaged in the attempt to overcome these immanent barriers, but it overcomes them only by means which again place the same barriers in its way in a more formidable size.

" ‘The real barrier of capitalist production is capital itself'. (Marx, Capital, vol. 3, 15; 2-3.)

"The circuit of capitalist production depends, among other things, on credit. The solvency of one link in the chain depends upon the solvency of another. The chain can be broken at numerous points. Sooner or later, credit must be paid off in cash. This fact is all too frequently forgotten by those who become indebted during the process of capitalist upswing. In the first phase of capitalist expansion, credit acts as a spur to production: ‘the development of the productive process extends the credit, and credit leads to an extension of industrial and commercial operations.' (Marx, Capital, vol. 3, p. 470.)

"This, however, is only one side of the coin. The rapid expansion of credit and debt pushes the market beyond its normal limits, but at a certain point this must turn into its opposite. During the boom, credit appears to be limitless, like the Horn of Plenty in ancient Greek mythology. But as soon as a crisis appears, the illusion is shattered. Returns are delayed, commodities are unsaleable in glutted markets, and prices fall. The development of the world market does not alter this fundamental process, but merely gives it a vastly greater scope in which to manifest itself. The accumulation of debt in the last analysis makes the crisis even deeper and more prolonged than what it would otherwise have been. The recent history of Japan is more than sufficient to confirm this. After a decade of boom characterised by rapidly increasing assets and share prices, the bubble was finally burst by a sharp increase in interest rates. The situation was very similar to that of the USA at the present time. On December 25th, 1989 the Bank of Japan raised interest rates, caused the sharp fall in the Stock Exchange, but since land prices still continued to rise, a new interest rate rise was necessary. Finally interest rates were raised to six per cent and by the end of the year share prices had fallen sharply by 40 per cent. Thereafter, the Bank of Japan kept interest rates high. At that time the Bank of Japan was praised by economists for its prudent handling of the economy. But the result was to prolong the recession for a decade.

"With globalisation, and the abolition of the restraints on credit and financial transactions, the scope for expansion has never been greater, but neither has the potential for a worldwide crash. However, it is not the case that crises are caused by fictitious capital, stock exchange swindles and excessive use of credit. Marx explains this in the third volume of capital:

" ‘Let us also disregard these sham transactions and speculations, which the credit system favours. Then, a crisis could only be explained as the result of a disproportion of production between the consumption of the capitalists and their accumulation. But as matters stand, the replacement of the capital invested in production depends largely upon the consuming power of the non-producing classes; while the consuming power of the workers is limited partly by the laws of wages, partly by the fact that they are used only as long as they can be profitably employed by the capitalist class. The ultimate reason for all real crises always have remained the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit.' (Marx, Capital, vol. 3, p. 472.)

"The expansion of world trade and the opening up of new markets in Asia also provided a temporary boost, but only at the cost of provoking an even bigger collapse. This is the shape of things to come."

These lines were written almost a decade ago, when the overwhelming majority of bourgeois economists were still denying the possibility of a world slump. We are entitled to ask: who understood the processes of the world economy better, and who made the correct predictions - the bourgeois economists or the Marxists?

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