The Great Financial Crisis

Causes And Consequences

Foster and Magdoff
Reviewed By
Joseph Werner
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Mainstream economic theory has always assumed that so-called free markets are self-regulating.

In contrast, Marxist economics places the question of expanded reproduction at the center

of analysis: how can a system based on competition, market anarchy and class struggle maintain

stability and growth? In "The Great Financial Crisis," John Bellamy Foster & Fred Magdoff

draw on a rich tradition of Marxist political economy to present a compelling analysis of the

financial crisis that began in the fall of 2008 in the United State and continues to engulf the

advanced capitalist economies in a deep, ongoing recession.

The analytical framework applied by the authors is a `stagnation-financialization' theory

developed in the 1960s and `70s by American Marxist economists Paul Baran, Paul Sweezy and

Harry Magdoff. Baran & Sweezy argued that the normal state of monopoly capitalism, which

began at the end of the 19th century, is stagnation. In a mature economy with increasing

productivity and an associated growing surplus, the capacity of the system far outpaces effective

demand.

With the opportunities for productive investment severely curtailed due to sufficient

existing means of production (factories and equipment) and overcapacity, investment

increasingly took the form of speculative finance. Thus began a trend toward debt buildup and

increasingly serious financial bubbles.

The analysis begins with a capitalist contradiction. The economy depends on wage-based

consumption to support growth and investment, but accumulation depends on keeping wages

low.

Despite decades of stagnating wages, however, overall consumption has continued a

steady increase, made possible by growing consumer debt, primarily from home mortgages.

Rising housing prices, along with the Fed's slashing of interest rates after the 2000 stock market
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crash, helped replace the stock market bubble with a housing market bubble. With an average of

81 percent of production capacity used over the last 30 years, financial capital increasingly

turned from productive investment to speculation. With the increasing financialization of the

economy, banks began to borrow to increase their speculative bets. Financial sector debt rose

from 10 percent of total debt in the early 1970s to nearly a third by 2005. Through new financial

instruments, including the securitization of mortgages, lending banks were able to transfer the

risk of defaults, thus encouraging ever more questionable loans.

In the remaining four chapters, Foster & Magdoff trace the relations between persistent

stagnation in the real economy and the growth of the financial economy. They argue that we have

entered a new phase, monopoly-finance capitalism, in which financialization provides a set of

tools to help monopoly capitalism--prone to stagnation due to chronic overcapacity and lack of

effective demand--reproduce itself. The financial economy has provided an outlet for the

concentrated surplus of corporate and individual wealth, but the financial system has become

increasingly complex and leveraged. The growth of new and increasingly esoteric financial

instruments provided a way to expand money capital. But no matter how much the financial

sector expanded, it could not overcome the stagnation of the production sector.

Foster & Magdoff provide a detailed, insightful analysis of the financial crisis. Their

book has many benefits, chief among them a real-time analysis of the unfolding of this world-

historical event using a clear and systematic theoretical framework. In addition, Foster &

Magdoff provide extensive data to back up their arguments about financialization, and an

excellent survey of the mainstream discourse surrounding the build-up and outbreak of the crisis.
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What you get from this book is that the economic problem we presently face is caused

neither by "a few bad apples" nor even the explosion of finance, per se. Rather, the current crisis

is "symptomatic of the underlying stagnation tendency that has its roots in the whole pattern of

accumulation under monopoly-finance capital" (p. 20). The rest of the book goes on to explain

what Foster and Magdoff mean by this.

For Magdoff and Foster, financialization, with its attendant speculation, bubbles, and debt

driven consumption, is a necessary consequence of intrinsic stagnationist tendencies in the

capitalist economy. These tendencies themselves emerge from the contradictions of capitalism.

There is on the one hand the contradiction between capital and labor, with the structural

domination of capital over labor giving rise to growing EXTREME inequality and thus the

effective demand problem that arises when the workers don't have the funds to buy back more

than a small share of what they produce, and capitalists are faced with diminishing profit

expectations on new investment.

One way to overcome this problem under capitalism is debt driven consumption, which

encourages the formation of bubbles. Thus, in the era of late neoliberal capitalism, itself

responding to the contradictions and stagnationist tendencies in u.s. capitalism's golden age,

workers who owned houses with inflating prices could finance consumption with their

appreciating equity--until the bubble burst.

There is, however, an unmentioned point worth noting. The authors frequently allude to the "real

economy", which they equate with the manufacturing sector. Intuitively, that makes sense since

it's goods production that must satisfy our everyday material needs. The financial sector, on the

other hand, is posited as dependent upon that "real" economy, to the extent that the financial

sector cannot expand indefinitely without some corresponding degree of productive growth. That
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too makes intuitive sense since manufacture is a chief outlet for profitable financial investment.

However, unless I missed something, the book simply posits that the financial sector cannot

expand indefinitely apart from growth in the real economy. That may satisfy intuitively, but

intuition does not rise to the level of persuasive proof. Yet, this dependent relation is a key

assumption behind the authors' assessment of the current crisis.