The World Bank’s recent report on global economic prospects is a bumpy and entertaining read – if terror stories are your idea of fun, that is. It contemplates the possibility of 3.5 percent economic growth for the next three years.
But it is also clear that a further loss of investor confidence (“market nervousness”) might well derail these chances of recovery.
The worst scenario would see governments defaulting on their debts, leading to a deeper crisis, and more unemployment and pain. Though the report doesn’t say so, there would almost certainly be more social and international instability.
Alex Callinicos’s latest book, Bonfire of Illusions, traces the origins of the present crisis and considers its historical significance. The book arrives at an extremely delicate moment for the capitalist system.
This book is in two sections. The first part is theoretically more intricate. It deals with the credit crunch and the structural banking crisis that hauled the economy into the deepest recession since the 1930s.
The second deals with the fracture of US dominance, the sharpening of international tensions and instabilities, and the rise of challengers like Russia and China.
These trends, which have become increasingly visible, hit us in the face in 2008. The war between Russia and Georgia broke out in August that year and the Lehman Brothers investment bank collapsed the following month.
As Callinicos shows, these episodes dealt a powerful blow to the US-based, neoliberal brand of capitalism that had been dominant since the end of the Cold War.
Crucially, they also exposed the fallacies of its main supporting ideologies – the tale of two globalisations. The first of these was liberal capitalism. We were assured that prosperity would follow from the deregulation of trade and finance.
The second globalisation was that of liberal governance.
This promised to transcend the old system of nation-states, and spread democracy and human rights.
It would mean a gradual end to environmental destruction, arms proliferation and old-fashioned tensions between states.
This tale of two globalisations was widely embraced by key figures from the early 1990s.
Now that consensus has cracked. The financial excesses have opened the floodgates of rage against bankers and speculators, from anger among workers, to scathing books and damning assessments in ruling class newspapers.
This critical flurry has tended to locate the roots of the crisis in the greed of those in the financial sector, its excessive deregulation and in financialisation.
This is the drive to make all the goods and services traded in the market into financial instruments.
In most accounts, a combination of these circumstances ensured that incalculable financial risks were spread across the system.
This resulted in the 2007 subprime crisis, the 2008 credit crunch and a global economic recession.
Callinicos shares the general dismay about the financial agents. But his key argument is that deregulation, footloose speculative practices and financialisation, though crucial, are not the ultimate sources of the crisis.
The book analyses these trends, but it argues that the crisis was generated in the capitalist system as a whole:
“What we are confronted with is an economic crisis that exposes the depths of the contradictions that have been at work in the entire process of capitalist accumulation, and not merely as some economists... would contend, the dysfunctions of the financial system”.
The debate is incomplete if it does not address the crisis of profitability that global capitalism has been mired in since the end of the post-Second World War boom in the late 1960s.
The thrust of neoliberalism from 1979 was to create a framework in which workers would accept lower wages and worse working conditions. Markets were flung open and relatively unprofitable capital destroyed.
Its aim was to restore profit rates to the levels of the long boom. The neoliberal revolution aimed to shift the balance in favour of capital, to the detriment of workers.
However, the treatment was contradictory. One of its key ingredients was wage repression, which would potentially shrink the demand for goods bought with those wages – putting the world economy in danger.
Rich countries, particularly the US, bridged the threat of a shortfall in consumer demand by an extreme expansion of credit. As their wages fell, many workers were forced to take out loans just to get by.
Callinicos writes, “If this explanation is correct, then we can definitely see the credit bubble as an effort to allow the US economy (and hence, thanks to its central role in maintaining demand, the world), to continue to grow, despite a failure to overcome a chronic crisis of profitability and overaccumulation.”
The expansion of credit rested on a highly volatile financial set up, which was the result of decades of financial deregulation.
It had already been shaken by several stock market crashes, devaluations and defaults.
The financial system of the 2000s was also sharply unbalanced. The ability of the US and other Western economies to increase cheap lending relied on their ability to keep interest rates at historically low levels.
This further relied on the East Asian economies, in particular China, re-investing their bloated foreign reserves in US bonds.
What emerges is, in Callinicos’s words, “an accident waiting to happen”. When the last bubble burst, triggering the subprime crisis, the enormous extent of the problem emerged.
The estimated cost of the slump is many trillions of dollars. National governments are throwing dizzying amounts of money into the economy, in an attempt to avert a global slump of unimaginable depths.
But even if they succeed in the short-term, the real source of the crisis – decades of low profit rates – remains at the centre of the system.
The illusions of liberal-capitalist globalisation went up in smoke along with the illusions of liberal-democratic globalisation.
The fantasy that a conglomerate of international organisations held together by US leadership was superseding the nation-state has faded away.
Callinicos writes, “As the banking system crumbled and the world slipped into recession, it was the state that came to the rescue, with nationalisations, bailouts and fiscal stimuli.”
The crisis and the Russia-Georgia war left the political fragmentation of the European Union (EU) shamefully exposed. The EU is often cited as the clearest example of globalisation transcending the state.
The eurozone’s retreat into forms of national protectionism as a response to the banking crisis is an indication of the unravelling of globalisation.
The different interests of its members with regards to EU and Nato expansion have intensified.
A crucial dimension of both these projects is countries’ relationship to Russia, with Europe’s great dependence on its gas.
The war with Georgia helped Russia stop the enlargement of Nato into former Soviet-dominated countries. Nato enlargement has been a central goal for all US administrations since the end of the Cold War.
The message was clear – Russia was no longer the “sick man” of the post-Cold War order. It had become a regional power, thanks to its oil and gas.
All this is compounded by the decline of US power, which was already stretched in Afghanistan and Iraq. Callinicos echoes writers David Harvey and Giovanni Arrighi in claiming that “American hegemony is nearing its end”.
A pattern is emerging of a fragmented world order, less and less under US direction.
It marks, as Callinicos puts it “the beginning of an era of more intense geopolitical competition and greater global instability”.
This short book throws light on the economic and geopolitical crisis of neoliberalism. But events continue to unfold at an impossible speed.
Capitalism threatens to claw back from the edge. Even if the lies of neoliberalism no longer wash, the beast refuses to go without a fight.
The obvious consequence of bailing out the banks – ballooning levels of public debt and government deficits – have been greeted by a consensus in the media and mainstream politics.
Their bottom line is that the deficit has to be closed and the national debt slashed – at a tremendous social cost.
The recent talk of “we’re all in it together” is one of the uglier ploys used by politicians to sell regressive budgets, inequality and unemployment.
It’s a spectacularly cynical way of telling you to pay up, grin and bear it.
Meantime, top corporations continue to dish out billions in bonuses, taxes on companies are cut further, lay-offs increase, and the public sector is squeezed.
This is the outlook facing people in Britain and across the world.
Though there are signs of economic growth, the cuts threaten to scupper the recovery. Moreover, the structural cause of the crisis has not been addressed.
The system’s economic prospects are dark, and we can expect more penury, pain and instability.
As Callinicos argues, 2008 marked a turning point. Neoliberal capitalism entered a period of turmoil.
The result is a historical crossroads – either neoliberalism drags itself on destructively, or it can be made to retreat further by a more rational, collective alternative.
The second prospect has immense difficulties, above all the weakness of the anti-capitalist left.
However, despite its terrible consequences, the crisis of neoliberalism opens up a chance to reformulate politics in our favour. The challenge is to seize this opportunity.
We must work to ensure that “the limits of the possible really are widened”. As usual, Alex Callinicos’s work is an invaluable tool for that task.
Gonzalo Pozo is the author of the forthcoming book The Geopolitics of Capitalism
Bonfire of Illusions by Alex Callinicos
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