Some commentators view the current crisis as arising from problems in finance that then impinged on the wider economy; others see it as a result of issues that arose in production and then led to financial problems. How do you view it?
It’s a false dichotomy that’s being posed. There is a more dialectical relationship between what you might call the “real” and “financial” sides of the economy. There is no question that there has been an underlying problem of what I would call “over-accumulation” for a considerable time now. And in part the movement into investing in asset values rather than production is a consequence of that. But as the search for new forms of asset value developed you also saw financial innovation that created the possibility of investment in hedge funds and those sorts of things.
There was a long-term process in which the rich looked for reasonably high rates of return and began to invest in a whole series of Ponzi schemes – but without Bernard Madoff at the top. In the property market, stock market, art market and derivatives markets, the more people that invest, the more prices go up, which leads to even more people investing. All of those markets have a Ponzi character to them. So there is a financial aspect to the crisis but unless you ask why the most affluent were taking that path you miss out on the real problem.
You mention a crisis of over-accumulation. Can you explain that concept?
Capitalists always produce a surplus product. A healthy capitalism has to grow at 3 percent per year; the problem is to find where you can achieve that 3 percent growth. There are various blockages. For instance, if capital is confronting labour problems, then it is hard for it to find an outlet and over-accumulation occurs. If it faces problems in the market, the same issue arises. Over-accumulation is any situation in which the surplus that capitalists have available to them cannot find an outlet, whether through labour constraints, market constraints, resource constraints, technology constraints or whatever.
In this context you have talked about mechanisms such as a “spatial fix” in which surplus capital is shifted abroad rather than accumulated at home. Would you see the growth of the financial system as another type of “fix”?
If you move towards a spatial fix you need a sophisticated financial system to achieve it. To the degree that a spatial fix was being sought after the 1970s, capitalism required a set of international financial institutions that would facilitate the flow of funds to China, India, Mexico or wherever. So the new financial architecture that emerged from the 1970s onwards was, in part, to facilitate ease of capital movement around the world.
But then the financialisation that occurred became an end in itself. You start to find new markets emerging in the 1990s in currency derivatives, interest rate swaps, etc. They grew from almost nothing in 1990 to about three times the output of the global economy in 2006.
The explosion of credit that accompanied this also helped capitalists to hold down wages.
There were many aspects to the crisis of the late 1960s and early 1970s but one fundamental aspect was the power of labour, and breaking the power of labour became terribly important. This was partly done by migration policies, by outsourcing and offshoring, and also by the political attacks by Ronald Reagan, Margaret Thatcher and others. By 1985 the power of labour had effectively been broken.
Ever since the 1970s we’ve been in a situation of what I’d call wage repression in which real wages didn’t really rise at all. But that led to problems in the market. If you restrict wages you have a problem with aggregate demand. One way that problem was solved was by giving working people credit cards and allowing them to go into debt. Household debt in the US has tripled in the last 20 years or so.
Again a key role was played by financial institutions. The best example I can think of is financial institutions lending money to builders and developers to construct housing, say around San Diego, then facing the problem of who is going to buy this stuff. The financial institutions then lend to working class people so they can buy the houses. After a while there aren’t enough “respectable” working class people to lend to, so they start to lend to those with very low credit ratings, which led to the emergence of subprime over the past five or six years.
The financial institutions have been operating on both sides – the production and the consumption of housing. They brought the whole of the population into a serious state of indebtedness. Now at some point or other, if indebtedness rises to a level that is no longer consistent with income, the thing is going to break down. That’s what we’re seeing right now.
The bubbles in asset values also concealed some of the problems.
When asset values are rising everybody thinks they are better off. A person who bought a house in 2000 for maybe $300,000 saw its price rise to maybe $500,000 four years later. If they cashed out they were $200,000 richer. Everyone starts to be in that position, not just corporations. So, yes, it conceals what the nature of the problem is. If there is enough collective expectation that the housing market is going to go up forever, you get the kind of asset bubble that goes on and on – until now.
Personally I was expecting a crash in the housing market in 2003. It didn’t happen. I kept thinking to myself, am I crazy? It didn’t happen in 2004 and I thought, am I even crazier? By 2005 things were getting ridiculous. In the end even I started to believe we were in a different world and that I’d been wrong. Then in 2006 things started crumbling and I realised I’d been right.
When I last interviewed you for Socialist Review in February 2006 you said, “I’m nervous about the possibility of a major financial crisis breaking out in the US.” Just how major do you think the current crisis is?
I was nervous about the US situation at the time I brought out A Brief History of Neoliberalism in 2006 and when I brought out The New Imperialism book in 2003. Back then I said that if the US was any other country it would be visited by the IMF. I think one of the things we have to realise is that if there had been a crisis in 2003, it would not have been as serious as the current one. The crisis will now have to take care of the past six years of profligacy.
Also if you compare it to the regional crises that happened before, such as the South East Asian crisis of 1997-98, there was always the US market to sell things to. But today where on earth is your market going to be?
We are in for a very difficult period. I can’t see us coming out of this for a number of years. But when I say “us” I think there will be a difference in regional impacts. I guess that while East and South East Asia are in a lot of trouble right now, because of the collapse in export-driven industrialisation due to the contraction of the US market, they are likely to be able to stimulate their domestic markets and come out of this with less violence than, say, the US.
The US is going to have to bear the brunt of this crisis, and of course people there are not used to it. If you lived in Argentina you’d be saying, “Not again!”
You have argued that, while the global role of the US is likely to be diminished, rivals such as China cannot currently take its place.
I don’t think China has any interest in supplanting the US as the global hegemonic power. It has a great interest in propping up the US. There is a complicated relationship between the US and China. The US relies very heavily on Chinese investment in the bonds issued by the US treasury. But the move by the US Federal Reserve to put a trillion dollars or so into this market in late March immediately saw the dollar falling.
I worry about what the Chinese will do in the face of a rapidly falling dollar. The US dollar has stayed remarkably stable; in fact it’s gained against other currencies in the past six months or so. But that may be reversed. It’s a delicate situation.
The Chinese are in a better situation than the US. Their banking system is not disrupted in the same way and they have more room for manoeuvre in terms of their surpluses. If they start to coordinate with Japan and South Korea, and if the Taiwanese throw in their lot with China economically, you’re likely to see the emergence of an East Asian collaborative zone. I’d not be surprised to see an East Asian regional bank along the lines of what is being proposed in Latin America.
Regionalisation is one process that we may see, which would leave the US as one powerful region alongside many others and without the power it has exercised over the global economy.
But the problem now is that China is sitting on trillions in dollar-denominated assets.
Yes. They are between a rock and a hard place. If they let the dollar decline they lose money. If they continue to invest in it they may lose even more in the long run. There’s considerable debate inside China. When they set up sovereign wealth funds, which invested in, say, the Blackstone Group, and lost money, there was a lot of internal criticism.
If there is a run on the US dollar, which is something I think everybody fears and nobody wants to talk about, then the consequences will be catastrophic. Regional configurations such as East Asia will have no option but to go it alone and the same will apply to Europe and Latin America. It will mean competition between regional blocs, the sort of thing that happened in the 1920s and 1930s with very unhealthy results.
Does the increasingly global nature of production make collapse into protectionism less likely than in the 1930s?
It makes it less likely at certain levels of production but in the face of a crisis you get very rapid reconfigurations. Consider how fast the de-industrialisation of Britain occurred in the late 1970s and early 1980s. The reconfiguration of production relations took place in the space of about ten years. Just because production systems and commodity chains are stretched over multiple spaces it doesn’t mean they can’t be cut up. You could have China cutting off outside suppliers and adopting an import-substitutionalist policy, which I suspect is going to emerge as a respectable way to deal with the current crisis.
So don’t anticipate that just because everything is now more globally connected we can’t disconnect it. However, having said that, there are vested interests involved. So there will be a political struggle over this.
On your website davidharvey.org you’ve been running an online reading group of Karl Marx’s Capital. Are you surprised by the massive interest this has generated?
Yes, astonished! It seems to have come out just at the right moment. I get emails from people saying, “I always wanted to read this book and finally I have got through it,” which is gratifying. I have tried to lay out something people can understand and work from, and then develop their own political ideas around.
It is important in approaching Capital to have some grasp of the overall dynamics of the system, and not just undertake a close reading of the first volume. How can this be achieved?
People really need to read a lot of Marx – volumes two and three, Theories of Surplus Value, the Grundrisse and so on. But I try to say, in the final lecture I think, that there are things that Marx misses. The nature of his project was the critique of classical political economy as much as it was an analysis of the dynamics of capitalism.
For instance, Marx did not want to deal with the question of interest. But at various points, even in volume one of Capital, the question of interest and credit becomes central – for instance in the discussion of the centralisation of capital and in the chapter on money. There is an issue here of the role of what I call the “state-finance nexus”. In the Communist Manifesto, Marx and Engels argue for the centralisation of the means of credit in the hands of the state. In the section on primitive accumulation in Capital, Marx talks about the rise of the bankocracy, the rise of state finance and the national debt as crucial moments.
If you really want a good analysis of capitalism, you have to put the question of the state and finance almost up front, whereas Marx puts it at the back – you have to get to volume three of Capital. It can be misleading to concentrate on production rather than, say, the mobilisation of money-capital. There are limits to how far you can take the volume one analysis if you want to understand how capital accumulates and how it circulates.
In your book Limits to Capital you sought to develop a more coherent picture from Marx’s fragmentary writings on interest, credit, etc. You seem to imply that more work in this area is needed.
A lot of people have been working on finance capital over the past ten or 15 years and there’s now an extensive literature on this. It is valuable work. But one of the problems I have is that it tends to isolate the financial system from the overall dynamics of capitalism – as in the dichotomy implied in your first question.
What routes are there out of the current crisis?
How we come out of the crisis depends fundamentally on the balance of class power. I don’t yet see the emergence of a coherent class opposition to the way, for example, that the British or US governments are trying to get out of the crisis.
We are beginning to get a populist outrage, which could produce something equivalent to political movements that have emerged in Latin America. I’m hoping that a coherent movement will start to crystallise which will say, “We don’t want to go out of this crisis only to enter an even deeper one in five years time,” and which will demand a radical transformation of the system.
The powers that be are trying to come out of the crisis without changing the fundamental dynamics of class power, but there’s a widespread sense that these have to change. It’s amazing to see the popular discontent here with Barack Obama’s economic team. For many of us, the people he selected were appalling. Fascinatingly, many people in the country would probably agree with us.
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