A fiery polemic

Issue: 128

Gareth Dale

Alex Callinicos, Bonfire of Illusions: The Twin Crises of the Liberal World, (Polity Press, 2010), £14.99

A book’s dedication rarely relates closely to its content but this is an exception. Dedicated to the memories of Chris Harman and Peter Gowan, its twin themes are their lifelong preoccupations: capitalist crisis (Harman) and US imperialism (Gowan).

In the first part, Callinicos examines the causes of the Great Recession. He divides them into three spheres. One is long-term overaccumulation and profitability decline. Capitalism’s 1950-73 “golden age” was not followed by stagnation, but the lower average profitability of subsequent decades explains the harsh programmes of restructuring and wage repression that came to be known as neoliberalism. But neoliberal restructuring couldn’t restore profit rates to levels capable of supporting sustained rapid global growth.

China’s rise occupies a pivotal position in Callinicos’ second sphere: the unstable and structurally imbalanced global financial system. China and its East Asian neighbours gained a competitive edge by keeping wages low, creating a “savings glut”, and depressing the value of their currencies through the accumulation of large dollar reserves. That the US could attract colossal chunks of East Asia’s savings can be read as a sign of its continued economic strength. That so many of its liabilities now lie in foreign hands can be read as a sign of weakness. Dollar recycling from China and other surplus countries enabled interest rates in the West to remain low, and this underlay events in the third sphere: the dependence of the economies of the West in the late 1990s and 2000s upon credit bubbles. With subdued wage growth, demand came disproportionately through spending by the rich and credit-driven spending by the poor—fuelled in part by predatory lending by banks. The trigger for the Great Recession, the bursting of the credit bubble, was indissolubly bound up with the other causes. Had profit rates been robust in the 2000s, expansion would not have been so bubblesome; had wages climbed in step with productivity, demand growth would not have relied upon credit mania.

The Great Recession has brought the neoliberal model into crisis. Not only has it arrived at the culmination of three decades of neoliberal ascendancy, but its major contributory causes include two of neoliberalism’s core commitments: wage repression and financialisation. By the latter, Callinicos is referring to three features in particular. One is the increased weight of finance. Another is the integration of a broader array of actors—including industrial firms and consumers—into financial markets. The third is the rise of shadow banking (hedge funds and private equity firms) and the proliferation of financial instruments, notably derivatives.

In tracing the part played by credit derivatives Callinicos draws upon Dick Bryan and Michael Rafferty’s Capitalism with Derivatives. In their account, derivatives dismantle any asset into constituent attributes and establish price relations between different sorts of capital. They enable the law of value to operate more forcefully and ubiquitously, as the intensity of competition between bits of capital is ratcheted up, enforcing the requirement that each asset yields its due return. The pressure to deliver “competitive” levels of wages and productivity to match global benchmark rates of return on capital places additional burdens on labour. Bryan and Rafferty predicted in 2006 that derivatives “have made it likely that any financial crisis will have a more pervasive and speedy impact than was previously the case”, a forecast that was amply borne out shortly after the ink had dried.

Using a delightfully absurd metaphor, Bryan and Rafferty describe the system of financial derivatives as “a flexible, floating monetary anchor” for the global financial system, similar to the role once played by gold. Callinicos concurs that the derivatives system provides a foundation of the financial system but does not see derivatives as a new “gold”, for, unlike Bryan and Rafferty, he disputes that they assume the role of money. Instead, reading Marx through David Harvey, he insists that the contradiction between money as measure of value and as means of exchange is an intrinsic feature of capitalism’s laws of accumulation as manifested, crucially, in the tension between the sustaining of accumulation through credit creation and the need to preserve the quality of money. Derivatives function as a measure of value but not as a means of circulation.

So much for the causes of the Great Recession. What of its nature? Callinicos argues that it was a moment of revelation of the underlying crisis of accumulation. Its acuteness stems from the fact that a generalised economic crisis arrived together with a major financial crash. Indeed, it is this that invites comparison with Great Depression, although in the recent crisis massive state intervention served to ensure that a slump on the scale of the 1930s was avoided. Had states permitted inefficient capitals to fail, an even sharper slump would have occurred, but the devaluation of capital would have helped to restore conditions for sustained growth. Instead, they shored up unprofitable banks and other firms deemed “too big to fail”, and helped to restructure and rescue industrial corporations such as GM and Chrysler. The problem with this strategy is that it leaves chronic overcapacity, as witnessed worldwide in certain sectors (such as automobiles), and most gravely in the section of the world economy that is recovering most rapidly, China. One should beware, therefore, of reading too much into the signs of recovery. The long-term crisis of overaccumulation and profitability, Callinicos predicts, is set to continue.

If the economic future is unstable, what of the geopolitical? Once upon a time there was talk of a sunny liberal future in which a benign and powerful US hegemon, backed by a strong EU, oversaw trends towards global governance and democracy. This geopolitical illusion has been smouldering for some time, but Callinicos identifies the Georgia-Russia war of 2008 as a pivotal conflagration. It was fought and won by Russia against an erstwhile colony whose overtures to Nato were perceived as threatening it with encirclement, while Washington could only look on helplessly. The limits to US power were revealed—Russia succeeded in splitting Nato’s European members over the issue. Meanwhile, Europe’s other international organisation, the EU, has been snared in contradictions. And in Asia, the limits to US power have been probed by the Iraqi and Afghani resistance forces, and face the looming challenge of China.

Hegemonic decline doesn’t happen overnight and its pace should not be exaggerated. US GDP is growing faster than many of its economic peers, not to mention its political rivals (Russia, Venezuela). The US will remain the world’s dominant economy for decades to come; Obama has successfully relegitimated US militarism; and Washington will continue to act as supreme “broker”, capable of orchestrating power relations across the globe. Nevertheless, the system is tending towards multipolarity, and relations between states will as a result become more fluid and unpredictable. 2008 won’t be the last time in which Washington’s “imperial overstretch” is manifested in impotent rhetoric as Russia’s borderlands blaze. Beijing-Washington tensions will be a recurring feature—even in Latin America, as Chinese trade links begin to honeycomb US influence, eroding the pillars of the Monroe Doctrine.

So what of the prospects for progressive change? Some harbour hopes for a return to the “embedded liberalism” of the postwar age, but for Callinicos that is but another illusion. That regime was built upon vigorous growth rates and the conceding of considerable economic autonomy to nation states, but the former seems unlikely and the latter can be ruled out due to the globalised nature of production. In the long term, he holds out for democratic planning. En route thereto, a number of measures can be taken, including nationalisation of the commanding heights, wealth redistribution, and a universal direct income. Illusions in neoliberalism, let alone the market, are deeply entrenched, and, despite the book’s title, Callinicos does not pretend that they will be reduced to ashes under the impact of the crisis. That will require protracted political and ideological struggles.