The fundamental proneness to crisis under capitalism was not overcome in the Golden Age of Capitalism and crisis in the late 1960s ushered in an era of finance by opening new avenues for accumulating wealth and turning the illusory into real wealth says C.P. Chandrasekhar
LYNN FRIES: It’s The Real News. I’m Lynn Fries. This is a report on a conversation I had with the author of “Karl Marx’s Capital and The Present,” India’s eminent economist, C.P. Chandrasekhar. The conversation took place at a Geneva meetup during the author’s visit in Switzerland. C.P.Chandrasekhar is a Professor of Economics at Jawaharlal Nehru University in New Delhi.
Here are some threads from C.P. Chandrasekhar’s book: Embedded in Marx’s Capital was the idea that structural characteristics and inherent tendencies make capitalism an unstable and deeply crisis-prone system; the idea that crises in capitalism would generate support for political movements aimed at overthrowing the system was central to the idea of Marx and Engels. One reason for this was their belief that the loss of legitimacy that capitalism would suffer because of a general crisis, and the pain that crisis would inflict on the working class, would galvanize the latter into recognizing its role and move to overthrow the system. But this political requirement for the transcendence of capitalism was crucial, since being prone to crisis did not mean that capitalism as an economic mechanism would break down and collapse; If political developments which ensure that capitalism is transcended do not successfully unfold, capital will seek ways to restore profits and accumulation.
The focus of the conversation is on finance in a world where capitalism has not been transcended, the wider issue being capitalism can mitigate crises but the contradictions characteristic of the system constantly reassert themselves. The conversation opens with a brief overview of how this happened in the late 1960s and early 1970s, and the subsequent rise of finance. As a point of departure, I asked our guest to comment first on how capitalism mitigated financial crises after the Great Depression.
C.P. CHANDRASEKHAR: Well, essentially, there was a period in which finance was regulated very strongly. It was regulated very strongly because of the fact that in the late 1920s and early 1930s it was because of a financial crisis that the recession in the in the United States and elsewhere in the developed world actually intensified and became the Great Depression. And therefore we, as you know, we had a number of initiatives which were taken. Besides the New Deal which tried to address the recession, there was an effort to try and address the fragility of finance in the form of the Glass-Steagall Act and the McFadden Paper, and so on.
So you had a number of initiatives which were taken. And the idea was that you should regulate stringently finance, keep competition in the financial sector down. Prevent banks from moving into other financial areas, and stick largely to banking activity, and not engage in securities trading other than government securities, for example. You controlled interest rates. So it was an extremely regulated system that you put in place.
And the interesting, sort of, lesson which we need to take away is that after that kind of regulation was introduced after the Second World War, in the period from 1945 till the end of the 1960s; in fact, almost from the period after the Great Depression to the end of the 1960s, you had-. We went through a phase in capitalism which was a golden age. It was an unusual period. It was a period in which you actually had relatively reasonable growth, extremely low rates of unemployment and low inflation.
So even if you cannot argue, and there’s reason to say that you can, but even if you cannot argue that it was the regulation of finance which helped capitalism generate the kind of dynamism that you saw during the golden age, in the period after the Second World War, it can definitely be said that having very stringent regulations, because America was one of the most regulated financial systems in that time, regulating finance does not go against the interests of growth. Now, the point is, however, that in order to be able to ensure that you keep that regulation you should be able to ensure that you can also keep the environment of growth going. That became difficult for a whole host of reasons.
One, of course, was that you couldn’t sustain the productivity increases that you saw during the golden age, which came partly because of the technologies which were generated during the Second World War. The spinoff of R&D during the Second World War. You could not keep commodity prices down. In particular, you could not keep energy prices down. Costs began going up. And if productivity is not rising and costs, both wage costs because of the fact that you had near full employment, and energy costs and commodity prices going up, you ended up in the situation where the system got afflicted with inflation. And once you got afflicted with inflation, measures of financial regulation became difficult to keep in place without undermining the profitability of the banking system. In particular, you could not keep in place the regulations, the stringent regulation of interest rates that you had under what was called Regulation Q in the United States.
So you had to begin to liberalize. You had to begin to lift regulation to allow interest rates to go up. You had to allow banking firms to go into new areas so that the institutions which were the main port of call of a nation’s savings, banks, now could take their money and go and try and make profits in order to be able to keep themselves going in financial markets of other kinds. So that they needed to enter risky areas. Once they entered risky areas, they needed to hedge against risk. For that they needed to create new kinds of financial assets. You had to allow securitization. That generated derivatives. And this whole process went on. So that, in some sense, it was the inability to keep in place the golden age because of the fundamental proneness to crisis under capitalism which had not been overcome by the welfare state which was put in place in the period after the Second World War. It was that inability that resulted in the situation that you had the forced diversification in the direction of finance. And that was accompanied by a liberalization which then generated a completely unbridled and unwarranted process of financialization which made the system vulnerable.
LYNN FRIES: You argue history has established how prescient Marx was. For example, the anarchy of capitalism as described by Marx led to the Great Depression. In contrast, theories of economists writing during the Golden Age have not stood the test of time. For example, the theory that because of lessons learned in dealing with the Great Depression, that kind of crisis would not recur.
C.P. CHANDRASEKHAR: The Golden Age in which the state intervened in order to be able to address the sort of anarchy of capitalism, the anarchical nature of capitalism, that wouldn’t be sustained. And that was an exceptional period. And we’ve got back to a system which is revealing itself to be crisis prone. But that crisis, those crises tend to be more intense. I mean, you know, you had difficulties in the late 1960s. You had the banking crisis of the 1980s, the banking and thrift industry crisis. You had the dot-com bust. You had 2007-’09. You had the Southeast Asian financial crisis. You know, you had crises in one part of the world or another all the time. And then at some point of time this comes together and you have a crisis of the kind that we had in 2009, which but for the huge intervention by the state both through the treasuries of different governments, as well as through the central banks, including the Federal Reserve in the U.S. That’s what prevented it from becoming the Great Depression. That was the express project. But that shows that you’re prone to exactly the kind of thing which those who thought that capitalism can be what it was in the period from the Second World War in the 1960s thought could not occur ever again actually, you know, was likely to occur.
LYNN FRIES: Getting back to your point about the process of unbridled financialization. With the rise of finance, we’ve seen the value of financial wealth in the system race ahead of real wealth.
C.P. CHANDRASEKHAR: You cannot have too much of a disjunction between the real economy and the financial, the financial realm of an economy, or of the globe. And this was an idea which has had a long history. Marx, for example, basically said that, I mean, at most you can have usurer’s capital, which begets money out of money, operating for particular periods of time in the early history of capitalism, or prior to that. But under capitalism, surpluses are generated in production. And therefore finance can actually make profits essentially by supporting production, by offering its services, or of providing functioning capitalists the capital needed for them to be able to acquire the means of production, the materials of production, employ labor to undertake production, generate surplus value and realize it and profit. A part of it is paid as interest, to interest-bearing capital.
So this whole idea is you can’t have this disjunction. But what we do see in practice, however, now, for a very long period of time, from the 1970s going on to now, which is close to a half century or more. But what you have been seeing is a continuous increase in the volume of financial activity. Finance, insurance and real estate [FIRE] now account for something like 19-20 percent of GDP in many countries. Financial profits, which were less than 10 percent, around 5 percent, 7 percent of total corporate profits now are close to 30 percent, something like 29 percent. So obviously there is this proliferation of finance. And there is an observed disjunction between the real economy and the financial realm.
So how can finance keep on making profits if it’s growing at a faster pace than the real economy? And the answer we have to it is that is that no more does the returns to finance come from the equivalent of, let us say, the interest rate, which is the rate of return on financial capital. A substantial part of financial profits come as a result of the capital gains generated through financial investments in financial assets, and of course in some real economy funds, as well.
So therefore the whole idea is that, you know, now profits are coming not because of undertaking activity which generates real surplus which is realized as a profit. Profits are coming because you’re buying assets and selling assets. And the value of those assets appreciates. You get capital gains, and a large part of profit is a financial profit, those capital gains. And a lot of it is not even capital gains which are immediately transformed into liquid cash or investment. It actually rests on the books, because every year, you mark your financial assets to markets. Well, what you find is that in the case of many assets, including equity of many real economy funds, the valuation of those funds is just not warranted by the likely profits, the potential profitability of those firms in the foreseeable future.
Even recognizing it, that this in some sense is illusory wealth, that it’s paper wealth, it’s not something that is real wealth. And that is proven by the fact that every now and then, people lose a lot of this value. We do know, however, that every time there is such a tendency for the value of financial assets to fall beyond a point because of the collateral effects, the external damage it can exert on the rest of the economy, including the real economy- as happened, for example, in 2008-09, which generated the great recession which we’re still mire in to a substantial measure- we know that the state intervenes to prevent the kind of collapse of international prices, the kind of asset price deflation, which is required to completely wipe out this illusory wealth that is being generated. So in some sense it’s almost like a ratchet effect. You do see some of it getting wiped out, but you’re still at a higher level than you were before to get to the end of the previous crisis. And this goes, this can go on for some time. And at the moment it seems to be going on in the world we live in.
How can that happen? Is it, you know, is it just an illusion continuing for far too long? Now, the difficulty with that position is that so long as those financial assets are assets which have markets in which they can be traded at the prices which are being quoted, and so long as the value of the currency into which you convert them, or the liquidity into which you convert them, is relatively stable, it is possible that these assets can be used to get you access to real assets – to capital, to materials of production, to workers, which you can engage in production, produce commodities in which surplus is embodied and realize those commodities to convert that surplus into profit.
So therefore in some sense there seems to be, in periods when you’re not in deep crisis, there seems to be the possibility of converting this illusory financial wealth into real wealth. This can continue so long as there is a potential or a promise to be constantly able to draw into the system new assets, new real assets, which can validate the value of these financial assets and say that they are not illusory.
Now, we do know that one of the things which happened in this era of financialization is that these kinds of assets have constantly been sought to be drawn into the system. One way in which it happens is through the privatization of state assets. Public assets are drawn in the market in order to privatize-, by privatizing them. So suddenly assets which were not available to the private sector are now available, so that these financial investors can convert financial wealth to real wealth if they want to. Now, the point is if you’re going to do that, the state must also ensure that those real assets can make profit. So you say that OK, I’ll change the rules. Earlier I used to control the prices of rail transportation, but now I’m going to privatize railway assets. And when I privatize railway assets I’m going to do away with the regulation of railway prices. Let private players charge as much as they want and make the profits they want. Strip the assets that they want to strip and keep the assets that they want to keep, such that these real assets give them profits, et cetera. OK.
But then it’s not just the privatization of public assets. It’s also a process of discovery of new assets which can be put in the private domain. So water which either publicly provisioned or just freely available then becomes water from which public access is excluded excepting for a price and is privatized. Just handed over to private players. And this can go on. You can have airwave spectrum which is privatized and given to telecommunications operators. You can have resources in the ocean. You can have forest resources. All sorts of things which are brought into the domain in which assets which earlier were not being traded or which the private sector cannot access now becoming accessible.
But this, too, cannot go on forever. This disjunction cannot continue to exist forever. But however, there can be a period of time when these assets are not just illusory assets. They are not, to use Marx’s term, they are not just fictitious capital. They are, in some sense, a kind of real capital because they can be transformed into real assets so long as there exist markets to trade these assets and the value of the currency into which they are converted is relatively stable. So therefore I do think that that this process has been going on, and can go on, but it cannot last forever because of the fact that there is this constant need to validate this illusory wealth.
LYNN FRIES: And among other things, one would expect the world environmental crisis to accelerate and intensify under this process of validating illusory wealth.
C.P. CHANDRASEKHAR: If you are going to have a cumulative increase because non-reversible tendencies are allowed to continue in terms of the damage to the environment in various ways, the sort of exhaustion of resources, including resources like water, is allowed to continue at the pace it’s continuing, then, yes, these things would intensify the crisis. And that would mean that, you know, the suffering which comes from economic crisis is going to be more, because it’s going to be combined with all of the effects, damaging effects, of this collateral damage of the existing capitalist system. And the idea that you can actually address these problems without addressing the fact that you happen to be in a system which is going to subordinate all else to the pursuit of profit and the accumulation of wealth is, I think, an idea which is not easily defended and sustained.
LYNN FRIES: As we conclude, special thanks to our guest, C. P. Chandrasekhar. And thank you for joining us on The Real News Network.