Capitalism on FIRE

Jane Kelsey’s new book The Fire Economy: New Zealand's Reckoning is all about ‘neo-liberalism’ and almost nothing about capitalism. It’s the same theme that Kelsey introduced in her 1995 book The New Zealand Experiment: A World Model for Structural Adjustment that blamed the deregulation of the Fourth Labour Government on the ‘neo-liberal revolution’ which replaced Keynesian ‘intervention’ with the rule of the market.

Neo-liberalism gave rise to ‘financialization’ as the FIRE economy (Finance, Insurance and Real Estate) became separated from society and the ‘real’ economy. Today neo-liberalism and the FIRE economy is ‘embedded’ and difficult to remove. Yet the GFC exposed neoliberalism as bankrupt and open to challenge. Neoliberalism having replaced the ‘epoch’ of Keynesian intervention in the 1970s is today facing a challenge to its existence. Kelsey outlines how the unique brand of neoliberalism in NZ can be politically contested and ‘disembedded’ to re-regulate the market to make it serve a more equal society.

Against Kelsey, we argue that capitalism is the problem not neo-liberalism. Neo-liberalism is a symptom of capitalism facing a terminal crisis having long ago reached the limits of its historic role in advancing human progress. For the last 100 years or capitalism has gone into decline and is threatening to destroy not only the social basis of human freedom but also the extinction of the human among many other species. We cannot put out the FIRE economy without replacing capitalism with a new society that serves the needs of humanity and nature.

The Neo-liberal counter-revolution

First, we argue that neo-liberalism, like Keynesianism before it, is a symptom of capitalism in crisis. These are not sequential ‘epochs’. They are attempts to resolve the fundamental crisis of capital caused by the contradiction between private property and social production that manifests itself as a crisis of falling profits, or the law of the tendency of the rate of profit to fall (LTRPF). See Michael Roberts defence of the LTRPF against David Harvey.

The LTRPF causes a shift of surplus capital from production to speculation. But such crises cannot be resolved until sufficient surplus capital is destroyed to restore profitable investment in production. Kelsey recognises that there was a shift in capital investment from industry to finance since the 1970s but offers a Keynesian explanation for this.

“The FIRE economy is a metaphor for the fundamental shift in global capitalism since the 1970s. Finance has replaced industry as the driver of wealth creation in affluent countries –a transformation known as financialization. Neoliberal ideology rules and institutions acted first as the midwife and then as the guardian of this economic order...Why did people, companies and institutions with spare capital become increasingly reluctant to invest or re-invest in manufacturing which was plagued by low profits, delay and risks?”

What accounted for such “poor returns on productive investment” leading to ‘financialisation’? Kelsey opts for the Keynesian ‘underconsumptionist’ explanation of the late Bruce Jesson, and the US ‘Marxists’ John Bellamy Foster and Fred Magdoff. They argue that low wages lead to falling demand and a move of capital away from production to finance. Keynesians claim that capitalist crises are caused by wages being too low depressing consumption and resulting in the overproduction of goods and hence a falling rate of profit on capital invested. Keynes answer to falling profits was to use the state to create employment, boost wages and consumption and thus encourage capitalists to invest in production.

Marxists proved that the underlying cause of crises was not low (or high) wages but a fall in surplus value relative to capital invested. That is, capitalists could not exploit workers hard enough to get a satisfactory profit on their investment. The only way that such a crisis could be resolved for the capitalists was by the massive destruction of old plant and machinery and the driving down of workers living standards by depression and war. This allowed the modernisation of plant and machinery combined with low wages to drive up the rate of exploitation and hence the rate of profit and accumulation of capital.

Marxists proved that in NZ, like the rest of the world, low wages were not the cause but an effect of the Great Depression of the 1930s. Keynesian intervention before, during and after WW2, did not result in the post-war boom, nor could it prevent its collapse in the 1970s. What made the post war boom possible was the depression and war which destroyed old technology and replaced it with new, and defeated the international proletariat driving down its wages and conditions. And Marxists proved that the post war boom ran out of steam not as a result of falling wages but falling profits. Profits fell because the production of surplus value (the rate of exploitation) could not keep pace with total capital expenditure.

The crisis leads to depression and war

The only solution to a structural crisis of falling profits is to destroy or devalue surplus capital (both constant and variable) sufficient to increase the rate of exploitation. These are collectively called ‘counter-tendencies’ to the LTRPF. Historically they mean a pattern of activity by which surplus profits in the imperialist countries are exported to colonies and semi-colonies to realise super-profits by exploiting cheap raw materials and labor power first by means of trade and then by establishing capitalist production. To reap the full potential of such super-profits all national barriers to the free movement of commodities and capital have to be broken down. During the Great Depression and WW2 many colonies and semi-colonies began to adopt economic nationalist barriers to free trade and capital flows in an attempt to ‘protect’ their economies from the dominance of imperialist super-exploitation.

This is what neo-liberalism is – the de-industrialisation of old technology in the imperialist countries and the breaking down of national barriers to the shift of production to semi-colonies to exploit cheap raw materials and labour power. The countries of the indebted ‘South’ and ‘East’ had their assets stripped and workers living standards destroyed – just like Greece today. This process also included the SU and China as they opened up to capitalism.

In NZ this is what happened when the Fourth Labour Government replaced Muldoon in 1984. Muldoon had attempted to resist IMF ‘structural adjustment’ imposing conditions on managing the national economy. He did this by trying to substitute for imports such as oil and control the flow of capital, but the IMF pulled the plug and threatened to foreclose on NZs debt. The Labour Government got the message and began to follow the dictates of the IMF to open the economy to force it to compete on the global market. This was not an ‘experiment’ as Kelsey continues to call it, nor was it a ‘revolution’. Like all capitalist attempted solutions to crises of overproduction, it was a counter-revolutionary attack on a sovereign nation’s ability to manage its economy through capital controls, import substitution and the nationalisation of key assets.

Yet on a global scale the forced ‘recolonisation’ of capitalist production in the ‘South-East’ was insufficient to soak up the trillions of surplus capital which continued to ramp up speculation in existing commodities and assets to new heights. This is what underlies ‘financialization’ – it is not a structural change in capitalism away from industry, but the failure of depression and war to create the conditions for a return to profitable production in industry.

It was the failure to turn Russia and China into semi-colonies capable of soaking up these surplus trillions allowing these countries to harness their own cheap raw materials and labor power and emerge as new economic powerhouses. With the bursting of speculative bubbles in the West in 2007, the productive growth of the new imperialists in the East (with their BRICS attachments) temporarily prevented the GFC from becoming a massive global depression.

FIRE and the GFC

The FIRE economy therefore is living proof that capitalism failed to overcome the structural crisis of overproduction in the West that began in the 1970s. The return of capitalism to the former Soviet union, China and Indo China in the 1990s contained the Asian Crisis and DotCom collapse but dould not stave off the GFC in 2008. The GFC is the surface expression of the explosion of the speculative bubble that could not be resolved earlier by the ‘neo-liberal’ counter-tendencies to the TRPF. So the GFC was not the result of ‘deregulation’ as agued by the Keynesians. Kelsey relies heavily on Bellamy Foster and Magdoff. Let’s see what they have to say about the GFC and then look at Roberts critique of the Keynesians.

Bellamy Foster and Magdoff think that the stagnation of production is behind financial speculation. The stagnation is caused by falling consumption which leads to falling profits. They are wrong on what causes that initial stagnation. The authors draw on Baran and Sweezy and even claim to go back to Marx. However, anyone who followed Baran and Sweezy in the 1940s and 1950s knows that they junked Marx for Keynes. For them the crisis of falling profits resulted from monopoly finance capital squeezing wages and consumption.

Marx treated under-consumption (of commodities and capital) as due to a deeper cause of crises - the LTRPF. Michael Robert’s shows that the LTRPF caused the onset of crisis in the 1970s not lack of consumption. The Keynesian policy of inflating wages to boost consumption ended in stagflation as profits were squeezed out of existence. Because the Keynesian policy only addressed an effect of crisis it could not counteract the cause of crisis, the LTRPF.

It was the failure of neo-liberalism to cut costs sufficiently to restore the post-war boom level of profits is what led to ‘financialization’ – the speculation of surplus capital in existing assets, driving up their prices and creating asset bubbles. The expansion of credit fuelled consumption further until the speculative bubbles burst in the GFC.

Michael Roberts also shows how the QE (quantitative easing) since 2008 has led to hoarding and further speculative investment rather than the destruction of surplus capital and a return to pre-crisis capital accumulation. All this means that there is no way capital can spend its way out of its crisis. Sooner or later the $trillions of fictitious capital has to be devalued and destroyed until the conditions for the return to profits are restored. We are back at depression and war as the only solution for capital to temporarily resolve its crisis.

Reform and Revolution

It becomes clear that Kelsey’s solution to the FIRE economy does not go to the roots of the problem. Because she adopts the Keynesian view that crises can be overcome by a policy of redistribution and state regulation she expects that neo-liberalism and the FIRE economy can be re-regulated and ‘disembedded’. This raises the question as to how far the capitalist state can be reformed. Kelsey agrees that the capitalist state ultimately serves only capital. But neo-liberalism is a ‘paradigm’ or ‘model’ of capitalism that Kelsey thinks can be regulated out of existence without the need to overthrow capitalism. For that reason, and perhaps for deeper reasons, revolution is off the agenda. So let’s see how revolutionaries prove that reforms such as Kelsey advocates in Aotearoa/New Zealand can only be implemented by socialist revolution.

We need to explain the difference between the parliamentary ‘political contest’ and the revolutionary Transitional Program that advances immediate demands to empower the proletariat to go beyond reforms to overthrow capitalism. Parliament is the democratic facade of the capitalist state. Social democracy was born to contain the rise of militant labour movement that threatened to overthrow the state. Ever since, parliament and its laws, have been a leg-iron on militant labour. Social reforms have always taken second place to profits. When profits fall, social reforms are repealed.

Today global capitalism is facing a crisis over its future existence and can only survive by destroying all the past social gains won by working class struggle. There is no room for reform or bourgeois democracy. Capitalism must be destroyed or humanity will be destroyed. We can see evidence of this everywhere where moderate struggles are met with armed repression driving workers to militant resistance.

The road to revolution is mapped out by the Transitional Program that draws on the transitional method of Marx, Lenin and Trotsky. It starts with immediate demands for what workers need to live, such as jobs, a living wage, free housing, health and education etc. As these demands are met by state repression at every point workers illusions in a peaceful, parliamentary road are put to the test, proving that the struggle for these demands can only be won by the seizure of state power.

As these struggles develop workers become fully conscious that to live, even to survive as a species in the face of global warming, capitalism must die. The problem is no longer seen as neoliberalism or the FIRE economy; capitalism is on fire, threatening to destroy humanity and nature. The fire can only be put out by an international socialist revolution.