The Great Financial Crisis: Causes and Consequences (review)

The book is a collection of articles on the current financial crisis published in the socialist magazine Monthly Review between May 2006 and December 2008. The first four chapters focus on the causes of the crisis, discussing the household debt bubble, the explosion of speculation, the nature of monopoly-finance capital and the financialization of capitalism that started in the 1980s. The final two chapters on the consequences of the crisis point out that the capitalist system is inherently unsustainable and that crises are a necessary mechanism rather than an anomaly of the system. The empirical evidence used in the book is exclusively from the US economy. It draws on works by Paul Baran and Paul Sweezy, Harry Magdoff, Torsten Veblen, Rudolf Hielferding, John Maynard Keynes and of course Karl Marx.

As a socialist critique of capitalism, the book revolves around the idea that mature capitalism has a general tendency to stagnation, rooted in the pattern of accumulation under monopoly-finance capital. Financialization, expressed as the increased ratio of debt to gross domestic product has changed its purpose in the last decades. In the late 1950s and early 1960s, industrial capitalism used the financial sector for reinvesting its own internal funds, while today's capitalist system is seeking for faster ways of multiplying profits. This creates an opportunity for the financial sector to offer innovative investment instruments and to divert investment away from the real economy. Capitalism has moved from the nineteenth century structure of Money-Capital-Money' to a postindustrial structure of Money-Money' where investments are made outside of the production sector. Financialization is the response to this inability of industry to find profitable outlets for its investment-seeking surplus. Therefore, the authors see the financial sector as the most essential component of capitalism, which at the same time enables demand and causes stagnation.

Financialization has come to the rescue of the entire system every time its tendency to stagnation had aggravated. To fight the stagnation of the 1970s, the system resorted to the extension of debt and the overreach of banks. When in the 1980s capitalism finally transformed from the old model based on the real economy to the new model of financial capital, the lender of last resort function of the government became a necessity. Because it is prone to stagnation, the system has become dependent on further financialization.

Similarly, crisis is a necessary component of capitalism but not in the sense of competition-induced failure of inefficient producers. It is necessary because the debt-generating phase of capitalism should be followed by a period of debt deflation. This happens when heavily indebted households sell the assets whose debt they are no longer able to service. This creates a downward spiral, which effectively reverts the upward bias of prices. In the absence of a severe depression during which debts are forcefully wiped out or drastically reduced, government financing creates still more layers of debt. Therefore, the crisis is a necessary mechanism of price adjustment at the expense of the working population.

John Bellamy Foster and Fred Magdoff find the causes of the Great Depression in the real economy and not in the money supply, the level of interest rates or regulation as alternative approaches claim. At the same time, the new technological revolution has failed to deliver the expected real economic growth but has instead eased speculation and fueled financialization.

In their brief review of the history of economic thought, the authors convincingly demonstrate how classical political economy as developed in the eighteenth and nineteenth century was "purified" from its class and political elements and increasingly presented as neutral in its neoclassical version of postwar economics. Abstracted from societal and historical developments, economics became "a self-confirming ideology" rather than a science of the real world. This apolitical approach leaves out of the debate the system's divided and unjust...