Facing the crisis

By Boris Kagarlitsky

The first years of the twenty-first century are not bearing out the hopes of the global elites. As is often the case, the pompous ceremonies have been followed by major setbacks. A warning that should have been heeded was the Asian crisis of 1997-98, the consequences of which were overcome only at vast cost. Ideologues and journalists, however, reassured the world with references to the peculiarities of the “new economy” that had triumphed in the late twentieth century in the US and Western Europe. According to this theory, we have entered a new phase of history in which the main factor of development is becoming a talent for innovation which in theory is organically present in Western culture. The Asian countries, oriented toward industrial production, are held to be simply incapable of entering this beautiful new world.

“Globalisation” has become not just the slogan of the day, but also the justification for all sorts of outrages, occurring before the gaze of all and sundry. Opponents of the system have been branded as dinosaurs or Luddites resisting technological progress. Everything would have been marvellous had a new bout of the crisis not struck exactly where the prevailing theory maintained such reverses were impossible by definition: in the most developed country, the USA, and in the most progressive sector, information technology.

Finance and computers

The mainstream explanation of globalisation holds that new technologies have allowed an unprecedented mobility of capital. With one press of a button, we are told, vast sums of money can be dispatched in any direction. From this, naturally, the conclusion is drawn that we have entered a quite new epoch, when control over the movement of capital is becoming technically impossible, and when the national state is also losing much of its influence as a result.

The problem with this “technological” explanation is that it actually explains nothing. Even a brief glance at the question shows that the liberalisation of capital markets began long before the appearance of personal computers or the internet. The first steps in this direction were taken by the Nixon administration in the 1970s, followed by still more decisive moves under Reagan and Thatcher in the early 1980s. In the countries of Latin America, the liberalisation of investment markets and the transnationalisation of capital also became the dominant tendency in the 1970s.

On the other hand, the speed with which information is transmitted does not in the least indicate that the possibilities for financial control have weakened; quite the reverse. The same mechanisms that can be used to shift capital can also be used to detect this process. The key question has never been the technical possibility of exporting money—European countries were combating the illegal export of silver as early as the seventeenth century—but the ability of the state to expose breaches after the event, and to punish the guilty. The paradox is that with electronic transactions, the state is theoretically able to obtain complete information on what is occurring, and the legal financial market can thus be controlled without difficulty. The accounts of “guilty” parties can be blocked automatically. In the 1980s and 1990s, all countries liberalised their financial markets to one degree or another. It is significant, however, that the countries of Scandinavia, which had been less consistent in carrying out this liberalisation, did not encounter more massive violations than countries which had adhered to a more “orthodox” market approach.

It was not technology that gave birth to the mobility of capital, but the mobility of capital that sharply increased the demand for the introduction of new technology. The globalisation that took place during the 1980s and 1990s represented the victory of financial over industrial capital. By the mid-1990s, a bloc had been consolidated on this basis between financial capital, the energy corporations and high-tech firms. The representatives of financial capital were trying to lower inflation to the maximum extent possible, even at the cost of reducing economic growth.

The mobility of capital has become a vital principle. Trade can be conducted on a world scale, information knows no borders, and even in ancient times money travelled about the globe. Production, by contrast, ties capital down, fixing it to a particular spot.

The history of capitalism includes periodic shifts in the relationship of forces between commercial-financial and industrial capital. As a rule, the periods that have seen a marked development of commercial-financial capitalism have also been epochs of political reaction. During these times, the state has played the role above all of a military and police instrument of the ruling class. Transport and communications have developed more rapidly than industry. The ideology of free trade has been dominant. This was the situation that applied, for example, in the first half of the nineteenth century, when the industrial revolution had not yet developed to its full extent.

The late twentieth century witnessed the same triumph of finance capital. The new technologies were meant to service the economy that was being established, and the corresponding sector of business thus entered readily into an alliance with the ruling group, embracing its ideology. In their turn, the new technologies became attractive to finance capital. In the high-tech sector, rapid growth combined with small investments created the ideal preconditions for a speculative boom. The growth of stock market quotations (the US NASDAQ index) in practice amounted to a redistribution of wealth between the “traditional” and “new” sectors of the economy. Industrial capital found this situation acceptable so long as the economy as a whole, and corporate profits along with it, continued to expand. The industrial capitalists made up for their losses by shifting their production to countries with cheap labour power, and by intensifying exploitation. In the process, however, the entire model of consumer society that had grown up since the second world war came under threat.

In the epoch of classical capitalism the main consumers were the upper and middle classes, including the urban and rural petty bourgeoisie. The proletariat was the main producer, but its labour power had to be as cheap as possible in order to ensure that cheap products were supplied to the market. Workers were worth little to the capitalists in the role of consumers.

With the advent of “Fordism” and the Keynesian model of capitalism, everything changed. Henry Ford declared that his workers themselves would have to buy his cars. The new rules of the game meant that on the scale of the economy as a whole, high wages were to the advantage of entrepreneurs. It was another matter entirely that whoever went down this road first lost in terms of competitiveness. State regulation was therefore needed to ensure that the whole capitalist class made concessions to all the workers simultaneously. Compensating for the drawbacks of this model was the possibility of using cheap raw materials and of exporting products to markets in the Third World.

The new model not only required a massive shift of industry to poorer countries, but by condemning workers in the West to take part in a “race to the bottom”, placed consumer society under threat. The gap between consumption and industrial production on a world scale has brought us back to the model of classical capitalism. The new equilibrium can be sustained only while the middle layers remain relatively numerous and the growth of their incomes ensures that consumer demand is pumped steadily through the market mechanisms. Inevitably, however, consumer society and the middle class will gradually be eroded. The less stable the position of the working population as a whole, the more vulnerable will be the white-collar layers and the labour aristocracy. For a certain time, this trend may be countered by two factors: the growth of new technologies, creating well-paid jobs in a few “fashionable” sectors, and increases in the debts owed by the middle layers, who can no longer permit themselves their accustomed standard of living, but cannot renounce it either.

The sectors of high technology and finance fostered the rise of new middle layers so long as they themselves were expanding. Nevertheless, the potential for growth in these sectors is very limited. These limitations, moreover, are not of a technological character. The high-tech sector expanded due to demand for its products from the rapidly growing commercial-financial sector. This sector, however, is not the sole—and in essence, not the ideal—source of demand for the high-tech sphere; in the 1960s and 1970s, for example, the main customer for this sector was the state. The present alliance is thus tactical and conjunctural.

The crisis of desynchronisation

The rate at which information can be transmitted has risen dramatically, but this does not mean that the processes this information is supposed to describe have accelerated at the same rate. Furthermore, the mechanisms through which decisions are taken, and the speed with which the decision-making process operates, did not change rapidly during the 1990s. In a certain sense, the abundance of information which has become available thanks to the new technologies has even created new problems. If information is forever being transmitted faster and in greater volumes, while changes in the area of production are not occurring as quickly, the widening gap is filling up with pseudo-information, with “noise”.

Technical devices that were originally created to make management easier have themselves become a source of problems. In March 2001 the Financial Times published a survey showing that company managers were swamped with work. “The average US office worker is spending almost half a day digesting and sending messages by telephone or e-mail”, the newspaper noted. Far worse is the fact that a significant part of this work is quite pointless: “Sixty per cent of the white-collar workers surveyed felt overwhelmed by the amount of information they receive each day”. As a result, they are observed to be suffering from “information fatigue syndrome” and “attention deficits”, as a result of which genuinely valuable messages are lost in the mass of secondary and unnecessary ones.1 Ultimately, the quality of management declines.

The reason for this does not lie in the advent of new technologies as such, but in the fact that their development has been divorced from the needs of the real economy. The channels of information have become loss-making so far as the volume of pertinent information generated by people’s social existence is concerned. Mobile financial capital has been able to make maximum use of the advantages of the new technologies, which is not surprising, since this capital has been the main customer for the innovations of the high-tech sector. The problem, however, is that the more rapid the turnover of financial capital has become, the greater the gap between stock market speculations and the processes taking place in the “real sector”.

Production takes time. After the initial investments have been made, time is needed for new means of production to be assimilated. First buildings have to be constructed; only then can equipment be purchased and installed, and only after this can workers be hired. Goods on sale also have to find purchasers, which needs a certain time. Meanwhile, the speculative market promises instant profits. The rate of turnover of capital is greater here by whole orders of magnitude, and in this regard, speculation is far more attractive.

It is another matter entirely that funds have to be invested in real companies. Fictitious capital cannot exist without some real, working economy. As noted earlier, speculative capital has found high-tech companies attractive in this regard precisely because these companies require little in the way of initial investment and the turnover of funds is rapid. The combination of speculative capital and high technology created the effect of the “new economy”, which lay behind the explosive increase of stock prices first in the US and then throughout the world.

These peculiarities of the financial market led inevitably to the desynchronisation of investment processes in various sectors. As always happens in the market, the sectors that promised less in the way of profit suffered a shortage of investment. Unlike the situation in “classical capitalism”, however, investment flowed not only to the sectors where profits were higher, but also to those from which money could be extracted more quickly. In this respect even a highly profitable productive enterprise lost out to a thoroughly dubious—and from the point of view of the real economy, quite senseless—stock market operation. Trillions of dollars were withdrawn from the real economy to be put in circulation on the stock market. The industrial sector had thus to bear a double burden: it had to ensure the profitability of enterprises, and at the same time subsidise an orgy of financial speculation. The result was an inevitable shortage of capital investment in industry, a situation which had particularly dire effects in the Third World, and also in Russia and a few other countries of eastern Europe. Meanwhile the countries of east Asia, which were protecting their capital markets and hence did not experience a shortage of investment, encountered the opposite problem. The maturing crisis of consumer society limited demand for their goods. By the late 1990s, east Asia was stricken by a classic crisis of overproduction, at the same time as other parts of the world lacked funds for modernising industry, and wages were falling.

For a time, the slowing of industrial growth in the midst of a speculative bacchanalia of financial capital could be concealed behind the illusion of a “technological revolution”. The new technologies were supposed to be an adequate source of growth in and of themselves. What actually happened was that in a context of increasing worldwide problems for industry, the technological revolution itself started to get bogged down.

Liberal theory assumes that processes occurring in parallel will be synchronised spontaneously by the market mechanism. In principle, the liberals are right. But one should not forget that there is little joy for entrepreneurs in the means through which the market resolves the dilemma—a global economic crisis.

The end of high profits

The phase of expansion that lasted from 1992 to 2000 was not only among the most prolonged in the history of capitalism. It was also remarkable for high profits and the rapid growth of stock prices, against a background of economic growth that was nowhere near so robust. Marx noted the tendency, inherent to capitalism, for the rate of profit to decline. On the whole, history bears out this conclusion, but there are certain periods when profits start growing rapidly, and when economists join in asserting that Marx was wrong or that his conclusions have become obsolete. The reason for this paradox is that the structure of a capitalist economy is not unchanging. New sectors and new markets rise up. Profit rates in these areas are at first extremely high, and it is only later that they start to decline in accordance with the general principles inherent to the system. These new sectors and markets serve to increase sharply the average rate of profit across the capitalist system as a whole.

The 1990s were a period of rapid growth of new sectors—this was the period when the infrastructure of the “information society” was set in place—and the assimilation by capital of “new markets”. What was involved in this case was not only the installing of a neo-liberal economic regime in the countries of the former “communist bloc” and Third World but also the “marketisation” of a series of areas of life in the West that had earlier been excluded from market relations. Health, education, public transport and so forth were placed on a commercial basis. The need to increase profits by appropriating new sectors also explains the irresistible desire of neo-liberal decision makers to implant private enterprise in ever new areas of life (this was the reason, for example, the General Agreement on Trade in Services (GATS) was drawn up in 2000-2001).

Market cycles are subject to the same laws as profits. As new sectors and markets arise, their own cycles form within them; these may not coincide with the cycles of the “old” markets and sectors. Hence in eastern Europe the transition to capitalism was accompanied by prolonged depression, which gave way to economic growth only in the late 1990s, when the potential for growth in the West was already petering out. This was particularly obvious in the case of Russia, where output began to increase only in 1999-2000, after the Asian economic crisis had already shown that the period of worldwide expansion was nearing its end.

For capitalism, the unevenness of development between sectors and countries is a cause of both growth and destabilisation. In the open world economy of the 1990s, the US became a magnet attracting capital from the entire world. This was due not so much to the exceptional dynamism of the US economy, as described by popular journalism, as to the exceptional position occupied by the US in the world system. It was not simply that the US represented an enormous market, and that the US dollar acted as the world currency. The more open the economies of other countries, the greater became the flow of capital into the US. The larger the US capital market, the more attractive it was to investors. By drawing capital out of other parts of the world, the US destabilised these regions, but at the same time the growth of the US economy acted as a shock-absorber, staving off a world depression. “This tremendous inflow of foreign capital—two or three hundred billion dollars a year for the last several years—has helped propel our expanding economy”, noted Doug Henwood. “That’s kept markets rising; it has kept consumers being able to spend beyond their means.”

In the conditions of the “open economy”, the depression in the countries of eastern Europe and a number of Third World states simply aided the transfer of funds, and helped buoy up the growth in the US:

Certainly Russian flight capital has injected a lot of cash; a lot of cash came out of Asia, Latin America, Eastern Europe, and the former Soviet Union and came to the United States’ stock markets. All these calamities have produced wonderful results for the American ruling class.2

Just as the “emerging markets” of eastern Europe and the Third World pumped in extra capital to sustain growth in the US and to some degree in the European Union, the rapid development of new information sectors in the West supported and prolonged the general growth. From this, theoreticians of the “information society” promptly drew the absurd conclusion that the technological revolution would guarantee uninterrupted growth. In reality, the “information economy” was subject to the same market cycles as the traditional economy, but in this case the cycles operated with a certain delay. After the potential for expansion in these sectors was exhausted, the “new economy” itself became a decisive factor in the downturn.

The increase in profits also had another, perfectly traditional reason: intensified exploitation of workers. The Wall Street Journal discussed this quite openly: “Corporate profits over the long term can only grow as fast as the economy feeding them, unless companies find ways to pay their workers less, charge their customers more, or increase profits abroad”. Ultimately, the newspaper noted, “much of the profit gains came from the workers’ pockets, and that can’t last”. Companies transferred production to countries with cheap labour power, and smashed the resistance of trade unions in the West, but by the late 1990s they had “stretched their labour gains about as far as they [could] go”.3

As Karl Marx explained, a “race to the bottom” imposed on workers by the bourgeoisie has its limits. If the cost of labour power falls without interruption, the proletarians will sooner or later be transformed into paupers whom the bourgeoisie will itself be forced to feed, instead of feeding at their expense. Under conditions of crisis, the natural reaction of entrepreneurs is once again to cut their costs at the expense of the workers. But this is precisely what employers were doing throughout the entire period of upturn, and the opportunities available to firms are now practically exhausted. Moreover, contrary to the usual scenarios, a crisis at least in its early stages may be accompanied by an increase in the pressure exerted by workers on management.

Ultimately, the eight-year economic expansion created the conditions for a new rise of the workers’ movement, which gradually started winning back the positions it had lost. This meant that the resources available to corporations for increasing their profitability were exhausted. Early in 2001, company profits were still relatively high, but a tendency for them to decline had become obvious.

Throughout the decade, the increase in stock prices substantially exceeded the growth of profits, but so long as profits also grew noticeably, this was not of great importance. From the moment when profits began to fall, maintaining the stock market bubble became impossible.

The oil crisis

During periods of economic growth, raw materials prices grow. This could not fail to have an effect on oil prices. The shock of the Asian economic crisis drove down oil prices, but the revival of production in Asia caused them to rise dramatically. When oil prices began increasing in the autumn of 1999, it seemed quite natural to expect that a sharp rise would be followed by a fall in demand and by stabilisation of the market, after which prices would decline. Fuel prices always fall in spring and summer; therefore, the same would happen this time as well. Moreover, oil producers themselves were taking fright at the excessively rapid rise in fuel prices, and had begun raising their output. The market, however, seemed to have run wild. To the increase in supply, it reacted with an even greater rise in prices.

The point was that the oil market was only part of the world economy. Over some fifteen years, vast sums had been taken out of the “real economy” throughout the world, and had moved into the sphere of financial speculation. In this case, Russia was no exception, and indeed, was in the front ranks, moving in the same direction as the US.

Monetarist economists had convinced the world that the only sources of inflation were state spending and the printing of paper money. Meanwhile, the rapid rise of share prices in the US, at the same time as almost all central banks were applying harsh policies, led to a curious form of inflation in which paper money was not devalued, but speculative financial capital grew at a rate totally out of step with the increase of production. The economies of the West came to feature a sort of “inflationary overhang”. This “superfluous” money eventually burst onto the oil market. The inflationary potential accumulated in the Western economies could not be realised due to the harsh policies of the central banks, but the more time passed, the greater this potential became. All that was needed was for some channel to appear, and this excess money would burst onto the market. After the Organisation of Petroleum Exporting Countries had reviewed the situation and sharply reduced quotas, oil prices leapt upward.

Under the pressure of the new oil prices, the financial “overhang” collapsed, and inflation was destined sooner or later to fly out of control, with the “superfluous” money breaking free and spreading throughout all sectors of the world economy. It is one of the ironies of history that the first oil shock, in 1973, disorganised the system of state regulation and undermined the “socialism of redistribution” that held sway in the West; by contrast, the second oil shock is disorganising the system of market-corporative regulation, and is striking a blow against neo-liberal capitalism. If the response to the oil shock of 1973 was a shift—even if after a certain delay—of the world economy to the right, to a liberal model, this time the most probable response (also after a certain pause) will be an analogous movement to the left. The wheel has turned full circle.

For oil exporting countries, including Russia, the growth of energy prices meant not only an unexpected windfall, but also the opportunity to maintain the illusion of economic success without serious structural reforms. Neither in Russia, nor in the Arab countries, nor in Mexico was the influx of petrodollars accompanied by attempts to implement serious investment programs. As in the aftermath of the 1973 oil shock, the money began returning to Western banks, increasing the inflationary pressure on the world economy as a whole. In 2000 the economy of post-Soviet Russia underwent record growth of seven per cent after almost a decade of depression. The same year, however, also saw a dramatic rise in capital flight to the West.

The structural problems of the oligarchic economies in the countries of the periphery prevented effective use of the flood of petrodollars, but as in the 1970s, the influx of money stimulated the political irresponsibility of the elites. In the 1970s the oil boom culminated in a series of political crises and catastrophes in countries that had gained from the new energy prices; the culmination of these processes was the Iranian revolution. The new oil boom created the preconditions for similar political cataclysms, above all in Russia.

The riddle of the US middle class

Until 2000, the US economy benefited more than any other from the established rules of the game, and at the same time remained the principal stabilising factor for the world system. With the beginning of the new century, however, the situation changed radically. Not only did the US market cease to be capable of extinguishing the tendency to crisis that had built up on a world scale, but it became the very source of the problem.

If the rapid growth of stock prices and the swelling of the financial “bubble” in the US in the 1990s did not escape the attention of economists, the increasing indebtedness of the US middle class was not viewed as a cause for special alarm. Still less were the accumulating debts of middle-class households and the growth of the US financial bubble linked in mass consciousness. Meanwhile, these two processes were not just closely interconnected, but fed on one another.

The expansion of financial capital could not fail to be accompanied by a rapid development of the credit market. This was aided both by the spread of new technologies—from smart cards to online banking—which made credit more accessible, and by the general market conjuncture. In addition, the financial corporations themselves consistently followed a policy aimed at attracting ever-growing sections of the population to their service zone. By the late 1990s the US middle class was enmeshed in debts. Occurring against a background of overall economic growth, the increase of indebtedness did not in itself arouse alarm so long as it was accompanied by a growth of money incomes. Whether the incomes rose faster or more slowly than the debts was not crucially important; even if they rose more slowly, this nevertheless allowed the positive dynamic to be maintained up to a certain point. If they rose faster, this led in practice not to a reduction of indebtedness, but to a still greater increase, since the growth of incomes made access to credit easier, and increased people’s borrowing capacity. Beginning in the first half of the 1980s, when the neo-liberal model triumphed definitively in the United States, debts—private, state and corporative—began growing rapidly. During the Clinton “expansion” period, indebtedness accelerated still further. Consumer debt exceeded one and a half trillion dollars. In 2000, outstanding mortgage debt exceeded $6.8 trillion, after more than doubling during the 1990s. Meanwhile, private debt in the US continually exceeded the state debt ($5.62 trillion in 2000), which went on growing despite the favourable conjuncture and the budget surplus.4 The combined state and private debt in 2001 reached $13.5 trillion.

It is not hard to see that the growth of the stock market pyramid was accompanied by a similar growth of the debt pyramid. These two processes mirrored and supported one another. Both pyramids represented fictitious capital. Just as shares cannot be sold in their total volume without an immediate fall in their price, a sudden, dramatic reduction in debt levels would provoke a crisis of the banking institutions. The pyramids, however, could not continue growing indefinitely.

On the social level, it was as though the two mirror-image pyramids were superimposed on one another. This reflects the structure of the US middle class, whose members were at the same time sinking ever deeper into debt, and being drawn increasingly into playing the stock market, which according to the prevailing theory should have provided them with the funds to service and pay off their borrowings. Meanwhile, the middle class could be divided into three groups: an elite who did not have burdensome debt commitments, and who actively played the stock market; a bottom layer who were heavily in debt and were incapable of playing the stock market; and a middle group who accumulated debts and stocks simultaneously.

The same applies to many of the small and medium companies that became increasingly dependent on external sources of financing, and also on their own stock prices. The rise in their share prices allowed them to draw on new credits, and so forth. While the trade was conducted to a significant degree on credit, the taxes were paid in real money; this ensured the famous surplus of which the Clinton administration was so proud.

Such a situation could not continue indefinitely. Beginning in 2000-2001, both the debt and stock market pyramids could not fail to be hit by crisis. The stock pyramid was able to correct itself spontaneously, burying the hopes of important parts of the middle class beneath its debris. The debts of private individuals, however, could be written off only through the good will of creditors. The US middle class finished up in a situation that in many ways recalled that of the more developed countries of the Third World; it was now unable to pay off its debts, and there was no chance the debts would be forgiven. There remained only one mechanism through which the problem could be resolved: inflation.


Financial capital in the US was able to exploit the specific advantages of the dollar. At the same time a national currency and a worldwide monetary unit, the dollar attracted investors; the surplus mass of dollars spread throughout the world, lowering the risk of inflation in the US, and in the process making the dollar even more attractive. The European finance markets lacked such advantages. It is this, and not an imaginary lag by Europe in the development of advanced technologies, which explains the fact that the “new economy” has not developed as rapidly on the eastern side of the Atlantic.

Stock prices rose, but not at the same rate as in the US. For one thing, European companies could not build a financial pyramid since they did not have the financial resources to maintain it. For another, it was impossible to expand the indebtedness of companies and the population to the same extent as in the US. In principle, this could be regarded as a sign of healthier and more stable development, but from the point of view of the finance capital which held sway in Europe just as in the US, it represented the main problem, the source of the weakness of the European economy. The ambitious project of introducing a single currency, a project undertaken by the ruling classes of the European Union in the late 1990s, amounted to an attempt to even up the situation and attract speculative capital to European financial markets.

Becoming a second or alternative world currency, the euro was meant to equalise the chances for competitors, thus infecting the European economy with all the maladies afflicting the US. The population spontaneously sensed the threat and put up resistance, but the mainstream press and politicians, naturally, put this down to “conservatism” and the emotional or cultural attachment of Europeans to their old national currencies.

The project of the euro was as ambitious as it was adventurous, and most importantly, very badly thought out. In the late 1990s the leadership of the European Union imposed common rules on all the member countries, rules that presumed a lowering of inflation to a uniform level of less than three per cent. What followed had the character of a one-off campaign, in the best Soviet tradition, with the countries rushing to report on time the results they had achieved.

The trouble was that in such circumstances, a uniform rate of inflation is impossible unless all the other parameters of economic development are equalised. Unless there is a policy of redistribution, in fact, market disproportions tend to increase. The European Union adopted some redistributive measures, but the leaders, in line with their common neo-liberal ideology, put their stake on the elemental forces of the market. Paradoxically, it was this which undermined the chances of a stable future for the euro.

With the help of administrative and political pressure, inflation was lowered simultaneously in all the countries involved. Then it started growing with still greater force in those countries which had artificially reduced its level for the sake of entering the euro-zone. Only now, this was no longer a problem of one or another particular country, but a destabilising factor for the entire European project. The euro was supposed to replace the national currencies on January 1, 2002. It would have been hard to imagine a less opportune moment. Before the new currency was supposed to enter circulation, the world and European economies were already in recession. This meant that supporting growth, or even mitigating the crisis, required a lowering of central bank interest rates. But this was something the European Union could not permit itself without at the same time dashing the hopes of turning the euro into a real rival to the dollar—that is, without defeating the whole purpose of the project. Still worse, the various countries entered the crisis in different conditions. Effective management of the situation required fundamentally different approaches in Germany, in Scandinavia, and in the countries of southern Europe. This proved technically impossible. The single European Central Bank had been established precisely in order to implement a common policy. Assembling ships into a single convoy requires the observance of definite rules. The whole convoy has to move at the speed of the slowest ship. If this rule is not followed, the remaining ships fall behind, and the convoy is dispersed.

The paradox was that the European Union could not allow itself to slow down and keep to a single rhythm of movement. The countries of southern Europe could not keep pace with Germany. The transition to a single currency coincided with the integration into the European Union of the countries of the former Eastern bloc: the Czech Republic, Poland and Hungary already stood in the first rank, expecting a final decision. However, there was not the slightest hope that the newcomers would cope in the long term with tasks which even countries that had been integrated into the European Union for many years were finding beyond them. The European “convoy” was becoming even more heterogeneous.

In the spring of 2001 the European Central Bank again refused to lower interest rates, so affirming its commitment to a strong euro—at any price. The trouble was that this price might well become the destruction of the common economic space, and ultimately, the collapse of the euro. The sole hope for the European project was that the crisis would bring about a spontaneous fall in the price of the dollar, and inflation in the US. This, however, did not portend a happy future for the euro either. The European Central Bank would be able to lower interest rates and unleash inflation, thus slowing the convoy and allowing the laggards to catch up, but this would be very remote from the original ambitious plans of the European elites. Instead of nearing their strategic goals, they would now have to concentrate exclusively on minimising the damage caused by their own past decisions.

Political dilemma

History records numerous cases of the debt enslavement of free producers occupying a “middle position” in the economic hierarchies of their societies. Examples range from the peasantry of ancient Rome to the European petty bourgeoisie and elements of the white settlers in Caribbean America in the seventeenth century. On this level, the drama experienced by the US middle classes at the beginning of the twenty-first century is far from unique. From ancient times, such debt crises have been accompanied by a sharp rise in social tensions, and by the appearance of populist movements. How events have developed subsequently has depended on the relationship of political forces. If the populist movements have been defeated, the middle layers have lost their status, independence, property and at times even their freedom, being turned into slaves or proletarians. If, on the other hand, the movements have been victorious, finance capital has not only had to accept huge losses, but has also lost a good deal of its influence in society. Precisely the same kind of struggle will inevitably break out in the countries of the West. At first it will probably take the form of battles around the question of inflation.

During the period when they were both growing, the “higher” (stock market) and “lower” (debt) pyramids counterbalanced one another. The collapse of the stock market pyramid destabilised its debt counterpart, altering the relationship of forces and moods in society. Not only do important elements of the middle layers have an objective interest in inflation as the ultimate means of reducing the debt burden, but the conjunctural union between finance capital and the high-tech sector is also disintegrating. During the period of high stock prices, the high-tech sector saw finance capital as the locomotive of development; now, it sees finance capital as the source of its problems. In turn, finance capital is trying to make up for its losses by beating debt payments out of the high-tech sector. A characteristic feature of the “new economy” was the combination of relatively low wages with the opportunity to participate in profits by taking up stock options. The collapse of the stock pyramid has meant that the link between workers and the real owners of the enterprises has been weakened; white-collar employees who had felt almost as though they owned the firms where they worked have been placed in the position of proletarians—if they have kept their jobs at all. The “new economy”, in sum, has turned out to be doomed to the same class conflict as the old one. Workers are starting to need pay increases, and to understand the reasons for the existence of trade unions.

Not only are finance capital and its last reliable ally, the energy industry, being forced to beat off attacks from more and more opponents, but objective inflationary pressures are also increasing. Since the second oil shock freed surplus financial resources and threw them onto the market, governments have been faced with a dilemma: whether to reconcile themselves to inflation and try to manage it, or to resist it to the last, while encountering growing discontent in formerly loyal sectors of the population. Winning this fight is impossible, but to admit as much would mean a fundamental break with the neo-liberal model and with the groups within finance capital that have dictated the policy course of governments, irrespective of their party, throughout the past decade.


Even if the ruling groups were prepared to change course, doing so is virtually impossible. During the 1990s they drove themselves into an institutional trap that they could well find fatal. The key principle of the neo-liberal “reforms”, on both a global and national level, is that they are supposed to be irreversible. This means that once the structures, rules and relationships have been set in place, it is impossible in principle to make corrections to them. The system does not have a reverse gear. Not a single one of the international documents of the neo-liberals specifies procedures for overturning decisions that have been taken, or for allowing individual countries to opt out of an agreement. Once abolished, mechanisms of regulation cannot be restored, as a matter of principle. It is not enough that regulation should have been outlawed (paradoxically, at precisely the time when the capitalist class has more and more need of it); the institutions themselves have been dismantled. Mechanically restoring them is both impossible and pointless. The new level of development of the market also requires new forms of regulation. The trouble is that creating a new system of institutions from scratch is not just difficult, but presumes a far greater level of radicalism, far more acute conflicts and, most importantly, the destruction on a corresponding scale of the neo-liberal order.

However much it might wish to do so, the bourgeoisie will not be able to escape from this institutional trap without outside help. Just as in the 1930s, the only way this conflict can be resolved is through a dramatic strengthening and radicalisation of the left. The crisis of the early twenty-first century is not simply the latest conjunctural decline within the context of the “natural” market cycle. It is the result of long-term processes unfolding within the capitalist economy over at least two decades, and places in question the neo-liberal model that has held sway throughout the current epoch. In other words, what is involved is a clearly expressed crisis of the system.

The twentieth century experienced at least two such crises, from 1929 to 1933 and in the early 1970s. Both times, the crisis culminated with the installing of a new model of capitalism (in the first instance, Keynesian, and in the second, neo-liberalism), but each time, the very existence of the system was threatened. Although the main threat to the system both in 1929-1933 and in the 1970s came from the left, ultra-right forces rose to prominence as well. During the years of the Great Depression, fascism came to power in Germany, and the fascist threat was quite real in France. It is significant that it was during precisely this period that the Stalin regime in the USSR took on its definitive totalitarian shape. The repressions and the centralised, autarkic economy were Stalin’s answer to the crisis of the world market. The revolutionary movements of the “red thirties” also failed, but the social democratic reforms in Europe and the New Deal in the US changed the face of capitalism until the beginning of the 1950s.

During the 1970s, the left alternative was represented by the Chilean and Portuguese revolutions. It seemed as though the radical movements that had failed in 1968 were about to gain a second wind. This, however, was the period when the neo-liberal model was put into practice for the first time by military dictatorships in Latin America. The defeat of the left, which had become obvious by the late 1970s, sealed the outcome of the crisis.

This time the left might, in theory, gain its revenge. Historically, the left has always played a dual role within the framework of capitalism. On the one hand, it has fought for a qualitatively new society, for socialism. On the other hand, it reformed capitalism, and thus, in essence, saved it. This holds true not just for reformists, but also for revolutionaries. Paradoxically, the one function of the left has been impossible without the other. Reform required that the system be subject to influences “from outside”, in both the politico-social and ideological senses. Without an alternative ideology, it would have been impossible to formulate the new ideas which subsequently lay at the basis of the reformist programs.

The capitalist crisis of 1929-1933 culminated in widespread reform. The crisis of the 1970s ended in a bourgeois counter-reformation. How will the crisis of 2001-2003 end? The inevitability of a return by the left to the centre stage of politics is obvious, even from the point of view of the long-term interests of the bourgeoisie itself, or at least, of a certain sector of it. Meanwhile, those left parties and politicians who accepted the rules of the game of the 1990s are becoming completely helpless in the face of the crisis. They are unable to propose anything meaningful to the working class, at the same time as they are no longer capable of effectively serving the ruling elites. More radical forces are moving to the forefront. What will they be able to propose?

Just as in earlier epochs, two currents are emerging within the left. The members of one of these are striving to overcome capitalism, the others, to improve it.

The program of transition

However things might turn out, the radicals and reformers have to cover a certain distance along the road together. Unless some kind of common program can be worked out, revolution will be just as impossible as reform, since there is nothing so conducive to radical change as the certainty that reforms will succeed. Reformism often acts as a springboard for revolution, as happened in France in 1789 and in Russia in 1917. The drawing up of a common platform uniting reformists and radicals does not signify by any means that this platform has to be as moderate as possible. Quite the reverse, since consistency and radicalism provide a guarantee of success in a world with an acute need for new ideas.

The movement that began in Seattle in 1999 showed that anticapitalist protest is becoming a vital necessity for millions of people not only in poor, but also in so-called rich countries. As a result, what needs to be placed in the forefront is not the moderate redistributive ideology of social democracy, but the idea of public property. The task is not only to revive the public sector, but also to transform it radically. Throughout the twentieth century, socialists were divided into supporters of workers’ self-management and admirers of centralised planning, without either side recognising that neither ideology would suffice for the main task of socialisation, that is, placing the public sector at the service of all of society. It is now possible to say that the public sector will work only if real social control is guaranteed. This presupposes accountability and transparency on a scale absolutely inconceivable to liberal economists. Economic democracy has to be representative, and this means that not only the state and workers, but also consumers and communities have to take part in the formation of boards of management.

The things we can use only collectively have to belong to society as a whole. This applies to energy, transport, extractive industries, utilities and the communications infrastructure, just as to science and education. But a no less and perhaps even more fundamental question is that of the socialisation of credit. Unless this is implemented, even if only in part, it will be impossible to find a socially acceptable solution to the world debt crisis.

Meanwhile, the separation of the private and public interest is absolutely fundamental. If that had been in place during the years of neo-liberal reform, the International Monetary Fund would not have been able to use money obtained from the governments of the West to make loans to the governments of the Third World and Eastern Europe in exchange for the privatisation of property, that is, to play in practice the role of a broker, and to exert political pressure in the interest of private investors. Public credits, to the last kopeck, cent, lira or penny, have to go to the public sector, into projects aimed at carrying out public tasks. The situation in which private commercial risks (and losses) are socialised, while profits are privatised, is becoming intolerable.

John Maynard Keynes wrote that the socialisation of investment was the only socialist slogan that from his point of view was justified. The main principle of socialism is control by society over the investment process, not state ownership of buildings and machines. The left has never been opposed to cooperatives or to municipal enterprises. On the contrary, these are the forms of organisation of production that can best reflect the needs of local populations. They cannot, however, take the place of public investments in projects intended to serve collective needs. The public sector acts as the tool through which society directly fulfils its collective tasks—economic, social, ecological and cultural. The market and the private sector are suited only to fulfilling private tasks, and no amount of regulating can do away with this contradiction. The more pressing the common tasks of all society and all humanity, the greater the need for socialisation. In an epoch of global warming, the socialisation of the energy industry is becoming a question of the survival of humanity. And if socialism can operate in this sphere, why not in others? If it can save us from worldwide inundation, why should it not become the leading principle of our life as a whole?

The answer to this and to many other questions will depend on the development of the movement, on its successes and defeats, its experience, its activists and leaders. It may be that radicals will not attain their historic goals this time either. But one thing is obvious: without the participation of radical forces, reform is impossible.


1. Financial Times, March 30, 2001, Recruitment, p. 11. 2. Doug Henwood, Monthly Review, April 2001, pp. 77-8. 3. Wall Street Journal, April 17, 2001, p. A10. 4. Economic Report of the President, 2001. us Government, Washington DC, 2001.