Making sense of the interregnum since 2007-9

To be more specific, the response by the leading states of the world economy was not to dispense with economic agents, institutions and practices that were no longer socially useful, thereby cleansing capitalist accumulation. They did not lay the ground for a new and dynamic phase of capital accumulation. On the contrary, states protected the interests of the privileged layer at the top of the capitalist class, and the main means of doing so was to deploy extraordinary monetary policies that relied on central bank command over the money that it creates itself. Publicly created money is a fundamental pillar of the power of the state in contemporary capitalism because it functions as the final means of payment. This intervention, however, only provided a façade of stability after 2007-9, papering over underlying imbalances that became larger and larger, and postponing the eruption of further crises.

Thus, the Great Crisis of 2007-9 opened a period marked by the profound weakness of capitalist accumulation across the world economy. In core economies during the 2010s average rates of growth were historically very low, profitability rates fell, labour productivity growth declined (despite the promises of all sorts of miracles by technological innovation), investment rates fell and “zombie” firms proliferated, i.e. those firms whose profits are so low they cannot even service their debts. 

In the financial realm, the aftermath of the Great Crisis led to an ever-increasing prominence of the so-called “shadow banks” – that is, financial enterprises that trade primarily in stocks and shares. They behave like banks but without creating money, which the regular commercial banks do as a matter of course. The financialisation of the economy thus deepened further in a market-based direction. As a result, in contrast to the weakness of accumulation, stock markets rose steadily during the period underpinned by the extraordinary monetary policies of core states, keeping interest rates low and engaging in massive asset purchase programmes. The consequences were, first, growing wealth inequality to the benefit of ever more powerful asset managers and, second, growing fragility of a crisis-prone financial system.

Meanwhile, workers have faced the harsh consequences of the continuing globalisation of production and its associated relocation of manufacturing. That meant finding increasingly precarious forms of employment, often in the so-called “gig economy”,with wages that were not even enough to take their families out of poverty. Consequently, wage growth was constrained while income and wealth inequality increased. As the power of capital spread across the world – both productive and financial – workers at the core found themselves under enormous and growing pressure to maintain basic living conditions, with even harsher conditions along gender, racial, and ethnic lines.

The blow of the pandemic 

It is clear that the Covid-19 pandemic struck at a time when the core of the world economy was in a very precarious condition. The economic shock of the virus in 2020-21 was, nonetheless, very great and immediately disrupted production and aggregate demand. To confront the disease states took extraordinary measures with different degrees of stringency, which had varied effectiveness in stopping the spread of the virus. The measures, nonetheless, greatly exacerbated the disruption of production across borders and led to a rapid and unprecedented collapse of aggregate demand. Capitalist accumulation faced a crisis of extraordinary dimensions in 2020.

Inevitably, some countries – particularly those that lacked strong labour regulations – saw a spike in unemployment. Hardest hit were self-employed people and workers in the informal sector, typically women and workers from racial, gender, ethnic and other groups who tend to suffer systemic oppression and rely on daily income for survival.

Moreover, lockdowns and restrictions also increased the burden of unpaid and domestic work of the families (particularly women), which often had to deal with the pressures of the lockdowns in conditions of overcrowding without proper access to water and electricity, in a context of uncertainty and stress due to the health emergency and their loss of regular income. There is no doubt that the pandemic rapidly took clear class, gender, and ethnic dimensions, which worsened the already tough conditions of workers and the poor at the core but also in peripheral countries.

Confronted with the blow to an already weakened accumulation, core states demonstrated their enormous power in the economic field. They immediately deployed expansionary monetary policies along lines that they had already practiced after 2007-9, lowering interest rates close to zero and expanding massively their asset purchase programmes. Intervention in 2020-21 left no doubt that the state is the true pillar of neoliberal globalised and financialised capitalism. Its main source of power is command over publicly created money as the final means of payment, and especially over the dollar by the US ruling bloc. The key policy institution of core states is the central bank, without whose regular and systematic intervention contemporary capitalism is unthinkable.

Moreover, the magnitude of the Pandemic Crisis in 2020 was so great that core states were forced to abandon the shibboleths of austerity and to deploy fiscal policy on an unprecedented scale. In this regard too, states in core countries demonstrated colossal power by implementing discretionary policies such as nationalising the wage bill of enterprises and making direct cash subventions to households, but mostly providing support to businesses by deferring taxes and social security contributions while offering credit and other guarantees. 

Their ability to deliver these extraordinary fiscal policies also depended on control over money created by central banks. Core states – above all, the USA – accumulated huge volumes of debt, large parts of which were monetised by the central bank. The ultimate source of state economic power in contemporary capitalism has never been clearer. 

The underlying weaknesses of accumulation

Equally clear, however, have been the profound limitations of the power of core states. The enormous boost to aggregate demand was implemented by monetary and fiscal policies based on the creation of money by central banks and requiring the ballooning of public debt. But it occurred against a profoundly weakened accumulation. And crucially, sustained state intervention since 2007-9 systematically avoided altering the underlying structures of financialised capitalism, despite reaching extraordinary levels of intensity in 2020-21. States refrained from nationalising strategic sectors of the economy or playing an active role in reorganising production and distribution. 

Thus, when the recovery began in earnest (in some countries already in 2021, in others in 2022) it was marked by supply-side disruptions, such as productive bottlenecks. If one adds to this the rise in energy prices due to the Russo-Ukrainian war that allowed energy producing firms to substantially increase prices leading to record profits, it is no wonder that the result was inflation to an extent not seen in decades in core capitalist countries. 

The rapid rise in inflation in 2021 and beyond reflects the profound difficulties and harsh choices that the interregnum poses for the ruling blocs of core countries. On the one hand, vast state intervention allows the deeply dysfunctional capitalism of our times to tick over. On the other, the absence of structural change gives rise to sharp problems precisely as intervention takes place. 

Rapid price increases across core countries lowered the income of workers, especially of the poorest income strata. Value was thus directly transferred from workers to the profits of firms as they raised their prices. However, inflation also poses a danger to the lenders of money and other holders of financial assets; that is, to the main beneficiaries of financialisation over several decades. Central bankers began to respond aggressively in 2022, raising interest rates high to cool aggregate demand and contain the growth of nominal wages. 

This response is typical of the class divisions that have marked the years of globalisation and financialisation. Instead of tackling the problem directly through controls over prices and active state intervention in the mechanisms of production and supply, the burden of adjustment was once again shifted onto those who bore none of the blame for causing it. Protecting the interests of the rich and powerful was paramount. There is little doubt that the interregnum is proving disastrous for workers and the poor.

Core, periphery and hegemony

A further and striking aspect of the Pandemic Crisis was that several states in peripheral countries attempted to deploy similar measures to states in the core but were unable to do so on a comparable scale. Thus, as core states became more active in support of the prevailing structures of accumulation globally, sharp divergences became apparent between core and periphery. Moreover, sharp conflicts and tensions also emerged between, on the one hand, the historic imperialist states at the core of the world economy and, on the other, rising powers from the periphery. The hegemonic position of the USA came under direct challenge from China, Russia, and others.

The interregnum has witnessed an exacerbation of global tensions that is unprecedented in recent years and is reminiscent of the imperialist frictions prior to 1914. The threat of world war hangs over humanity, spurred by economic contests that are global. The spread of neoliberal capitalism during the last four decades has been pioneered by globally active productive capital – the builders of global value chains – together with the globally active financial capital – the banks and investment funds of financialisation. The stagnation of accumulation at the core has been matched by the proliferation of exploitative capitalist tentacles across the globe.

Internationally active productive capital and internationally present finance are the most aggressive pairing of capitals ever known. Neither dominates the other and both have a global ambit by their very nature. Together they have redefined core and periphery in the world economy on an entirely capitalist basis – there is no longer a non-capitalist periphery that carries economic weight. For these exceptionally aggressive private capitals, profit can be extracted internationally by taking advantage of lower wage costs and other production advantages such as loose environmental regulations; profit can also be extracted by investing loanable money capital in financial assets internationally. The entire world market is their natural terrain and they do not seek territorial exclusivity through, say, rigid tariffs and customs.

Rather, there are two paramount requirements for globally active capitals: first, access to world money as the main means of payment and value preservation in the world market; second, an institutional and legal framework for international investments, trade, payments, accounting, and so on, that is conducive to profit making. The state that can provide a reliable form of world money and ensure a conducive institutional and legal framework for globally active capitals is the hegemonic state, and that, of course, is the USA. 

For peripheral countries, their subordination amounts precisely to an inferior position for their currencies in the world market, thereby limiting their ability to pursue fiscal, monetary, credit, trade, and other policies. Subordination also amounts to accepting the institutional and legal framework of the world market, which confers benefits to productive and financial capital of the core. 

But the periphery that has gradually been formed along these lines is far from fixed or unchanging. On the contrary, the emergence of globally active productive enterprises and the mobilisation of state power in several peripheral countries has led to the emergence of autonomous centres of capitalist accumulation beyond the core. The result has been rapid differentiation among peripheral countries. 

The hegemonic contest that has inevitably emerged during the interregnum is thus reminiscent of the intra-imperialist contes prior to 1914 primarily because it is fundamentally economic. But it is also profoundly different from the older imperialist frictions because the contestants for hegemony come entirely from the periphery rather than the core. The main challenger is obviously China, although Russia and other countries are also taking part. The issues on which the hegemonic contest focuses are naturally the determination of world money and the institutional framework of the world market. The power of the USA is under threat with regard to the role of the dollar and in connection with the agencies and mechanisms that give shape to the world market. 

The USA long ago lost its preeminent position with regard to production and more recently also in trade relative to China. But it retains its preeminence in finance, and the role of the dollar as world money will be far from easy to challenge. By the same token, the hegemonic USA will continue actively to exercise control over the dollar reserves of other countries and its central bank will selectively favour particular countries when it comes to accessing dollars. The subordination of peripheral countries will continue and the contest for hegemony will only become more intense in the years ahead. The end result of such contests is, of course, war. 

A radical anti-capitalist and socialist way out

After more than four decades of neoliberal dominance the core of the world economy shows no signs of dynamism, the periphery is desperate for a path toward growth, and the struggle for hegemony is more vicious than ever, pushing the world toward war. This atrocious predicament speaks to an exhausted model of worldwide capitalist accumulation based on command by US monopolies over global production networks, a market-led financial globalisation underpinned by the US dollar, and US political and military hegemony. 

The consequences include steady impoverishment of the living conditions of the vast majority of the population around the world, particularly women, LGBTQ+ people, migrants, ethnic minorities, and people in the Global South. The beneficiaries are some large firms, such as those in technology and fossil fuels, and financial asset managers.

The model is exhausted but is also incapable of generating a new way ahead for the world. The main challenger to US hegemony, China, is slowly gaining ground in global production and finance but is not yet capable of providing an alternative that could become hegemonic at the world level. Thus, we are living in an interregnum full of morbid symptoms. There is a mounting environmental crisis with ever-worsening manifestations and the retreat of democratic representation. World war is a real threat, but so is growing authoritarianism in large areas of the globe, and the rise of the far right across both core and peripheral countries.

Anti-capitalist and socialist forces have struggled to come up with explanations of the contradictions of the current phase of capitalism and offer democratic and class-based alternatives for the masses. We need fresh and forward looking debates on what these alternatives could be but this could happen only if the present predicament of world capitalism was properly analysed. Our book is a contribution to that effort. 

Costas Lapavitsas is a Marxist economist, and Professor at the School of Oriental and African Studies, University of London. He was elected as Member of Parliament for Syriza in but left the party in opposition to their implementation of austerity.

Nicolás Aguila is doing a PhD in Economics at theDepartment of Philosophy, Politics, and Economics, University of Witten/Herdecke, Germany. He is a member of the EReNSEP Writing Collective.