Roots of the Economic Crisis

Z magazine, November 1998


The current economic crisis involves a series of "falling dominoes." Thailand, Indonesia, Malaysia, South Korea, Japan, Russia, and by the time you read this perhaps Brazil and more, are undergoing severe recessions. The toppling economies are big news because rather than just the poor suffering, this time those of ample means are suffering too. Indeed, if the value of stocks declined while other prices and wages went unchanged and economic activity

proceeded unabated, only those owning stocks would lose, and the share of total wealth in elite hands would decline. If your house doesn't change in value and your wage doesn't fall and your job doesn't disappear, but Bill Gates's stock drops, you improve relative to him. That kind of revaluation would be redistributive and we could perhaps celebrate it. Regrettably, however, the current crises go beyond just revaluing stocks to also afflicting the poor with devastating unemployment, horrible wage reductions, unexpected foreclosures, life threatening food and goods shortages, and increased starvation and disease. For growing numbers, these are the worst of times.

After World War II, following the lead of the U.S. and Britain, the Bretton Woods system was established for international economic coordination. It utilized new institutions such as the World Bank and the IMF and had two basic principles. (1) Liberalize trade of goods, making it easy to transact. (2) Manage capital flow, making it hard for capital investment to leap from country to country without attention to consequences. It was understood that capitalist economies running full steam ahead with no oversight would yield horrible by-products not only for the poor, but for the rich as well. Bretton Woods limited short-run plunges for profit to preserve long-run profit possibilities.

There were two important observations behind all this. First, investors being able to move their monies where and when they please would lead to fluctuations in the relative value of currencies and other dislocations undermining trade and investment-in worst case scenarios inducing recession or even depression. Second, the free flow of capital would undermine democracy and the welfare state. Capital controls, a la Bretton Woods, not only guard against dislocation and crisis, but also allow governments to carry out monetary and tax policies, unemployment benefits, and social programs, and maintain public goods, all without fear of capital flight, which would, if allowed, limit such behavior. To foreshadow, it isn't hard to guess the punch-line of our story. When capitalists got firmly in the saddle after beating back post World War II advocates of social democracy, in their zeal to eliminate the social protections afforded by Bretton Woods, they also eliminated its economic safeguards against financial crises.

The Bretton Woods system operated as intended for about a quarter century engendering the golden age of capitalism through the 1950s and 1960s. Then capitalists began to thirst anew for untrammeled profitability. On their behalf, Nixon unilaterally abrogated Bretton Woods in the early 1970s. By the 1980s capital controls were mostly gone in rich countries with the smaller economies like South Korea dropping them in turn. Now the IMF no longer regulates capital flows, but instead systematically forces countries to eliminate restrictions on international investment as a condition of bailouts. ,

What has been the result? In rich countries, growth of productivity has slowed. Incomes have stagnated or declined for the great majority, conditions at work have deteriorated, social services have been gutted, infrastructure has decayed, and the welfare state has been eroded. At the top of the heap, in the U.S., the top I percent of households own about half the stock and other assets that have increased in value, and the top 10 percent own most of the rest. They are the ones enjoying the elimination of Bretton Woods. The next 10 percent, the 80th to the 90th percentile has seen their net worth decline in the 1990s. It gets worse as you go down, with few families maintaining their living standards of 1973-when the new economy really began to take hold, with many falling behind. In poor countries, the same has occurred, but worse.

Why-would anyone favor such outcomes in place of the economic growth and social stability of Bretton Woods? Growth isn't what capitalists seek. Capitalists seek profits. Throughout the post Bretton Woods period profits have soared, particularly in the 1990s. Indeed, the current jitters on Wall Street have nothing to do with the plight of the poor, which is not part of Wall Street's agenda, but only involve fears that there may be an end to their post-Bretton Woods stupendous growth in profits. The 25 years after Bretton Woods was curtailed have been a disaster for humanity, but a joyous fairy tale for the rich.

The reason for the fairy tale for the rich is frankly explained by federal reserve head Allan Greenspan. He fingers significant wage restraint and greater worker insecurity. That is, eliminating Bretton Woods and thereby allowing capital flight to undercut social support systems zapped labor big time. The Clinton administration attributes high profits to salutary changes in labor market institutions, which is a delicate way of saying the same thing. The business press points out that workers are too intimidated to seek some share in the good times. Business Week recently reported that 60 percent of workers are very concerned about job security and 30 percent somewhat concerned.

When 90 percent of the work force is insecure, that's a fairy tale economy for the rich.

So the bottom line is that we have accelerating untrammeled profit-seeking for the few with derivative reduction of the well being of the many, and, alongside that, increasing destabilization finally threatening even the rich. Digging economies out of recessions certainly benefits the poor. Nonetheless, for radicals to spend their time telling elites how to return to saner profit-seeking has a potential downside. It can turn radicals into doctors of capitalism-not educating and acting to raise anti-capitalist sentiment and commitment, but giving the impression that while a "sick capitalism" is horrible, a "healthy capitalism" is fine.

Radicals shouldn't ignore the current crisis or entirely forego thinking about policies to correct the hardships it imposes. Instead while we act to ameliorate immediate suffering, we should also act in ways that lead beyond capitalist ideology and institutions. If we propose an end to the IMF and World Bank, we should also indicate what equitable international economic exchange ought to look like and what kinds of institutions can safeguard it.

A movement to end the IMF and World Bank has to lead to a movement for better institutions in their place. When we decry the dislocations of crisis, we need to explain what structural changes will bring about true justice (not just less extreme injustice): how workplaces must be reorganized, how remuneration should be determined, how allocation should transpire. We need to oppose sick capitalism in a way that opposes healthy capitalism too, and we need to favor immediate reforms not as ends in themselves, but in a way that fosters ever more changes and ultimately a whole new economic system.

Economics watch