Chris Harman


The Outbreak of the 2007 Crisis

(November 2007)

Transcript of talk at the Historical Materialism weekend in November 2007.
First published on Chris Harman’s Back Pages, 23 June 2009.
A number of graphs are mentioned in the text but none of them were posted on the blog.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

I want to start by saying that a couple of times in the past I’ve been on platforms debating with Bob Brenner. On this occasion I agree completely with his conclusions even if I come to this conclusion by a rather different path to him.

I want to start by looking at predictions and so see whether they have fitted or not. If you are a Marxist it is sometimes rather disturbing to look at what you said 10 or 15 years ago. My first major attempt to produce something in Marxist economics was a series of articles in International Socialism Journal which later appeared as the book Explaining the Crisis. I wrote these articles in 1981-2 as we were going through the second of the crises which have characterised the world since 1975. We have been through two more major crises since then.

My conclusion essentially was this. Capitalism inbuilt features included its cyclical movement – the business cycles, the slumps and booms, the ups and downs, that Marx described.

There were also two long terms trends. First, there was the tendency of the rate of profit to fall, which Marx argued was counteracted by the devaluation of capital through the crisis. Second, there was the concentration and centralisation of capital.

The British Marxist – or rather South African-Israeli-British – Marxist Mike Kidron made the point that the tendency to the concentrations and centralisation of capital, with individual capitals getting bigger and bigger and representing a bigger part of the world system – makes it more difficult over time for capitalism to solve it crisis by the devaluation of capital through crisis. This is because the units of the system become so big, that any that go out of business in the crisis create the danger of what he called “black holes”, whereby one giant firm goes down and pulls others down with it. The unprofitable firms go out of business causing the profitable firms that supply them also to go out of business. As capitalism gets older this leads firms to put pressure on the state to try to stop devaluation through crisis taking place, regardless of what the capitalist ideology says.

Mike argued the possibilities of doing this began to come to an end in the 1970s. Then you are faced with a situation where capitalism, still unable to solve its problems by devaluation, enters a period of low levels of accumulation, low levels of profitability,

My conclusion in 1982 was essentially we were in a period, a long downturn of capitalism – I don’t like talk of up waves and down waves, that is far too mechanical. Kidron spoke of ageing capitalism, it had become sclerotic, it no longer had the flexibility to solve its own problems by its own inbuilt mechanisms, and that therefore we were faced with a long period of crisis. I rephrased that to say crises because in this process two things happened. You had minor devaluations of capital. And you had increased pressure on workers, on wage and so on – and increasing rate of exploitation, as is shown in the graphs. I nevertheless argued this would not be sufficient to clear out the system and open up the way for a new period of expansion. I wrote it would require the bankruptcy of two or three major economies to clear out sufficient of the old capital from the system for the system to revive.

Looking back at what I wrote, I think I underestimated the capacity for there to be booms of five or six years in particular parts of the capitalist system in these period. We have to be honest. There was a recovery from the crisis of the 1980s to some extent in the US, particularly in Japan and in Germany. There was a recovery from the crisis of the 1990s towards the end of the 1990s. And clearly there has been a whole new area of capital accumulation in China over the last 20 to 25 years.

Nevertheless, the central point I still want to persist with is that capitalism still faces the central problem of, if you like, the weight of the past, of past accumulation which it find difficult now to write off. It can past the buck. Firms get into trouble and the central banks move in to rescue them. But the costs of doing so are spread out among the system.

So the first graph I want to show you was produced by two people working for the IMF two years ago. They produced a major study of saving and investment through the system as a whole. What is important is that both saving and investment go down. But if you look at it more closely, the line for investment is for gross investment as defined in normal capitalist terms, that is, it includes things like housing – even though in reality housing is a form of consumption. If you were to take in terms of productive investment, what you would find is a long term decline, so that is now considerably less than global savings. Global savings are effectively surplus value created on a world scale, and it is less than global investment.


The second feature worth looking at is the rate of profit, which Bob also talked about. These are the figures for the US.




Non-financial Corpns





























If you looked at the figures for Germany, for most western countries and Japan they would show to a very large extent a similar picture. You find a big fall in the rate of profit from the late 1960s until 1982. Then from then onwards a recovery in the rate of profit, then a lowering of the rate of profit, then recovery of the rate of profit again, then lowering of the rate of profit again. But at no point before the year 2000 does it arise above the level of the mid 1970s that provoked the first major post war crisis. So you have recovery on the basis of increased exploitation, and also, with crisis of the early 1990s and the crisis of 2002-2 were distinct from all the previous capitalist crises of the post war period in the sense that they were accompanied by major bankruptcies. There was a study of bankruptcies. There is a study of bankruptcies, the Bankruptcy Year Book, which points out there were no major bankruptcies in the United States between the 1930s and the Grand Pen bankruptcy which was 1970, and that was an isolated occurrence. But if you look at the last few crises you find a growing number of big bankruptcies in all the major economies. And you also find the bankruptcy of one major economy, and a number of minor economies – that is the bankruptcy of the old USSR. This had some effects for the system as a whole.

Despite these things, the rate of profit for the system as whole had not recovered by the year 2000 above the level. If the rate of profit does not recover, as Bob said quite rightly, then there is a problem with investment. The incentive to invest is not sufficient to absorb all the productive capacity of the system.

This does not mean there is no productive investment. Rather, there is this mass of capital wondering round the world with internationalisation of the financial system looking for any opportunity where it seems there are profits to be made. Usually these opportunities are not productive – as with the housing boom and as with previous speculative booms like the stock exchange boom of the late 1980s, and stock exchange and booms of the late 1990s. Occasionally they will focus on some area where they believe there is profit to be made by productive investment. The big case was the telecoms boom that took place as the same time as the shares boom of the late 1990s. The expenditure on that was amazing.

The crisis of the early 2000s began before the 9/11 2001. The week before 11 September the Financial Times had a series on the telecoms industry. It calculated that $1000 billion dollars worth of optical cables etc. had been laid down by the telecoms industry in the expectation of somehow making profits from it. The value of that much investment was wiped out in the crisis – and in Britain one great bastions of the British engineering industry, GEC-Marconi was also effectively wiped out. In the US we saw Enron and WorldCom wiped out in that crisis.

What was wiped out was investment on the expectation of profits which could not be achieved.

The latest bubble has been a bubble in the United States, but also accompanied by a drive of investment towards China, which I will return to later.

The third thing which has to understand is that when we talk about internationalisation of the system does not mean the decoupling of the giant corporations from the state. There is something called the Transnationality Index produced every year by UNCTAD which measures the proportion of assets, sales and workforce of the major corporations that are based in one country. Of the top 100 corporation’s world wide, on average, despite all the talk about globalisation, half the assets of each of those corporations are based in one country. That means that what happens in that country is central to their profitability and so forth. It is also quite interesting that the for United States multinationals the average is greater than half – in other words US multinationals are on average less multinational than others. The most multinational are the ones based in small countries – like Sweden, Holland. And even there the figures are deceptive. The other assets of multinationals based in Sweden are likely to be in the neighbouring Scandinavian countries, of those in Holland in Germany or sometimes in Britain.

So declining world wide profitability, leading to declining rates of accumulation, also experiences bursts of frenzied investment in one part of the world or another. So it seems that the engine driving the system forward is first in one part of the world, then in another, only for the engine then suddenly to falter. The Japanese engine faltered 15 years ago, just as the American Congress were worried that Japan was going to overtake the United States in seven or eight years.

Faced this situation the states are not something separate from the system. They intervene in the system. So when we talk about an economic crisis, this reflects itself politically. I think it does so in two ways. It is very difficult not just to speak in terms of countries. It is also very difficult not just to speak in terms of corporations. We have to say the corporations based in particular countries use their governments to offload the impact of the economic crisis on to corporations based in other countries. That is politics becomes global politics.

Something else also happens. The word “neoliberalism” is very much a misnomer in describing of how governments respond in this situation, because they are under intense pressure from corporations to intervene to prop them up. Therefore there is a paradox. During what is sometimes called the “Keynesian period”, or sometimes the “Fordist period” – I prefer the phrase the “state capitalist period” – of the system from the 1940s until the mid 1970s, the world economy was expanding, most national economies were expanding, and very rarely did states intervene with the classical Keynesian methods of pumping money into the economy to keep it expanding. During what people tend to call the “neoliberal period” of the last 35 years, governments have intervened in this way much more than they did in the previous period.

When they do so it can produce crises inside governments, not merely between governments. People in Britain who have been watching the spectacle of the Governor of the Bank of England hauled over the coals by the big voices in the City of London for not intervening over Northern Rock earlier. Whatever they say in theory, the big figures in finance and industry look to government intervention in such a situation.

The rise of China is another factor in the situation. People sometimes see as it as meaning we are moving out of the long period of crises is.

This is depicted in the graph.


You can see that China is rising very quickly within the system.

What are not called the BRICS – Brazil, Russia, India, China and South Africa – are shown as just about reaching the level of the European Union 15 (that is, before its expansion into Eastern Europe) in terms of output.

But I must give a warning on these figures. The IMF, the World Bank and OECD tend to give figures for the size of national economies these days in terms of “PPP” – that is in terms of how much can be bought internally with the currency. These are very useful figures for providing a view of how much people are actually consuming, since at current exchange rates a very important range of goods – staple foods, transport, personal services – are much cheaper in some countries rather than in others. But in terms of what matters to capitalism as a system, they are misleading. If you want to know living standards are in a country use PPP. If you want to know what capitalists and states can buy in the world system, you have to use exchange rate figures. And therefore exchange rate figure for China (and to the BRICS as a whole) would be much lower than that shown in the graph – that is at perhaps a third of the EU 15 level. Indeed, a recent recalculation for the Asian Development Bank of the Chinese economy in PPP terms shows it as being half the size as shown in the graph. (it shows it as being about $4 trillion as opposed to the US’s $13 trillion in 2005 and would lower the graph line for both China and the BRICS a lot).

I will argue that the rise of china is not yet sufficient to change the dynamics of the world system. There are people who say the rise of China can solve all the problems created if there is a crisis in the United States or Europe. I would argue palpably from the figures that the Chinese economy is just not big enough to carry that through.

What is more, an important fact about the rise of China is that it represents a further destabilising element in terms of the state system of capitalism. Capitalists see need the state to intervene to deal with the threat of crisis.. But the instability makes it much more difficult for states to do so effectively..

An important element on instability lies in tango for two between the Chinese and the American economies. The Chinese economy has a surplus of vast sums of money which are lent to the United States to allow American consumers and the American state to buy; things to keep the US economy running. This is an element of instability in the system.

A couple more things. This graph shows the rate of exploitation of the advanced economies over recent decades. I t shows the proportion of wages in national value added. What can be seen is that the rate of exploitation everywhere has been rising. This is one of the important factors countering the fall in the rate of profit, permitting profit rates to rise by the year 2000, so that they had made up half of what they had lost between the late 1960s and 1982.


But, here comes the crucial point in terms of the system. As Tony Cliff used to say, capitalism is caught between two Scylla and Charybdis, the two mythical monsters in Homer’s The Odyssey. Cliff always used to argue one monster was the falling rate of profit, the other was the reaction to the falling rate of profit by cutting wages. If the rate of profit does not raise investment high enough to produce a new spell of investment and wages are cut, then there is a problem of a shortage of total demand in the system to keep the system going forward. This is precisely what is shown by the figures given earlier for global saving and investment. If gross investment is only just about saving .and productive investment is below savings, then there are funds that cannot be absorbed by the system in such a way as to produce more surplus value. But they can be absorbed for a time if the system finds some way by which people can borrow to buy what the system is producing.

This leads us straight to the subprime mortgage crisis in the US. What has been happening effectively for the last five years is that American financiers conned themselves into the belief that poor people in the US could borrow enough money to buy the excess produced n a world . This is a form of the old pyramid scam, what economists sometimes call a Ponzi scheme, the illusions that you give money to people and they buy things off you and somehow you are going to end of better off than before.

We are seeing that come unstuck, but not only in the United States. It is coming unstuck in terms of China. The figures for China for saving and investment are quite incredible. For the world as a whole officially defined gross capital for the world is above saving, for China officially defined gross capital formation is below saving,. This leaves a vast excess of domestic saving over investment which is then sent across the Pacific to be lend in the American economy to keep the whole system running. That is why the situation today is very serious.


Riccardo Bellofiore at an earlier meeting used the phrase “privatised Keynesianism”. Keynes imagined you could drop pound notes from a helicopter and this would keep the economy working through a crisis. Instead of dropping pound notes from a helicopter, the United States financiers have been giving away houses in the belief that somehow they will get something back from it. That creates a very serious crisis.

Faced with it, the options for capitalists are very limited. Martin Wolff writing in the Financial Times puts forwards three options. In his case it is a question of once bitten, twice shy because he wrote at the time the Asian crisis of ten year ago began in Thailand that it was only a “hiccup” in the system, of no importance whatsoever. This time he does see the importance of what is happening. Using the figures on savings and investment from the IMF he is saying effectively there may be no way out of the crisis but for the American state to bear the burden of all the loans that have been given to the American population. But from a Marxist point of view that really means that the American state raises the wages of the American workers so that they can buy the goods which have been supplied by capitalism. That is only another way of saying the only way out of the crisis is not to raise the rate of profit but to lower it. This is very serious in terms of the system.

That does rule out completely the possibility of short term solutions. When crises began to develop in 1987 and 1997, they managed to defer the crises by two to three years by government action. They may be able to do that. I don’t believe they can defer it indefinitely because of the contradictions of the system.

There are longer contradictions which will be there even if they have a short crisis and they find some way out of it. There are two long terms problems.

The rise of China is putting enormous pressure on all the other capitalist countries . Their response to it is to increase the rate of exploitation, and that then become a game that puts the pressure on every other country to do the same. It is very clear if you read the various documents produced by the European Union, European business committees, agencies and so forth, Europe can only survive in global competition – they mean European capital in global markets – against American, Chinese and still Japanese capital by increased pressure on welfare, on wages, on hours and so forth. All the measures that are rather misleading entitled neoliberalism – they are really the measures capitalism needs in the current phase of the system regardless of the ideology of those who run the system – all these measures are built into the current phase of the system. So even if we see through this crisis, we are not going to see an upturn in living standards and conditions such as those of us who are old enough witnessed in the 1950s and 1960s.

The last point is that along with this there will be increased clashes between the great capitalist powers in which the great corporations are based, clashes which can be quite dramatic, can take the form of proxy wars elsewhere in the world – in some ways the Iraq War is a proxy war by the United States in order to be able to exert pressure on Europe, Japan, Russia, and China. There will be more such things. In such a situation any notion that capitalism in its present phase is somehow peaceful is nonsense.


My last graph is for government expenditure which shows it as rising not only over the last two centuries. It but over the last two decades, through the phase of so called neoliberalism. There has been more government involvement, particular with the growth of US arms spending over the last six years. According to one calculation by one of the writers in Monthly Review, US arms expenditure is not two and half or three percent of GNP. He puts the figure at 5 percent. That is there is militarisation, not in terms of great powers – I am tempted to say “as yet” – but in terms of the most powerful great power, the US, trying to protect its multinationals in this situation by waving the big stick. In order to get the other powers to accept what it says in the crisis.

I cannot see any easy way for the system to get out of the long period of economic downturn it has been going through. To get out of it, just raising the rate of exploitation is not enough. It requires some of the giants of the system to go out of business to clear the way for others. I don’t think the system in its present phase can tolerate this. The other multinational corporations can’t tolerate it. Therefore we are going to see this crisis, emergence from this crisis, possible another boom somewhere in the world, then another crisis and all the time a tightening on the people working within the system.

Last updated on 6 December 2009