Lessons from the economic crisis Ruthless Criticism

Lessons from the economic crisis

[Lecture by Joseph Patrick in San Francisco, California: September 3, 2009]


The basic history of the current economic crisis is familiar enough to everybody. If you take the time to look, you can find plenty of information on the “chain reaction” that ran from failed speculations in a rather new and exotic corner of the financial sector (trade with ABSs, especially mortgage-backed securities, CDOs, credit default swaps, etc.) to the near-total collapse of the financial sector as a whole, and finally to what is now being called the “great recession,” the most severe economic crisis of the postwar era. Statisticians report that there will be 50 million additional deaths from starvation in the third world, a drastic rise in unemployment in the industrial countries and throughout the world, a dramatic drop in industrial production and exports. Not only that, the crisis already has a few bankrupt states under its belt, further bankruptcies might still be coming, and the value of numerous different national currencies is tanking.

So the crisis is here. How has the general public reacted to all this? On the one hand, there has been a great deal of outrage at perceived greed on the part of Wall Street's denizens and speculators in general; at London’s “city boys” and at yuppies and old hands whom they accuse of not even understanding their own creations. The financial sector and its players haven’t had such a bad reputation for years.

On the other hand, this outrage has long since passed over into the hope, and even the demand, that these banks will return to business as usual as soon as possible – and that in the future, their business will operate with a greater measure of reliability and security. Faced with the consequences of the failure of the banking system – be it the loss of a job or of any prospect for getting one because of a “credit crunch” suffered by companies, or be it the loss of their savings because of failed investment banks, funds and insurance companies – they insist that everything be done in order in order to promote the recovery of the banking world.

To that end, people are willing to make sacrifices: unions – most prominently in the auto industry – are making compromises on wages and working hours; most people are willing to accept that the nation’s “savings rate” must rise, that is, that they will have to have more respect for the limits that their low wages and uncertain job prospects impose on them. Many will abandon even the hope of owning their own home or a decent apartment. If they have no income, no job and no assets, then economic sense dictates that they shouldn’t have a home either. Others will have to recognize that they simply cannot afford to have a second or even a first automobile, regardless of how much they might need it. The people are willing to bear all these costs for a return to the status quo – even the left agrees, as long as the instigators of the crisis also pay their faire share for restoring their own riches and their own enrichment.

And by doing that, by hoping for and demanding an end to the crisis and a return to normalcy, the general public is ignoring the unpleasant lessons that the crisis itself has been teaching them about the economy and the society in which they live. And they ignore these lessons at their own cost. These lessons are what I want to talk about tonight. I want to draw some simple, perhaps even obvious, conclusions from what we have had to experience over the last few years of the crisis. One thing is certain, even if some of the conclusions are familiar, nobody seems to take them seriously.

1. Lesson on the nature of the real economy


The very first thing we could learn from the crisis is what a truly absurd situation a capitalist crisis is. Everybody knows that an economic crisis entails a radical increase of poverty and deprivation, a more or less drastic breakdown in the material life-process of society. And yet: Is there any shortage of goods for consumption? No, supermarket chains complain of overfilled store shelves, excess inventory; the “housing crisis” doesn’t mean a lack of homes, instead there are massive foreclosures – too many houses and people thrown out of their homes. A shortage of means for producing goods? No, we hear talk of “overcapacities” in the auto industry – too many cars and too many car plants. Or is there a shortage of labor-power to produce those goods? No, there are even dramatic rises in unemployment because firms have had to “shed” personnel – too many people.

The question is – too much for what?

Certainly, there is not too much of all that for the purpose of fulfilling needs. Plenty of people would love to get hold of the goods on the shelves and the autos in the car lots. And many people would jump at the chance to be able to work for a living. Apparently, there is too much of all these things – not for the needs of the needy, but for the economy and its purpose. These things are useless, because they cannot be used to turn a sum of money into a larger sum of money – the purpose that characterizes the market economy. That is an absurdity that only capitalism has managed to achieve. Former societies suffered crises because of a shortage of wealth; in capitalist society, people suffer in the face of excess wealth – useless for the purpose of accumulating money. And because of that kind of an excess of wealth, crises plunge the majority of the population deeper into poverty.


Of course, in the current economic crisis, there is a shortage of one thing – credit. What do the fears of a “credit crunch,” which have now become a reality, teach us? In the market economy, credit – borrowed money – is the most decisive economic resource. Without credit, work cannot be done, useful goods cannot be produced, machines cannot be employed, services cannot be provided, etc.

That is not really a secret to anyone; the importance of bank loans for companies is something that most people take for granted. And if they didn’t realize that before, they have certainly come to adopt that opinion now. Credit, more than ever, has a great reputation – it is the means needed to produce all the things society needs and enjoys. And companies that make their money producing and selling those goods have also earned the honor of being deemed the “real economy,” busy with the production of useful things for people’s needs.

But this high opinion of both credit and the “real economy” is remarkable, given the fact that credit in and of itself is not a means of producing anything at all. It doesn’t facilitate labor, nor does it create machines and other instruments of labor, and it doesn’t bring about raw materials. If the purpose of the real economy was merely to combine labor with the necessary tools and materials in order to produce goods, borrowed money would be as superfluous as can be, and the real economy would be unaffected by a “credit crunch.”

Clearly, credit is useful and necessary to the “real economy,” but for what? Borrowed money, just like money in general, is useful for financing production – i.e., for gaining access to and getting a hold of the sources of wealth, from which a producer would otherwise be excluded. That is because these goods are all private property, subject to the exclusive ownership of their owners. Without the monetary means to purchase that property, no work can be done, no good can be produced and no service can be provided. The usefulness of credit presupposes a barrier to production that has nothing to do with a shortage of means of production, but with the exclusive and excluding form in which it exists – private property. In this sense, all production in the market economy is subject to the rule of property, the power of exclusive ownership and control over the means and sources of material wealth – especially other people’s labor. The sources of material wealth – labor and means of production – are not subject to the purpose of producing useful goods for society’s needs, but to the private power of their owner.


In the form of credit, this power of property over labor and means of production becomes a tradable commodity. It can be bought and sold, or rather: lent and borrowed. When banks make loans, they transfer the right – for a limited period of time – to make use of others’ property as if it were their own. When a capitalist in the real economy receives a loan from a bank, he acquires the power to command other people’s property and other people’s labor-power for his own enrichment, to have other people produce more value than they receive in the form of wages. In short, the capitalist thereby acquires the power to exploit that labor on a larger scale – one that he would not be capable of on the basis of his own funds. Furthermore, he acquires the power to make that exploitation more effective, to “rationalize” it. He can invest in the machines and other technological innovations that make labor more productive in a capitalistic sense: more labor for less wages.

The price for that power is the interest that a borrower must pay for the loan he receives. This means that the transaction will only pay off for the borrower if he uses the credit he receives to make a profit and does so successfully – a profit that is higher than the rate of interest he must pay on his loan. Credit does just that: it expands capitalists’ capacity to make profits on an increasing scale.

It is only because that is the purpose of production in the real economy – turning money into more money, and as much of it as possible – that credit is a useful instrument for production in this economy. For the physical process of production, credit is useless. But for turning an advance of money into a larger monetary return, credit is very useful for the real economy. Only because the real economy pursues the same goal as the financial sector can it make use of credit, and only for that reason can it be harmed by a shortage of credit.

That is why it’s wrong to make a distinction between the bad financial capitalists on the one hand, who are interested only in money and deal in mere speculation, and the good “real economy” on the other hand, where the players are interested in tangible, useful things. Both have the same goal. And what is true for banks is just as true for companies, if they don’t stand to make a profit on production, then no production takes place and no one can earn a livelihood.


But credit is not only useful for capitalists in their competition over market share. What the credit crunch makes clearer than ever is that credit is an indispensable means for doing business – the crucial means needed to succeed in capitalist competition. If the collapse of the speculative business that goes on in the financial sector can cause the most severe crisis of the postwar era, then credit is not just a convenience, but the all-important means for doing business. With credit, anything is possible; without credit, nothing is possible. Without a constant source of other people’s property, production not only slows down, but can come to a halt and even shrinks.

This reveals that companies have long since been doing business – investing in labor and the means to exploit it more profitably – on a scale that far exceeds what they would be able to do on the basis of their past business success. They have long since been doing business with means that do not derive from their own earnings, but from anticipated future earnings. Capitalists are, in this sense, always “living beyond their means.” That is how they compete – they live beyond their means in order to increase their means. If a credit crunch brings their business to a standstill, then the capital they employ for business is credit. If the money capitalists have to do business is useless without borrowed money, then the means of business is debts.

Remarkable: Most people avoid debts if they can; to be in debt is a bad thing, a burden. For business, however, debts are their lifeblood. What makes this economy go ‘round are not goods, means of production or labor, but debts that function as capital.

Therefore: Even the business of companies that produce the most tangible goods is a speculation on the future of their business; that speculation determines whether they get the means they need to compete in the future.


Summary: It’s no secret that if banks aren’t healthy and profitmaking suffers, the masses are more or less doomed. Unfortunately, however, this is usually taken as proof that the health of the banks and the economy, and all the means by which they do their business – even the most complex financial derivatives – are a crucially important means for the livelihood of the masses. And because that is so important for their own livelihood, it demands and deserves a great deal of support and sacrifice from those same masses.

But the crisis itself teaches a different lesson: the economic aims of the people are not the aim of this economy. Their purpose – getting a job and going to work to earn the money they need to finance their needs – is not the economic purpose of capitalism. Turning money into more money – that is the economic purpose of capitalism. If there is no profit to be made by employing their labor, it’s worth throwing them out on the street. If their labor is not good for profit, then no labor is performed at all. If that is the case, then we can see what labor in this economy is good for: not producing useful goods for needs, but increasing the property of capitalists. Or rather: Their work is good for ensuring the creditworthiness of their employers, and thus their access to credit, their ability to get into debt with the banks. So ultimately, their work is good for one thing – supporting the business that banks do with debts.

2. Lesson on the business of the banks


Ever since the financial crisis broke out, we have been told time and again by politicians and the press that the crucial service that banks provide to the “real economy” consists in providing loans so that companies can create not only jobs, but also produce all the goods and provide all the services on which “we” all depend. The raison d’etre of the banks? Giving loans to productive firms whenever they need them, thus supporting the production of useful goods, the satisfaction of needs.

But the crisis teaches us what a peculiar service that is, and that we can only call it a service in a very ironic sense. Is there any other service whose reduction or absence can ruin the recipients of that service? Janitors and waitresses – not even auto companies – could claim that kind of importance. The mere fact that the reduction of this service can threaten to strangle the entire material production process demonstrates that we need to stand the customary notion of “who serves whom” on its feet: If production comes to a halt as soon as the banks are no longer willing or able to finance production for the sake of their own earnings, then commodity production serves the banks’ business, not the other way around.

Banks either provide or withdraw the decisive resource of the capitalist economy – the power to advance capital – thus enabling or disabling profitmaking in industry and commerce. With their lending decisions, the banks act as judges over commodity production, passing judgment with a view to their own profit interests.


Step back and consider that for a moment. What is the business of banks? First, their business is actually quite miraculous. They turn money into more money – without engaging in the process that actually produces additional money value. They don’t invest in means of production and labor; they don’t exploit that labor to produce commodities; and they don’t sell those commodities on the market. Banks turn money into more money merely by entering into legal contracts with debtors of all kinds – companies, consumers, and governments. The money a bank makes on these transactions is not determined by the degree to which their debtors actually succeed in producing additional capitalist wealth.

Regardless of whether the money a bank lends is even used to create additional wealth, the increase of the bank’s capital is determined in advance. And the debtors have a legal obligation to make that come true. Other businesses turn money into capital by investing in a process of production and exploitation, successfully selling those goods on the market and earning a profit; for the bank, money is capital as soon as it is lent out.

In that sense, the business of the banks is capitalism in its most pure and perfect form. They pursue and achieve the purpose of all capitalist activity – turning a sum of money into a larger one – without any detour into the world of actual physical commodity production. The subordination of material wealth to the purpose of profitmaking – that attains its most perfect expression in the business of the banks, which make their profits not by engaging in the production and sale of material wealth at all, but with the power to command all material wealth for the purpose of capital accumulation.

Remarkable: Capital, self-expanding value, money that begets more money, is a social relationship. Money increases in the hands of productive capitalists by being invested in a process of production and exploitation that produces additional value, from which the workers are excluded and which lands in the pocket of the capitalist. The bank sells that social relationship of force and exclusion as a thing and by merely transferring it to others, the bank makes that social relationship productive for its own wealth. That fact is based on the fact that all the sources of wealth can be purchased and that they are totally subordinated to the power of money. But if that is the case, then all you need to increase your money is – money. If you have money, you have everything you need to turn it into more money. If you have money, you have capital – that is what the bank learns from its own lending business.


That practical knowledge that the banks draw from their lending business – that money in their hands is capital – forms the basis for that other branch of the financial industry whose dimensions arouse so much astonishment: the securities trade. Here, banks do business and enrich themselves independent of the “real economy.” Here, banks enrich themselves by trading amongst themselves, doing business with their power to turn money into capital.

Issuers of securities take incoming payments from the whole spectrum of their business activities (e.g., mortgage payments), take the liberty of postulating an underlying capital that yields that stream of income, sell that capital to the “community of investors” – usually other banks – and turn that postulated capital into actual money proceeds.

Investors turn their money into capital by purchasing these securities and thereby acquiring assets – which consist in paper documents that perform the same function as the most intricate process of capitalist production; they yield a return, an increase of money.

And what is that capital, bought and sold on the capital markets, made of? Debts. The greatest fortunes of this society are made up of debts that function as capital. That is perhaps most clearly demonstrated by the current crisis, in which the failure of one bank led to the failure of several others. The failure of one bank to service its debts and thus confirm their quality as capital leads to the destruction of the others assets, which makes them incapable of servicing their debts and confirming their quality as capital, and on and on. Ergo: The assets of one bank consist in the debts of the others.

3. Lessons from the bailout


Recall the situation last summer: the financial system was racing towards the edge; major banks were going broke or were about to go broke; the entire global market economy stood at the brink. And then: Governments in the more dominant capitalist nations mobilized dizzying sums of money, employed them in a wide variety of ways – all to save the big investment banks from failure and fend off the horrendous consequences for the economy as a whole.

What do we learn from that?

The state does not regard the business of the banks as a business like any other. In the case of private individuals and the overwhelming majority of companies, bankruptcy is more or less a private affair to be settled between those who have gone bankrupt and their creditors. Companies are either wound down or restructured and rebooted; for the most part, the state doesn’t get involved. The failure of one company is the flipside of the success of other companies – and the market economy marches on.

If a bank fails, then the state is much more concerned; the failure of even an individual bank of decent size is an emergency to be dealt with, and a failure of the banking system is tantamount to a national catastrophe. Many creative metaphors for that: “meltdown,” “standing at the abyss,” “economy on the brink.” “Gentlemen, if you don’t save the banks, tomorrow there will be no economy left to save.” In the eyes, of the state, a bank failure is, in short, an apocalyptic scenario.


For that reason, the bailout itself enjoys both a good and a bad reputation.

On the one hand, many are very impressed with the state’s demonstration of its power, with the ability of politicians and government institutions to spring into the breach at a crucial moment and fend off despair. Many on the left are pleased to see the neoliberal idea refuted, and to see the state reestablish its authority over the market.

At the same time, many others have complained of what they regard to be a glaring injustice: billions for the banks, further sacrifices for the rest – taxpayers, homeowners, etc. They argue that if the state apparently doesn’t have any trouble mobilizing enormous amounts of money, why doesn’t it spend more on those who need it the most? That money could just as easily be put to use in schools and hospitals, to bail out poor homeowners and small business, to promote better housing for inner-city neighborhoods, public transportation systems, green energy, etc.

The state’s response to these complaints shows how inappropriate both these reputations are. Bernanke: “hold our noses and save the banks.” If the financial system is the most crucial player in the market economy, that teaches us that the wealth of this society doesn’t consist in goods or in means of production, but in the power to finance processes of moneymaking. That is what the state rescues when it rescues the economy; that is the wealth of the nation.


The state’s intervention to restore that power is therefore also very instructive in another sense – it reveals the nature not only of that wealth is political force. If the political power of the state is what rescued the banks and with that the entire economy and all its wealth – the assets of banks and firms, the savings of the population –, then this economy is founded upon the force of the state. If money and its value gets saved by an act of the state, then money is a product of state force. And if the power to finance is the wealth of the nation, the wealth of the nation is a relationship of power – it is the power of exclusive ownership over wealth and the power to get hold of that wealth.

Likewise, making money is nothing but the process by which that power is exercised over all the elements of society’s wealth – over raw materials and means of production, and over the labor of other, propertyless people – for the purpose of turning money into more money.


Finally, the state’s rescue efforts show how much the state insists that the wealth of this society is private property and there for the purpose of accumulating as private property in private hands.

First, that fact is illustrated by the constraints that the state has imposed on itself even while directly intervening in the economy in such a thorough way. It does not compel the banks to make loans and suspend their profit calculations; it provides them with liquidity, guarantees their solvency and gives them access to an abundance of government funds for that purpose. In short, the state uses its political power to improve the conditions for banks to carry out their private business – to make loans and profit on the interest, to buy and sell securities and make a profit on that. Even in cases where the state has nationalized the banks, it is not in order to place restrictions on their profitmaking, but to compel them to make use of the power of property for the purpose of accumulating it.

Second, the insistence of the state that the wealth of the nation consists in private property and private enterprise is illustrated by the state’s ultimate powerlessness to restore the economy to its former glory. If we think of the many worries that circulated about the effectiveness of the banks to reboot interbank lending and lending to the real economy, or the current worries about inflation – what does that tell us? The state can provide beneficial conditions for doing business, it can even provide the means for doing business, but it cannot compel the banks to take that money and turn it into credit (What happened was that banks took the money of the state to meet their payment obligations – to wind down their business and not to expand it.). Whether that money is turned into credit that drives capital accumulation. That is a matter to be settled by – the market. But one thing is clear – the state even puts the value of its own money at risk in order to save the business of the banks with debt and credit and capital.

That is how serious the state is about the accumulation of private property. And that is what “gets back on its feet again” when the economy gets back on its feet again: the renewed and even more radical subordination of the entire material life-process of society to the eminently capitalistic business of the banks.

Conclusion: Our hope is that once you understand that that is what economic recovery means in this society, you will lose the desire to hope for that recovery.