Friday, 17 October 2008

An underconsumptionist explanation of the crisis

This article proposes an 'underconsumptionist' explanation of the crisis, in non-technical terms:

Rick Wolff, 'Capitalist crisis, Marx's shadow', MR Zine, September 2008

Wolff argues that the origins of the crisis go back to the 1970s when the success of American corporations in keep workers' wages down (mainly by outsourcing work to poor countries and bringing in low-wage immigrants) meant they were unable to find profitable outlets for investment in manufacturing, since the workers could not afford to buy any more goods. Their solution was to lend their profits back to workers (via banks), in the form of mortgages, car loans and so on. Competition between lenders led to an ever increasing bubble of lending to increasingly poor workers over the 1980s, 1990s and 200s, until finally it became apparent that a large proportion of these loans (specifically 'sub-prime' mortgages) could never be repaid, and the banks took fright.

Wolff makes a serious effort to trace the crisis back to the 'core components of capitalism', as he puts it, instead of focusing on specific events such as the Fed's low interest rate policies after 2000 or the development of sophisticated derivatives, or on vague assertions about the greed and irresponsibility of bankers. His explanation also goes a long way back, which is only right since he is trying to explain a crisis that is unprecedented the last 60 years.

Some specific criticisms could be made. He doesn't say much about the role of countries like China, Japan and oil-rich states in propping up US consumption in the last ten years through cheap products on the one hand and indirect loans to US workers on the other (though he could probably fit these into his basic account). And one of the comments argues that the massive increase in outsourcing and immigration in the US didn't begin until 10 years after US wages began to stagnate. But the real question is whether Wolff is right that 'underconsumption' in the US economy is the ultimate cause of this crisis.

PS (20 October): Rick Wolff has pointed me to a fuller exposition of his argument on the crisis in a lecture he gave on 7 October, Capitalism Hits the Fan: A Marxian View.