("The Causes of the 1929-33 Great Collapse: A Marxian Interpretation," byJames Devine in Research in Political Economy. vol. 14: pp. 119-194, with annotation added.)
[introduction] [section I] [section II]
[previous section] [end of this section]
[appendices] [references] [notes] [short version] [a new analysis of the future]
Either explicitly or implicitly, any paper on the Collapse also concerns the present day: are we about to suffer from a new collapse and depression? or, are we in a depression already? It is quite common to note the similarities between the present [[p. 168]] period and that of the 1920s or even the 1930s. But no two historical periods are exactly alike (nor could they ever be), so we must emphasize not only the similarities but also the differences if we want to understand what is going on. If anything, we should presume that history will not repeat itself, that though the future may be bleak, it will be so in different ways than during the 1920s and 1930s.
In order to deal with the question of the future, consider the main topics in the rough order they were approached in section II, but integrating the U.S. into the analysis of the world economy, just as the real-world U.S. economy itself has been increasingly integrated. So consider the roles of nationalist rivalry, the newest Restoration, and the current "Silent Depression." This very sketchy survey allows some provisional results. Some of the conclusions of this section and the entire paper are summarized in the table IV, which places both the current and the inter-war periods in historical perspective. It should be stressed that the cut-off dates of the various eras are approximate. [For example, the stagflationary crisis phase of the 1970s is merged with the beginnings of the new regime of "Global Capitalism," which really flowered in the 1980s and 1990s. Note also that I have decided that the phrase "Global Capitalism" does not capture the uniqueness of our current era as well as "Neo-Liberal Capitalism" does.]
Section II emphasized the importance of a hegemon to the avoidance of the type of rampant nationalist rivalry [within the core capitalist countries] that helped produce both World War I and the Great Collapse. Given the uneven development of the world capitalist system, i.e., the way in which the U.S. is suffering from an economic and financial decline relative to other major capitalist countries (Japan, Germany, etc.) [and] some "Newly Industrialized Countries" such as South Korea [over the long haul, in terms of labor productivity] -- [with the added insult of competition from] (temporarily during the 1970s) oil-producing countries -- an alarmist might conclude that the world economy is facing either a new world war or new collapse. The U.S., it is said, is suffering from "imperial over-reach," i.e., world military and diplomatic ambitions far beyond its domestic economic capacity, and will be pushed to tend its own garden [cf. Kennedy, 1987]. The breakdown of the Soviet Union as an external threat pushing the core capitalist nations to unite, combined with the potential abdication by the U.S. of its "global responsibilities," suggests that the world economy will collapse in economic chaos and trade warfare (or even actual warfare).86
But this alarmist conclusion is extremely premature. The nature of hegemony may have changed, but it has hardly ended. The International Monetary Fund seems increasingly powerful [despite controversies in 2000], as countries beg to be let in, even when admission entails a loss of economic sovereignty and submission to excruciating austerity programs. Further, with Soviet opposition removed, the U.S. has been able to use the United Nations and other international institutions to organize "new world order" campaigns (as with the 1991 war against Iraq). International organizations such as the General Agreement on Tariffs and Trade seem able to prevent future trade wars, among the core capitalist countries, while hot wars among these powers seem very unlikely. [[p. 169]] [The phrase "trade war" has taken on new meaning. Rather than indicating a war of competing and mutually-contradictory tariffs, it now means a spat between countries over a specific commodities (such as bananas) mediated by the G.A.T.T. or W.T.O.]
[A key problem in the 1990s is that the chaotic international situation of the 1920s has been reversed: now the global hegemon may be too strong, unfettered by competition from the U.S.S.R. and strong labor movements, encouraging deflation. See below.]
The origins of this state of affairs can be found in the U.S. reign as hegemon: "Open Door" policies [cf. Williams, 1959] encouraged the world-wide breakdown of barriers to trade (formalized as G.A.T.T.) and, more importantly, the international spread of direct investment, i.e., the rise of transnational capital. The latter is more crucial because it implies a [gradual] divorce between a nation-state and "its" capital. This [decline of the nation-state-centered "model" of economic growth promotion] in turn undermines domestic coalitions that form behind protectionist programs, along with other forms of nation/capital unity. The increasingly powerful internationalist sector of capital opposes protection; the class forces left pushing for raising or not lowering trade barriers include that fraction of capital permanently tied down to domestic production, a shrinking sector, and some of organized labor, a severely weakened force. "Buy American" campaigns (incipient protectionism) run up against common-sense arguments that many goods of "foreign" corporations are built in the U.S. and many of the products of "domestic" corporations are produced abroad. Moreover, many of the components in both types of products are now made all over the globe. This reinforces the effects of the normal conflicts among domestically-based industries (e.g., steel vs. autos) and the like.
Thus the situation discouraging protectionism by the U.K. prevailing before the 1930s now involves the U.S. This setting has also affected much of the rest of the core capitalist countries.87 So the integration of the world economy via direct investment makes the abolition of G.A.T.T. or its new incarnation, the World Trade Organization, unlikely.88 Instead of the protectionism/cartelization vicious circle seen during the first four decades of this century, the next decade could instead see increasing international trade and investment.
Also weakening the tendency toward state-against-state competition among the core powers was the post-World War II fall of formal empires (of France, Britain, etc.) in the periphery. Diminishing returns to empire became negative returns as anti-imperialist movements grew in strength, while the United States campaigned for "Open Door" anti-colonialism immediately after World War II. Though the latter push slowed during the Cold War, the long-term trend was toward decolonization. Replacing formal and political colonization in most peripheral countries was less formal neo-colonialism or informal economic dependency.
Replacing military battles among the core countries over territory were civil wars in, and border-wars among, peripheral countries (now including Eastern Europe) -- along with efforts by core countries against individual countries in the periphery (as against Panama in 1990). Wars have shifted from the core to the periphery even more than during Polanyi's "Hundred Year's Peace." In the core, state-against-state economic competition also seems increasingly less likely than the less-violent competition among transnational capital.89 [Needless to say, I consider to Bosnia, Kosovo, Chechnya, and the like (where armed combat has flared) to be on the capitalist periphery, not the core. The 1999 US/NATO war against Serbia fits my generalization very well: it is a war of the unified rich capitalist countries against a peripheral country.]
At some point between the 1960s and the 1990s, the nature of world capitalism changed qualitatively. To liberal Robert Reich , a truly world economy is emerging as countries lose many or even most of their independent economic [[p. 170]] roles. To Marxists Robert Ross and Kent Trachte , we have gone beyond the Monopoly Capitalism and new Imperialism of the pre-World War II era (described in section II), and the post-World War II stage (to be sketched below). Instead of the unity of the state with a nation's capitalist class, we have "Global Capitalism," a new stage of imperialism in which states are increasingly subordinated to the world capitalist class. This means that at the same time that the hegemon has faltered, the economic distinction between nation-states has been sapped. The economic dependency that hobbled or prevented self-sustained (autocentric) growth in the formally independent peripheral countries has become more generalized, so that such growth is becoming possible only if it occurs on a world-wide scale.90 [The U.S. is far from being like Honduras in terms of its economic dependency. However, it is moving in that direction.]
It is true that there has of late been some movement toward a breaking-up of the advanced countries into trading blocks (Western Europe, the North American Free Trade area, Eastern Asia), but this has hardly reached the extent of that of the late 1920s and early 1930s and seems unlikely to do so [cf. Nye et al., 1991]. There is currently no equivalent of the formal British Empire to bolster a new Sterling Block; similarly, Japan does not dominate Eastern Asia politically (in the style of the old empires) and, as an exporting powerhouse, would hardly benefit from building further trade barriers. The U.S. uses its still-substantial clout to prevent the unified European market from excluding U.S. goods and investment. Further, as North America unifies its markets, this might lead to more, not less, international trade: the Mexican government brags that its economy is one of the most open in the world; if this claim is accurate, the North American Free Trade Agreement would expose Canada and the U.S. to freer trade not only with Mexico but with the rest of the world.
But it would be wrong to conclude, as free-traders do, that the opening of the world to increasingly free trade is a "virtuous circle," the opposite of the vicious circle discussed in section II. In fact, trade competition is playing a role in the competitive austerity which forms a key element of the 1980s-90s Restoration. [This competitive austerity replaces trade wars and the like in encouraging a new world depression to arise.]
The stage of capitalism during U.S. hegemony and the Cold War has been termed "Monopoly Capital" by Baran and Sweezy, "Fordism" by the Regulation school, and a three-fold "Accord" by the Social Structure of Accumulation school. Though these schools' descriptions do have something to contribute, I emphasize an aspect of the U.S. political economy that meshes with its hegemony. The military-Keynesian role of the state helps define this period: U.S. spending on wars, the "containment" of Communism, and the nuclear balance of terror stabilized the realization of profits and thus private investment, especially in privileged sectors (the military-industrial complex).
Complementing this was civilian spending, so one can follow James O'Connor  to refer to the "warfare/welfare state." In the U.S., emphasis was on infrastructure such [[p. 171]] as the "National Defense Interstate Highway System" and education (the G.I. Bill). In nations of Western Europe with stronger labor movements, the welfare state received greater emphasis. This stabilized consumer spending and further encouraged the stability of profits and investment.91 [This civilian spending was part of the Cold War, trying to win the ideological battle by distributing benefits widely in response to popular struggles rather than repressing or ignoring them. To some extent it was a working-class victory, reflecting its political power, which slowly declined after 1950 or so.]
Though these programs were successful in promoting the stable realization of profits for a long period, in the end the production of profits was hurt, encouraging a falling rate of profit.92 As discussed below, over-expansion occurred not relative to demand, but relative to supply constraints [cf. Devine, 1987]. With the large role of government in stabilizing accumulation, the process is no longer one of simple excessive investment by capitalists, but one of over-expansion of demand as a whole. Further, because of the relatively autonomous and thus often slow process of government decision-making [and the factors discussed below], this over-expansion lasted for a longer time, so that supply-side imbalances had a chance to accumulate. [This encouraged the stagflation crisis of the 1970s.] Finally, the response to the resulting fall in the rate of profit was also more politicized: instead of simple wage cuts as in the 1930s, we see competitive austerity programs engineered by governments and central banks.
Examine these issues more concretely. The U.S. war in Vietnam (an important side-effect of its hegemony) unleashed tendencies toward a world-wide social crisis and later spurred the late 20th century Restoration. On the one hand, the anti-war movement and domestic prosperity sparked the rise of a variety of insurgent social forces in the U.S., including environmentalism, feminism, minority-rights movements, and wildcat strike waves. [These were facilitated by high employment at the time.] This trend was mirrored in many other countries, from Mexico to Italy to France to Czechoslovakia.
On the other hand, the rise of international competition (the slow eclipse of U.S. economic domination) was jump-started by Vietnam war expenditures. Helped partly by Marshall Plan-type aid [and Korean War spending], Japanese and German capitalism had recovered from World War II, as did other areas on the front-line of the fight against the Communist Menace (South Korea, Taiwan). Then Vietnam-era high demand helped them enter U.S. markets. Rising social unrest and fears of not being reelected discouraged both Presidents Johnson and Nixon from cutting social programs or raising taxes enough to pay for the war, avoid inflation, and prevent the rise of foreign competition. Spoiled by years of economic hegemony, U.S.-based companies had a tendency to rest on their laurels rather than to modernize existing domestic plant and equipment. [This is a nugget of truth from the "Monopoly Capital" interpretation.] When push came to shove, they responded by accelerating the internationalization of their operations. This in turn helped to speed the decline of the U.S. economy (as opposed to U.S.-based companies).
Rather than an absolute decline, however, the U.S. is suffering from the embarrassment of equality with its competitors, compared to its dominance during the 1950s and 1960s. All of these factors and the growing integration of world markets conspired to disrupt the status quo that had promoted a historically-unique period of relatively equally distributed growth during the 1950s and 1960s.93 [[p. 172]]
Over-expansion in the context of a regime of relative labor scarcity also encouraged falls in profit rates in the advanced capitalist countries, even before 1973 oil-shock. As Armstrong et al. [1991, especially ch. 11] show, reserve pools of labor had helped both U.S. and Western European profits after World War II. So when the pools began to dry up, profits were squeezed, not only in the U.S., but in the core capitalist world as a whole. The persistence of high demand also allowed oil producers to raise prices dramatically twice during the 1970s, hurting profit rates further. The final result was the general stagflation crisis of the mid- to late-1970s.
In response came the "monetarist" Restoration. Though much the 1970s has been termed a "one-sided class war," the Restoration hit with a vengeance with the ascent of Margaret Thatcher in the U.K. and Paul Volcker in the U.S., and the general trend toward tight-money, reactionary, and anti-labor policies all over the world (both core and peripheral).94 [This Restoration has since been termed "Neo-Liberalism."] Severely rising interest rates encouraged world recession, but helped ruling elites fight inflation and dissident movements. These movements were pushed to take more "pragmatic" stands, since there was a smaller economic pie to divide. Adding to this trend were direct anti-labor efforts (such as the destruction of the U.S. PATCO union [in 1981]), huge tax-cuts aimed to help the rich, and the like. In sum, the class and social struggles were won by the most conservative sector of the capitalist class, as in the early 1920s.
Though working-class and other movements became increasingly marginalized so that class struggle became progressively one-sided, the 1920s vicious circle of protection and cartels was not in operation. But this did not mean that world competition among nation-states has ended. Again, as with after World War I, competition changed its form. Despite the rise of global capitalism, nation-states still exist and have important economic functions, including the collection of taxes to pay interest on external debt, the maintenance of law and order, and efforts to attract international capital.
Many peripheral countries (especially in Latin America and Eastern Europe) had accumulated international debts during the relatively prosperous 1970s. The monetarists' rising interest rates sparked the "Debt Crisis," which in turn became a series of I.M.F.-style austerity programs. Each country cut civilian spending, subsidies, wages, and so forth, while stepping on the monetary brakes. Numerous countries attempted to cut imports and expand exports. The fact that so many countries were engaging in similar programs (and the stagnation that was encouraged) meant that each had to keep on trying harder. This process was abetted as transnational corporations raised the ante by pitting one country (or region) against another, whipsawing competing countries just as they pit individual factories' workforces against each other.
This competitive austerity has spread, to involve many other sectors of the world economy burdened by debt accumulated during the generally illusory prosperity of the 1980s: this competition now includes most U.S. workers, [[p. 173]] corporations, state and local governments, and even the Federal government. With anti-systemic movements weakened or destroyed, there was little resistance to the downward spiral of wages and social benefits [until the boom of the 1990s led to a temporary rise in real wages].
Rather than being a virtuous circle, the rise in international trade has encouraged cutting of wages and social programs. For example, the Canada-U.S. free trade agreement has forced Canadian businesses to compete with cheaper labor in the traditionally anti-union southern U.S. Though in theory and in the long run, freer trade might increase world production, in the crucial short run the adjustment costs are encouraging a distributive shift against the working class and the poor and also a shrinkage of the middle layers [of corporate bureaucrats, independent businesspeople, and the like].
The reason for the general lowering of wages and similar standards is the return to "labor abundance" in U.S. and other countries after the early 1970s. This return is only partly due to the migration of labor and the like (as outlined in section III.A for the 1920s), e.g., the new supplies of cheap labor arising in the newly peripheral countries of the former Soviet bloc. Making labor abundance decisive (and immune to restrictions on international labor immigration) is the international hypermobility of capital [cf. Bluestone and Harrison, 1982, 1988]. [Click here for a more up-to-date discussion of capital mobility.]
As a result of growing international integration and labor abundance, wages are being equalized world-wide, tending toward the lowest common denominator. The equalization is modified by inter-country productivity differences. But capital mobility tends to undermine the productivity advantage of the core countries. [This is nowadays termed the "race to the bottom."]
Global capitalism may be "the new Leviathan" (in Ross and Trachte's terms) but this Colossus does not abolish the anarchy of production or the inevitability of crisis: competitive austerity can lead to a global underconsumption trap. As mentioned in section II.D, if all or most economic units in the world engage in extraordinary measures to cut demand and boost supply, all it does is to encourage deflation and depression. For this scenario to be played out, the non-consumption elements of world demand have to be blocked. This is quite possible given the generality of the debt overhang and excess capacity, which discourage investment. [In the US, corporate debt overhang has been moderated by the profit boom of the 1990s, changing this conclusion.]
This deflationary bias is made worse by the behavior of relatively prosperous countries such as Japan, and its imitators in the East Asian "Tigers": these countries have so far resisted integration into Global Capitalism and have stuck to the "old system" of unity of nation and capital ("Japan, Inc.," "Korea, Inc.," etc.) and have run large trade surpluses. Further, other countries are trying to imitate them; in fact, this is the export-led growth model encouraged in the periphery by the World Bank, though not in a statist way practiced by Japan et al. [This last refers to countries like Malaysia, Thailand, and Indonesia, which were hit by the financial crises of 1997, as a result of competitive overinvestment that involved South Korea, also.]
So far, no international agency aims to prevent deflation. Indeed, the World Bank and the I.M.F. have encouraged it, with the latter acting more as a collection agency and enforcer for creditors than as a world central bank. [In fact, even establishmentarian economists accused the I.M.F. of making the 1997 Southeast Asian crisis worse.] This seems a symptom of hegemonic weakness: a stronger hegemon would be more concerned with world economic stagnation and less concerned with restoration of capitalist power and the service of debts. [But it can also be seen as a sign of hegemonic strength combined with free-marketeer hubris, i.e., excessive strength of the hegemon.]
Ironically, it has been the weakness of the U.S. that has to a large extent blocked the deflationary result of competitive austerity and export promotion (and has encouraged world agencies to continue their deflationary policies). The U.S. federal government's accumulation of debt (via the budget deficit), boosts domestic demand, while the U.S. economy's accumulation of external debt (via the current-account deficit) boosts world demand. A sort of global Keynesianism based on hegemonic weakness has prevented collapse. The anti-contractionary effect of deficits has become more common as more governments have had increasing financial problems. [In the late 1990s, the US government's deficit has disappeared, becoming a surplus, but the trade deficit has persisted and worsened. Instead of the government running a surplus, it is the private sector, which is much more prone to bankruptcy than is the U.S. government. The trade deficit has been holding up the world economy, while debt-financed private spending has been replacing the government deficit as a source of growing domestic demand.]
The U.S. "double deficit" balancing act has become less tenable in recent years, as interest charges on outstanding debt grow faster than tax revenues and as U.S. policy-makers become increasingly nervous about the balance on the current account. Expansionary fiscal policy has been blocked and President Clinton has [with the help of Congress] shifted toward contraction. Further, with the Cold War over, there seems to be no rational excuse for not cutting the military budget, even to capitalists. It is possible that a recession in the United States (stimulated by excessive private-sector debt, and the decreased willingness of banks to lend) could spark a new world Collapse. Recession has encouraged further austerity ("downsizing") by companies, individuals, and state and local governments, while the fall in U.S. imports broadcasts depression to the world. To make things worse, Japan has suffered from a slowdown [and then a sustained depression] after its feverish speculative boom ("the Bubble economy") collapsed.
But this scenario of a spectacular new Collapse in the near future makes the unlikely assumption that the U.S. will suddenly balance its government budget, raising taxes or shaking the addiction to Military Keynesianism in a cold-turkey bout. Just as the power of the rich prevents a significant rise in their taxes, that of the U.S. military-industrial complex and the fear of throwing voters out of work prevents such a rapid change, despite its seeming rationality. These fears, plus the obvious need for more civilian infrastructural and education spending (even from a capitalist perspective [cf. R. Reich, 1991]) might also mean that a severe military cut-back would be counterbalanced elsewhere in the government budget.95 [As predicted, the sudden shock scenario did not occur, as the US government slowly moved its budget into surplus. However, the Federal government is by-and-large depressing aggregate demand, so that it is the private sector's debt accumulation that is fueling expansion.]
The sudden shock, if it comes, might come from Japan: as Walter Russell Mead  suggests, Japan is playing the role now that the United States played in the 1920s, so that world stability depends on the prosperity of Japan. The drastic fall of stock and real-estate prices in Tokyo, in this view, could trigger effects analogous to that of the U.S. stock-market Crash of 1929. Not only does the Japanese slide hurt world trade, but it can make the cost of loans more expensive to the U.S. Only time will tell whether Japan's role in the world economy is large enough to spur a world collapse in the face of persistent U.S. deficits. It seems unlikely, however, that the Japanese economy has played a large [[p. 175]] role in propping up the world economy so that the removal of that role would lead to a sudden Collapse. Further, to the extent that their prosperity is independent of their ability to export, the East Asian "newly industrialized countries" might prop up the world economy. [Obviously, my suggestion that the Japanese collapse would not cause a new world Depression involving the US turned out to be accurate, though its stagnation still remains a world problem. Otherwise, this paragraph's discussion applies to the effects of the 1997 collapse of the East Asian "tigers."]
If a new collapse occurs, it will likely be reinforced by the current international monetary system. The post-Bretton Woods floating-exchange-rate monetary system is much less stable than had been advertised by Milton Friedman and his followers: this system has involved massive and rapid changes in exchange rates that have disrupted international trade, has encouraged the rise of the world Casino Economy [cf. Strange, 1986], and has broadcast inflation internationally. (Most countries have thus moved toward managed floats and currency blocs [such as the European Union].[Argentina has moved to a permanently fixed exchange rates with the dollar -- until the next crisis.] Unregulated international banks, the flows of "hot money" across borders, and rapid financial innovation make any single country's monetary and fiscal policies much less effective for promoting domestic prosperity. [These played a crucial role in the spread of crisis from East Asia to Russia to Brazil in 1997-8.]
But though the world monetary system (or lack thereof) was an element of the 1930s crisis, it is less important in causing a new world Collapse than the more basic avoidance of trade wars or competitive austerity. That is, the shaky gold standard of the 1920s might have worked well if there had not been intense nation-state contention, problems with debt and reparation overhang, and the like; further, the somewhat chaotic monetary system in place during World War I was not a total disaster. The monetary system only contributes to collapse by reinforcing the effects of more fundamental factors.
Dramatic tales of sudden world collapse exaggerate the quality of the previous period of prosperity. To a large extent, the prosperity of the 1980s was similar to that of the 1920s, i.e., largely illusory and unequally distributed. Many sectors of the world economy have been suffering from Depression conditions for a long time, especially those directly involved in competitive austerity. Unemployment rates have been rising in recent years even in many core countries. Income distributions have become more unequal, while discontent with economic conditions has spilled over to xenophobic movements in many countries.
Most of the economic statistics for the U.S. in the 1980s indicate that the "prosperity" was poorly distributed. Real weekly wages in the private sector were lower in 1991 than in 1959 [Council of Economic Advisors, 1992: 346], while the "social wage" has been steadily cut.96 The family supply of labor to the wage-labor market has increased, as more women have been working for wages in addition to doing their domestic labor, to try to maintain household income, while hours of work have increased for those able to find work [Schor, 1992]. As a result, real median family pecuniary income in 1990 is not that different from that of 1971 [CEA, 1992: 330] despite the much more significant fall in real weekly earnings during the same period. Even so, consumers have been pushed to accumulate debt [[p. 176]] in order to keep afloat [cf. Pollin, 1987]. Unemployment hurts more than in previous decades, because of accumulated debt, cut-backs in unemployment and other state-provided benefits, and the linkage of affordable health insurance to employment. Some areas of the U.S. economy -- specifically the "minority" communities in the rapidly decaying cities -- are suffering from a combination of the worst aspects of 1930s-style depression and 1920s-style gangsterism. [The situation has gotten worse than as described in this paragraph, except for the cyclical upturn of 1997-9.]
What makes this unequally-distributed prosperity different from that of the 1920s is that efforts to raise the rate of profit in the U.S. were not been very successful even before the 1991-1992 recession.97 Though Michl  found that declining profit share tended to squeeze profit rates between 1948 and 1972 (especially between 1965 and 1972), a "profit unsqueeze" (rising profit shares) started in 1972. Counteracting this, and preventing a recovery of the profit rate (and in fact depressing it) from 1972 to 1985 were rises in the composition of capital [K/Y] and falling capacity utilization.98 Arsen  interprets this latter fall in profit rates in terms of intensified international competition [as does Brenner, in his 1998 book]; this would fit with the fall in profit rates in other core capitalist nations. Much of the success in raising profit rates in the U.S. has been through tax cuts, i.e., at the expense of the public purse, which contributed to the government deficit. As a result of the profit-rate fall between the 1960s and the 1980s, corporations have faced severe debt loads [Pollin, 1986], so the U.S. economy has faced historically high bankruptcy rates [CEA, 1992: 404]. It is true that certain sectors of the U.S. economy have benefited: in the 1980s, it was the speculative buccaneers such as Michael Milken, while in the early 1990s it was top management of U.S. corporations. But these have been exceptions to the general stagnation of incomes -- exceptions to what Wallace Peterson  terms the "Silent Depression" and Alain Lipietz calls the "Slow 1929" that has persisted since the 1970s. Over-investment has been primarily financial rather than real. [Since this article was written, the profit and investment situations have changed, so that a repeat of the 1929 story seems more likely. Click here for my discussion. See my recent notes on the profit rate. Also see my article on wage dispersion.]
In final summary, it should be expected that those sectors of the world economy (e.g., Japan) that are out of step with the world-wide competitive austerity should join the crowd. But it seems unlikely that there will be a forcible readjustment on the scale of the early 1930s. There is little evidence that over-investment of the 1920s sort occurred during the 1980s in the U.S. [However, the 1990s fits the picture better.] Instead, prosperity was based on U.S. military Keynesianism and tax-cuts for the rich, which should dissipate not rapidly (a sudden crisis) but only gradually. If over-investment occurred, it was in Japan, but it is hard to believe that the world-wide impact of its fall would be sudden. Instead, any deepening of world stagnation is likely to be gradual. [Given the changes in the world and U.S. situation since this paper was written, this predicted gradualism seems less likely.]
[As seen sporadically above, a key issue came up in the process of my writing comments on this paper in 1999. Is the problem of international instability in the 1990s that of the hegemon being "too weak" as in the 1920s or that of it being "too strong"? Thinking in these terms can be misleading, since "power" is not a one-dimensional variable. The hegemon's power can be measured (1) relative to that of nonhegemonic capitalist powers or (2) relative to noncapitalist elements.
[The original paper emphasized the first, following the lead of the global Keynesians like Kindleberger. Though this emphasis on intraclass capitalist competition is not all wrong (and helps us understand the onset of the Great Collapse), it is the second that is crucial to the present question: the key difference between the hegemon's role in the 1960s and that of the 1990s should be seen more in terms of the relative strength of the hegemon vis-à-vis labor and other forces preventing unfettered capitalism and pushing to share in productivity gains. In the 1960s, unlike the 1990s, the power of the U.S., the I.M.F., and the World Bank (the unholy trinity now standing astride the world) was moderated by competition from the U.S.S.R., the power of social democracy in Western Europe, and the more anemic might of the U.S. labor movement, together with "labor scarce" conditions in the core countries (in part due to limits on capital mobility and the persistence of the nation-based model of economic growth). In the 1960s, these forces encouraged the general sharing of prosperity in the core countries. But the problem of the 1990s is that the hegemon (and its allies) does not face such political limits, while labor abundance prevails due to capital mobility (and labor's political losses). In this sense, we might conclude that the key issue is that of the relative power of labor versus capital on a world scale, with the 1990s being an era of global labor abundance and weakness encouraging the reassertion of underconsumption tendencies in this era of Neo-Liberalism. We need to strengthen labor on a global scale, which of course involves national efforts working in tandem where possible.]
[introduction] [section I] [section II] [section III]
[top of this section]
[appendices] [references] [notes] [short version] [a new analysis of the future]