Stoking the bonfire of illusions

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In August 2008 Russia went to war with its neighbour, Georgia. One month later Lehman Brothers bank went bust, plunging capitalism into crisis. In reviewing Alex Callinicos's new book, Jane Hardy explores how these apparently unrelated events signalled epochal changes in the global economy

Two recent events, unequal in magnitude, represent epochal changes to the global economy. The first was the brief war between Georgia and Russia in early August 2008. This was followed by the second: the collapse of Lehman Brothers in September of the same year, which precipitated the biggest financial crash since the Great Depression of the 1930s.

Academics and commentators have seen these as separate events operating in different spheres, but a central tenet of Bonfire of Illusions, the new book by Alex Callinicos, is that the economic sphere does not operate independently from the political sphere. Callinicos argues that capitalist imperialism needs to be understood as the intersection of economic and geopolitical competition.

Different perspectives on the crisis are discussed in order to understand the analyses and solutions proposed by sections of the ruling class and reformists. These range from the classical-liberal view that underpins neoliberalism to the contributions of John Maynard Keynes and Hyman Minsky. Finally a Marxist interpretation is set out which is developed throughout the rest of the book.

Reformists have seen the crisis as a result of a dysfunctional financial system, while more radical writers have argued that finance has become all powerful. But the book argues that it is important to understand that just because the crisis was triggered by the financial system this does not mean that it started there. Callinicos argues that the crisis has exposed deeper contradictions in the capitalist system. Therefore we need to take an integrated view of the relationship between financial phenomena and the dynamics of production.

This requires understanding three dimensions. The first is that there is a long-term crisis of over-accumulation and profitability. The great boom of 1949 to 1973 was an exceptional period of capitalism which was stabilised by high levels of military expenditure by both the US and the Soviet Union. However, from the late 1960s the rate of profit was falling. But to see the period since 1973 as one of crisis does not mean that it was one of permanent stagnation - it has been interspersed with significant periods of expansion.

Finance humbled

Second, what we have seen are chronic patterns of financial and economic instability to overcome the underlying crisis of over-accumulation and profitability. These patterns involved trying to force up the rate of exploitation by trying to get workers to accept lower wages, longer hours and worse working conditions. There have also been large-scale restructurings and mergers, when larger capitals gobbled up those that were weaker and less profitable. Between 1945 and 1971 there were a mere 38 financial crises compared with 139 between 1973 and 1997.

Third, there has been a growing reliance on credit bubbles to sustain economic expansion. Broadly speaking, these were caused by a chain of events whereby rock-bottom interest rates and extensive credit drove up property and financial assets for households and firms, which then undertook more spending and borrowing on the basis of inflated assets. In Britain by 2007 debt was 171 percent of disposable income. The book points to two further important aspects of the current crisis. One new feature has been the relationship between China and the US. The low consumption by Chinese workers and high profits of Chinese capital have been recycled to provide credit for US consumers and companies. This meant that no country was insulated from the recession, which quickly infected the major manufacturing and trading economies of Japan, Germany and China. The other big difference between the current crisis and that of the 1930s is that hugely increased state spending has limited the fallout.

However, Callinicos points out that this is only a temporary fix as it does not resolve the basic contradictions of the system. Capitalism is therefore stuck with a dilemma: if major states step back and allow the market to rip and lay waste to the least efficient sections of capital, the slump and the recession will be prolonged. But if they prevent large-scale restructuring to wipe out (devalue) some sections of capital the long-term crisis of overaccumulation and profitability will continue.

The book points to the way in which the crisis and the response to it have exploded one of the big myths which has dominated the last two decades, which is that of the decline and marginalisation of the nation-state. Governments rushed to the rescue of their banks and domestic industries with nationalisations, bailouts, fiscal stimuli, quantitative easing and subsidies. Diverging national interests were reflected in the EU's response to the crash. Rather than a coordinated approach the reaction of governments was every man for himself. It was clear that power did not reside in Europe, but with its individual countries. There has been a protectionist drift as every major country provided subsidies, urged consumption of home goods or, in China's case, devalued its currency.

Bonfire of Illusions goes on to examine the position of the US in the global economy in terms of its ability to exert political power and economic dominance. The starting point is the war between Russia and Georgia which appeared to be a traditional territorial conflict between the Russian state and a Georgian government eager to reclaim the Moscow-backed separatist enclaves of South Ossetia and Abkhazia. The Georgian president, Mikheil Saakashvili, presents his regime as "an outpost of Euro-Atlanticism". Vladimir Putin used the war to inflict a crushing military defeat on Georgia and demonstrate Russia's determination to resist Washington's efforts to expand Nato eastwards. The episode was widely seen as symptomatic of the limits of Washington's reach and also the transnational capitalist space over which it has steadily expanded in the last seven decades.

Russia had three advantages in the war with Georgia. First, it had overwhelming local military superiority. Under Putin the economy has benefited from the energy boom of the mid-2000s. Putin has re-established control of the oil and gas industries, brought order to the Russian state and rebuilt its military capabilities. Second, because the US's military capabilities were tied up in Afghanistan and Iraq, Washington's options were hugely restricted. It has created a black hole that has absorbed US military capabilities and limited their options elsewhere, thereby exposing US weakness. Third, the EU's dependence on Russian energy gave Moscow a long-term advantage enabling it to divide Washington's European allies.

Callinicos argues that this is the moment at which state capitalism bit back. However, this is not the start of a new Cold War - the gap between Washington's and Moscow's economic and military capabilities is far greater than during the Cold War. The US is the only genuinely global power, but it is vulnerable to "imperial overstretch".

The political and economic are inextricably linked. The economic crisis has stretched the power of the US directly and materially. It has drained away political energy and economic resources. Rescuing the banks and averting a new depression has meant a huge increase in borrowing which imposes enormous fiscal costs on the US, making it harder to maintain its military dominance.

Empire confined

The end of the Cold War did not mark the ascent of US super-imperialism, but rather the beginning of an era of more intense geopolitical competition and greater global instability. Economically, although the US remains the core of the global economy, there are challenges. China's economy has overtaken that of Britain and Germany and may supplant Japan as the world's second largest economy. However, it is unlikely that it can displace the US at the centre of the global economy. It would need not just to grow but also to expand its domestic market in order to become a significant market for the exports of other countries. The export model depends on a deeply embedded constellation of class relations and interests that will be hard to change.

The implication of this analysis is that the US is likely to remain, by some distance, the most important capitalist economy for some years to come. Its rulers continue to exploit the central position it occupies in the financial system. It still sees itself as a global broker. Obama in particular represents new ideological capital to be used by the US state in rebuilding its global position after the disasters of
George W Bush's presidency.

The book concludes that the massive state interventions of 2008 and 2009 were emergency measures and underpin a structural change in economic relations. Callinicos points to a combination of macro-Keynesianism and micro-neoliberalism. Although state intervention is back on the agenda, as faith in unbridled markets has collapsed, relentless privatisation is still being carried on in Britain. For capitalism as a whole, there is the contradiction of a return to the nation-state at the very time when it needs greater transnational coordination. This is reflected in G20 summits, which have done little more than paper over the differences between their leaders.

Callinicos argues that it is about not simply the failure of a particular type of capitalism, but a crisis of capitalism itself. Suggesting an alternative is a tall order. Although nationalisation has been an important demand of mass movements in South America, this in itself is not enough. Callinicos argues that the existing state cannot be harnessed as the main agent of progressive social change and he rejects the idea that markets can be democratised.

In short, the book advocates a democratically planned economy which is self-managing, where elected workplace and neighbourhood councils take responsibility for their own affairs and link together to make decisions for society as a whole. A huge hole has been torn in the practice and ideology of neoliberalism which opens up alternatives - "the boundaries of the possible are widened allowing the billions of victims of capitalism finally to escape".

This book provides a highly accessible account of the turbulence endemic in global capitalism. It breaks down the division between the economic and the political and is a vital tool for socialists in understanding the new world order.

Bonfire of Illusions is published by Polity, £14.99