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Gérard Duménil
Dominique Lévy
Copyright Date: 2011
Published by: Harvard University Press
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  • Book Info
    Book Description:

    This is a work of empirical economics, in which Dumenil and Levy adduce a wide range of evidence to argue that capitalism has entered a phase characterized by rapid technological change, increasing returns to capital, and financial instability. While the authors focus on the interpretation of contemporary capitalism, they also integrate an historical perspective, showing that in the immediate post-World-War II era from 1945 till 1975, now considered a golden age of capitalism in which economic growth was high, inflation low, and income inequality decreasing, returns to capital decreased. In the 1970s this trend reversed, and real interest rates started rising, returns to capital increased, and income inequality widened. This cycle occurred in earlier eras, including one that began in the late nineteenth century and ended in The Great Depression. The authors argue that the similarity between the late nineteenth early 20th century and the past two decades is remarkable. Following the depression of the 1890s, more favorable profitability trends were established as a result of the managerial revolution, in the context of the original assertion of the political and economic hegemony of finance. This course of capitalism culminated in The Great Depression. Will the second hegemony of finance end as the first one did in collapse? The authors do not conclude that a crisis similar to the Great Depression is on the agenda, but a major adjustment will be required. Whether it is a new phase of neoliberalism or a new distinct social order is an open question.

    eISBN: 978-0-674-05930-6
    Subjects: Economics, Finance, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. Introduction
    (pp. 1-4)

    The crisis that began with the subprime loan crash of August 2007 in the United States will remain a distinctive milestone in the history of capitalism. From its onset, the financial turmoil took unexpected proportions. The shock gradually unsettled the fragile financial structure that had been built during the previous decades and destabilized the real economy. By September 2008, it became evident that capitalism was entering into a deep and lasting crisis, a Great Contraction, reminiscent of the Great Depression.

    Neoliberalism is a new stage of capitalism that emerged in the wake of the structural crisis of the 1970s. It...


    • [I. Introduction]
      (pp. 5-6)

      Two very distinct categories of phenomena are involved in the analysis of the contemporary crisis: the historical dynamics of capitalism, on the one hand, and financial and macro mechanisms, on the other hand. The interpretation of the crisis lies at the intersection of these two sets of processes, and the difficulty is to do justice to both and account for their reciprocal relationships.

      Neoliberalism should be understood as a new phase in the evolution of capitalism. As such, it can be described intrinsically—its basic mechanisms and contradictions. The reference to a most recent phase raises, however, the issue of...

    • CHAPTER 1 The Historical Dynamics of Hegemony
      (pp. 7-32)

      The present chapter focuses on hierarchies among classes and countries, more specifically, neoliberalism as a class hegemony and the global dominance of the United States in neoliberal globalization. The sequence of formation, climax, and crisis of neoliberalism is interpreted as an episode in the history of the rise and fall of such social and international configurations. Neoliberalism appears as the latest of three social orders, which jointly constitute modern capitalism, that is, capitalism since the turn of the twentieth century. The rise and fall of each of these social orders can be dated to the occurrence of major crises, or...

    • CHAPTER 2 Anatomy of a Crisis
      (pp. 33-42)

      The mechanics of the financial expansion and innovation after 2000, and the technical aspects of the macro trajectory of the U.S. economy are far afield from the discussion of periodization and social and international hierarchies found in the previous chapter. The explanation of the crisis of neoliberalism lies, however, at the intersection of these two categories of issues. One of the aims of the present study is to bridge the gap between technical mechanisms and historical interpretations.

      In the investigations of the mechanisms that led to the crisis, the time frame often begins after the 2001 recession, when the most...


    • CHAPTER 3 The Benefit of Upper Income Brackets
      (pp. 45-54)

      Income statistics do not provide straightforward information on class patterns and their changing configurations and powers. One must be content with categories such as income brackets and a loose notion of “upper classes.” But the historical transformation of income distribution is quite revealing of underlying social changes. This is the viewpoint in the present chapter.

      Interestingly, the sequence of the three social orders that jointly constitute modern capitalism is manifest in the historical profile of income distribution in the United States. The growing income and, more generally, social inequalities during the neoliberal decades, both within each country and globally, have...

    • CHAPTER 4 The Apotheosis of Capital
      (pp. 55-70)

      The analysis in the previous chapter hinges around a statistical notion of “upper income brackets.” Two components of such incomes are involved, high wages at the top of income hierarchies and capital income. The present chapter focuses on capital income, that is, the specifically capitalist aspect of social relations. Approached from this viewpoint, the social framework is familiar. It opposes capitalist classes and a class of workers broadly defined as wage earners. Part of the investigation in the remainder of this book can be conducted on such grounds. Neoliberalism is, thus, understood as the expression of the restoration of the...


    • CHAPTER 5 The Managerial and Popular Classes
      (pp. 73-89)

      Beginning with the observation that the distinction between capital income and wages does not account for the complexity of social relations in contemporary capitalism, the present chapter establishes the framework of a tripolar class configuration in which capitalist, managerial, and popular classes are distinguished. A special emphasis is placed on managerial classes, their functions, and their changing role along the phases of modern capitalism.

      The important role of wages in the formation of high income is clearly apparent in the data and increasingly so. This observation basically questions the treatment of wages as a homogeneous whole on, at least, two...

    • CHAPTER 6 A Theoretical Framework
      (pp. 90-98)

      The analysis in the previous chapter takes the tripolar class pattern as given. No attempt is made at laying the theoretical foundations of this approach. The purpose of the first section below is to establish such foundations in a framework of Marxist inspiration, adjusted to the features of modern capitalism. It elaborates on the distinction between ownership and management, separates between the capitalist and managerial classes, and introduces the category of popular classes in which clerical personnel and production workers are jointly considered. The second section summarizes the overall typology of social orders, including the alternative potential combination without historical...


    • CHAPTER 7 A New Financial Sector
      (pp. 101-112)

      As could be expected, neoliberalism and neoliberal globalization deeply altered the structure and functioning of the financial sector. In many instances, this was specifically true after 2000. The present chapter does not purport to systematically account for these trends but to draw the attention to the dramatic expansion of financial mechanisms, and to locate in which institutions and through which instruments this was performed, as a preliminary to the analysis of the crisis.

      The mere consideration of the masses of assets and debt provides a straightforward illustration of what the size of financial expansion is in neoliberalism. Table 7.1 compares...

    • CHAPTER 8 Free Trade and the Global Financial Boom after 2000
      (pp. 113-124)

      The present chapter recalls and documents the main aspects of neoliberal globalization, the combination of tightly interconnected trends. Free trade, the free international mobility of capital, the globalization of financial institutions and mechanisms, and foreign exchange transactions are the four main components. The emphasis is on the sharp acceleration of globalization, real and financial, since the mid-1990s, in particular after 2000, one among the basic determinants of the contemporary crisis. The same acceleration is observed as in the previous chapter.

      Inasmuch as possible the perspective here is that of the global economy. Due to the emphasis on the United States,...

    • CHAPTER 9 A Fragile and Unwieldy Structure
      (pp. 125-140)

      The analysis in the previous two chapters points to the tremendous expansion of financial and global mechanisms, sometimes in a very short period of time, and the dramatic consequences of neoliberalism and neoliberal globalization in their most advanced configuration. All barriers—regulations and frontiers among countries—were lifted. The wild dynamics of a world of free trade and free international movements of capital upset the basic economic mechanisms. Macro policies lost their stabilizing potential. The latter bout of expansion after 2000 marked the ultimate phase in the construction of a highly fragile and unwieldy structure.

      The root of the expansion...


    • CHAPTER 10 Declining Accumulation and Growing Disequilibria
      (pp. 143-155)

      There are five components to the unsustainable macro trajectory of the U.S. economy: (1) an increasing deficit of the balances of trade or current account;¹ (2) the corresponding financing of the U.S. economy by the rest of the world; (3) the rise of the demand emanating from households; (4) the growing indebtedness of households; and (5) the declining trend of domestic investment. (Government demand and indebtedness have potentially the same effects as demand and indebtedness emanating from households, but they were not the main aspects after 2000.) U.S. hegemony worldwide was a crucial factor in the maintenance of the first...

    • CHAPTER 11 The Mechanics of Imbalance
      (pp. 156-170)

      The previous chapter emphasizes the prevalence of five major trends in the U.S. economy since the 1980s. They relate to (1) the balance of trade or current accounts, (2) foreign financing, (3) consumption, (4) the indebtedness of households and government, and (5) accumulation. Considered jointly, these trends define the trajectory of the U.S. economy.

      The simultaneous prevalence of these trends is not coincidental. The present chapter introduces a framework in which they are analyzed as properties of a system of interdependent variables, the manifestations of the same underlying mechanisms.

      A classification of countries is introduced, depending on their propensity to...


    • [VI. Introduction]
      (pp. 171-172)

      The contemporary crisis is the crisis of neoliberalism under U.S. hegemony. It is, therefore, in the inner dynamics of this social and international order that the original causes of the crisis must be sought, notably in the quest for high income (Part II). Parts IV and V focused, respectively, on each of the two strands of determinants originating from this same root: (1) neoliberal globalization and financialization; and (2) the unsustainable macro trajectory of the U.S. economy. As suggested in Diagram 2.1, both categories of factors converged to the determination of the crisis. The seismic wave of the collapse of...

    • CHAPTER 12 The Second Reprieve: The Housing Boom and Crash
      (pp. 173-184)

      One of the central aspects of the trajectory of the U.S. economy is the declining investment rate of nonfinancial corporations, with obvious consequences on growth rates. This development was, however, temporarily hidden by the boom of investment in information technologies during the second half of the 1990s, which came suddenly to a halt in the 2001 recession. The recovery from this recession was achieved thanks to the housing boom, itself fueled by the explosion in households’ indebtedness, notably its subprime component. The first symptoms of the housing crisis were observed as early as the beginning of 2006, when the decline...

    • CHAPTER 13 Feeding the Mortgage Wave
      (pp. 185-194)

      The mortgage wave after 2000 and its subprime component made the housing boom possible, but the rise of loans would have been itself impossible in the absence of the support from securitization and the insurance against defaults, two crucial financial devices. Both categories of mechanisms simultaneously expanded tremendously and underwent significant transformations during the decade. The traditional activity of Ginnie Mae and GSEs (Fannie Mae and Freddie Mac) in the issuance of MBSs, was supplemented by the new generation of private-label issuers. The business of insuring against credit defaults spurred the activity of the new boiling derivative market of CDSs....

    • CHAPTER 14 Losing Control of the Helm in Times of Storm
      (pp. 195-204)

      Financial authorities did not passively observe the housing boom, the mortgage wave, and the explosion of financial mechanisms. But, given the propensity to deregulate, monetary policy was the unique instrument in the late attempt at checking the rise of household debt and the financial craze (Box 14.1). This policy was manifest in the gradual increase of the Federal Funds rate as soon as the recovery from the 2001 recession was obtained. The attempt failed.

      It is also important to understand that there was no panacea in a monetary policy susceptible of impacting long-term rates to solve the problems of the...


    • CHAPTER 15 A Stepwise Process
      (pp. 207-212)

      The outburst of the crisis is officially dated to the disruption of the interbank market in August 2007. The importance of this date in the overall dynamics of the crisis is obvious, but it was neither the beginning nor the end of what was originally denoted as the “subprime crisis.” The Federal Reserve Bank of Chicago (the Chicago Fed) letter of August 2007 states: “We believe that the subprime mortgage problems are not likely to spill over to the rest of the mortgage market or the broader economy.”¹ But they did.

      The period covered here includes this initial event but...

    • CHAPTER 16 The Seismic Wave
      (pp. 213-220)

      The crisis began in the housing sector and spread sequentially from mortgages to the entire financial sector, with the crucial intermediate link of securitization and MBSs. As could be expected from the tremendous expansion of financial mechanisms after 2001, a number of instruments among the most daring, such as CDOs, were devalued. In August 2007, an important step forward was accomplished that revealed underlying trends. Other instruments such as SIVs, the holders of important portfolios of ABSs, were also hurt and sometimes destroyed. For the remainder of the financial sector directly engaged in such operations or holding the products of...

    • CHAPTER 17 The Financial Structure Shaken
      (pp. 221-227)

      The financial crisis gained in extension and severity between August 2007 and September 2008 (Phase B). Its nature was profoundly altered. The new development was that, besides the proper “liquidity component” of the crisis, financial institutions incurred major losses. The devaluation of the net worth of corporations was reflected in the declining prices of their shares, the punch line being sometimes bankruptcy. Another major feature of the period was the massive intervention of central institutions.

      The dimension of the devastation was suddenly revealed under the pressure of events. This came after years of blindness, underestimation of risks, overvaluation of assets...

    • CHAPTER 18 The State to the Rescue of the Financial Sector
      (pp. 228-243)

      Despite the deeply rooted faith in free-market economics and the so-called discipline of the markets, the crisis initiated a chain of interventions from central institutions. There is nothing surprising in this sharp reversal away from the basic tenets of the neoliberal creed. Neoliberalism is not about principles or ideology but a social order aiming at the power and income of the upper classes. Ideology is a political instrument. Considered from this angle, there was no change in objectives. In neoliberalism, the state (taken here in a broad sense to include the central bank) always worked in favor of the upper...

    • CHAPTER 19 The Great Contraction
      (pp. 244-252)

      As of the end of 2009, the diagnosis concerning the overall amplitude of the downturn of the GDP, which began in the last months of 2008, is straightforward. It will be large, a Great Contraction. The first manifestations of these exceptional proportions are already evident. A recession could, in any case, be expected after the housing boom, but the financial crisis conferred a dramatic character on this downturn. The size of the contraction is at the image of the collapse of credits to households and nonfinancial corporations, the credit crunch proper and, reciprocally, the decline of output adds fuel to...

    • CHAPTER 20 World Capitalism Unsettled
      (pp. 253-264)

      September 2008 marked not only the deepening of the crisis in the United States, but also the entrance of global capitalism into crisis. The financial crisis took on global proportions, with a dramatic impact on currencies. This broadened scope led to the implementation of a set of policies intending to bolster financial corporations worldwide, with a significant degree of cooperation among central banks. Nonetheless, growth rates plunged, arousing a second generation of such policies, whose main instrument is budget deficit.

      This extension to major capitalist countries and countries in the periphery was the combined effect of three sets of developments:...


    • CHAPTER 21 Eighty Years Later
      (pp. 267-280)

      Despite obvious differences in historical contexts, the common aspects between the first half of the twentieth century and contemporary capitalism are striking. Eighty years later, the same stubborn logic underlying the pursuit of profit and high income led capitalism along a new unsustainable historical path, where regulation and control were sacrificed on the altar of the unbounded freedom to act of a privileged minority. Similar dynamics led to comparable outcomes.

      There is no general agreement concerning the interpretation of the Great Depression, a multifaceted phenomenon (Box 21.1). Alternative explanations are either excess or deficient competition, a structural lack of demand...

    • CHAPTER 22 Policies and Politics of the New Deal
      (pp. 281-294)

      In many respects, the situation of the U.S. economy in 2009 is similar to the one prevailing in the early 1930s. If the downturn of output is considered, the parallel must be drawn between 1929 and 2008, almost an eightieth anniversary. Focusing on the treatment of the proper financial component of the crisis, the parallel is between 1930–1933 and 2007 for a still undetermined number of years.

      The year 1933 marked the beginning of the New Deal.¹ (It is traditional to distinguish two New Deals, the first one between 1933 and 1935, and the second one, from 1935 to...


    • [IX. Introduction]
      (pp. 295-296)

      The credits (loans to the financial sector and securities purchased by the Federal Reserve) and government spending were the first measures to be taken to confront the manifestations (defaults, bankruptcies, and the contraction of output) of the crisis and avoid further deterioration. The treatment of the main causes of the crisis defines more basic but also urgent tasks to be performed. Financialization, accumulation, disequilibria, and globalization are involved. If such adjustments were not realized, there would be no actual recovery or only ephemeral recovery. The crisis also revealed the severity of the threats posed on the continuation of U.S. international...

    • CHAPTER 23 Economic Requirements
      (pp. 297-308)

      A first approach to alternative postcrisis domestic and international scenarios is to consider the factors that led to the crisis sequentially, and discuss the measures that could avoid the repetition of the chain of events that led to the contemporary stalemate. For example, the trends toward financialization, considered independently from other mechanisms, suggest new regulations that might contribute to the stability of the financial system. This is the straightforward viewpoint adopted in the present chapter, a broad spectrum of mild or more radical reforms as they could be implemented by a government committed to the restoration of the situation.


    • CHAPTER 24 The National Factor
      (pp. 309-325)

      The emphasis in the previous chapter is on the correction of the consequences of neoliberal trends. A second crucial issue is the maintenance of U.S. international hegemony. Actually, these two elements must be considered jointly as in the phrase “neoliberalism under U.S. hegemony”, certainly the most accurate characterization of the situation of international capitalism prior to the crisis.

      Given the prevailing neoliberal trends in the country and the advance of challengers around the globe, the economic preeminence of the United States is diminishing at considerable speed. To distinct degrees, depending on the course of events during the forthcoming decades, a...

    • CHAPTER 25 Beyond Neoliberalism
      (pp. 326-334)

      When things are considered from the viewpoint of historical dynamics—the succession of various social orders in the history of capitalism, separated by structural crises—the occurrence of the contemporary crisis suggests a transition to a new social order, a new phase of modern capitalism beyond neoliberalism. But the mere repetition of historical events is not a convincing argument.

      Only limited adjustments have been performed in the United States during the first stages of the crisis. The hypothesis here is, however, that major corrections must be expected in the longer run. Such rectifications should take the form of strengthened managerial...

  13. APPENDIX A. The Dynamics of Imbalance: A Model
    (pp. 339-344)
  14. APPENDIX B. Sources
    (pp. 345-350)
  15. APPENDIX C. Acronyms
    (pp. 351-352)
  16. Notes
    (pp. 353-368)
  17. Index
    (pp. 369-391)