New Left Review 20, March-April 2003
In a landmark engagement with Robert Brenner’s account of the long downturn of the world economy since the 70s, Giovanni Arrighi lays out a social and political economy of the roles of labour unrest, national liberation and corporate financialization in the crisis of the post-war order, and the prospects for a militarized US hegemony today.
THE SOCIAL AND POLITICAL ECONOMY OF GLOBAL TURBULENCE
‘Depression’, wrote Thorstein Veblen shortly after the end of the Great Depression of 1873–96, ‘is primarily a malady of the affections of the business men. That is the seat of the difficulty. The stagnation of industry and the hardship suffered by the workmen and other classes are of the nature of symptoms and secondary effects’ To be efficacious remedies must, therefore, be such ‘as to reach this emotional seat of the trouble and . . . restore profits to a “reasonable” rate’.  Between 1873 and 1896 prices had fallen unevenly but inexorably, in what David Landes has called ‘the most drastic deflation in the memory of man’ Along with prices, the rate of interest had dropped ‘to the point where economic theorists began to conjure with the possibility of capital so abundant as to be a free good. And profits shrank, while what was now recognized as periodic depressions seemed to drag on interminably. The economic system appeared to be running down’. 
In reality, the economic system was not ‘running down’ Production and investment continued to grow not just in the newly industrializing countries of the time (most notably, Germany and the US) but in Britain as well—so much so that, writing at the same time as Landes, another historian could declare the Great Depression of 1873–96 nothing but a ‘myth’.  Nevertheless, as Veblen suggests, there is no contradiction in saying that there was a ‘great depression’ at a time of continuing expansion in production and investment. On the contrary: the great depression was not a myth precisely because production and trade, in Britain and in the world economy at large, had continued to expand too rapidly for profits to be maintained at what was considered a ‘reasonable’ rate.
More specifically, the great expansion of world trade from the middle of the nineteenth century had led to a system-wide intensification of competitive pressures on the agencies of capital accumulation. An increasing number of business enterprises, from an increasing number of locations across the UK-centred world economy, were getting in one another’s way in the procurement of inputs and disposal of outputs, thereby destroying one another’s previous ‘monopolies’—that is, their more-or-less exclusive control over particular market niches.
This shift from monopoly to competition was probably the most important single factor in setting the mood for European industrial and commercial enterprise. Economic growth was now also economic struggle—struggle that served to separate the strong from the weak, to discourage some and toughen others, to favour the new . . . nations at the expense of the old. Optimism about the future of indefinite progress gave way to uncertainty and a sense of agony. 
But then, all of a sudden, as if by magic,
the wheel turned. In the last years of the century, prices began to rise and profits with them. As business improved, confidence returned—not the spotty, evanescent confidence of the brief booms that had punctuated the gloom of the preceding decades, but a general euphoria such as had not prevailed since . . . the early 1870s. Everything seemed right again—in spite of rattlings of arms and monitory Marxist references to the ‘last stage’ of capitalism. In all of western Europe, these years live on in memory as the good old days—the Edwardian era, la belle époque. 
As we shall see, there was nothing magical about the sudden restoration of profits to a more ‘reasonable’ level, and the consequent recovery of the British and Western bourgeoisies from the malady provoked by ‘excessive’ competition. For now, let us simply note that not everyone benefited from the ‘beautiful times’ of 1896–1914. Internationally, the main beneficiary of the recovery was Britain. As its industrial supremacy waned, its finance triumphed and its services as shipper, trader, insurance broker and intermediary in the world’s system of payments became more indispensable than ever.  But even within Britain not everybody prospered. Particularly noteworthy was the overall decline of British real wages after the mid-1890s, which reversed the rapidly rising trend of the previous half-century.  For the working class of the then hegemonic power, the belle époque was thus a time of containment after the preceding half-century of improvement in its economic condition. This no doubt gave an additional boost to the renewed euphoria of the British bourgeoisie. Soon, however, the ‘rattling of arms’ got out of hand, precipitating a crisis from which the British-centred world-capitalist system would never recover.
Robert Brenner’s tightly argued and richly documented book, The Boom and the Bubble: The US and the World Economy, does not refer to world capitalism’s late-nineteenth-century experience of depression, revival and crisis.  The central argument of the book, however, continually invites a comparison between that earlier period and what Brenner calls the ‘persistent stagnation’ of 1973–93, followed by the ‘revival’ of the US and world economies. The purpose of this article is not so much to develop such a comparison as to use the earlier experience as a foil in assessing the validity and limits of Brenner’s argument. In the first part of what follows, I shall reconstruct as best I can Brenner’s analysis, focusing on its most interesting and essential aspects. In the second section, I re-examine the argument critically, focusing on its weaknesses and limits. I will conclude by incorporating my critiques into a revised version of Brenner’s argument.
I. THE ECONOMICS OF GLOBAL TURBULENCE
Brenner’s objective in The Boom and the Bubble, as in his earlier ‘Economics of Global Turbulence’, is to provide evidence in support of three closely related propositions. The first is that the transformation of the long expansion of the 1950s and 1960s into the comparative stagnation of the 1970s and 1980s was inscribed in the forces that drove the expansion. The second is that the persistence of comparative stagnation, from 1973 to 1993, was due primarily to the ways in which the business and governmental organizations of the leading capitalist states responded to the sharp and generalized fall in profitability that marked the initial transformation of expansion into stagnation. And the third contention is that the revival of the US economy after 1993 was not based on a resolution of the problems underlying the long downturn; indeed, it may actually have aggravated them, as witness the world-economic crisis of 1997–98 and the potentially even more serious crisis that the US and world economies have experienced since the bursting of the ‘new economy’ bubble.
A) Uneven Development: from Boom to Crisis
As argued in detail in ‘Global Turbulence’, and briefly summarized at the outset of The Boom and the Bubble, Brenner sees both the long boom of the 1950s and 1960s and the crisis of profitability between 1965 and 1973, which brought the boom to an end, as rooted in what he calls ‘uneven development’. In Brenner’s definition, this is the process whereby laggards in capitalist development seek to and eventually succeed in catching up with the world-economic leaders. 
Focusing on Germany and Japan as the most successful among the laggards who, after the Second World War, attempted to catch up with prior developmental achievements of the US, Brenner argues that it was the capacity of these two countries to combine the high-productivity technologies, pioneered by the United States, with the large, low-wage labour supplies crowding their comparatively backward and rural small-business sectors, that pushed up their rates of profit and investment. Through the early 1960s this tendency did not negatively affect US production and profit, because ‘goods produced abroad remained for the most part unable to compete in the US market and because US producers depended to only a small extent on overseas sales’. In this crucial respect, therefore, ‘uneven development was . . . still to a surprising extent separate development’.  Indeed, although ‘uneven economic development did entail the relative decline of the US domestic economy . . . it was also a precondition for the continued vitality of the dominant forces within the US political economy’:
US multinational corporations and international banks, aiming to expand overseas, needed profitable outlets for their foreign direct investment. Domestically based manufacturers, needing to increase exports, required fast-growing overseas demand for their goods. An imperial US state, bent on ‘containing communism’ and keeping the world safe for free enterprise, sought economic success for its allies and competitors as the foundation for the political consolidation of the post-war capitalist order . . . All these forces thus depended upon the economic dynamism of Europe and Japan for the realization of their own goals. 
In short, up to the early 1960s, uneven development was a positive-sum game, which buttressed ‘a symbiosis, if a highly conflictual and unstable one, of leader and followers, of early and later developers, and of hegemon and hegemonized’.  To paraphrase Landes’s account of the great depression of 1873–96, it had not yet become ‘economic struggle’—a zero- or even negative-sum game that would benefit some at the expense of others. In Brenner’s own account of the onset of the long downturn of 1973–93, this is precisely what uneven development became between 1965 and 1973. By then Germany and Japan had not just caught up but had ‘forge[d] ahead of the US leader . . . in one key industry after another—textiles, steel, automobiles, machine tools, consumer electronics’ More important, the newer, lower-cost producers based in these and other follower countries began ‘invading markets hitherto dominated by producers of the leader regions, especially the US and also the UK’. 
This irruption of lower-priced goods into the US and world markets undermined the ability of US manufacturers ‘to secure the established rate of return on their placements of capital and labour’, provoking, between 1965 and 1973, a decline in the rate of return on their capital stock of over 40 per cent. US manufacturers responded to this intensification of competition at home and abroad in various ways. They priced products below full cost—that is, they sought the established rate of profit only on their circulating capital; they repressed the growth of wage costs; and they updated their plant and equipment. Ultimately, however, the most decisive US weapon in the incipient competitive struggle was a drastic devaluation of the dollar relative to the Japanese yen and German mark. 
End of the gold–dollar standard
To some extent, the devaluation was itself the result of the deterioration in the US balance of trade that ensued from the loss of competitiveness of American vis-à-vis German and Japanese manufacturers. Nevertheless, the effects of this trade balance on the values of the three currencies were considerably amplified by government policies that destabilized—and eventually disrupted—the international gold–dollar standard regime, established at the end of the Second World War. For the German and Japanese governments responded to the inflationary pressures engendered in their domestic economies by the export-led production boom with a repression of domestic demand, which further increased both their trade surpluses and speculative demand for their currencies.  At the end of Johnson’s administration and at the beginning of Nixon’s, the US government did attempt to turn the tide of growing international monetary instability, through fiscal austerity and tight monetary policies. Soon, however,
the political costs of sustaining a serious anti-inflationary policy—not to mention the alarming fall in the stock market . . . proved unacceptable to the Nixon Administration. Well before the defeat of the Republicans in the congressional elections of November 1970, and as high interest rates threatened to choke off the recovery, the government turned once again to fiscal stimulus and the Fed accommodated with a policy of easy credit. As Nixon was to put it several months later, ‘We are all Keynesians now’. 
The US turn to macroeconomic expansionary policies in mid-1970 sounded the death knell for the gold–dollar standard. As interest rates fell in the United States, while remaining high or increasing in Europe and Japan, short-term speculative money fled the dollar, sending the US balance-of-payments deficit (short and long term) through the roof. The half-hearted attempt of the Smithsonian Agreement of December 1971 to preserve fixed exchange rates through a 7.9 per cent devaluation of the dollar against gold, and a revaluation of the mark by 13.5 per cent and of the yen by 16.9 per cent against the dollar, failed to contain the renewed downward pressure that the Nixon administration put on the US currency through yet another round of economic stimulus. By 1973, the pressure became unbearable, resulting in a further major devaluation of the dollar and the formal abandonment of the fixed-rate system of exchange in favour of the float. 
The massive devaluation of the dollar against the mark (by a total of 50 per cent, between 1969 and 1973) and the yen (by a total 28.2 per cent, from 1971 to 1973)—Brenner claims—secured ‘the kind of turnaround in relative costs that [the US manufacturing sector] had been unable to achieve by way of productivity growth and wage restraint’ The turnaround had a galvanizing effect on the US economy. Profitability, investment growth and labour productivity in manufacturing staged a comeback, and the US trade balance was restored to a surplus. The impact on the German and Japanese economies was just the opposite. The competitiveness of their manufacturers was sharply curtailed, making it their turn ‘to forego their high rates of return if they wished to maintain their sales’ The world crisis of profitability had not been overcome. But its burden was now more evenly shared among the chief capitalist countries. 
In sum, uneven economic development—understood as a process of successful catching up of laggard with leading economic powers—produced both the long postwar boom and the crisis of profitability of the late 1960s and early 1970s. As long as the catching up was going on, it sustained a worldwide virtuous circle of high profits, high investments and increasing productivity. But once the laggards—or at least two of the most sizeable ones—had actually caught up with the former leader, the result was a worldwide glut of productive capacity and a consequent downward pressure on rates of profit. Soon, however, a massive, government-supported devaluation of the dollar against the mark and the yen distributed the fall in profitability more evenly among the three main capitalist powers.
B) Over-Capacity and Persistent Stagnation
Uneven development generated the excess capacity that provoked the general fall in the rate of profit between 1965 and 1973. But it was the failure of capitalist enterprises and governments to restore profitability to its previous levels through the elimination of excess capacity that was primarily responsible for the persistence of comparative stagnation over the two decades from 1973 to 1993. In Brenner’s conceptualization, there is ‘over-capacity and over-production’ (two terms he always uses together) when ‘there is insufficient demand to allow higher-cost firms to maintain their former rates of profit’. These firms are thus ‘obliged to cease using some of their means of production and can make use of the rest only by lowering their prices and thus their profitability. There is over-capacity and over-production, with respect to the hitherto-existing profit rate’.  Either the over-supply of productive capacity is eliminated, or the rate of profit must fall, with all the dire consequences that such a fall entails in a capitalist economy, from drops in the rates of investment and productivity growth to the decline of real wages and levels of employment. Brenner’s contention is that, at least up to 1993, the over-supply of productive capacity that underlay the crisis of profitability of 1965–73, far from being eliminated, if anything increased further, continually depressing profitability.
The contention is based on two lines of argument, one concerning capitalist enterprises and one concerning governments. In Brenner’s conceptualization of world capitalism, there is no spontaneous market mechanism that will prevent over-capacity from developing in a large number of industries, or from becoming a chronic feature of the world economy once it has developed. Higher-cost incumbent firms have both the means and the incentive to resist exit from overcrowded industries, while over-capacity and falling profits do not necessarily discourage new entry. Higher-cost incumbents resist exit because many of their tangible and intangible assets ‘can be realized only in their established lines of production and would be lost were [the incumbents] to switch lines’. Moreover, ‘the slowed growth of demand which is the unavoidable expression of the reduced growth of investment and wages that inevitably results from falling profit rates, makes it increasingly difficult to reallocate to new lines’. These firms, therefore, ‘have every reason to defend their markets [by seeking the average rate of return on their circulating costs only] and to counterattack by speeding up the process of innovation, through investment in additional fixed capital’ The adoption of such a strategy, in turn, ‘will tend to provoke the original cost-reducing innovators to accelerate technical change themselves, further worsening the already existing over-capacity and over-production’. 
At the same time, the aggravation of over-capacity does not deter new entry and a consequent further downward pressure on the rate of profit. ‘On the contrary. The initial fall in profitability . . . can be expected to intensify the world-wide drive for even lower production costs, through the combination of even cheaper labour with even higher levels of techniques in still later-developing regions’.  The most conspicuous instance of such new entry during the long downturn were producers based in so-called Less Developed Countries—especially in East Asia, but also Mexico and Brazil—who managed to make significant inroads in world markets for manufactured goods, further intensifying the downward pressure on prices and profitability. ‘There was, in short, not only too little exit, but too much entry’. 
This first line of argument is, for the most part, developed deductively on the basis of circumstantial evidence. There is very little business history proper in either ‘Global Turbulence’ or The Boom and the Bubble In both texts, the bulk of the empirical evidence and historical narrative concerns the second line of argument, according to which the governments of the main capitalist powers, especially the United States, share responsibility for aggravating rather than alleviating the market tendency towards too little exit and too much entry. In this respect, Brenner’s main contribution to our understanding of the long downturn is to show that the governments in question acted not so much as regulators—though they did that too—but as active participants, even protagonists, of the system-wide competitive struggle that has set capitalists against one another since the late 1960s.
As previously noted, in his account of the 1960s crisis of profitability Brenner already saw the US government’s pursuit of a major devaluation of the dollar against the mark and yen as making a decisive contribution to shifting the burden of the crisis from American to German and Japanese manufacturers. Similarly, in his account of the long downturn, Brenner shows how the ebb and flow of currency devaluations and revaluations have been key instruments of governmental action in the inter-capitalist competitive struggle. These are marked by three major political-economic turning points: the Reagan–Thatcher monetarist ‘revolution’ of 1979–80, which reversed the devaluation of the US dollar of the 1970s; the Plaza Accord of 1985, which resumed the dollar devaluation; and the so-called ‘reverse Plaza Accord’ of 1995, which again reversed the devaluation. Let us briefly examine Brenner’s account of the relationship between these turning points and the persistence of over-production and over-capacity in manufacturing, which underlies his long downturn.
By the late 1970s, the US macro-policy of Federal deficits, extreme monetary ease and ‘benign neglect’ with respect to the dollar’s exchange rate reached the limit of its ability to sustain economic expansion and restore American manufacturing competitiveness and profitability. The policy had ‘enabled the advanced capitalist economies to transcend the oil crisis recession of 1974–5 and to continue to expand during the remainder of the decade’. Nevertheless, in their effects ‘Keynesian stimuli proved to be profoundly ambivalent’. While sustaining the growth of demand domestically and internationally, ‘Keynesian remedies helped to perpetuate over-capacity and over-production, preventing the harsh medicine of shakeout, indeed depression, that historically had cleared the way for new upturns [in profitability]’ Reduced profitability, in turn, made firms ‘unable and unwilling . . . to bring about as great an increase in supply as in the past when profit rates were higher . . with the result that the ever-increasing public deficits of the 1970s brought about not so much increases in output as rises in prices’ The escalation in inflationary pressures was accompanied by record-breaking deficits in the US balance of payments. By 1977–78 these deficits ‘precipitated a devastating run on the US currency that threatened the dollar’s position as an international reserve currency, [clearing the path] for a major change of perspective’. 
The change came with the Reagan–Thatcher monetarist revolution of 1979–80. According to Brenner, its main objective was to revive profitability, not just or even primarily in manufacturing, but in the low-productivity service sector and, especially, in the domestic and international financial sectors, through reduced corporate taxation, increased unemployment and the elimination of capital controls. Unlike earlier, Keynesian solutions, however, monetarist remedies sought to restore profitability by administering the harsh medicine of shakeout. Unprecedentedly tight credit provoked ‘a purge of that great ledge of high-cost, low-profit manufacturing firms that had been sustained by the Keynesian expansion of credit’ Although inflationary pressures were rapidly brought under control, record-high US real interest rates and the rising dollar associated with them ‘threatened to precipitate a worldwide crash, starting in the US’. 
The crash was avoided by the ‘fortuitous’ return of Keynesianism—with a vengeance. Reagan’s ‘monumental programme of military spending and tax reduction for the rich . . . partly offset the ravages of monetarist tight credit and kept the economy ticking over’. Reaganite policies did, of course, bring back current-account deficits, also with a vengeance, especially ‘since, from this point onward, most of the rest of the world increasingly eschewed Keynesian public deficits’. As in the 1970s, unprecedented deficits provided ‘the injections of demand that were needed . . . to pull the world economy out of the recession of 1979–82’. In contrast to the 1970s, however, even larger US deficits did not now provoke a run on the dollar. On the contrary, the pull of extremely high real interest rates and a push from the Japanese Ministry of Finance resulted in a massive inflow of capital into the United States from all over the world, leading not to a depreciation but to a sharp appreciation of the US currency.