Finance: the last refuge
In a sense, this competitive strategy is nothing but the continuation by other means of the logic of the product cycle that Brenner himself invokes in another context. For the leading capitalist organizations of a given epoch, this logic involves shifting resources ceaselessly, through one kind of ‘innovation’ or another, from market niches that have become overcrowded (and therefore less profitable) to those that are less crowded (and therefore more profitable). When escalating competition reduces the availability of relatively empty, profitable niches in the commodity markets, the leading capitalist organizations have one last refuge, to which they can retreat and shift competitive pressures onto others. This final refuge is the money market—in Schumpeter’s words, ‘always, as it were, the headquarters of the capitalist system, from which orders go out to its individual divisions’. 
In this respect, as previously noted, US capital in the late twentieth century was following a trajectory analogous to that of British capital a century before, which had also responded to the intensification of competition in manufacturing through financialization. As Halford Mackinder pointed out in a speech delivered to London bankers at the turn of the century, when the financialization of British capital was already at an advanced stage: the industrialization of other countries enhanced the importance of a single clearing house, which ‘will always be where there is the greatest ownership of capital . . . [W]e are essentially the people who have capital, and those who have capital always share in the activity of brains and muscles of other countries’.  This was certainly the case during the belle époque, when nearly one half of Britain’s assets were overseas and about 10 per cent of its national income consisted of interest on foreign investment. 
In spite of the far greater economic, military and political power of the United States in comparison to the British empire, sharing in the ‘activity of brains and muscles’ in other countries through financialization has been more arduous for US capital. To be sure, American primacy in the formation of vertically integrated, multinational corporations has been a highly effective means of putting such sharing into operation throughout the twentieth century; and immigration, of course, has ‘drained’ brains and muscles from all over the world, throughout US history.  Unlike Britain in the nineteenth century, however, the United States was not structurally oriented to playing the role of global clearing house; its relationship to the world economy was rather that of a self-centred and largely self-sufficient continental economy. 
Under the conditions of the increasing fragmentation and eventual breakdown of the world market that characterized inter-capitalist struggles in the first half of the twentieth century, the scale, self-centredness and relative self-sufficiency of the US economy provided American capital with decisive competitive advantages. US primacy in the formation of vertically integrated, multinational corporations enabled it to outflank, through direct investment, the rampant protectionism of the period. Nevertheless, the very success of the United States in promoting the reunification and expansion of the global market after the end of the Second World War diminished those advantages; and the intensification of international competition that ensued turned them, in some respects, into handicaps. An expanded and unified world market enabled enterprises based in smaller, less self-centred and self-sufficient countries to enjoy economies of scale and scope comparable to those of US firms. The lack of organic integration of the United States in the global economy, meanwhile, prevented American capital from taking full advantage of the tendency towards financialization which was gaining momentum, at home and abroad, under the impact of intensifying competition and the associated crisis of profitability.
Here lies yet another contradiction of the inflationary crisis-management strategy that the United States adopted under Nixon. As argued in the preceding sections, this had been dictated by a combination of economic, social and political considerations which, despite their diversity, had one underlying goal in common: the attempt to preserve the relative self-centredness, self-sufficiency and size of the American economy. Whatever its success in redistributing the burden of the profitability crisis from US capital to US labour and foreign competitors, the strategy ended up by deepening the crisis of American hegemony and by provoking a devastating run on the dollar which threatened to destroy US financial power in the world at large. The argument developed in this section provides us with new insights into the reasons for this deepening crisis and for the success of the monetarist counterrevolution in reversing the precipitous decline of US world power.
Hegemony and financialization
In a nutshell, the main reason why the inflationary strategy backfired is that, instead of attracting, it repelled the growing mass of liquidity, released by the financialization of processes of capital accumulation on a world scale, from the US economy and its currency. And conversely, the main reason why the monetarist counterrevolution was so stunningly successful in reversing the decline in US power is that it brought about a massive rerouting of global capital flows towards the United States and the dollar. To be sure, this rerouting transformed the United States from being the main source of world liquidity and foreign direct investment, as it had been in the 1950s and 1960s, into the world’s main debtor nation and absorber of liquidity, from the 1980s up to the present.  As we shall see, Brenner is probably right in doubting that levels of indebtedness of this order are sustainable in the long run. Nevertheless, for twenty years now an escalating foreign debt has enabled the United States to turn the deteriorating crisis of the 1970s into a belle époque wholly comparable to, and in some respects far more spectacular, than Britain’s Edwardian era.
It has, first of all, allowed the United States to achieve through financial means what it could not achieve by force of arms—to defeat the USSR in the Cold War and tame the rebellious South. Massive borrowing from abroad, mostly Japan, was essential to Reagan’s escalation of the armament race—primarily, though not exclusively, through the Strategic Defence Initiative—well beyond what the USSR could afford. Combined with generous support to Afghan resistance against Soviet occupation, the escalation forced the Soviet Union into a double confrontation neither side of which it could win: in Afghanistan, its high-tech military apparatus found itself in the same difficulties that had led to the US defeat in Vietnam; while in the arms race, the United States could mobilize financial resources wholly beyond the Soviet reach. 
At the same time, the massive redirection of capital flows to the United States turned the flood of capital that Southern countries had experienced in the 1970s into the sudden ‘drought’ of the 1980s. First signalled by the Mexican default of 1982, this drought was probably the single most important factor in shifting competitive pressures from North to South and in provoking a major bifurcation in the fortunes of Southern regions in the 1980s and 1990s. On the one hand, there were regions—most notably East Asia—that, for historical reasons, had a strong advantage in competing for a share of the expanding US demand for cheap industrial products. These areas tended to benefit from the redirection of capital flows, because the improvement in their balance of payments lessened their need to compete with the United States in world financial markets, and indeed turned some of them into major lenders to the US. Other regions—most notably, Sub-Saharan Africa and Latin America—were, for historical reasons, particularly disadvantaged in competing for a share of the North American demand. These tended to run into balance-of-payments difficulties that put them into the hopeless position of having to compete directly with the United States in world financial markets.  Either way, the United States benefited both economically and politically as American business and governmental agencies were best positioned to mobilize in the global competitive and power struggles for the cheap commodities and credit which Southern ‘winners’ eagerly supplied, as well as for the assets that Southern ‘losers’ had to alienate willy-nilly at bargain prices.
Finally, massive inflows of foreign capital were essential to the ‘Keynesianism with a vengeance’ that rescued the US and world economies from the deep recession provoked by the switch from extremely lax to very tight monetary policies. This recession, and the ideological and practical liquidation of the welfare state that accompanied it, was the true turning point in the collapse of workers’ leverage in the US and other core regions. To be sure, the stagflation of the 1970s had already worn down workers’ resistance against attempts to shift the burden of intensifying competition onto their shoulders. But it was only in the 1980s that, in core countries in general and the United States in particular, pressure from below on money wages subsided, and workers came to rely on governmental control of price inflation as their best chance of protecting their standards of living.
As Brenner maintains, the weakening of labour’s leverage was greater in the United States than in other core regions and thereby contributed to the revival of US profitability in the 1990s. Yet although this was undoubtedly a factor in the revival, Brenner’s narrow focus on inter-capitalist competition in manufacturing is again misleading. For the turnaround was primarily due, not to the comparatively slower growth of US real wages, but to the overall re-orientation of the American economy to take full advantage of financialization, both at home and in the world at large. From this point of view, the ‘de-industrialization’ of the United States and other core regions certainly had ‘negative connotations’ for the workers most directly affected by it; but it had no such dire meaning for the US economy as a whole, and especially its wealthier strata. Rather, it was a necessary condition of the great revival of US wealth, power and prestige of the 1990s, when—to paraphrase Landes’s characterization of the Edwardian era—in spite of rattlings of arms in the South and former East or monitory references to a coming clash of civilizations, everything seemed right again.
III. A SOCIAL AND POLITICAL PERSPECTIVE
Radical as the foregoing criticisms may appear and, in some respects, actually are, they do not involve a refutation so much as a recasting of Brenner’s argument within a broader social and political perspective. In the concluding part of this article, I shall make such recasting explicit by drawing from and adding to Brenner’s account of the long downturn and my own critique of it. As in the first section, I shall deal successively with the origins, dynamics and prospective outcomes of the long downturn.
In underscoring the difficulties involved in attributing causal priority to any of the interacting elements that have propelled the economic expansion of East Asia in the 1970s and 1980s, Robert Wade has invited us to think ‘more in terms of opening a combination lock than a padlock.’  What is true of East Asia is a fortiori true of the world-economic expansion of the 1950s and 1960s and of the long downturn that followed. Brenner’s uneven development is undoubtedly an element of the combination; but it is by no means the key that unlocks the mechanisms of capital accumulation on a world scale, from boom through crisis to relative stagnation.
A) Origins of the Downturn
The particular form that uneven development assumed after the Second World War—as opposed to the forms that it took, let us say, in the nineteenth century, or in the first half of the twentieth—was thoroughly embedded in, and shaped by, the formation and evolution of US world hegemony in the Cold War era. US hegemony, in turn, had a peculiar social character, reflected in system-wide institutional arrangements quite different from those that underlay the nineteenth-century UK-centred world economy. It follows that the operation of uneven development in generating both the postwar boom and the subsequent long downturn can only be understood in conjunction with the formation and evolution of the particular institutional arrangements of US hegemony.
These arrangements were eminently political in origin and social in orientation. They were based on the widespread belief among US government officials that ‘a new world order was the only guarantee against chaos followed by revolution’ and that ‘security for the world had to be based on American power exercised through international systems’.  Equally widespread was the belief that the lessons of the New Deal were relevant to the international sphere.
Just as the New Deal government increasingly took active responsibility for the welfare of the nation, US foreign policy planners took increasing responsibility for the welfare of the world . . . It could not insulate itself from the world’s problems. As at home, moreover, it could not neatly pick and choose among those problems, distinguishing politics from economics, security from prosperity, defence from welfare. In the lexicon of the New Deal, taking responsibility meant government intervention on a grand scale. 
In Franklin Roosevelt’s original vision, the New Deal would be ‘globalized’ through the United Nations, and the USSR would be included among the poor nations of the world to be incorporated into the evolving Pax Americana, for the benefit and security of all. In the shoddier but more realistic political project that materialized under Truman, in contrast, the containment of Soviet power became the main organizing principle of US hegemony, and American control over world money and military power became the primary means of that containment.  This more realistic model was not so much a negation of the original notion of creating a global welfare state, as its transformation into a project of a ‘warfare-welfare state’ on a world scale, in competition and opposition to the Soviet system of communist states. 
The speed and extent of the process of uneven development, to which Brenner traces both the postwar boom and the subsequent downturn, can only be understood with reference to the successes and failures of this project. The model was, indeed, highly successful in launching one of the greatest system-wide expansions in capitalist history. In its absence, world capitalism might well have gone through a long period of stagnation, if not outright depression, comparable to that which extended from the initial establishment of British hegemony at the end of the Napoleonic Wars to the take-off of the mid-nineteenth-century long boom at the end of the 1840s. Under US hegemony, in contrast, such a contraction was avoided altogether through the joint operation of both military and social Keynesianism on a world scale. Military Keynesianism—that is, massive expenditures on the rearmament of the United States and its allies and the deployment of a far-flung network of quasi-permanent military bases—was undoubtedly the most dynamic and conspicuous element of the combination. But the US-sponsored spread of social Keynesianism—that is, the governmental pursuit of full employment and high mass consumption in the West or North, and of ‘development’ in the South—was also an essential factor. 
The reconstruction and upgrading of the German and Japanese industrial apparatuses—the centrepiece of Brenner’s uneven development—were integral aspects of the internationalization of the US warfare-welfare state. As Bruce Cumings notes, commenting specifically on the American approach to Japanese reindustrialization, ‘George Kennan’s policy of containment was always limited and parsimonious, based on the idea that four or five industrial structures existed in the world: the Soviets had one and the United States had four, and things should be kept this way’. Kennan’s ‘idea’ was translated into US government sponsorship of Japan’s reindustrialization. The Korean War became ‘“Japan’s Marshall Plan” . . . War procurement propelled Japan along its war-beating industrial path’. 
Far from being a spontaneous process originating from the actions of capitalist accumulators ‘from below’—as it had been in the nineteenth century under British hegemony—uneven development under American hegemony was a process consciously and actively encouraged ‘from above’ by a globalizing US warfare-welfare state. This difference accounts not just for the speed and extent of the long postwar boom but also for the particular combination of limits and contradictions that transformed it into the relative stagnation of the 1970s and 1980s. Brenner’s account of the onset of the long downturn points to one such limit and contradiction: successful catching up creates new competitors, and intensifying competition exercises a downward pressure on the profits of incumbent firms. To the extent that this was an unanticipated outcome of the Cold War project, it was not just a limitation but also a contradiction of American policies. It is nonetheless more plausible to suppose that the outcome was an anticipated but unavoidable economic cost of policies whose primary objectives were not economic but social—the containment of communism and the taming of nationalism—and political: the consolidation of US hegemony.
Drawbacks of the Cold War project
The most serious contradiction of US policies lay elsewhere: that is, precisely in the difficulties involved in attaining these social and political objectives. To be sure, in the incumbent and rising centres of capital accumulation, rapid economic growth, low levels of unemployment and the actual spread of high mass consumption consolidated the hegemony of one variant or another of liberal capitalism. As previously noted, however, even in these centres the political triumph of capitalism did not lessen and, on the whole, actually strengthened the disposition of workers to seek a greater share of the social product through direct struggle or electoral mobilization. Washington’s Cold War policies thus put a double squeeze on profits—a first squeeze from the intensification of inter-capitalist competition, which they promoted by creating conditions favourable to the upgrading and expansion of the Japanese and Western European productive apparatuses; and a second squeeze deriving from the social empowerment of labour, which they promoted through the pursuit of near full employment and high mass consumption throughout the Western world.
This double squeeze was bound to produce a system-wide crisis of profitability but there is no reason why, in itself, it should have produced the crisis of US hegemony which became the dominant event of the 1970s. If the problems of profitability came to be subsumed within and dominated by this broader hegemonic crisis, the reason is that in the world’s South the US warfare-welfare state attained neither its social nor its political objectives. Socially, the ‘Fair Deal’ that Truman promised to the poor countries of the world in his 1949 inaugural address never materialized in any actual narrowing of the income gap that separated North and South. As Third World countries stepped up their industrialization efforts—the generally prescribed means to ‘development’—there was indeed industrial convergence between North and South; but, as previously noted, there was no income convergence at all. Third World countries were thus bearing the costs without reaping the expected benefits of industrialization. Worse still, in 1970 Robert McNamara, then president of the World Bank, acknowledged that even high rates of GNP growth did not result in the expected improvements in the welfare of Third World nations. 
Partly related to this social failure, the political failure of the US warfare-welfare state was far more conspicuous. The epicentre of this was of course the war in Vietnam, where the United States confronted the practical impossibility of victory, despite escalating US casualties and the deployment of military firepower without historical precedent for a conflict of this kind. The upshot was that the United States lost much of its political credibility as global policeman, thereby emboldening throughout the Third World the nationalist and social revolutionary forces that Cold War policies were meant to contain. Along with much of the political credibility of its military apparatus, the United States also lost control of the world monetary system. As contended earlier in this article, the escalation of public expenditures to sustain the military effort in Vietnam and to overcome opposition to the war at home—through the ‘Great Society’ programme—strengthened inflationary pressure in the United States and the world economy at large, deepened the fiscal crisis of the US state and eventually led to the collapse of the US-centred system of fixed exchange rates.
It is, of course, impossible to know whether the Bretton Woods regime would have survived without these effects of the Vietnam War. Nor is it possible to predict what would have happened to world capitalism had uneven development been driven ‘from below’, as in the nineteenth century, rather than ‘from above’ as under the US Cold War regime. All I am saying in contrast to Brenner’s account is that, historically, uneven development after the Second World War was embedded from beginning to end in Cold War rivalries, and was therefore thoroughly shaped by the successes and failures of the strategies and structures deployed by the hegemonic US warfare-welfare state. The intensification of inter-capitalist competition and the associated crisis of profitability were important as a signal that the long postwar boom had reached its limits. But they were only an element of the broader crisis of hegemony that contemporaneously signalled the limits and contradictions of US Cold War policies.
B) Financialization and the Monetarist Counterrevolution
To turn now to the dynamic of the long downturn: my critical assessment of Brenner’s account implicitly suggested that the monetarist counterrevolution of 1979–82 was a far more decisive turning point in the evolution of US and world capitalism than either the Plaza Accord of 1985 or the reverse Plaza Accord of 1995, to which Brenner seems to attribute equal or even greater importance. In my view the accords of 1985 and 1995 were moments of adjustment within a process of revival of US hegemony that had begun with the switch from ultra lax to extremely tight monetary policies. Before the switch, the US inflationary management of the crises of profitability and hegemony tended to repel rather than attract the growing mass of capital that sought accumulation through financial channels. Worse still, in spite of the positive effects of the competitiveness of US manufacturers that Brenner emphasizes, they created conditions of accumulation on a world scale that benefited neither the US state nor American capital
Crucial in this respect was the explosive growth of the Eurodollar and other extraterritorial financial markets. Curiously, Brenner hardly mentions this development, even though it originated in the same years as his transition from boom to downturn and left an indelible mark on the 1970s. Established in the 1950s to hold dollar balances of communist countries unwilling to risk depositing them in the United States, the Eurodollar or eurocurrency market grew primarily through the deposits of US multinationals and the offshore activities of New York banks. Having expanded steadily through the 1950s and early 1960s, it started growing exponentially in the mid- and late-1960s—eurocurrency assets more than quadrupling between 1967 and 1970. 
Hard as it is to know exactly what lay behind this explosion, it is plausible to suppose that it was triggered by the joint crisis of profitability and American hegemony of those years. Although Brenner focuses on US manufacturers producing at home, we know that US corporations operating abroad had also begun to face tougher competition from their European rivals.  Moreover, Europe was the epicentre of the pay explosion of 1968–73. Horizontal pressure from intensifying competition and vertical pressure from labour’s leverage must have given a major boost to the liquidity preference of US multinational corporations operating abroad. Since conditions for the profitable reinvestment of cash flows in production were even less favourable in the United States than in Europe, as the growing fiscal crisis of the US warfare-welfare state increased the risks of new taxes and restrictions on capital mobility, it made good business sense for American multinationals to ‘park’ their growing liquid assets in eurocurrency and other offshore money markets rather than repatriate them.
Be that as it may, the explosive growth of eurocurrency markets provided currency speculators—including US banks and corporations—with a huge masse de manoeuvre with which to bet against, and thereby undermine, the stability of the US-controlled system of fixed exchange rates. And once that system actually collapsed, the gates were open for an ever-growing mass of privately controlled liquidity to compete with the US and other state actors in the production of world money and credit. Three mutually reinforcing tendencies were at work in this particular competitive struggle.
First, the breakdown of the regime of fixed exchange rates added a new momentum to the financialization of capital, by increasing the risks and uncertainties of commercial-industrial activities. Fluctuations in exchange rates became a major determinant of variations in corporate cash-flow positions, sales, profits and assets in different countries and currencies. In hedging against these variations, or in trying to profit from them, multinationals tended to increase the mass of liquidity deployed in financial speculation in extraterritorial money markets where freedom of action was greatest and specialized services most readily available. 
Second, combined with the loss of credibility of the United States as global policeman, the massive devaluation of the US currency in the early 1970s prompted Third World governments to adopt a more aggressive stance in negotiating the prices of their exports of industrial raw materials—oil in particular. Intensifying inter-capitalist competition and the stepping up of low- and middle-income countries’ industrialization efforts had already led to significant increases in these prices before 1973. In 1973, however, the virtual acknowledgment of defeat by the US in Vietnam, followed immediately by the shattering of the myth of Israeli invincibility during the Yom Kippur War, energized OPEC into protecting its members more effectively from the depreciation of the dollar through a four-fold increase in the price of crude oil in just a few months. Coming as it did at the tail end of the pay explosion, this so-called first ‘oil shock’ deepened the crisis of profitability and strengthened inflationary tendencies in core capitalist countries. More important, it generated an $80 billion surplus of ‘petrodollars’, a good part of which was parked or invested in the eurocurrency and other offshore money markets. The mass of privately controlled liquidity that could be mobilized for financial speculation and new credit creation outside publicly controlled channels thereby received an additional powerful stimulus. 
Finally, the tremendous expansion in the supply of world money and credit, due to the combination of extremely lax US monetary policies and the explosive growth of privately controlled liquidity in offshore money markets, was not matched by demand conditions capable of ensuring the preservation, let alone the self-expansion, of money capital. To be sure, there was plenty of demand for liquidity, not only on the part of multinational corporations—to hedge against or speculate on exchange-rate fluctuations—but also on the part of low- and middle-income countries, to sustain their developmental efforts in an increasingly competitive and volatile environment. For the most part, however, this demand added more to inflationary pressures than it did to the expansion of solvent indebtedness.
Formerly, countries other than the United States had to keep their balance of payments in some sort of equilibrium. They had to ‘earn’ the money they wished to spend abroad. Now they could borrow it. With liquidity apparently capable of infinite expansion, countries deemed credit-worthy no longer had any external check on foreign spending . . . Under such circumstances, a balance-of-payments deficit no longer provided, in itself, an automatic check to domestic inflation. Countries in deficit could borrow indefinitely from the magic liquidity machine . . . Not surprisingly, world inflation continued accelerating throughout the decade, and fears of collapse in the private banking system grew increasingly vivid. More and more debts were ‘rescheduled’, and a number of poor countries grew flagrantly insolvent. 
In short, the interaction between the crisis of profitability and the crisis of hegemony, in combination with the US inflationary strategy of crisis management, resulted in a ten-year long increase in world monetary disorder, escalating inflation and a steady deterioration in the capacity of the US dollar to function as the world’s means of payment, reserve currency, and unit of account. Brenner’s narrow focus on profitability in manufacturing misses this broader context of the collapsing monetary foundations of the world capitalist order. What was the point of taking some of the pressure off profits in US manufacturing through lax monetary policies if, in the process, money capital—the beginning and end of capitalist accumulation—was made so abundant as to be a free good? Was not the abuse of US seigniorage privileges in fact chasing capital into alternative monetary means, thereby depriving the US state of one of its main levers of world power?