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Financial Implosion and Economic Stagnation, Back To The Real Economy- Part2

Economics / Recession 2008 - 2010 May 21, 2009 - 03:42 AM GMT

By: Global_Research


Continued from Part 1 here

A Political Economy - Economics in its classical stage, which encompassed the work of both possessive-individualists, like Adam Smith, David Ricardo, Thomas Malthus, and John Stuart Mill, and socialist thinkers such as Karl Marx, was called political economy. The name was significant because it pointed to the class basis of the economy and the role of the state. 39 To be sure, Adam Smith introduced the notion of the “invisible hand” of the market in replacing the former visible hand of the monarch. But, the political-class context of economics was nevertheless omnipresent for Smith and all the other classical economists. In the 1820s, as Marx observed, there were “splendid tournaments” between political economists representing different classes (and class fractions) of society.

However, from the 1830s and ’40s on, as the working class arose as a force in society, and as the industrial bourgeoisie gained firm control of the state, displacing landed interests (most notably with the repeal of the Corn Laws), economics shifted from its previous questioning form to the “bad conscience and evil intent of the apologetics.”40 Increasingly the circular flow of economic life was reconceptualized as a process involving only individuals, consuming, producing, and profiting on the margin. The concept of class thus disappeared in economics, but was embraced by the rising field of sociology (in ways increasingly abstracted from fundamental economic relationships). The state also was said to have nothing directly to do with economics and was taken up by the new field of political science. 41 Economics was thus “purified” of all class and political elements, and increasingly presented as a “neutral” science, addressing universal/transhistorical principles of capital and market relations.

Having lost any meaningful roots in society, orthodox neoclassical economics, which presented itself as a single paradigm, became a discipline dominated by largely meaningless abstractions, mechanical models, formal methodologies, and mathematical language, divorced from historical developments. It was anything but a science of the real world; rather its chief importance lay in its role as a self-confirming ideology. Meanwhile, actual business proceeded along its own lines largely oblivious (sometimes intentionally so) of orthodox economic theories. The failure of received economics to learn the lessons of the Great Depression, i.e., the inherent flaws of a system of class-based accumulation in its monopoly stage, included a tendency to ignore the fact that the real problem lay in the real economy, rather than in the monetary-financial economy.

Today nothing looks more myopic than Bernanke’s quick dismissal of traditional theories of the Great Depression that traced the underlying causes to the buildup of overcapacity and weak demand—inviting a similar dismissal of such factors today. Like his mentor Milton Friedman, Bernanke has stood for the dominant, neoliberal economic view of the last few decades, with its insistence that by holding back “the rock that starts a landslide” it was possible to prevent a financial avalanche of “major proportions” indefinitely. 42 That the state of the ground above was shifting, and that this was due to real, time-related processes, was of no genuine concern. Ironically, Bernanke, the academic expert on the Great Depression, adopted what had been described by Ethan Harris, chief U.S. economist for Barclays Capital, as a “see no evil, hear no evil, speak no evil” policy with respect to asset bubbles. 43

It is therefore to the contrary view, emphasizing the socioeconomic contradictions of the system, to which it is now necessary to turn. For a time in response to the Great Depression of the 1930s, in the work of John Maynard Keynes, and various other thinkers associated with the Keynesian, institutionalist, and Marxist traditions—the most important of which was the Polish economist Michael Kalecki—there was something of a revival of political-economic perspectives. But following the Second World War Keynesianism was increasingly reabsorbed into the system. This occurred partly through what was called the “neoclassical-Keynesian synthesis”—which, as Joan Robinson, one of Keynes’s younger colleagues claimed, had the effect of bastardizing Keynes—and partly through the closely related growth of military Keynesianism. 44 Eventually, monetarism emerged as the ruling response to the stagflation crisis of the 1970s, along with the rise of other conservative free-market ideologies, such as supply-side theory, rational expectations, and the new classical economics (summed up as neoliberal orthodoxy). Economics lost its explicit political-economic cast, and the world was led back once again to the mythology of self-regulating, self-equilibrating markets free of issues of class and power. Anyone who questioned this, was characterized as political rather than economic, and thus largely excluded from the mainstream economic discussion. 45

Needless to say, economics never ceased to be political; rather the politics that was promoted was so closely intertwined with the system of economic power as to be nearly invisible. Adam Smith’s visible hand of the monarch had been transformed into the invisible hand, not of the market, but of the capitalist class, which was concealed behind the veil of the market and competition. Yet, with every major economic crisis that veil has been partly torn aside and the reality of class power exposed.

Treasury Secretary Paulson’s request to Congress in September 2008, for $700 billion with which to bail out the financial system may constitute a turning point in the popular recognition of, and outrage over, the economic problem, raising for the first time in many years the issue of a political economy. It immediately became apparent to the entire population that the critical question in the financial crisis and in the deep economic stagnation that was emerging was: Who will pay? The answer of the capitalist system, left to its own devices, was the same as always: the costs would be borne disproportionately by those at the bottom. The old game of privatization of profits and socialization of losses would be replayed for the umpteenth time. The population would be called upon to “tighten their belts” to “foot the bill” for the entire system. The capacity of the larger public to see through this deception in the months and years ahead will of course depend on an enormous amount of education by trade union and social movement activists, and the degree to which the empire of capital is stripped naked by the crisis.

There is no doubt that the present growing economic bankruptcy and political outrage have produced a fundamental break in the continuity of the historical process. How should progressive forces approach this crisis? First of all, it is important to discount any attempts to present the serious economic problems that now face us as a kind of “natural disaster.” They have a cause, and it lies in the system itself. And although those at the top of the economy certainly did not welcome the crisis, they nonetheless have been the main beneficiaries of the system, shamelessly enriching themselves at the expense of the rest of the population, and should be held responsible for the main burdens now imposed on society. It is the well-to-do who should foot the bill—not only for reasons of elementary justice, but also because they collectively and their system constitute the reason that things are as bad as they are; and because the best way to help both the economy and those at the bottom is to address the needs of the latter directly. There should be no golden parachutes for the capitalist class paid for at taxpayer expense.

But capitalism takes advantage of social inertia, using its power to rob outright when it can’t simply rely on “normal” exploitation. Without a revolt from below the burden will simply be imposed on those at the bottom. All of this requires a mass social and economic upsurge, such as in the latter half of the 1930s, including the revival of unions and mass social movements of all kinds—using the power for change granted to the people in the Constitution; even going so far as to threaten the current duopoly of the two-party system.

What should such a radical movement from below, if it were to emerge, seek to do under these circumstances? Here we hesitate to say, not because there is any lack of needed actions to take, but because a radicalized political movement determined to sweep away decades of exploitation, waste, and irrationality will, if it surfaces, be like a raging storm, opening whole new vistas for change. Anything we suggest at this point runs the double risk of appearing far too radical now and far too timid later on.

Some liberal economists and commentators argue that, given the present economic crisis, nothing short of a major public works program aimed at promoting employment, a kind of new New Deal, will do. Robert Kuttner has argued in Obama’s Challenge that “an economic recovery will require more like $700 billion a year in new public outlay, or $600 billion counting offsetting cuts in military spending. Why? Because there is no other plausible strategy for both achieving a general economic recovery and restoring balance to the economy.”46 This, however, will be more difficult than it sounds. There are reasons to believe that the dominant economic interests would block an increase in civilian government spending on such a scale, even in a crisis, as interfering with the private market. The truth is that civilian government purchases were at 13.3 percent of GNP in 1939what Baran and Sweezy in 1966 theorized as approximating their “outer limits”—and they have barely budged since then, with civilian government consumption and investment expenditures from 1960 to the present averaging 13.7 percent of GNP (13.8 percent of GDP). 47 The class forces blocking a major increase in nondefense governmental spending even in a severe stagnation should therefore not be underestimated. Any major advances in this direction will require a massive class struggle.

Still, there can be no doubt that change should be directed first and foremost to meeting the basic needs of people for food, housing, employment, health, education, a sustainable environment, etc. Will the government assume the responsibility for providing useful work to all those who desire and need it? Will housing be made available (free from crushing mortgages) to everyone, extending as well to the homeless and the poorly housed? Will a single-payer national health system be introduced to cover the needs of the entire population, replacing the worst and most expensive health care system in the advanced capitalist world? Will military spending be cut back drastically, dispensing with global imperial domination? Will the rich be heavily taxed and income and wealth be redistributed? Will the environment, both global and local, be protected? Will the right to organize be made a reality?

If such elementary prerequisites of any decent future look impossible under the present system, then the people should take it into their own hands to create a new society that will deliver these genuine goods. Above all it is necessary “to insist that morality and economics alike support the intuitive sense of the masses that society’s human and natural resources can and should be used for all the people and not for a privileged minority.”48

In the 1930s Keynes decried the growing dominance of financial capital, which threatened to reduce the real economy to “a bubble on a whirlpool of speculation,” and recommended the “euthanasia of the rentier.” However, financialization is so essential to the monopoly-finance capital of today, that such a “euthanasia of the rentier” cannot be achieved—in contravention of Keynes’s dream of a more rational capitalism—without moving beyond the system itself. In this sense we are clearly at a global turning point, where the world will perhaps finally be ready to take the step, as Keynes also envisioned, of repudiating an alienated moral code of “fair is foul and foul is fair”—used to justify the greed and exploitation necessary for the accumulation of capital—turning it inside-out to create a more rational social order. 49 To do this, though, it is necessary for the population to seize control of their political economy, replacing the present system of capitalism with something amounting to a real political and economic democracy; what the present rulers of the world fear and decry most—as “socialism.”50


  1. Harry Magdoff and Paul M. Sweezy, The Irreversible Crisis (New York: Monthly Review Press, 1988), 76. Back to Article
  2. James K. Galbraith, The Predator State (New York: The Free Press, 2008), 48. Back to Article
  3. “Congressional Leaders Were Stunned by Warnings,” New York Times, September 19, 2008. Back to Article
  4. Manas Chakravarty and Mobis Philipose, “Liquidity Trap: Fear of Failure,”, October 11, 2008; John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1973), 174. Back to Article
  5. “Drama Behind a $250 Billion Banking Deal,” New York Times, October 15, 2008. Back to Article
  6. “Government’s Leap into Banking Has its Perils,” New York Times, October 18, 2008. Back to Article
  7. “Single-Family Homes in U.S. Fall to a 26-Year Low,”, October 17, 2008; “Economic Fears Reignite Market Slump,” Wall Street Journal, October 16, 2008. Back to Article
  8. See “Depression of 2008: Are We Heading Back to the 1930s,” London Times, October 5, 2008. On the Japanese stagnation, see Paul Burkett and Martin Hart-Landsberg, “The Economic Crisis In Japan,” Critical Asian Studies 35, no. 3 (2003): 339–72. Back to Article
  9. “The U.S. is Said to Be Urging New Mergers in Banking,” New York Times, October 21, 2008. Back to Article
  10. “CDO Cuts Show $1 Trillion Corporate-Debt Bets Toxic,”, October 22, 2008. Back to Article
  11. “Banks are Likely to Hold Tight to Bailout Money,” New York Times, October 17, 2008. Back to Article
  12. Hyman Minsky, Can “It” Happen Again? (New York: M. E. Sharpe, 1982), vii–xxiv; “Hard Lessons to be Learnt from a Minsky Moment,” Financial Times, September 18, 2008; Riccardo Bellofiore and Joseph Halevi, “A Minsky Moment?: The Subprime Crisis and the New Capitalism,” in C. Gnos and L. P. Rochon, Credit, Money and Macroeconomic Policy: A Post-Keynesian Approach (Cheltenham: Edward Elgar, forthcoming). For Magdoff and Sweezy’s views on Minsky see The End of Prosperity (New York: Monthly Review Press, 1977), 133–36. Back to Article
  13. Irving Fisher, “The Debt-Deflation Theory of Great Depressions,” Econometrica, no. 4 (October 1933): 344; Paul Krugman, “The Power of De,” New York Times, September 8, 2008. Back to Article
  14. “Amid Pressing Problems the Threat of Deflation Looms,” Wall Street Journal, October 18, 2008; “A Monetary Malaise,” Economist, October 11–17, 2008, 24. Back to Article
  15. Ben S. Bernanke, “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” National Economists Club, Washington, D.C., November 21, 2002, Back to Article
  16. Ethan S. Harris, Ben Bernanke’s Fed (Boston, Massachusetts: Harvard University Press, 2008), 2, 173; Milton Friedman, The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing, 1969), 4–14. Back to Article
  17. Ben S. Bernanke, Essays on the Great Depression (Princeton: Princeton University Press, 2000), 5; Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1963). For more realistic views of the Great Depression, taking into account the real economy, as well as monetary factors, and viewing it from the standpoint of the stagnation of investment, which above all characterized the Depression see Michael A. Bernstein, The Great Depression (Cambridge: Cambridge University Press, 1987), and Richard B. DuBoff, Accumulation and Power (New York: M.E. Sharpe, 1989), 84–92. On classic theories of the Great Depression see William A. Stoneman, A History of the Economic Analysis of the Great Depression in America (New York: Garland Publishing, 1979). Back to Article
  18. Ben S. Bernanke, “Money, Gold, and the Great Depression,” H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia, March 2, 2004, Back to Article
  19. Ben S. Bernanke, “Some Thoughts on Monetary Policy in Japan,” Japan Society of Monetary Economics, Tokyo, May 31, 2003, Back to Article
  20. Bernanke, Essays on the Great Depression, 43. Back to Article
  21. "On Milton Friedman’s Ninetieth Birthday,” Conference to Honor Milton Friedman, University of Chicago, November 8, 2002. Ironically, Anna Schwartz, now 91, indicated in an interview for the Wall Street Journal that the Fed under Bernanke was fighting the last war, failing to perceive that the issue was uncertainty about solvency of the banks, not a question of liquidity as in the lead-up to the Great Depression. “Bernanke is Fighting the Last War: Interview of Anna Schwartz,” Wall Street Journal, October 18, 2008. Back to Article
  22. Ben S. Bernanke, “Asset Prices and Monetary Policy,” speech to the New York Chapter of the National Association for Business Economics, New York, N.Y., October 15, 2002,; Harris, Ben Bernanke’s Fed, 147–58. Back to Article
  23. Ben S. Bernanke, “The Economic Outlook,” October 25, 2005; quoted in Robert Shiller, The Subprime Option (Princeton: Princeton University Press, 2008), 40. Back to Article
  24. Magdoff and Sweezy, The Irreversible Crisis, 76; Burkett and Hart-Landsberg, “The Economic Crisis in Japan,” 347, 354–56, 36–66; Paul Krugman, “Its Baaack: Japan’s Slump and the Return of the Liquidity Trap,” Brookings Papers on Economic Activity, no. 2 (1998), 141–42, 174–78; Michael M. Hutchinson and Frank Westermann, eds., Japan’s Great Stagnation (Cambridge, Massachusetts: MIT Press, 2006). Back to Article
  25. Magdoff and Sweezy, The Irreversible Crisis, 51. Back to Article
  26. Magdoff and Sweezy, The End of Prosperity, 136; Hyman Minsky, John Maynard Keynes (New York, Columbia University Press, 1975), 164. Back to Article
  27. Greenspan quoted, New York Times, October 9, 2008. See also John Bellamy Foster, Harry Magodff, and Robert W. McChesney, “The New Economy: Myth and Reality,” Monthly Review 52, no. 11 (April 2001), 1–15. Back to Article
  28. Manas Chakravarty, “A Turning Point in the Global Economic System,”, September 17, 2008. Back to Article
  29. See John Bellamy Foster, Naked Imperialism (New York: Monthly Review Press, 2006), 45–50. Back to Article
  30. Jim Reid, “A Trillion-Dollar Mean Reversion?,” Deutsche Bank, July 15, 2008. Back to Article
  31. See Paul A. Baran and Paul M. Sweezy, Monopoly Capital (New York: Monthly Review Press, 1966); Harry Magdoff and Paul M. Sweezy, The Dynamics of U.S. Capitalism (New York: Monthly Review Press, 1972), The Deepening Crisis of U.S. Capitalism (New York: Monthly Review Press, 1981), and Stagnation and the Financial Explosion (New York: Monthly Review Press, 1987). Back to Article
  32. Bellofiore and Halevi, “A Minsky Moment?” Back to Article
  33. See Michael Yates, Longer Hours, Fewer Jobs (New York: Monthly Review Press, 1994); Michael Perelman, The Confiscation of American Prosperity (New York: Palgrave Macmillan, 2007. Back to Article
  34. Economic Report of the President, 2008, Table B-47, 282. Back to Article Back to Article
  35. Correspondents of the New York Times, Class Matters (New York: Times Books, 2005), 186; Edward N. Wolff, ed., International Perspectives on Household Wealth (Cheltenham: Edward Elgar, 2006), 112–15. Back to Article
  36. For a class breakdown of household debt see John Bellamy Foster, “The Household Debt Bubble,” chapter 1 in John Bellamy Foster and Fred Magdoff, The Great Financial Crisis: Causes and Consequences (New York: Monthly Review Press, 2009). Back to Article
  37. Ben S. Bernanke, “The Global Savings Glut and the U.S. Current Account Deficit,” Sandridge Lecture, Virginia Association of Economics, Richmond Virginia, March 10, 2005, Back to Article
  38. Steingrímur J. Stigfússon, “On the Financial Crisis of Iceland,”, October 20, 2008; “Iceland in a Precarious Position,” New York Times, October 8, 2008; “Iceland Scrambles for Cash,” Wall Street Journal, October 6, 2008. Back to Article
  39. See Edward J. Nell, Growth, Profits and Prosperity (Cambridge: Cambridge University Press, 1980), 19–28. Back to Article
  40. Karl Marx, Capital, vol. 1 (New York: Vintage, 1976), 96–98. Back to Article
  41. See Crawford B. Macpherson, Democratic Theory (Oxford: Oxford University Press, 1973), 195–203. Back to Article
  42. Friedman and Schwartz, A Monetary History of the United States, 419. Back to Article
  43. Harris, Ben Bernanke’s Fed, 147–58. Back to Article
  44. See John Bellamy Foster, Hannah Holleman, and Robert W. McChesney, “The U.S. Imperial Triangle and Military Spending,” Monthly Review 60, no. 5 (October 2008): 1–19. Back to Article
  45. For a discussion of the simultaneous stagnation of the economy and of economics since the 1970s see Perelman, The Confiscation of American Prosperity. See also E. Ray Canterbery, A Brief History of Economics (River Edge, NJ: World Scientific Publishing, 2001), 417–26. Back to Article
  46. Robert Kuttner, Obama’s Challenge (White River Junction, Vermont: Chelsea Green, 2008), 27. Back to Article
  47. Baran and Sweezy, Monopoly Capital, 159, 161; Economic Report of the President, 2008, 224, 250. Back to Article
  48. Harry Magdoff and Paul M. Sweezy, “The Crisis and the Responsibility of the Left,” Monthly Review 39, no. 2 (June 1987): 1–5. Back to Article
  49. See Keynes, The General Theory of Employment, Interest, and Money, 376, and Essays in Persuasion (New York: Harcourt Brace and Co., 1932), 372; Paul M. Sweezy, “The Triumph of Financial Capital,” Monthly Review 46, no. 2 (June 1994): 1–11; John Bellamy Foster, “The End of Rational Capitalism,” Monthly Review 56, no. 10 (March 2005): 1–13. Back to Article
  50. In this respect, it is necessary, we believe, to go beyond liberal economics, and to strive for a ruthless critique of everything existing. Even a relatively progressive liberal economist, such as Paul Krugman, recent winner of the Bank of Sweden’s prize for economics in honor of Alfred Nobel, makes it clear that what makes him a mainstream thinker, and hence a member of the club at the top of society, is his strong commitment to capitalism and “free markets” and his disdain of socialism—proudly proclaiming that “just a few years magazine even devoted a cover story to an attack on me for my pro-capitalist views.” Paul Krugman, The Great Unraveling (New York: W. W. Norton, 2004), xxxvi. In this context, see Harry Magdoff, John Bellamy Foster, and Robert W. McChesney, “A Prizefighter for Capitalism: Paul Krugman vs. the Quebec Protestors,” Monthly Review 53, no. 2 (June 2001): 1–5. Back to Article

Monthly Review

Global Research Articles by John Bellamy Foster

 Global Research Articles by Fred Magdoff

© Copyright John Bellamy Foster and Fred Magdoff , Global Research, 2009

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.

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Kirk Joseph
21 May 09, 08:55

Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.

Winston Churchill

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