Issue 98 of INTERNATIONAL SOCIALISM JOURNAL Published Spring 2003 Copyright © International Socialism

Toil and trouble: the nature of the US economy

A review of Robert Brenner, The Boom and the Bubble: The US in the World Economy (Verso, 2001), £15


At the beginning of the 21st century capitalism remains stubbornly and increasingly prone to economic crisis. This is manifest in the series of crises that have rocked the system, particularly in the economic and financial meltdowns of the 1990s in Mexico, East Asia, Russia, and most recently Argentina. The spectacular fraud and pillaging of giant US companies such as Enron, WorldCom and Xerox not only calls into question the US economic miracle, but suggests that major corporations are mired in deep financial difficulty. Further, the stagnation that besets the major economies of Japan and Europe shows no signs of abating.1 In this context Robert Brenner's new book is very welcome. The work builds on a general account of the evolution of post-war capitalism which appeared as a full issue of New Left Review.2 The focus of this work is the US expansion and boom of the 1990s, the stockmarket bubble and the ensuing bust and downturn.

In a review of Brenner's work in general, Alex Callinicos3 argues that the strength of his approach lies firstly in producing a detailed narrative of long term trends in the capitalist mode of production, at a time when the so called radical economists of the 1970s have turned their backs on such a project. Second, the rate of profit lies at the centre of this analysis. The specific contribution of this book, however, lies in trying to make sense of the insanity of stockmarkets in the 1990s when shares reached meteoric heights, driven by the euphoria of the 'new economy'. This debate about the relationship between finance and the real economy is particularly important because it has been fashionable in some quarters to see unregulated financial capital as in the driving seat of the real economy. Commentators such as Will Hutton4 and Walden Bello5 , for example, see footloose finance as the root cause of recent turbulence and instability. As we shall see, Brenner gives a much more nuanced and fuller account of the relationship between the role of finance and the real economy, and one which views them as inextricably linked.

Rather than the chronological approach taken by Brenner, I am going to structure the discussion into three interrelated themes. I begin with a reprise of the fall and subsequent rise of the US economy in the early 1990s. The arguments here have been fairly well elaborated and debated elsewhere. The second section looks at the apparent paradox of finance and the real economy whereby the price of shares rocketed while profits stagnated or fell. Third, I examine the myth of the 'new economy' which has been hyped up by academics and governments and heralded as a new phase of capitalism to justify this disjuncture between share prices and the real economy. According to Alan Greenspan of the US Federal Bank the US economy in the 1990s was 'history's most compelling demonstration of the productive capacity of free peoples operating in free markets'.6

The fall and rise of the US economy

Brenner's main argument is that the boom and bubble of the 1990s can only be understood in the context of a much longer perspective and in particular, of the forces that produced the onset and perpetuation of the long stagnation of the world economy between 1973 and 1995. Brenner's theory of crisis explains this fall in profitability as a consequence of capitalist competition between, and the uneven development of, the three main global economies: Japan, the US and the European Union. This uneven development is manifest in the way that these rival blocs of capital, with investment in fixed capital of different ages and efficiency, led to competition, chronic overinvestment and overcapacity. These warring brothers, however, have to cooperate to ensure the continued health of their competitors, by adjusting the rules of the game from time to time through exchange rate agreements and trade arrangements. Therefore they are engaged in a sort of 'beggar my neighbour' routine which means that different economies are in ascendancy at different points in time according to the level of their exchange rates, relative costs and abilities to discipline labour.

This form of competition involves a leapfrogging process as different blocs of capital are subject to more propitious conditions for making profits. While the US was in the lead in the 1950s, Japan and Germany forged ahead in the 1960s and 1970s, as they were able to impose lower prices and win an ever increasing share of the world market, and therefore able to maintain old profit rates. The US, however, had overinvested and was lumbered with sunk costs in production methods that were too costly, and was therefore unable to maintain profit levels. The basic argument was that the role of international competition leading to manufacturing overcapacity and overproduction forced down profit rates.

From the mid-1990s, however, the fortunes of the US economy were reversed. The US manufacturing sector began to enjoy major cost advantages and turned the tables on its rivals, vastly improving its competitive position. Assaults on organised labour, the purging of redundant high-cost production, a binge of mergers and acquisitions along with the pressure of high interest rates, recession and an overvalued dollar, brought major gains in productivity growth in the early to mid 1980s. Further, the 1985 Plaza Accord, an agreement between the US, Germany and Japan to reduce the value of the dollar, to some extent rescued US manufacturing. According to Brenner this was a turning point in US manufacturing and a watershed in the global economy.

Therefore, the argument was that this combination of industrial shakeout, wage repression and dollar devaluation detonated a major shift in the modus operandi of US manufacturing towards an increasing reliance upon exports. After a hiccup in 1991-1992 manufacturing assumed an upward trajectory. In the aftermath of the slow recovery from the 1990-1991 recession the revival of profitability in manufacturing began to stir the whole economy.

Brenner's theory of crisis: a critique

Brenner's theory of crisis has been extensively debated and criticised in this journal by Rob Hoveman7 and elsewhere by Alex Callinicos8 and Chris Harman9 , and therefore in this section I intend to briefly rehearse only the most salient points. The first criticism levelled at Brenner's theory of crisis is that it is based on a rejection of the labour theory of value and the tendency for the rate of profit to fall (TRPF). Marx argued that investment undertaken to improve productivity would lead to a fall in the rate of profit. However, in Brenner's explanation of this leapfrogging process by the three powerful capitals through increased investment, the very opposite is the case. Asserting the centrality of the tendency of the rate of profit to fall does not imply a crude inevitability of the demise of capitalism, as there are a number of countervailing tendencies whose operation can prevent the rate of profit from falling or even restore the rate of profit. These countervailing factors might include, for example, an intensification of the exploitation of labour, the increased productivity of capital or leakages such as spending on arms.

The second major criticism of Brenner's account centres on the notion that, although he accepts the effect of arms spending in the US economy as a stabilising factor, he does not put it as central to understanding why capitalism entered a long boom and why that boom could not persist. This is put succinctly by Callinicos:

It is not appropriate to discuss this at length but this argument is covered thoroughly elsewhere.11

A third criticism of Brenner's approach is that it is not elaborated or situated in the Marxist intellectual tradition from which it emerged. Overproduction appears as the main problem at a particular historical conjuncture in his explanation of crises of the system. However, he is not explicit about the way in which overproduction is not an occasional aberration but is endemic to the capitalist system itself. Much of Brenner's analysis is of the (mis)management of the key global economies rather than emphasising, as Marx did, the tendency of the system towards anarchy, as firms expand production to try and boost profits.

The ascent of finance, the bubble and the pinprick: Brenner's account

Brenner redeems himself, to a certain extent at least, from one of Rob Hoveman's criticisms--namely that he fails to build an account of the role of the financial sector into his explanation of crisis.12 Therefore a second and major theme of the book is to trace how changes in the financial system and the real economy are interrelated in fuelling booms and slumps. In contrast to other accounts, finance is seen as being inextricably linked to the real economy rather than a disembodied force, in that it both reflects and affects the real economy. Brenner looks at the way in which the background to changes in the financial system can be traced back to the mid-1980s. The easing of entry into financial activities by governments paved the way for higher returns, and initiated a process of far-reaching financial deregulation. This involved the elimination of capital controls and the breakdown of existing barriers that confined financial institutions to specialised functions and geographical spheres. The upshot of this was the rerun of financial cycles. 'With the unshackling of finance the world economy was once again gripped by one credit-based speculative boom after another, issuing inevitably in devastating crashes'.13

From the start of the 1980s huge financial bubbles blew up all across the advanced capitalist economies, especially on the stockmarket in mergers and acquisitions, and in commercial real estate as speculative demand drove up asset values. The outcome was mainly the unprecedented escalation of indebtedness on the part of non-financial corporations which spent hundreds of billions of borrowed dollars on leveraged buyouts and the repurchase of their own shares, which led the banks to ever greater financial fragility.

As US manufacturing entered a deep recession at the start of the 1980s, lenders and speculators were offered only limited options by the real economy. In the face of the stagnating economy throughout the 1980s a major reallocation of capital took place in the direction of financial activity. Between 1975 and 1990 the proportion of total private plant and equipment investment devoted to FIRE (finance, insurance and real estate) doubled from 12-13 percent to 25-26 percent. According to Brenner:

The onset of the bubble

Brenner argues that by the end of 1995, even after rapid growth for 12 years, share prices had not outdistanced the growth of corporate profits, and still reflected the recovery of US profitability. However, from this point onwards share prices disengaged themselves from underlying corporate profits and a major stockmarket bubble began to blow up.

Therefore the conditions for the expansion of the equity market bubble were prepared by the transformation of domestic and international financial conditions in 1995, and were perpetuated by the Federal Reserve during the next four years in terms of easy credit. Non-financial institutions were able to vastly ratchet up their borrowing for the purpose of buying shares in colossal quantities--either to accomplish mergers and acquisitions or to simply repurchase their own outstanding equities and fatten up the price of shares. To make this possible corporations entered into the greatest wave of accumulation of debt in their history. For example, the $50.2 billion that non-financial corporations devoted to share purchase absorbed 50 percent of the total of $1.035 trillion they borrowed in these years. Brenner sums this up:

The inflation of asset values resulting from the rise in stock prices appeared to endow households with such magnified wealth, which led to a historic erosion of household savings, as well as a big boost in household borrowing, both of which prompted further consumer spending. The resulting increase in the growth of consumer demand gave a major kick to what already appeared to be an increasingly powerful boom that had initially been dynamised by the recovery of profitability, competitiveness and exports in the manufacturing sector. It was, moreover, driving other advanced capitalist economies from the doldrums, extracting them from their recessions in the first half of the decade. In the new international cyclical upturn that ensued, 1997 represented a definite peak.

However, by 1998 the US economy had returned to the conditions of the first half of the 1980s, as exports proved exceedingly difficult and manufacturing profits fell. According to Brenner the same rising dollar that spelled trouble for US and East Asian manufacturing was now helping to fuel the greatest equity price aggrandisement in US history. The wealth effect of the bubble continued to lash the US economy forward, even as the manufacturing sector saw its competitiveness, its international sales and its profitability fall away. By the first half of 2000 corporate, household and financial sector debt as a percentage of GDP were at an all-time high.

The bubble bursts

The logic of this, according to Brenner, was that since so much of the increased investment was clearly unable to justify itself in terms of either realised or prospective profits, a good deal of it was bound to turn out to be overinvestment. The bubble could for a time obscure some of this redundant capacity. But, given that firms were already having difficulty making profits in the halcyon days of the end of the century they were bound to suffer truly excruciating downward pressure on their rates of return when the stockmarket wealth effect ceased to subsidise investment and consumer demand as well as productivity growth.

During Spring 2000, one e-business after another ran out of money and collapsed, setting off a stockmarket decline. During the following winter and summer almost all of the great names in the information technology sector were struck by a succession of increasingly distressing profit reports.

The wealth effect went into reverse and the virtuous circle turned into a vicious circle. Overcapacity, along with the reduction in expenditure and borrowing by households and firms derived from the reverse wealth effect, created powerful downward pressure on the economy as a whole. By mid-2001 firms were beginning to cut back on plant, equipment and labour force. The US economy has been deprived of its bubble and is now reeling from the effects of the huge glut of productive capacity left in its wake.

Brenner not only provides a detailed narrative of the stockmarket bubble and its burst, but his analysis of the complete disjuncture of share prices and profitability lays the basis for understanding the debacle of Enron. It is now just over a year since the bankruptcy of Enron, once the US's 75th largest company, which had overstated its profits to the tune of $1.2 billion. This was the first spectacular event of an unfolding drama where bosses had plundered firms and manipulated figures on a massive scale in order to bolster the prices of shares. Within a few months this was topped by WorldCom, which had fiddled $3.8 billion, and further it transpired that Xerox had overstated its profits by $1.46 billion between 1997 and 2000. These companies were dismissed by some as the 'bad apples'. However it became clear that this pillaging and fraud went right to the heart of the system. According to The Economist, by 2002, 250 companies had had to restate their accounts compared with 92 in 1997 and only three in 1981.17

Seeing the finance sector and the real economy as interlinked is an important antidote to those who see finance as a disembodied force, and the solution to corporate corruption as good governance. However, echoing an earlier criticism, Brenner fails to locate his analysis in the framework of the Marxist tradition that he draws on, which reduces both the potency and the clarity of his argument.

Finance and the real economy

Walden Bello suggests that the ascendancy of finance heralds a new era of finance capitalism when he argues, 'The globalisation of finance meant that increasingly its dynamics serve as the engine of the global capitalist system,' and further that 'volatility, being central to global finance, has become the driving force of the global capitalist system as a whole'.18 This critique of finance is echoed by the likes of Will Hutton and Larry Elliot who see finance capital as slowing down growth by directing economic activity towards short term profits and shareholder value. Hutton argues that we should look towards the models provided by France and Germany where, in his view, the financial sector has been usually harnessed to support productive capital.19

Marx summed up the role of finance by arguing that credit played a dual role in the financial system--that of a prophet and of a swindler. Finance is a prophet in that it provides the means through which capitalism can expand. The credit system brought together those capitalists who did not have an immediate outlet for their profits and those with an idea for productive investment but no capital. So financial capital acted as a sort of lubricant by redistributing surplus value created in the process of production. The credit system made capital more mobile geographically, allowing capitalists to expand to other parts of the world, and more mobile in usage, so that there was money available to invest in innovation in new areas of the economy. As we have seen, the massive mergers and acquisitions of the past two decades would not have been possible without syndicates of financial institutions to underpin them, and therefore it enables capitalism to constantly restructure itself and survive in the face of competition and falling profits. He described the role of the credit system thus:

Marx also recognised that not all of this money would be reinvested in the productive sector and talked about the way that some of that credit would be used for speculation in what he describes as the 'most colossal system of gambling and swindling'.

Therefore money and credit cannot be severed from the real economy, despite appearances to the contrary. As Marx pointed out, the development of the production process expands credit, while credit in turn leads to an expansion of industrial operations. Businesses have to borrow to finance investment and raw materials, and individuals have to borrow to consume. However, significant resources are also channelled into unproductive investment, which could take the form of shares or other financial assets.

In the short run the system can be independent of the productive sector, and perversely for a short time can move in the opposite direction of the economy as a whole, with share prices influenced by all sorts of disconnected events. But in the medium to long run the financial sector and the real economy are integral. The price of shares is related to the level of dividends, which is in turn related to profits. If profits are falling the firm will not be able to pay out dividends and share prices will fall. Sometimes this happens gradually, or sometimes you have what is euphemistically called a 'correction', when there is a quick and sudden fall.

In terms of economic crisis then, credit is the lever of overproduction and excessive speculation. It accelerates the material development of the productive forces and, therefore, the violent outbreaks and contradictions in the system that have become deeper and more frequent in the last decade.

The myth of the 'new economy'

The third major theme of the book is to demolish the myth of the 'new economy', which was embraced as representing a new epoch in capitalism. Here Brenner produces some interesting insights into the way in which this was a necessary myth perpetuated in business and government circles to explain the complete disjuncture between equity prices and underlying profits. Greenspan of the US Federal Reserve publicly promulgated an analysis of the US boom in terms of the 'new economy' in which the rising stockmarket was not only fully justified, but also played an indispensable role.

It was argued that the economy's increased dynamism and recent phase of productivity growth had been propelled since 1993 by the sharp increase in the growth of investment, especially in high-tech plant and equipment. In this 'virtuous cycle' there were expectations of ongoing accelerated productivity increases, rooted in the technological breakthroughs of the 'new economy', which justified expectations of huge profits in the future. According to Brenner, the 'new economy' justified higher profit expectations that were naturally reflected in unstoppable equity prices. In turn, rising equity prices, by way of the wealth effect, incited higher consumption and investment growth, which sustained 'new economy' technological advances, which in turn justified higher profit expectations and so on.

The huge and growing gap between equity prices and profits raised the possibility that what was actually in play on the stockmarket was no mere reflection of improvement in the real economy, but rather a financial bubble. However, Greenspan continued to insist:

Therefore in this view it was clearly 'new economy' productivity gains that were generating rising incomes (and profits), and pushing up equity values. Equity prices reached their zenith, and later in 2000 the technology and internet stocks--that Greenspan had touted as transforming the economy's profit-making potential--exploded in much more extreme fashion, more than doubling in value, while the Dow Jones e-commerce index quadrupled. The internet-dominated NASDAQ index doubled from 2,736 in October 1999 to just over 5,000 in March 2000. Therefore there was an absurd disconnection between the rise in paper wealth and the growth of actual output, and particularly profits, in the underlying economy.

One indication of the exceptional level attained was the ratio between companies' valuations in terms of their equities on the stockmarket on the one hand, and in terms of what it would cost to replace their plant and equipment and financial capital on the other. At the beginning of 2000, for non-financial corporations, this ratio (known as Tobin's q) reached an all-time high of 2.06--compared with 1.14 in 1995, and 0.46 in 1986, and to an average of 0.65 for the 20th century as a whole.22

Stockmarket valuation of high technology companies, and especially internet firms, were even more absurd. Despite their tiny place, by any measure, in the economy, the capitalisation of internet companies reached 8 percent of the total stock valuation. The reality was that most of these companies had made losses. In a sample of 242 internet companies studied by the OECD during the third quarter of 1999, only 37 made a profit, and two companies accounted for 60 percent of the profits made by all 37.23

Brenner raises three criticisms of the miracle of the 'new economy'. First, he suggests that the impacts of the 'new economy' are neither historical nor relatively spectacular. For example, in the decade of the 1990s the US economy as a whole did not remotely compare with the first quarter-century of the post-war era. He also suggests that the much vaunted increase in labour productivity of 5.2 percent between 1993 and 2000 was not spectacular when compared with Germany (4.8 percent) and France (4.9 percent). Second, he suggests that the role of new institutions in fostering entrepreneurship, innovation and the accumulation of intangible assets were completely overstated. The rise of venture capital, that was supposedly at the heart of the emergent 'new economy', funding high technology start-up firms comprised a minute fraction of total investment. Third, powerful technologies had been coming on-line for some time. Firms had simply stepped up the use of these technologies in learning-by-doing (as with computers), the economies of scale (as with semiconductors), and the network effects (as with all aspects of information technology).

Other criticisms could be added. Brenner in general accepts the figures for GDP and productivity which were advanced to support the 'economic miracle'. However, recent research by Professor Robert Gordon of Northwestern University, Chicago, quoted by Faisal Islam24 suggests that not only was the productivity revival short lived, but US figures for GDP and productivity were inflated by 'hedonic' adjustments introduced in 1985 to reflect the improving quality and increasing power of goods bought for the same price. Further, Brenner does not acknowledge that these crises and dramas in the financial sector have a much longer history than the last 30 years. Kindleberger, a business historian, has looked at the way in which the speculative frenzies on commodities ranging from tulips to railroads have always been endemic to the capitalist system.25

The collapse of capitalism?

In assessing the prospects for the global economy, Brenner suggests that the film is running backwards. The deflation of the stockmarket bubble is propelling the US economy, heavily burdened by manufacturing overcapacity, towards serious recession and in the process detonating further recession all across an advanced capitalist world that is similarly held down by superfluous productive power. The resulting downturn is weighing particularly heavily on the triangle of interlinked economies in East Asia, Japan, and the US itself, so that mutually reinforcing downturn is in prospect. Still, given the enormous financial imbalances that have been left over from the bubble and which hang over the US and the world economy--the still over valued US stockmarket, the huge US current account balances, massive US overseas debt, and the record-breaking US private sector deficit--there is no assurance that economic difficulties will end even there.

Quoting a survey in The Economist Brenner puts overproduction at the centre of his analysis:

A recent article in the Financial Times by Martin Wolf27 emphasises the importance of the US economy, which according to OECD forecasts will generate 52 percent of the increase in world demand this year. In 2003 total domestic demand in the US is forecast to grow by 2.8 percent, against growth of 0.7 percent in the EU and minus 1.4 percent in Japan. The US is especially vulnerable because of the 'triple debt trap' whereby demand is only sustained by unprecedented indebtedness by consumers and firms and a massive deficit on the current account of the balance of payments. Therefore the health of the world economy and its ability not to slide into another crisis depends on the ability of Bush and the Federal Reserve under Greenspan to stoke up US demand, through high personal and corporate indebtedness, and run a large deficit on the current account. As a way of reviving the economy Bush has proposed giving another huge handout to the rich by scrapping tax on dividends to keep share prices up.28 Recently Eddie George, Governor of the Bank of England, gave bland assurances that Britain was somehow weathering the storm of a stagnating world economy. But the British economy has also depended on an orgy of borrowing on the strength of a housing market with rocketing prices. According to The Observer, 'This mortgage equity withdrawal is out of control and is responsible for £2 in every £3 of growth in consumer spending'.29 Any collapse of house prices could send the UK from a virtuous circle to a vicious circle, compounded by the slowdown in other major economies.


Undoubtedly Brenner's work is a meticulously researched and scholarly piece which makes a significant contribution to the debate about post-war capitalism. Its strength lies in elaborating the links between finance and the real economy, and explaining the madness of stockmarkets and rocketing share prices. It places the rate of profit and overproduction at the centre of the analysis, and therefore rescues the argument from those such as Will Hutton and Larry Elliot who suggest that recessions and slumps could be avoided if global finance were harnessed and reformed. The book is also incredibly prophetic in anticipating the debacle of major US companies such as Enron and WorldCom, and how their desire to demonstrate profitability and maintain shareholder value was built on sand as these companies had been pillaged and subject to fraud on a breathtaking scale. In the current climate Brenner's book has profound relevance in setting the context for US capitalism and imperialism. Although the military capacity of the US is quite obscene and far in excess of its competitors, it helps us to understand why deeper and more frequent recessions, and slow growth mean that it is no longer in a position to rebuild the world economy. Those who want to both understand the nature of the beast and change the world will find much of interest in this book.


  1. M Wolf, 'Stagnation in Germany and Japan, Unsustainable Imbalances in the US', Financial Times, 18 December 2002.

  2. R Brenner, 'The Economics of Global Turbulence', New Left Review 229 (May/June 1998).

  3. A Callinicos, 'Capitalism, Competition and Profits: A Critique of Robert Brenner's Theory of Crisis', Historical Materialism 4 (1999), p27.

  4. W Hutton, The State We're In (Jonathan Cape, 1995).

  5. W Bello et al, 'Notes on the Ascendancy and Regulation of Speculative Capital', in W Bello et al (eds), Global Finance: New Thinking on Regulating Speculative Capital Markets (Zed Books, 2000).

  6. R Brenner, The Boom and the Bubble: The US in the World Economy (Verso, 2002), p218.

  7. R Hoveman, 'Brenner and Crisis: A Critique', International Socialism 82 (Spring 1999).

  8. A Callinicos, op cit.

  9. C Harman, 'Footnotes and Fallacies: A Comment on Brenner', Historical Materialism 4 (1999), pp94-104.

  10. A Callinicos, op cit, p27.

  11. An analysis of the permanent arms economy can be found in T Cliff, 'Perspectives for the Permanent War Economy' in Neither Washington Nor Moscow (London, 1982), pp101-107. It was then developed in M Kidron, 'Western Capitalism Since the War' (London, 1970) and in C Harman, Explaining the Crisis (London, 1984).

  12. R Hoveman, op cit.

  13. R Brenner, The Boom and the Bubble, op cit.

  14. Ibid, p83.

  15. Ibid, pp151, 152.

  16. Ibid.

  17. The Economist, 7 January 2003.

  18. W Bello, op cit, pp4, 5.

  19. W Hutton, op cit.

  20. K Marx, Capital, vol 1 (Penguin, 1976), p778.

  21. Quoted in R Brenner, The Boom and the Bubble, op cit, p179.

  22. Ibid, p228.

  23. Ibid, p187.

  24. F Islam, The Observer, July 2002.

  25. C F Kindleberger, Manias, Panics and Crashes: A History of Financial Crises, (Wiley, John and Sons, 2000).

  26. R Brenner, The Boom and the Bubble, op cit.

  27. M Wolf, op cit.

  28. Financial Times, 7 January 2003.

  29. The Observer, 8 December 2002.

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