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The End of the "Golden Age" of Capitalism and the Rise of Neoliberalism
by Tomasz Konicz
Thursday Jan 20th, 2011 4:06 AM
"The central point is that the financial sphere has the potential of developing into an autonomous subsystem of the whole economy with an enormous capacity of self-expansion.. Like cancer, it has no internal control mechanism. It can only be brought under control through external interventions.. In Pinochet's Chile, deregulation, privatization, tax cuts, monetarism and social dismantling were tested in detail by the Chicago boys before this policy mix was applied in the first industrial countries under US president Reagan and the British "iron lady" Margaret Thatcher"

A Short History of the Worldwide Economic Crisis, Part I

By Tomasz Konicz

[This article published in the German-English cyber journal Telepolis, 11/24/2008 is translated from the German on the Internet,]

The global financial branch staggering over a year [1] at the abyss [2] has taken a step forward and is now in free fall. Lehman Brothers, AIG and Northern Rock – who can list all the once powerful financial corporations, insurers or mortgage banks – that fell victim at ever shorter intervals to the financial crisis? Regarding the implosion of the international financial system established in the last three decades and advancing at a breathtaking speed, it seems important to trace the genesis and development of this global architecture of the world financial markets collapsing like a house of cards. Alongside a considerable gain in historical knowledge, the causes of the current world financial crisis will be illumined here. Is only naked, uncontrolled “greed” of some speculators responsible for the present economic dislocations? Is the expansion of financial markets going along with neoliberal deregulation and liberalization culpable in the misery? Or do the causes of this late-capitalist malaise lie deeply hidden in the innermost structure of the capitalist production method?

The rise of the neoliberal world economic system marked by the dominance of financial markets – whose financial superstructure collapses over us – resulted from the radical economic crises of the early 1970s that seized nearly all western industrial countries. This crisis ended a period of economic prosperity in Western Europe and the US that continued since the early 1950s for which the historian Eric Hobsbawm coined the term “Golden Age of capitalism” (Hobsbawm, Age of the Extreme, p.285ff). The leading Western economic nations posted an average economic growth of four percent between 1950 and 1970, which contributed substantially to full employment and shortage of workers in several industrial nations. A brief glance at this “Golden Age” is rewarding since this stands in public discussion as a model of an alternative capitalist development in the face of the brewing worldwide economic crisis.


More than rebuilding Western Europe and Japan devastated by the World War contributed to this unique economy. In this period, an “inner expansion” occurred within advanced free enterprise societies where more areas of society and life were opened up. The scientific-technical progress tightly interlocked with the economy contributed to the formation of new markets. Thanks to these developments, house work was revolutionized between 1950 and 1970 by the household appliance industry. The food sector, home entertainment products, civilian aircraft construction, retail trade businesses and mass tourism experienced their economic breakthrough. New materials like synthetic or man-made fibers and plastics led to another revolution of established industrial branches.

Mass motorization stood at the center of this long stormy growth based on opening new markets within industrialized countries (inner expansion). The greatest impulse for mass employment up to the 1970s started from this industrial branch, the auto sector. Fordism was the main production principle for car manufacturers and many other branches of industry. By means of assembly-line production and massive use of workers and machines, mass-produced goods were manufactured which found their consumers in their producers – thanks to relatively high wages. This production principle is named after the US industrialist Henry Ford, the first to use the assembly line in car manufacturing. Between 1950 and 1970, rationalization and technical innovation did not stop at the factory gates. The demand for workers in other newly arising economic branches far exceeded the cancelled jobs.

Alongside the millions of workers who assemble cars on a mass scale on assembly lines in Russelsheim and Detroit, the employment-effect of the state-financed development of the whole transportation structure must be considered (streets, bridges, tunnels, filling stations and refineries). The mass “Fordist” manufacture of cars can be described as the key industry of this “Golden Age of capitalism.” Despite the rapidly increasing automation and rationalization, car manufacturing was the “backbone” of industry – particularly in Germany and Japan – up to today.

An economic policy described as Keynesianism following its creator the economist John Maynard Keynes corresponded to Fordism in production. This economic course is regarded as the economic answer to the devastations of the 1929 worldwide economic crisis… Classical liberal economic policy failed in mastering this crisis. A demand-oriented political initiative was necessary to ensure a mass purchasing power demand can meet the mass-produced goods.

On one side, the state invested to a large extent in the transportation infrastructure for example, stimulating the economy by means of state demand. In the scope of a counter-cyclical policy in times of a threatening recession, the state should generate credit-financed demand with massive economic programs and reduce the arising debts during an economic upswing thanks to higher tax revenues.

On the other side, the activities of unions and developing corporatist structures in the factories were promoted politically. Employee representatives and entrepreneurs saw themselves as a team “all in the same boat” together responsible for the well-being of the enterprise and no longer as “class enemies” as in past centuries.

This so-called corporatism (called “social partnership” in Germany) had a material foundation since unions up to the 1970s gained respectable wage increases and reduced working hours for employees. Thus a considerable part of the increased profits through the enormous productivity gains went to the workers in the form of higher wages stimulating private demand. Thus scientific-technical progress led first to an expansion of mass demand and not to mass layoffs on account of rationalization measures and automation.

At that time the “strictly regulated” financial sector acted as a source of credits that flow in industrial production and social infrastructure. The political scientist Georg Fulberth summarized Keynesian monetary- and fiscal policy as follows:

“Businesses and the state take credits, invest them and thus engender demand covering their supply. Full employment and high profits should then suffice for the interest, compound interest and even expansion of state spending.”
Fulberth: “Kleine Geschichte des Kapitalismus” (Short History of Capitalism)

The state-forced development of education, the health sector and also the formation of the social system in most industrial countries occurred in this period. Employment was generated here. With rising wages, a comprehensive social system, full employment and terrific economic growth, the social-democratic critics of neoliberalism saw a model for the future and stubbornly urged economic programs in this declining Keynesian “Golden Age.”


What led to the crisis of this seemingly perfect free enterprise economic wonderland erupting at the beginning of the 1970s? The term stagflation – a rampant inflation joined with a stagnating or declining economy – was coined for the economic dislocations seizing nearly all western industrial countries since 1973. Both phenomena are closely connected.

The inflationary dynamic can be referred back to the falling profit-rate of businesses. Since the second half of the 1960s, profits fell again and again in relation to the capital used by businesses particularly in the US – the so-called “return” of industrial capital.

A few fundamental explanations seem appropriate here. Profit is the crucial principle, the innermost drive of a market economy. Businesses use their capital in the production of goods only for increasing profit through their sale on the market. Thus the production of goods is a means to an end to increase capital. This is an economic cycle that has existed since the beginning of the capitalist production method. Capital applied for production of goods must raise a profit. The capital-stock enlarged for profit is used in the production of more goods. In their book “A House of Cards,” [3] the theoreticians Gerry Gold and Paul Feldman explained the effects of reinvesting profits to raise the productivity (and competitiveness) of a business.

“Productivity raised through capital investments makes profit rates fall since fewer workers are needed as the source of value in relation to the total extent of investments. At the same time, higher production brings a reduction of costs and therefore of value that every asset embodies. When prices fall, more and more goods must be sold to maintain the revenue. Therefore growth is absolutely essential to maintain and raise profits. That is the essential point of the problem of capitalism.”
Gerry Gold and Paul Feldman

Contrary to everything that our bankers and financial advisors tried to get us to believe in the last decades, the real value of goods and services is still based on the over-exertion of human workers. The social perspective is important here. Employment in the established industrial branches also goes back to increased productivity. New industrial branches opened up by technical progress must absorb this worker surplus to maintain the stability of the capitalist system. Thus a pressure to permanent expansion expressed in the publically fetishized “economic growth” is inherent in capitalism in several regards. The profitable investment of capital, the capital exploitation, is its core.

From the end of the 1960s to the 1980s, the profit rate in the US fell constantly. On the other side, the profits falling in relation to total capital resulted from the exhaustion of the “inner expansion” of capitalism. After a phase of tumultuous conquest, the newly opened free enterprise areas (household, entertainment industry and tourism) and industrial branches (cars, civilian aircraft and plastics) experienced a certain market satiation in which high economic growth as in the 1950s and 1960s was not possible any more. The economic stagnation characterizing the early 1970s resulted along with inflation. New markets were opened, the infrastructure built and the war damages of the Second World War long repaired. Further expansion possibilities for investment-friendly capital were simply lacking.

… A kind of wage race driving inflation began in which unions sought to adjust their wage demands to the ever-faster galloping inflation. In addition, the “oil crisis” occurred in 1973 when OPEC tried to massively increase the price for crude oil and raise the price of goods in industrial states.

The scientific-technical progress closely interwoven with industry and leading to higher productivity and short-term competitive advantages proved to be a two-edged sword. If productivity increases and new technologies into the 1970s contributed to opening new markets and creating more and more jobs than fell away in older industries through rationalizations, this development capsized from 1973. From that moment – the last year with full employment within the OECD -, mass unemployment unknown for decades returned in industrial countries. The fast spreading rationalization and automation led to more and more goods produced in ever shorter time by fewer workers.

New industrial branches like micro-electronics and the IT-sector accelerated this trend since the new technologies created far fewer jobs than were rationalized away. This positive development – more products produced in a shorter time by a few people – contributed to the crisis of capitalist economies in the 1970s. Our capitalist “work society” undermines its own foundation with increasing unemployment and the decreasing number of workers needed in the production of goods. Capitalism could “adjust to everything except itself,” the crisis-theoretician Robert Kurz declared.

Thus the capitalist world system characterized by Keynesian economic policy and Fordist production methods found itself in a fundamental crisis in the 1970s that resulted from the exhaustion of “inner expansion” and falling profit rates and flowed into immense stagnation tendencies and rising mass unemployment. These same forces that fueled the stormy growth of capitalism in its “Golden Age” now initiated its crisis. From the late 1980s, this stigmatized an ever-larger part of the population able to work.


The lifting of the gold bond of the US dollar in 1971 was a central presupposition for the transition from the Keynesian to the neoliberal model of capitalism. Until then, the greenback in its function as world currency was firmly coupled to the gold reserves of the US while all other currencies of the OECD stood in fixed exchange rates to the dollar. The US government guaranteed 35 US dollars could always be exchanged in interstate trade for an ounce of gold. Until 1971 money in western industrial nations was only a symbol for gold – a commodity. The commodity gold played the role of a general equivalent – b y means of the US dollar and fixed exchange rates – in which all other goods had their value.

However the US government since the 1960s covered the escalating costs of the Vietnam War and social reforms by inflating the dollar. By printing more dollars, the face value of the US dollar in European and Japanese possession already exceeded the US gold reserves in the 1960s. On August 17, 1971, the Nixon administration saw itself forced to cancel the gold backing of the US dollar. On March 11, 1973, the leading industrial nations dissolved their fixed exchange rates to the US dollar and passed over to the free “floating” of the currencies. Since those fateful years, currencies have not been covered by anything substantial. Thus money is a pure matter of trust.

On one hand, the annulment of the gold backing of the US dollar led to the cancellation of the regulating, stabilizing function of the global system of fixed exchange rates. On the other hand, it accelerated the rapid spread and establishment of the financial markets since currencies very quickly became speculative commodities. No substantial restriction can now be applied to control the money supply; it could be increased in a potentially unlimited way for purely economic-political considerations. This monetary fool’s license contributed decades later to the enormous dimensions of the present financial crisis.

The counter-movement that sought to cut through the economic “Gordian knot” of the stagnation of the 1970s and later came to be known under the term “neoliberalism” dared its first practical steps in 1973. After Chile’s socialist president Salvador Allende was overthrown on September 11, 1973 and a fascist dictatorship installed under General Augusto Pinochet continuing to 1990, the South American country acted as an experimental field of neoliberal policy. In Pinochet’s Chile, deregulation, privatization, tax cuts, monetarism and social dismantling were tested in detail by the Chicago Boys [4] before this policy mix was applied in the first industrial countries under US president Ronald Reagan and the British “iron lady” Margaret Thatcher.

The policy of the Reagan administration voted into office in 1980 should be briefly sketched because of its towering significance in forming the global economic system dominated by the financial markets. The “neoliberals” saw the way out of the stagnation of the 1970s in a return to the past [5], tax relief for the wealthy and businesses, a deregulation of the financial markets, social cuts and the first privatizations. In their essence, most measures of “Reaganomics” aimed at raising the profit rates. This policy had a certain success as is clear from the graph. From the 1980s, the profits of US corporations rose even if the high profit rates of the 1950s and 1960s could not be reached any more. The leftist theoretician Chris Harman remarked:

“How did the profit rates recover? One important factor was the increase of the exploitation rate within the economy along with the rising share of capital- and the falling share of labor – as apparent in the gross domestic product.”
Chris Harman [6]

Thus an ever –larger share of the” economic cake,” of the gained gross domestic product, went to the corporations and the share of wage-earners in social wealth decreased. Thus real inflation-adjusted wages of the American population have stagnated since the Reagan era. Today US wage-earners earn less de facto than 1973. This was made possible through an anti-union policy of the Reagan administration in whose course the degree of union organization of the US work force fell more and more. Reaganomics introduced the notorious “deregulation” of the labor market which massively pushed back the lifelong regulated working conditions of the Keynesian “Golden Age” and established precarious employment in whole branches of industry.

The massive tax gifts for the top-earners (the top tax rate fell from 70% to 28%) were legitimated in the framework of the trickle-down theory (derived from the English theory). The massively increased wealth of the top ten-thousand would “seep down” to the poorest through the economy. The massive inequality in the distribution of income and assets in the US had its origin in Reaganomics.

An enormous state indebtedness of the United States formed for the first time within the Reagan era since the massive tax cuts carried out in the 1980s went along with Washington’s enormous armaments effort with which the Soviet Union should be “armed to death.” Consequently the neoliberals retained an important element of Keynesian policy in the credit-financed economic programs from which only the military-industrial- complex of the US profited this time.

The reduction of public spending postulated by the US neoliberals was enforced for the social state, not for the military sector. In general, the period of Reaganomics showed a great susceptibility for crisis. In 1981 a serious recession broke out. The consequence was an unemployment rate of 10 percent in 1987. A new recession referring back to the speculative excesses of Reaganomics broke out at the beginning of the 1990s and prevented the reelection of President Bush Senior.


The billions of tax relief for the rich and corporations did not flow as investments in industry suffering under low profit rates and satiated markets as postulated in neoliberal ideology. These billions flowed on the deregulated financial markets where far greater profits beckoned.

Since the 1980s, the size of the stock markets dramatically increased. Speculations on the currency- and commodity markets were established (in pork bellies and frozen orange juice for example). In 1987 the first warning shot was heard on “Black Monday,” the first speculative overheating on the US stock market since the 1930s. The leading US index fell 22.6 percent within one day after years of tumultuous growth during which the Dow Jones doubled between 1985 and 1987. That was the largest percentage drop of the Dow within one day in its history. However these losses were equalized within 15 months and serious repercussions on the economy were delayed.

The savings deposit crisis [7] that shook the US at the end of the 1980s and contributed to the recession from 1990 to 1991 was very different. The 3800 US community savings banks suffering under the high inflation of the ending Keynesianism in the 1970s were confronted with considerable deposit outflows promising higher returns. The Reagan administration reacted in a classical “neoliberal” way by annulling the strict regulation of community money institutions that was drawn as a lesson from the 1929 Depression. Therefore the savings banks fell into a tumult of the booming financial markets and expanded at a high tempo. The number of mortgages given homeowners rapidly soared since home prices simultaneously rose in the early 1980s. Community financial institutions speculated with risky junk-bonds, that is with high-risk business loans.

Falling home prices from 1985 caused savings banks skid in masses into insolvency. 2412 community banks went bankrupt. The costs for US taxpayers amounted to $326 billion. With the savings banks, the US economy collapsed. This precursor from the current crisis from the 1980s had a far smaller size. The present “bailouts” for US financial capital already move in the range of several trillion dollars.

Attentive observers could see the fundamental change within the free enterprise economy at that time which engendered the “financial explosion” of the 1980s. In 1985 Paul Sweezy already described the causes of the nascent dominance of the financial industry and its interaction with the real economy. In an article titled “The Financial Explosion” appearing in December 1985, [8] the US economist and editor of the renowned theoretical journal Monthly Review (in which Albert Einstein published [9]) made the connection between the stagnation of the 1970s and the massively expanded financial markets of the 1980s.

According to Sweezy, the economy stagnating from 1970 functioned as a “breeding ground” for the financial explosion during the Reagan era. The term “financialization of capitalism” [10] quickly established itself in the Anglo-Saxon area to describe that explosion. Financial capital is subject to the same growth pressure – the necessity to expand described above – as the manufacturing industry. Money is the commodity of the banks. The most important lever for a further growth of profits lies in the expansion of credits and the successful marketing of more debts. But since credits are mainly given to businesses and states in the age of Keynesianism, the banks also fell into stagnation as soon as the investment activity of corporations and governments slackened.

The financial sector, inflated by the quick capital flows owed to the fiscal policy of the Reagan administration appeared very innovative in the expansion of its markets, in the pursuit for new borrowers. On one hand, the financial capital – after the exhausted “inner expansion” – moved to an “outward expansion” by flooding the largely corrupt pro-western regimes in the third world with credits that laid the foundation for the debt trade and left the states of many developing countries bankrupt in the following decades.


On the domestic market, new fields of activity were created like speculation on the commodity exchanges and currency markets, the fraud with options and the business-takeovers financed by banks – the birth of the notorious investment banking. All these new “markets” and their goods and services went along with excessive use of credit and resulting indebtedness which are minimized or played down today in the branch as leverage. Sweezy recognized that this financial explosion and the related indebtedness was a self-reinforcing process which had an enormous growth potential.

“The central point is… that the financial sphere has the potential of developing into an autonomous subsystem of the whole economy with a gigantic capacity for self-expansion. If the process of expansion fi8rst fully started with the reemergence of stagnation in the 1970s, it tends to grow by itself. Like cancer, it has no internal control mechanism. It can only be brought unde3r control through external interventions.
Paul Sweezy [11]

Why has no external intervention occurred? Why did US governments not intervene? Why did they even remove New Deal restrictions of the financial sector? In answering these questions, Sweezy emphasized the most important effect of the financialization of capitalism on the real economy which allowed the now collapsing financial superstructures to grow rampantly over a long time. The wild financial sector expanding uncontrollably has a stimulating effect on the economy. It helps indirectly to mitigate the effects of economic stagnation. On one hand, there are jobs arising in the financial branch and the need for jobs, furnishings, transportation and communication which helped the economy. In addition, Sweezy named the enormous increase of wealth generated at least in the3 short term within the financial sector and which propels consumption. In the following chapters, these mechanisms will be analyzed more precisely.

The “financial explosion” is in fact one of the “forces opposing stagnation,” the Harvard graduate and Schumpeter-student noted. In the coming decades, these repercussions of speculative bubble formation on the real economy intensifying rapidly – with the help of economic- and monetary-policy. Sweezy’s nearly prophetic words on the course of the crises of the coming decades predicted exactly the reactions of politics to every speculative bubble bursting in the future.

“We now see exactly although everyone criticizes the increasingly heinous excesses of the financial explosion although nothing happens or is even seriously proposed – to bring them under control. The opposite is the case. Every time a catastrophe threatens. The authorities help put out the fire – and pour more gasoline for the next flames to flare up. The reason is simply the whole economy would plunge into chaos if the explosion were brought under control. The metaphor of the man riding the tiger is exactly true for this process.”
Paul Sweezy [12]

In Part 2, you will read about the fundamental contradictions of neoliberal crisis management. You will learn about the Kondratjew c cycles and about the “dark sides” of the highly praised Clinton era which peaked in speculation with high tech stocks.

Telepolis Artikel-URL:

Part II” “The High Tech Bonanza and the Explosion of the Financial Markets”:

Part III: “From Real Estate Speculation to the Collapse of the Global Deficit Economy”:

“True and False Causes of the Financial Crisis”:

The Report of the Stiglitz Commission:

Tom Tomorrow cartoon on Goldman Sachs:

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