The Crisis of Capitalism; Why the Socialists are Wrong

Clearly international free market capitalism is the midst of the greatest long wave debt crisis in history; including government, corporate and personal debt. Overcapacity plagues virtually every industry around the globe from Taipei to Toledo to Timbuktu. Debt, overcapacity, and their impact on market prices are the key long wave winter season trends that have yet to run their course. The world now faces the final years of this long wave decline and winter season that will deliver global economic and financial upheaval until 2012.

One must confess that it is rather interesting that very few mainstream analysts and economist saw the crisis of capitalism coming, but are now convinced it is behind us and trotted out as experts on the subject by the mainstream media. Meanwhile, researchers in the field of World-Systems Analysis (WSA) wrote in detail of the long wave forces that were undermining capitalism and predicted the crisis, but received no recognition. The bad news is that some world-systems analysts, whose writings and predictions proved valid in recent years, and who tend to have socialist leanings, believe capitalism is now in a death grip, from which it will never escape. They are excited about the possibilities for advancing their cause. The good news is they are wrong. 

There is solid reason to believe, based on long wave theory and even World-Systems Analysis, that capitalism will emerge stronger than ever from this global crisis. In fact, Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, available at Amazon, makes the case that a new golden age lies ahead for international free market capitalism. A new global economy and long wave boom will emerge after the purge of debt and overcapacity from the global system through bankruptcy, austerity and default. Meanwhile, radical innovation and the rise of emerging markets with billions of new producers and customers will combine to produce a fantastic boom and new era for international free market capitalism, but this new era is coming only after the global crisis runs its course into 2012.

The accelerating global long wave crisis has the potential to take capitalism to a new level by triggering radical change that unleashes currently dormant human potential. It is already beginning. Necessity is the mother of invention. Major political change is in fact a necessity. It must come to ensure the reversal of the bad political policies that have produced piles of debt and promoted wealth redistribution, legalized theft that helped make this long wave crisis worse than it had to be. Jubilee on Wall Street has termed the coming new era of global political change and the economic boom it will drive as The Great Republic.

Unfortunately, the global economy is not out of the woods just yet. Socialists are seeking to use the opportunity of crisis to move their agendas forward during this long wave winter season, which they see as a great opportunity to seize the day. They believe the crisis of capitalism puts the world on the cusp of a new age of global socialism. It would be wise to understand their thinking and plans, why they are wrong, and the actions required to insure their plans fail and left behind in the dustbin of history.   

Immanuel Wallerstein is the father of World-Systems Analysis (WSA), developed by him in the 1970s. Wallerstein is a Senior Research Scholar at Yale and received his Ph.D. from Columbia University and is the former President of the International Sociological Association. Wallerstein continues to write a column for Agence Global. He has strong socialist leanings, but he understands capitalism and its vulnerable underbelly of capitalist politics extremely well. WSA incorporates a detailed understanding of long wave theory.  Most world-systems analysts, like Wallerstein, believe capitalism is in its death throes and that government response to the current long wave winter crisis will do irreversible structural damage to capitalism.

Wallerstein has observed that the three key rising costs of doing business in the capitalist system are (1) taxes, (2) raw materials and other non-labor production costs (which is driven by supply and demand, but also by government regulations and piles of paperwork for every industry), and (3) labor costs (this includes the costs of public employee labor driven, which also increases what the private sector must pay due to government competition for employees). Note that the public unions in number (3) are one of the greatest causes of the tax increases in number (1). WSA suggests that these three rising costs to capitalism are leading to the demise of capitalism. Unfortunately, this is in fact true. Many of these rising costs are driven by poor government administration; however, some are a planned and deliberate attempt to destroy capitalism by its socialist enemies.

It is time to recognize the forces that are raising the costs of capitalism to a point where there are no profits left and it suffers colossal failure. Policies need to reverse and mitigate these forces. Political movements are now afoot in many countries, including the Tea Party movement in the U.S., that appear to recognize these threats and seek to reverse them in a major way. The emerging move toward aggressive austerity measures around the world has the potential to reduce all three costs and push back the socialist strategy to destroy capitalism.  Socialists advocate increasing the burden of all three of these costs to capitalism in order to destroy profits and the profit motive. Socialists believe that the current global long wave crisis is an opportunity to increase all three of these costs to capitalism to insure capitalism’s demise. The socialists are fighting the emerging trends toward austerity tooth and nail.   

Most world-systems analysts believe that economic long waves are the birth pangs of global socialism and will ultimately produce crises so severe that a new global socialist, left-of-center, social-democratic, redistributive order will rise from the ashes of international capitalism, a capitalist system that is so badly damaged that it cannot recover. Unfortunately, such thinking cannot be dismissed and needs to be addressed, since socialist solutions look more attractive and are, in fact, being embraced and aggressively implemented during this long wave winter crisis.

Wallerstein espouses that there have been three types of social systems throughout history and that a fourth is yet to develop as an “invention of the future.” The first type of social system he discusses in his book, The Politics of the World­ Economy, is the reciprocal minisystem such as the Greek city­ state. The second type is the redistributive world empire, such as Rome.

The present international system is an example of the third type of social system Wallerstein defines. Wallerstein’s work examines what he calls the capitalist world economy, which he argues has been evolving since the 14th century. In his discussion of the capitalist world economy, he pre­sents the typical and predictable two-class position that the sur­plus capital of the direct producers–the working proletariat–is extracting from the system in the form of profit and distributed via the market to the bourgeois capitalist class.

Wallerstein’s basic thesis is that we are now in the midst of a transition from the capitalist world economy into the fourth type of social system, which he believes will be some form of left-of-center government-led redistribution-based system. This would be a system where profit and private property would be abolished and the public–in other words, the state, would hold ownership of pro­duction. Wallerstein sees the capitalist world economy as being in a sys­temic crisis that began with the Russian Revolution in 1917, one that will give birth to a socialist government-led redistributive system at the end of a transition lasting 150 years; so we are now in the final decades of this transition.  

In light of the collapse of the Soviet Union, the replacement of socialist governments in Eastern Europe with regimes friendly to the capitalist world economy, reunification of Germany, and the many losses of revolutionary (i.e., antisystemic) movements inter­nationally in recent decades, e.g. China embracing capitalism, there could be a temptation to write off the work of Wallerstein and his general thesis altogether. The current crisis of capitalism in this long wave winter season now clearly puts such a write off on hold.

Until a few years ago, it appeared that the capitalist world economy had turned the tide on the socialist challenge. However, Wallerstein himself predicted some of the shifts and changes in the 1980s and 1990s, especially the opening of Eastern Europe to Western market influences. His work provides a great deal of reac­tionary fodder for those with socialist revolutionary tendencies, as well as food for thought for those of us who would like to pre­serve a free market, capitalist, international economy, and, therefore, need to be aware of prominent socialist and neo-Marxist thinking.

Wallerstein clearly sees the capitalist system as having a natural tendency to overshoot necessary supply and overproduce as the “anarchy of production” seeks to maximize profits. This long wave principal and tendency of overproduction is reviewed in detail in Jubilee on Wall Street, although it does not cast it in such a negative light. The notion that all trends go too far and evoke their own rever­sal would be clear to Wallerstein.

Wallerstein sees economic demand as strictly a “function of the sum of political arrange­ments.” He believes that when these political arrangements supporting demand are stable for a period of time, production over­shoots demand and major bottlenecks are created in cycles lasting 45 to 55 years-the Kondratieff wave. We agree with this interpretation, although government intervention has clearly extended the range of long wave bottlenecks to as long as 64 years. Jay Forrester using System Dynamics at MIT suggest long waves can last 70 years.

Wallerstein argues that over the centuries, each long wave decline and advance has deepened the capitalist system. He believes they forced the capitalist system to further penetrate the entire globe in order for the system to pull out of the long wave con­traction phase and into the next long wave expansion. He believes that to ensure the capitalist system’s survival, capital must always seek greater returns both in peripheral and in entirely new regions and countries. This is the reason most socialists believe the devel­oped world exploits developing countries, to ensure the prof­itability of capital and, therefore, the future of the system.

Wallerstein basically argues that now, after many long waves that have driven capitalism into previously remote regions, the entire globe has basically been penetrated by the capitalist world economy. He argues that the capitalist world economy has reached or will soon reach the end of the line, a point where there are no more undeveloped and untapped regions and peoples to bring into the periphery of the capitalist system. In a sense, he is arguing that capitalism is reaching the point where it has run out of victims. The rapid rise of the BRIC countries of Brazil, Russia, India and China are an example of this long wave phenomenon, but this is a process that is closer to its beginning than its ending. International capitalism is in many respects only now hitting its stride, and the forces of socialism at work during this particular long wave winter crisis must be held in check and turned back. 

There are clear problems with Wallerstein’s arguments. Even Wallerstein argues there are other ways for capitalism to pull out of a long wave decline and stimulate a new long wave era of growth. Further expansion into new regions to create a new periphery for exploitation is not critical for free market capitalism to pull out of a long wave decline. During much of the cold war, the capitalist system was losing territory on its borders and was still expanding powerfully in a long wave advance. There are numerous issues with Wallerstein’s argument in this regard.

Wallerstein has a few insights into how the free market system pulls out of long wave declines, although many of his ideas borrow heavily from Kondratieff’s original work. Wallerstein’s observations, however, undermine his own argument of the ultimate systemic crisis of capitalism. He believes that, since its inception in Western Europe in the 13th and 14th centuries, the capitalist system has pulled out of a long wave stagnation phase in four basic ways.

The first way that capitalism can try to pull out of a long wave decline is by further mechanizing to save labor costs or by simply shifting production to the low labor costs of the periphery. This basically means that industry buys more machines to cut labor costs and increase productivity or moves production to a develop­ing region or country with cheaper labor.

When production is shifted to countries with low labor costs, demand is stimulated in these areas. Products are produced more cheaply for the developed core countries, and demand is generat­ed in the peripheral areas of new production due to the wages paid. What we are currently witnessing is precisely what Wallerstein expected to occur. The problem is that this process produces a drag in developed countries as good jobs in textiles, auto production, etc., emerge elsewhere. In the early going, this process creates more of a drag than a boost on wages because the new jobs in the periphery pay a lot less than the old job in the core country (i.e., deflation), but it creates better margins for capital investment in the periphery. The real boost to the system will come during the next advance and spring season of the long wave as the peripheral areas become even more developed. That new spring season is dead ahead.

Wallerstein’s elaboration of some of Kondratieff’s thinking is important in the present stage of this long wave because of the massive political restructuring that has taken place globally in recent years, particularly in former socialist nations. The new markets for shifting production into Eastern Europe, Russia, China, India, and Latin America, which includes the BRIC countries, surpass anything ever seen in a long wave decline. At no time in history, have so many markets been open­ing up with potential for stimulating demand and expanding the penetration of capitalism in general. These drastic differences with the 1930s are one reason it could be argued that we are in for a mild long wave winter season rather than a severe one. Hope springs eternal.   

The second way Wallerstein sees capitalism pulling out of a long wave winter crisis he takes directly from Kondratieff: the innovation and new technology that invariably arises during a decline to set the stage for an advance. By creating new business­es and industries around new innovations, overall demand is stim­ulated in the economy. The new technology and new industries that come with it create the new jobs for the next long wave advance in the developed core countries. The new technology and industries have quasi-monopolies and sometimes monopolies based on patents and thus better margins than the old industries. New jobs replace the old jobs that were shifted to the periphery in the decline.

A third way Wallerstein sees the capitalist system pulling out of decline is with redistribution of world surplus in both core and periphery areas of the capitalist system. This is a unique contribution to long wave thought and is a late 20th-centu­ry phenomenon. This redistribution is an effort to increase demand and stimulate the system. Wallerstein sees this as the planned bourgeoisification of the proletariat. This could be seen as the central effort of the New Deal during the Great Depression and many of the policies during this decline. Redistribution of wealth is an attempt to stimulate the system by shifting wealth from the few to the many. Even though the attempt fails relative to true free markets and actually hampers recov­ery, Wallerstein is correct in observing that it is one way governments of capitalist states have tried to stimulate the system to move out of a long wave decline. This is proving to be the case once again.

Finally, Wallerstein argues that demand was stimulat­ed in past long wave declines by expanding the outer boundaries of the capitalist world economy. New periphery countries were cre­ated, areas previously untouched by Western capital. It should be noted that Wallerstein sees the globe as fully absorbed into the capitalist world system at the close of the 20th century. In his analysis this final option for pulling out of decline no longer exists. This is the primary reason he believes the capitalist system has entered its systemic crisis.

Only one of Wallerstein’s four observations on how capitalism pulls out of crisis depends upon the borders of the cap­italist system being expanded, at least on earth. The other three can come internally and dynamically and do not require exploita­tion or incorporation of new land or peoples. The capitalist system is less dependent than ever upon the capital and labor relationship with which socialists are so obsessed. There is also the final frontier: space. Expansion into space doesn’t take more room on earth. Elbowroom in this regard is unlimited. New lands and peoples do not have to be exploited. Of course, it is not exploitation, but opportunity. Call it expansion.

What the socialists do not recognize is that avenues for deploy­ment of capital are limitless on earth, even in old markets that can be rejuvenated. Capitalism will not die because it runs out of room, even if the space industry doesn’t pan out. However, we are clearly seeing space exploration beginning to pick up steam in this long wave decline and winter season. Space tourism is only beginning. Space exploration is expected to boom in the long wave advance years ahead, once we get this long wave winter behind us.  

Wallerstein’s strongest argument for his vision of the emergence of socialist world government was his observation of the increasing socialization of the means of production. This was taking place up until the late 1970s and early 1980s. Socialism, the public ownership of production, was expanding, and many believed it was working in some countries. However, this trend reversed when socialism appeared to have hit a wall. At least it did until the latest long wave winter season crisis in the last few years. We now see even the U.S. government rushing headlong into the ownership of production and services, even auto manufacturing and bank ownership. The speed with which we are seeing the reemergence of the global forces of socialization as this global crisis unfolds is remarkable.

Many of Wallerstein’s predictions are coming to fruition as a period of economic stagnation forces the capitalist world economy to retrench and seek to stimulate new demand and fight to keep open new mar­kets. This is exactly what Wallerstein argued the capital­ist system would do. The applicability and accuracy of some of Wallerstein’s insights should make the reader cautious about ignoring his prognostication that proponents of a government-led socialist redistributive government will once again assert a claim for being the next logical world social system when hard times hit capitalism once again; indeed, this is happening now. This long wave winter is about to get a lot worse, which will bring the socialists out in force.

Exact timing isn’t crucial for Wallerstein since he allows for a transition process taking 150 years after the Russian rev­olution. With such a broad time parameter, Wallerstein would seem to argue that what appeared to be the receding tide of socialism was only a surface aberration in good times. Indeed, a renewed call for socialist world government has emerged as capitalism’s chips are down in this long wave decline and the trend of the 1980s and 1990s toward privatization has suffered a major reversal of fortunes.

It would therefore be wise to understand these socialist arguments and the flaws in those arguments. The long wave cleans out the capitalist system for a new beginning; it will never kill it, unless government leaders, as well as the more radical revolutionaries once again take socialist theory espousing a new social system seriously.

A closer look at World-Systems Analysis suggests that long waves are not the birth pangs of global socialism, but the birth pangs of a new era for international free market capitalism that will exceed all others in human liberty, freedom, economic opportunity, growth, financial stability and progress. It order to do so great political change must occur and the three key rising costs for capitalism identified by Wallerstein of 1) taxes 2) material costs, and 3) the costs of labor must be reversed, aggressively. The party is over. It is time to right the bloated and sinking ships of state by cutting taxes, deregulating, reducing the size of government and ending what is effectively taxpayer extortion by public unions through excessive public employee wages and benefits. These three key costs can, are and will continue to be reversed.

Capitalism did not cause the depth of this global long wave crisis. State capitalism caused the depth of it. Big government and big business got too cozy and failed to manage their risks, which has made this long wave crisis worse than it had to be. Another name for state capitalism is fascism, which looks more like the Roman Empire, which was a redistributive world empire. This is the more dangerous threat than socialism, but the redistributive world empire, where grandmothers and pensioners bail out bankers that cannot manage their risk, is also on the ropes. The only real hope is back to the future, the international free market capitalism of Adam Smith is the only future that offers real hope. Moreover, it is coming, ready or not. 

Germany forcing austerity on the PIIGS is a clear sign that German leadership understands that danger of the global system and that major political restructuring is necessary and coming. They are choosing to lead, and it is exciting to observe this change in real time. It is clear that all European governments require radical downsizing. This realization is just beginning. The U.S. Tea Party movement is pushing for fiscal responsibility and throwing out the incumbents wholesale. Never before has we seen such a radical and sweeping change in politics around the globe.

Social liberals and social conservatives who share the common ground of supporting fiscal constraint and reducing the size of government are behind the Tea Party, which the major media has not yet recognized. This is a major new development and game changer, driven by long wave fundamentals. These are positive signs for the future. These emerging trends represent the cutting edge of an international political revolution than runs deep. The coming global political sea change will insure the socialists are wrong and that the greatest days lie ahead for international free market capitalism by reversing the decade long trends that have compromised international free market capitalism.

Although Wallerstein and other socialists saw the global long wave crisis coming when most capitalists did not, due to their understanding of the long wave, they do not appreciate the renaissance of international free market capitalism that is coming and the desire of the human spirit world over for freedom and liberty. The American revolution of 1776 is going global. Socialists do not understand the power of the innate desire for human freedom and liberty, long wave innovation and that necessity is the mother of invention, even in international political economy.

Most capitalists did not see the current global crisis coming, because they dismissed the overwhelming long wave evidence, and do not realize we are still in a long wave winter season. The socialists are overestimating the damage the global crisis will do to capitalism. Neither capitalists nor socialists fully appreciate the remarkable forces for positive change now being unleashed that will cause the global economy to boom beyond 2012. Every monthly issue of The Long Wave Dynamics Letter provides an update from a Kondratieff long wave and World-Systems Analysis perspective and is available at

The international political economy and international free market capitalism are now convulsing in the last gasp of socialism and state capitalism, not the crisis of capitalism. A new golden age is coming for international free market capitalism. Put your political capital to work in the voting booth. However, it would be wise to keep most of your investment capital dry until 2012. Long live The Great Republic.

David Knox Barker is author of Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, Updated and Expanded Edition (2009). He is the founder of, and the publisher and editor of The Long Wave Dynamics Letter.

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