Taking advantage of the 2008 financial crash, the financial oligarchy and their proxies in the governments of the core capitalist countries have been carrying out a systematic economic coup d’état against the people the ravages of which include the following:

  • Transfer of tens of trillions of dollars from the public to the financial oligarchy—brought about through fraudulent creation of debt money, exchanged for real money when it is chalked up as public debt to be paid through brutal austerity cuts;
  • Extensive privatization of public assets and services, including irreplaceable historical monuments, priceless cultural landmarks, and vital social services such as water supply;
  • Substitution of corporate/banking welfare policies for people’s welfare programs;
  • Allocation of the lion’s share of government’s monetary largesse (and of credit creation in general) to speculative investment instead of real investment;
  • Systematic undermining of the retirement security of millions of workers and civil servants such as firefighters, teachers, school employees, and other public servants;
  • Ever more blatant control of economic and/or financial policies by the representatives of the financial oligarchy.


Despite the truly historical and paradigm-shifting importance of these ominous developments, their discussion continues to remain outside the purview of the mainstream economics. Focusing on superficial descriptions or symptomatic and instrumental factors such as deregulation, sub-prime mortgage lending, securitization, greed, and the like, mainstream economics does not begin to touch upon, let alone explain, these crucially important issues. It has not even explained why the financial collapse took place in the first place; except for the supposedly “irrational behavior of economic agents” and “invasive government policies” (neoliberal explanation), or deregulation and “neoliberal ideology” (Keynesian explanation).

While blaming policies of deregulation, securitization, and other financial innovations as factors that facilitated the financial bubble and its implosion is not false, it masks the fact that these factors are essentially instruments or vehicles of the accumulation of fictitious finance capital. No matter how subtle or complex, they are basically clever tools or strategies of transferring surplus value generated elsewhere, or of creating fictitious value (through speculation) out of thin air.

The prevailing accounts thus tend to leave out of consideration the systemic dynamics of the accumulation of finance capital (as a parasitic or self-expanding growth process that can turn money into more money while bypassing the messiness of producing anything of real value), the inherent limits to that accumulation, production and division of surplus value, class relations, and the balance of social forces. Indeed, most of these accounts tend to shy away from even using words and expressions such as exploitation, surplus value or class struggle. They also tend to view the state as a disinterested entity above economic or class interests; a perception that fails to acknowledge the fact that the economic policy-making apparatus in most of the core capitalist economies is dominated largely by kleptocratic elites that are guided by the imperatives of big capital, especially finance capital.

Not only mainstream theories but also most of the contemporary Marxian theories of capitalist crisis have failed to offer a satisfactory explanation of the financial collapse and the ensuing Great Recession. Although the current domination of major capitalist economies by finance capital seems new, it is in fact a throwback to the capitalism of the late 19th and early 20th centuries, that is, the capitalism of monopolistic big business and gigantic financial institutions. The rising economic and political influence of powerful financial interests at the time led a number of Marxist and other political economists such as John Hobson, Rudolf Hilferding and Vladimir Lenin to develop profound theories of the rise of finance capital and its destabilizing impact on advanced market economies, as well as on international relations.

However, as the Great Depression and the subsequent New Deal and Social-Democratic reforms significantly curtailed the size and the influence of big finance, they also led to an unfortunate fading of the rich Marxist tradition of a keen interest in the historical evolution of finance capital—as if the reforms and the post-WW II expansion of capitalism had permanently done away with the destabilizing properties of finance capital. Accordingly, the ensuing Marxist theories of crisis either disregarded or discounted the destabilizing role of the financial sector. Instead, they focused most of their attention on other (non-finance) theories of crisis: the under-consumption theory, the disproportionality theory, and the theory of “the tendency of the rate of profit to fall.” With few exceptions, this neglect of the role of finance capital has created a regrettable void in the contemporary Marxian theories of capitalist crisis.

This study intends to fill the theoretical void of a satisfactory explanation of the 2008 financial collapse and the ensuing long recession that continues to this day. Instead of simply blaming the “irrational behavior of economic agents,” as neoliberal economists do, or “right-wing” policy-makers and “neoliberal capitalism,” as many left/liberal economists do, the study will focus on the core dynamics of capitalism, or the “laws of motion of capitalist development” (as Karl Marx put it), that not only created the huge financial bubble, but also subverted public policy in the face of such an obviously unsustainable bubble. The study will further argue that while the prevailing views of financialization as an instrumental culprit in the collapse of the market is not false, it fails to point out that financialization is basically an indication of an advanced stage of capitalism—the stage of the dominance of finance capital. The more fundamental issues to be addressed and explained are the submerged forces behind financialization, the material grounds that fostered the “irrational behavior” of market players, or precipitated the extensive deregulation of financial markets.


The first chapter of this volume focuses on the conservative tradition of the neoclassical economics, which has come to be known in recent decades as neoliberal economics. The discussion presented in this chapter shows why the neoliberal model of full employment general equilibrium lacks a theoretical foundation to explain either the 2008 financial crash or the ensuing long recession. Indeed, the model denies the existence of a crisis of the magnitude of the crash or of the subsequent recession; it explains away financial turbulences and economic crises by blaming them on external factors such as “irrational behavior” of market players, natural disasters, “supply shocks,” or government intervention. Barring such “exogenous” factors, the “self-adjusting” power of the market mechanism is said to be capable of fending off major financial or economic crises. Accordingly, unregulated “efficient capital markets,” where “rationally behaving agents know all the information about securities pricing,” are supposed to price securities or financial assets “correctly,” that is, according to the risks and rewards to the underlying real values—thereby ruling out the incidence or existence of a financial crash, or economic crisis.

Critics have aptly pointed out that characterizing mainstream economics as a scientific discipline is false. This chapter argues that not only is mainstream economics not scientific, it in fact borders on superstition and metaphysics. Prior to scientific findings of the geological origins or causes of earthquakes, many believed that they were expressions of the gods’ giving vent to their anger. Others believed that they were caused by a dragon that lived beneath earth; whenever it became angry and shook its tail and moved its colossal body it shook the earth as well. Neoliberal economists’ explanation of periodic financial implosions (and of economic crises in general) by factors “external” to capitalist system tends to border on similarly unsavory explanations. It can also be argued that blaming capitalism’s systemic failures on the “irrational behavior of economic agents” is akin to some simplistic interpretations of religion that attribute humans’ misfortunes or miseries to their deviations from God’s ways: had they not been misled by satanic temptations and strayed away from the Lord’s path, they would not have been afflicted by misery.

This chapter’s critique of the neoliberal paradigm will go beyond simply describing the neoliberals’ view of the financial crisis, or merely exposing how unrealistic it is to assume, as the proponents of this view do, that unregulated capital markets will “correctly” price securities or financial assets. More importantly, it will show why or how despite all of its faults and flaws the paradigm has come to dominate the economic/finance discipline; and why or how despite its disgraceful record (in terms of either explaining or offering solutions) of recent years it continues to remain the official economic shibboleth of governments and policy makers, as well as of the overwhelming majority of academic textbooks on economics and finance. It also explains why so many intelligent and technically competent economists are so firmly devoted to such an abstract or esoteric model that, while interesting, does not explain much.

The second chapter provides a critique of the Keynesian explanations of the 2008 financial collapse and the ensuing Great Recession. Most Keynesian economists blame the financial implosion and the subsequent recession on neoliberal ideology, on Reagan’s and/or Thatcher’s economic doctrine, or on economists at the University of Chicago. The argument presented in this chapter demonstrates that the transition from Keynesian to neoliberal economics stemmed from much deeper roots than pure ideology; that the change started long before Reagan and Thatcher were elected; that neoliberal austerity policies are class, not “bad,” policies; and that the Keynesian reliance on the ability of the government to re-regulate and revive the economy rests on an optimistic perception that the state can control capitalism. The chapter argues that, contrary to such hopeful perceptions of the role of the state in economic affairs, public policy is more than simply an administrative or technical matter of choice; more importantly, it is a deeply socio-political matter that is organically intertwined with the class nature of the state and the policy making apparatus.

The chapter further argues that the Keynesian stimulus prescription which relies almost exclusively on strong demand, or high employment and high wages, is one-sided; because growth under capitalism is not just a function of strong demand but also of low costs, which often means low employment and low wages. In other words, economic growth under capitalism can be just as wage/demand driven (as was the case in the immediate post-WW II period), as cost/supply driven, as was the case in the 1980s and 1990s.

The chapter also highlights why or how the initial (mid 1930s–late 1960s) success of the Keynesian economics had more to do with the vigorous class struggles and pressures from the people at the time than the genius of Keynes; and why in the absence of another overwhelming pressure from the grassroots the Keynesian economic reforms could remain a fondly-remembered, one-time experience in the history of economic reforms.

The third chapter provides a critical analysis of the neoclassical economics as a whole, that is, of a number of major shortcomings that are shared by both conservative–neoliberal and liberal–Keynesian traditions of neoclassicism. A major flaw of the neoclassical paradigm is its concept of credit and/or money supply, and therefore of the financial sector. Contrary to the neoclassical “circular flow” model, rooted in their faith in the (barter-like) Walrasian general equilibrium model, in the era of highly “financialized” capitalism, demand for credit is not limited to industrial or commercial credit, that is, to debt financing of real investments and sales. Perhaps more importantly, a large part of credit is nowadays created for speculative investment. In the age of big finance, parasitic finance capital, systematically transferring economic surplus from the real to the financial sector, has effectively undermined the neat neoclassical “circular flow” mechanism—where people’s savings and producers’ (retained) earnings are supposed to be recycled through financial intermediaries into productive investment. Sucking financial resources from the rest of the economy, as well as generating fictitious capital out of thin air through speculation/gambling, parasitic finance capital feeds on itself—just like a real parasite.

Neoclassical economists have not, so far, been able to reconcile the independent, parasitic growth of the financial sector with their “circular flow” and/or general equilibrium model. Sadly, instead of trying to incorporate the autonomously expanding financial sector into their real sector model, they have chosen to ignore it—lest it should disturb their shipshape, convenient model. Not surprisingly, they cannot explain, for example, the growing gap between corporate profitability and real investment—a divergence indicating that, in recent years, significant portions of corporate profits are not reinvested for capacity building; it is diverted, instead, to financial investment in pursuit of higher returns to shareholders’ capital (Harding 2013). Nor can they explain the fact that while bank lending to the financial sector as a share of GDP has quadrupled since the 1950s, the similar ratio for bank lending to the real sector has remained almost unchanged (Hudson and Bezemer 2012).

To explain why the neoclassical economic paradigm is so shallow—nearly irrelevant to real world developments—this chapter also briefly looks back at the origins of the paradigm, and demonstrates that its superficiality is not altogether fortuitous; it is because the paradigm was developed primarily as an ideologically–driven theoretical construct to be counter–posed to the classical economic paradigm—not as an evolution, extension, or elaboration of that earlier paradigm (which in a holistic fashion studied economics in conjunction with politics, sociology and history) but as a counterfeit and mystifying substitute for it.

Chapter 4 is devoted to another major flaw in the neoclassical (both liberal and conservative) school of economic thought: a grave absence of a historical perspective. The crucially important void of a historical outlook explains why (with some exceptions) the overwhelming majority of mainstream economists failed to see that the financial meltdown of 2008 and the subsequent economic contraction represent more than just another recessionary cycle. More importantly, they represent a structural change, a new phase in the development of capitalism, the age of “finance capital,” as the late German economist Rudolph Hilferding (1981) put it.The salient characteristics of the new stage include economic and political dominance of finance capital; debt/credit/money creation primarily for speculation and asset price inflation and only secondarily for productive investment; creation of new bubbles to remedy past bubbles; redistribution and transfer of national resources through fraudulent debt creation—to be paid through austerity cuts.

Chapter 5 is devoted to the evaluation of the Marxist views (both classical and contemporary) of the role of finance capital in market fluctuations and economic crises. While paying homage to Marx for his profound understanding of “the laws of motion of the capitalist mode of production,” most left/liberal economists argue that, nonetheless, his analysis cannot be of much service to the study of contemporary banking and finance, as these are post-Marx developments. I will argue in this chapter that, in fact, a careful reading of his work on “fictitious capital” reveals keen insights into a better understanding of today’s financial developments. I will further argue that the flawed treatment of finance capital by many of today’s Marxist scholars represents not only a regrettable departure from earlier views of Marxists like Lenin and Hilferding but also from Marx’s own treatment of finance capital.

Chapter 6 provides a brief overview of the history of debt cancellation. Using empirical evidence from both distant and recent pasts, the chapter demonstrates that, contrary to today’s official views that debt cancellation may lead to economic disorder, as epitomized by the slogan “too big to fail,” it is often economic recovery, not collapse, which results from cancelling or writing down the oppressive debt burdens.

Historical records show that debt relief in the Bronze Age Mesopotamia, designed to restore economic revival and social harmony, took place on a fairly regular basis from 2400 to 1400 BC. Ancient documents also indicate that the Bronze Age tradition of debt cancellation may have served as the model for the Biblical pronouncements of periodic debt relief, called Jubilee.Numerous passages in the Old Testament dealing with issues of economic equity and social justice call for periodic rebalancing of socioeconomic arrangements that would include debt cancellation and land restitution. Both logic and empirical evidence indicate, however, that the rationale behind the idea of debt cancellation/modification goes beyond moral issues of compassion and justice. Perhaps more importantly, it is grounded on broader and longer-term considerations of socioeconomic revival and sustainability. The chapter highlights a number of instances of economic renewal through successful policies and practices of debt relief—practices that were sometimes branded as creating a “clean slate,” or a debt-free fresh start.

Chapter 7 points out that, as the late German Marxist economist Rudolf Hilferding argued,private banking system represents a fraudulent kind of socialism, modified to suit the needs of capitalism. It socializes other people’s money for the benefits of the few. Evidence shows that between 35 and 40 percent of all consumer spending in the United States is appropriated by the financial sector—a hidden tribute or rent that systematically transfers economic resources from Main Street to Wall Street, thereby steadily exasperating inequality, draining people’s economy and depressing their lives. The chapter delivers a convincing case that, contrary to popular perceptions in the core capitalist countries, there are indeed compelling reasons not only for higher degrees of reliability but also higher levels of efficiency of public–sector banking and credit system when compared with private banking—both on conceptual and empirical grounds.

Chapter 8 makes a strong case that while nationalization of commercial banks could mitigate or do away with market turbulences that are due to financial bubbles and bursts, it will not preclude other systemic crises of capitalism. These include profitability crises that result from high levels of capitalization, from insufficient demand and/or underconsumption, from overcapacity and/or overproduction, or from disproportionality between various sectors of a market economy.

The chapter further argues that regulations of financial intermediaries would not be an effective or long-term solution either because, for one thing, due to the political influence of powerful financial interests, their implementation is highly unlikely; for another, even if regulations are somehow implemented, they would provide only a temporary relief. For, as long as there is no democratic control, regulations would be undermined by the influential financial elites that elect and control both policy–makers and, therefore, policy. The dramatic reversal of the extensive regulations of the 1930s and 1940s, which were put in place in response to the Great Depression and World War II, to today’s equally dramatic deregulations serves as a robust validation of this judgment. To do away with the recurring crises of capitalist system, therefore, requires more than nationalization or regulation of the financial institutions; it requires changing the system itself.


This book is distinct on a number of grounds. For one thing, it is highly interdisciplinary, both in style and scope, organically combining economics, politics, sociology and history. For another, it is unique for its historical and/or Marxian approach or method of analysis, not only in terms of the historical evolution of finance capital but also of the class character of the state and institutions that nurture that evolution. In addition, the book is written in a way that, both in terms of content and style, will be of interest (as well as accessible) not only to a range of disciplines in academe but also to “non-expert” lay readers who are concerned with the recurring instability of financial markets or, more generally, with the woes and vagaries of the capitalist economic system.


Harding, R. (2013) “Corporate investment: A mysterious divergence,” Financial Times, July 24. Online. Available HTTP: <; (accessed August 29, 2013).

Hilferding, R. (1981) Finance Capital: A Study of the Latest Phase of Capitalist Development, ed. Tom Bottomore, London: Routledge & Kegan Paul.

Hudson, M. and Bezemer, D. (2012) “Incorporating the Rentier Sectors into a Financial Model,” World Economic Review, vol. 1, no. 1. Online. Available HTTP: <; (accessed April 05, 2013).