James K. Galbraith: Can American-led Global Financial Capitalism Survive?

As a part of the Future of Capitalism Project at the Council on Foreign Relations (CFR), Roger W. Ferguson Jr. is inviting a diverse range of participants from academia, private sector, and government to contribute to a series of blog posts to provide perspectives on the different types of capitalism in practice around the world, the challenges these systems face, and their future in the twenty-first century. This post comes from James K. Galbraith, executive director of the Joint Economic Committee, United States Congress in the early 1980s. He also served as chief technical adviser for macroeconomic reform to the State Planning Commission, People's Republic of China, in the mid-1990s.  Professor Galbraith is currently the Lloyd M. Bentsen, Jr. chair in Government/Business Relations at the LBJ School of Public Affairs, at the University of Texas at Austin.

“Can Capitalism Survive?” was the question posed in 1942 by Joseph Schumpeter, a great economist and political reactionary.  His answer was negative, but premature.

In 1989 I published my first book, unmemorable except for a prescient subtitle “Technology, Finance and the American Future,” and a rough hierarchy of the emerging global division of labor: Advanced Technological Powers, Intermediate Manufacturing Powers, and Resource-Based Economies.

The historical United States laminated all three layers, beginning as supplier of cotton to British mills, progressing to industrial strength and emerging in the mid-twentieth century as the dominant financial and technological power. In my father's world, the great American industrial corporation, countervailed by strong unions and a regulatory welfare state, integrated technology, finance, production and resources, under the global umbrella of Bretton Woods and the atomic bomb.

But through the 1960s, 70s, and 80s this comprehensive position eroded, partly from the political struggle of business against labor, finance against industry, and the Vietnam war – and partly from aging, obsolescence, and the recovery and rise of Germany, Japan, later Korea, and finally China. In each of these, the Galbraithian industrial firm continued to be the tool and engine of advance.  But in the United States there was a comprehensive defeat of labor, a victory for finance and the dollar, the triumph of “shareholder value”—and a consequent decline of the industrial heartland.

At the time, from my post on the front lines at the Joint Economic Committee, I opposed the policies of President Reagan and Paul Volcker, the then-chair of the Federal Reserve. But I thought afterwards, as the Cold War ended, that the world they forced into being might have succeeded. It might have, but for the arrogance and violence of Presidents Bush, Clinton, Bush Jr., and Obama, and for the libertarian fantasies of our financial leaders.

I hoped, back then, that a symbiotic, integrated world system might be made to work, with the United States providing military security, a liquid and stable financial reserve asset, incubators for new technologies staffed by worldwide talent, and also a large share of global demand, realizing Adam Smith's principle that “the division of labor is limited by the extent of the market.” The other requisite was global confidence that the privileges of the American position were earned by a wise stewardship—by a global Keynesianism in a peaceful world.

Trust in the United States as a guarantor of world security has eroded since the early 1990s. Our predations in post-Soviet Russia, the bombing of Belgrade, the long debacle in Afghanistan, the destruction of and policy failures in Iraq, Libya, Syria, and Yemen, and—yes—the 2014 coup in Ukraine all played a role. Also our “forward strategy” toward China, over Taiwan, Hong Kong, Xinjiang. Irrespective of merits, in these matters a Newton's Law applies: actions beget reactions.

In 2020 the pandemic exposed the fragility of the global supply chain, first by interrupting production, then by clogging distribution channels, with effects on shipping, semiconductors, automobiles, while oil prices first slumped and then rebounded, generating inflation. Yet through it all, and despite abusive deregulation of finance, leading to global crash in 2007-2009, the dollar-reserve system survived. It even became clear that the euro, the pound, and the Swiss franc all depend for their stability on swap lines from the Federal Reserve.

We come now to the final act. Its prelude is the rise of China and Russia, in tandem, through all the three stages, from poverty to power over forty years in China's case and in the case of Russia back from asset-stripping, deindustrialization, demilitarization, hyperinflation, demographic collapse, and capital flight in twenty-five years. To the extent that America's leaders understood these developments—and with respect to Russia one may doubt it—they saw them as threats. The perception of threat begets... the perception of threat. And so today, we have a war.

The U.S. response to that war is necessarily financial. There is no serious military option, as President Biden has stated. Therefore the U.S. sanctions oligarchs, cuts off Russian banks, and freezes Russian central bank assets, while Western firms flee the country. The sanctions on oligarchs presuppose they still enjoy the influence they wielded under Yeltsin, which they do not. The other sanctions aim to damage Russia through its civilian population, a repellent practice. But the world has changed. The actual effects on Russia's economy are minor. Against Europe on the other hand they risk catastrophe, so clearly that already, as I write, Germany, Austria, Hungary and Slovakia are backing down. The distinction to draw, is that between natural gas and hot air.

And meanwhile, the dollar-reserve system has now lost its global monopoly. It's been just a two months since the start of this war, and already one great remaining pillar of American world power—a pillar that has stood for a century in various forms—no longer stands alone. A non-dollar, non-euro trading region has been born. China is the new linchpin of both systems. India will play in both. And so will Germany and its neighbors in Europe, like it or don't. From the standpoint of global capitalism, we have already entered the multipolar world. The foreign policy makers of the United States have created it—in record time.