THE global economic crisis is usually seen as the sequel to the collapse of the housing bubble in the United States. This understanding however is inadequate. The formation of that bubble and its collapse are episodes which are themselves embedded within a deeper structural crisis that afflicts contemporary capitalism, one related to the phenomenon of “globalisation”. Many see the present globalisation as no different from, indeed as a continuation of, the previous episode of globalisation that had been interrupted by the two world wars, the Great Depression and the post-war adoption of State interventionism within broadly national economic regimes. This view however is erroneous. The present globalisation is a sui generis phenomenon that makes contemporary capitalism differ in important respects from all that has preceded it. THREE BASIC FEATURES Capitalism prior to the current globalisation had been characterised by three basic features. First, labour did not have free mobility from the “south” to the “north”; indeed it still does not have. The “long nineteenth century”, lasting until the First World War, had seen two large waves of migration across the globe. There was a migration from Europe to the temperate regions of white settlement like Canada, the United States, Australia and New Zealand where the migrants occupied land by dispossessing the original inhabitants. They kept up their own standard of living and therefore also the actual wage back home. This was a “high wage, temperate-to-temperate region migration”. There was a second wave of migration at the behest of capital that was from tropical or subtropical countries like India and China to other tropical regions where the migrants were employed as coolies or indentured labourers on mines, plantations and construction projects. The countries from which the migrants came had witnessed substantial “deindustrialisation”, in the sense of the destruction of traditional craft production by the import of manufactures from the capitalist metropolis which had thrown large numbers of people out of work and intensified the pressure on the limited land mass. This had led to extraordinarily depressed real wages. This second wave of migration therefore was a “low wage tropical to tropical region migration”. Each of these waves involved approximately 50 million people but they were kept strictly separate. Tropical labour was not only not allowed to move freely to Europe; it was also restrained from moving to the temperate regions of white settlement. Even when in the post-Second World War years, migration occurred on a larger scale than before from the “south” to the “north” it still remained controlled migration, regulated in accordance with the needs of capital. There was no free labour mobility. The second feature of pre-globalisation capitalism was that capital did not move freely from the “north” to the “south”. Here, there were no juridical restrictions upon its moving; nonetheless it moved only to plantations, mining, export activities and the infrastructure required for such activities, such as railways (where typically the rates of return were guaranteed by the colonial State). There was no migration in any significant sense to manufacturing, despite the lower real wages prevailing in the “south”. Why there was so little migration of capital from the “north” to set up manufacturing units in the “south” has been much discussed. We need not enter that discussion here; we merely note the fact that capital from the “north” did not move freely to the “south” despite there being no juridical restraints upon its doing so. The third feature was that the import of manufactured goods produced in the “south” was taxed heavily in the north. Because of this, the emerging local capitalists, even if they did manage to set up manufacturing units within the “south” (despite the numerous hurdles placed in their way by the colonial regimes) were precluded from entering the “northern” markets. They were confined at best to their own local markets; and even there they had to face competition from “northern” manufactured goods without any protection given to them. The net result of these three features was that the world economy became “segmented” into two parts, and the real wages in one part, the “north”, were not restrained by the massive labour reserves of the other, the “south”. To be sure, there was a reserve army of labour located within the “north” too (capitalism can never function without such a reserve army), which restrained “northern” wages; but its size being relatively small, its restraining influence on “northern” wages was not so absolute as to tie these wages down to some “subsistence” level. Put differently, world capitalism had two reserve armies of labour: there was a relatively small one in the “north” which, though it restrained wages, did not prevent their rise, through trade union action, with increases in labour productivity. Then there was a huge reserve army in the “south” which prevented wages there from rising above a bare subsistence level (and thereby helped to achieve price-stability in the metropolis by preventing any autonomous cost-push for raw materials), but did not restrain “northern” wages owing to this fact of segmentation. What this segmentation meant therefore was that while real wages in the “north” rose with labour productivity, real wages in the “south” continued to stagnate at a bare subsistence level under the pressure of its massive labour reserves. In addition however it also contributed to bolstering the internal demand within the global “north”. The rise in real wages along with labour productivity helped to prevent the emergence of the problem of demand deficiency. A rise in real wages along with labour productivity to be sure is neither a necessary nor a sufficient condition for thwarting a possible deficiency of demand: after all even with a constant share of wages and even with all wages being consumed, demand deficiency can still arise because of a waning of the drive to invest; and likewise euphoric expectations about prospective profits among capitalists can push up investment to a point where even a declining wage share does not cause a deficiency of aggregate demand. But a rise in real wages does help in boosting aggregate demand: it keeps the level of demand higher than it would have been for any given level of investment. The current globalisation has broken down this segmentation of the world capitalist economy. Even though labour from the “south” is still not free to move “north”, capital from the “north” is now moving “south” to locate plants there for exports to the world market as a whole including to “northern” markets which are now open to such exports from the “south”. This also means however that the workers in the “north” are now exposed to the baneful consequences of the massive labour reserves of the “south”. DAMOCLES SWORD One obvious implication of this has been the decline in the strength of trade unions in the advanced countries. The essence of workers’ “combinations” in the form of trade unions, as Marx had noted in The Poverty of Philosophy, is to restrict competition among workers. Globalisation, by exposing the workers in the advanced countries to competition from the workers from the “south”, undermines the trade unions in the former. Quite apart from the effects of the actual relocation of plants from the “north” to the “south”, the very threat of such relocation hangs like a Damocles sword over the workers of the “north” limiting the strength of their trade unions. The second related implication is that the real wages of the workers in the advanced countries can no longer rise with labour productivity; under the pressure of the massive labour reserves of the “south”, they tend to remain stagnant. They do not, of course, tend towards equality with the real wages of the “south” (since there is a certain temporal irreversibility about real wage levels for political reasons if nothing else); but the vector of world real wages, consisting of wages both in the “north” and in the “south”, tends to remain unchanged, even as labour productivity increases in the world economy. It is not surprising that in the United States, in the last three decades or more, the real wage rates have remained stagnant even in absolute terms. The stagnation in the vector of real wages even as labour productivity increases in the world economy implies an increase in the share of surplus. This amounts to an increase in the income inequalities in the world. World income inequalities in fact would continue to rise in the era of globalisation unless the world labour reserves get progressively exhausted. This however is not happening and is not even likely. The other implication of this rising share of surplus is an ex ante tendency towards overproduction owing to inadequate demand, which follows from the fact that workers devote a larger proportion of their incomes to consumption compared to capitalists. Such an ex ante tendency does not necessarily mean an actual ex post occurrence of crisis and stagnation on account of it. State intervention in demand management can always ward off such a tendency. (Indeed Baran and Sweezy had argued in the context of post-war America that military expenditure played a major role in keeping up the level of aggregate demand in that economy despite an ex ante tendency towards over-production stemming from a rising share of surplus). But here we come to another important aspect of the current globalisation. The globalisation of capital, above all of finance capital, entails that, in a world of nation-States­, every such State must willy-nilly pursue only those policies which are demanded by finance capital, for otherwise it faces the prospect of finance capital leaving its shores en masse and unleashing a financial crisis upon its economy. And finance capital is invariably opposed to State intervention in demand management for keeping up the level of activity in the economy, an opposition that gets expressed through its insistence upon “sound finance” (which holds that governments should balance their budgets, or at the most have a fiscal deficit not exceeding a certain fixed percentage of GDP). Since governments are restrained from increasing taxes in a world of globalised finance (since this would drive finance capital away), and also from increasing their borrowings (because of the pressure to adopt “sound finance”, or what is now called “fiscal responsibility”), they cannot intervene directly to raise aggregate demand, and hence cannot offset the ex ante tendency towards over-production that the de-segmentation of the world economy brings in its wake. The only antidote to stagnation under these circumstances, when there are no colonial markets “on tap”, and when State intervention in demand management is undermined by the opposition of globalised finance capital, is provided by the formation of “bubbles”. Indeed in the period since the decline of Keynesian demand management, while the average growth rate of the advanced capitalist world has slowed down, such growth as has occurred has owed its occurrence to a set of “bubbles” in the US in particular: the “dotcom bubble” followed by the “housing bubble”. Hence the view which attributes the current global economic crisis to the formation of bubbles and argues that regulatory measures to prevent such bubbles would produce a crisis-free capitalism, is completely off the mark. In the absence of such bubbles, contemporary capitalism would be permanently mired in stagnation and mass unemployment. Bubbles today provide the only basis for booms, just as their collapse causes recessions and slumps. The predicament of contemporary capitalism therefore arises not from the fact that it has experienced “bubbles” together with their inevitable collapse, both of which were avoidable; it arises from the fact that it needs precisely such “bubbles” to provide whatever relief it can from stagnation and mass unemployment. The global economic crisis thus consists not in the collapse of the bubble but in the fact that capitalism is caught in this structural predicament, where it will continue henceforth to experience protracted stagnation and mass unemployment, relieved occasionally by the temporary palliative offered by a bubble.