“Bubbles” and Neo-Liberal Capitalism
Prabhat Patnaik
NEO-liberal capitalism has an immanent tendency towards stagnation, which arises because of the operation of two factors: the first is the growth in income inequality that it continuously spawns; since the poor consume the bulk of their incomes while the rich “save” (that is, do not consume) most of it, consumption demand, and hence overall aggregate demand, tends to fall below the growth of producible output, resulting in a rise in unemployment and unutilized capacity that drives the economy down.
This continuous tendency towards a rise in income inequality arises from the fact that, owing to the mobility of capital across country borders, wages across the entire world have to suffer the baneful consequences of the massive third world labour reserves; and the relative size of these reserves does not diminish despite such relocation of capital from the Global North. On the one hand the withdrawal of state support from petty production and peasant agriculture forces distressed producers from these sectors to move to towns in search of employment, thereby increasing the number of job-seekers; on the other hand, the rise in the rate of growth of labour productivity that is enjoined upon all countries because of trade “liberalisation”, via the adoption of new processes and products, keeps down the number of new jobs being created. Real wages across the world therefore fall behind labour productivity, causing a rise in the share of economic surplus in the output of each country and in world output as a whole; the observed rise in income inequality is an empirical manifestation of this phenomenon and constitutes the basic reason for the tendency towards stagnation under neo-liberal capitalism.
The second factor that underlies the realization of this tendency is the inability of state intervention to rectify this deficiency of aggregate demand relative to producible output. Such state intervention is what John Maynard Keynes, the foremost bourgeois economist of the twentieth century, had pinned his hopes on. But since state intervention to yield results, must mean larger state expenditure financed either by a fiscal deficit or by taxing the rich (the other alternative, of taxing the working people and spending the proceeds does not entail an increase in aggregate demand since the working people consume the bulk of their income anyway), and since both these means of financing state expenditure are disliked by globalized finance and hence ruled out, the Keynesian remedy ceases to work. The tendency towards stagnation arising from over-production relative to demand under neo-liberal capitalism has therefore no effective counterweight in the normal course.
But this is where “bubbles” come in. Speculation in the market for assets or claims to assets pushes up their prices sky-high which encourages extra investment in those sectors (because of the ease of raising finance) and extra consumption by the holders of such claims (who feel extremely wealthy and hence consume more, even though much of this wealth is actually fictitious). Hence even though the asset price bubble is primarily a financial phenomenon, it has an effect on the real economy. And such bubbles play the role of providing a temporary counterweight to the tendency towards stagnation under neo-liberal capitalism.
Such bubbles do not negate the tendency towards stagnation; they do not introduce a long-term growth trend. They occur from time to time, and introduce a temporary wave around the growth trend before dying out. During the upward surge of the bubble there would be some improvement in the performance of the real economy, just as when the bubble collapses, and a financial crisis ensues, the performance of the real economy would receive a setback. Of course a bubble does not arise entirely out of the blue; it is typically associated with the introduction of some new technology, in the form of some new product (or process). The euphoria generated by the new technology translates itself into a bubble that then gets metamorphosed into a speculative phenomenon, where the focus is no longer what the new technology would fetch, but on how other speculators would behave.
The Austro-American economist Joseph Scumpeter had rightly seen technology being introduced in such waves, but had erred grievously in not recognising the phenomenon of deficiency of aggregate demand and the consequent tendency towards over-production, and how that in turn affects the shape and nature of the wave through which technology gets introduced. One consequence of this was his vision that the economy is always at full employment (the wave caused by the introduction of new technology affecting only prices rather than employment), so that when the wave is finally over and dust has finally settled, the workers are decidedly better off owing to the higher labour productivity that the new technology has brought, whose benefits accrue to them in the form of higher wages. This idyllic picture alas does not hold, a point whose significance we shall presently see.
Such a temporary reprieve from the tendency towards stagnation under neo-liberal capitalism, had been provided by two such bubbles earlier, both occurring in the U.S.: the dotcom bubble of the 1990s and the housing bubble that followed almost immediately afterwards (such immediate succession being deliberately engineered to an extent by Alan Greenspan the then chairman of the Federal Reserve Board, which is the U.S. central bank). After the collapse of the housing bubble, the world economy sank into a prolonged stagnation, aggravated in its initial phase by the after effects of the collapse of this bubble. Not surprisingly, the growth rate of the world economy during the decade 2012-21 (that is, after the pandemic-induced drop had been reversed), was lower than the growth-rates during the previous three decades 1982-91, 1992-2001, 2002-2011, which themselves were lower than during the decades of the post-war period.
There is an impression that the Artificial Intelligence bubble currently underway will not only offset the tendency towards stagnation for the present, but will also do so on a more sustained basis. This perception however is completely erroneous. While the size of the AI bubble in financial terms is quite significant, its impact on the real economy is not; indeed two points have to be noted about the impact of the AI bubble on the real economy.
First, its impact on the totality of the real economy within the U.S. itself, though positive, is quite marginal. According to the U.S. Bureau of Labour Statistics, the youth unemployment rate in that country in July 2025 was 10.8 percent, which was not only high in itself, but represented an increase over July 2024 when it was 9.8 percent. In other words, the boost to the level of activity in the real economy provided by the AI bubble today is not significant enough to cause a fall in the year-on-year youth unemployment rate.
What is more, and this is the second point to be noted, when this bubble bursts, as it inevitably will, there will be a substantial rise in unemployment rate in the U.S.; this would be so for three reasons: first, the effect of the bursting of the bubble (and even if there was no speculative bubble, but just the introduction of technology in a wave, the effect of the ebbing of that wave), which would be in the nature of a cyclical downturn in employment; second, the effect of AI itself in reducing employment even in normal times (that is, even if there were no cyclical downturn); and third, the effect of reduced incomes of the employees as a whole (since wages would not be rising while employment falls) on aggregate demand and hence on the level of activity (this is what economists call the “multiplier effect”). Even when the first of these effects has waned, the second and the third will continue, and will ensure that the net long-term consequence of the introduction of AI would have been a vastly increased permanent level of unemployment, which will further accentuate the tendency towards stagnation of neo-liberal capitalism.
Nothing demonstrates more clearly than the introduction of AI the irrationality of capitalism as a mode of production and the unquestionable superiority of socialism over it . A technological breakthrough that in a socialist economy would be absorbed through increased leisure for everyone without any fall in real wages, and would in addition enhance human capacity, causes reduced employment directly, reduced real wages because of it, and an accentuation both these reductions (in employment and real wages) through their multiplier effects via reduced aggregate demand.
