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CHAPTER TWO

The Urban Roots of Capitalist Crises

In an article in the New York Times on February 5, 2011, entitled “Housing Bubbles Are Few and Far Between,” Robert Shiller, the economist who many consider the great housing expert in the US, given his role in the construction of the Case-Shiller index of housing prices, reassured everyone that the recent housing bubble was a “rare event, not to be repeated for many decades.” The “enormous housing bubble” of the early 2000s “isn’t comparable to any national or international housing cycle in history. Previous bubbles have been smaller and more regional.” The only reasonable parallels, he asserted, were the land bubbles that occurred in the US back in the late 1830s and in the 1850s.1

This is, as I shall show, an astonishingly inaccurate and dangerous reading of capitalist history. The fact that it passed so unremarked testifies to a serious blind spot in contemporary economic thinking. Unfortunately, it also turns out to be an equally blind spot in Marxist political economy. The housing crash of 2007–10 in the US was certainly deeper and longer than most—indeed, it may well mark the end of an era in US economic history—but it was by no means unprecedented in its relation to macroeconomic disturbances in the world market, and there are several signs that it is about to be repeated.

Conventional economics routinely treats investment in the built environment in general, and in housing in particular, along with urbanization, as some side-bar to the more important affairs that go on in some fictional entity called “the national economy.” The sub-field of “urban economics” is thus the arena where inferior economists go while the big guns ply their macroeconomic trading skills elsewhere. Even when the latter notice urban processes, they make it seem as if spatial reorganizations, regional development, and the building of cities are merely some on-the-ground outcome of larger-scale processes that remain unaffected by that which they produce.2 Thus, in the 2009 World Bank Development Report, which, for the first time ever, took economic geography and urban development seriously, the authors did so without a hint that anything could possibly go so catastrophically wrong as to spark a crisis in the economy as a whole. Written by economists (without consulting geographers, historians, or urban sociologists), its aim was supposedly to explore the “influence of geography on economic opportunity” and to elevate “space and place from mere undercurrents in policy to a major focus.”

The authors were actually out to show how the application of the usual nostrums of neoliberal economics to urban affairs (like getting the state out of the business of any serious regulation of land and property markets and minimizing the interventions of urban, regional and spatial planning in the name of social justice and regional equality) was the best way to augment economic growth (in other words, capital accumulation). Though they did have the decency to “regret” that they did not have the time or space to explore in detail the social and environmental consequences of their proposals, they did plainly believe that cities that provide

fluid land and property markets and other supportive institutions—such as protecting property rights, enforcing contracts, and financing housing—will more likely flourish over time as the needs of the market change. Successful cities have relaxed zoning laws to allow higher-value users to bid for the valuable land—and have adopted land use regulations to adapt to their changing roles over time.3

But land is not a commodity in the ordinary sense. It is a fictitious form of capital that derives from expectations of future rents. Maximizing its yield has driven low- or even moderate-income households out of Manhattan and central London over the last few years, with catastrophic effects on class disparities and the well-being of underprivileged populations. This is what is putting such intense pressure on the high-value land of Dharavi in Mumbai (a so-called slum that the report correctly depicts as a productive human ecosystem). In short, the report advocates the kind of free-market fundamentalism that has spawned a macro­economic earthquake of the sort we have just passed through (together with its continuing aftershocks) alongside urban social movements of opposition to gentrification, neighborhood destruction, and the use of eminent domain (or more brutal methods) to evict residents to make way for higher-value land uses.

Since the mid 1980s, neoliberal urban policy (applied, for example, across the European Union) concluded that redistributing wealth to less advantaged neighborhoods, cities, and regions was futile, and that resources should instead be channeled to dynamic “entrepreneurial” growth poles. A spatial version of “trickle-down” would then, in the proverbial long run (which never comes), take care of all those pesky regional, spatial, and urban inequalities. Turning the city over to the developers and speculative financiers redounds to the benefit of all! If only the Chinese had liberated land uses in their cities to free market forces, the World Bank Report argued, their economy would have grown even faster than it had!

The World Bank plainly favors speculative capital over people. The idea that a city can do well (in terms of capital accumulation) while its people (apart from a privileged class) and the environment do badly, is never examined. Even worse, the report is deeply complicit with the policies that lay at the root of the crisis of 2007–09. This is particularly odd, given that the report was published six months after the Lehman bankruptcy and nearly two years after the US housing market turned sour and the foreclosure tsunami was clearly identifiable. We are told, for example, without a hint of critical commentary, that

since the deregulation of financial systems in the second half of the 1980s, market-based housing financing has expanded rapidly. Residential mortgage markets are now equivalent to more than 40 percent of gross domestic product (GDP) in developed countries, but those in developing countries are much smaller, averaging less than 10 percent of GDP. The public role should be to stimulate well-regulated private involvement … Establishing the legal foundations for simple, enforceable, and prudent mortgage contracts is a good start. When a country’s system is more developed and mature, the public sector can encourage a secondary mortgage market, develop financial innovations, and expand the securitization of mortgages. Occupant-owned housing, usually a household’s largest single asset by far, is important in wealth creation, social security and politics. People who own their house or who have secure tenure have a larger stake in their community and thus are more likely to lobby for less crime, stronger governance, and better local environmental conditions.4

These statements are nothing short of astonishing given recent events. Roll on the sub-prime mortgage business, fueled by pablum myths about the benefits of homeownership for all and the filing away of toxic mortgages in highly rated CDOs to be sold to unsuspecting investors. Roll on endless suburbanization that is both land- and energy-consuming way beyond what is reasonable for the sustained use of planet earth for human habitation! The authors might plausibly maintain that they had no remit to connect their thinking about urbanization with issues of global warming. Along with Alan Greenspan, they could also argue that they were blind-sided by the events of 2007–09, and that they could not be expected to have anticipated anything troubling about the rosy scenario they painted. By inserting the words “prudent” and “well-regulated” into the argument they had, as it were, “hedged” against potential criticism.

But since they cite innumerable “prudentially chosen” historical examples to bolster their neoliberal nostrums, how come they missed that the crisis of 1973 originated in a global property market crash that brought down several banks? Did they not notice that the commercial property–led Savings and Loan crisis of the late 1980s in the United States saw several hundred financial institutions go belly-up at the cost of some US$200 billion to US taxpayers (a situation that so exercised William Isaacs, then chairman of the Federal Deposit Insurance Corporation, that in 1987 he threatened the American Bankers Association with nationalization unless they mended their ways)? That the end of the Japanese boom in 1990 corresponded to a collapse of land prices (still ongoing)? That the Swedish banking system had to be nationalized in 1992 because of excesses in property markets? That one of the triggers for the collapse in East and Southeast Asia in 1997–98 was excessive urban development in Thailand?5

Where were the World Bank economists when all this was going on? There have been hundreds of financial crises since 1973 (compared to very few prior to that), and quite a few of them have been property- or urban development–led. And it was pretty clear to almost anyone who thought about it—including, it turns out, Robert Shiller—that something was going badly wrong in US housing markets after 2001 or so. But he saw it as exceptional rather than systemic.6

Shiller could well claim, of course, that all of the above other examples were merely regional events. But then so, from the standpoint of the people of Brazil or China, was the housing crisis of 2007–09. The epicenter was the US southwest and Florida (with some spillover in Georgia), along with a few other hot-spots (the grumbling foreclosure crises that began in the late 1990s in poor areas in older cities like Baltimore and Cleveland were too local and “unimportant” because those affected were African-Americans and minorities). Internationally, Spain and Ireland were badly caught out, as was Britain, though to a lesser extent. But there were no serious problems in the property markets in France, Germany, the Netherlands, or Poland, or at that time throughout Asia.

A regional crisis centered in the United States went global, to be sure, in ways that did not happen in the cases of, say, Japan or Sweden in the early 1990s. But the S&L crisis centered on 1987 (the year of a serious stock crash that is typically and erroneously viewed as a totally separate incident) had global ramifications. The same was true of the much-neglected global property market crash of early 1973. Conventional wisdom has it that only the oil price hike in the fall of 1973 mattered. But it turned out that the property crash preceded the oil price hike by six months or more, and the recession was well under way by the fall (see Figure 1). The property market crash spilled over (for obvious revenue reasons) into the fiscal crisis of local states (which would not have happened had the recession been only about oil prices). The subsequent New York City fiscal crisis of 1975 was hugely important because at that time it controlled one of the largest public budgets in the world (prompting pleas from the French president and the West German chancellor to bail New York City out to avoid a global implosion in financial markets). New York then became the center for the invention of neoliberal practices of gifting moral hazard to the investment banks and making the people pay up through the restructuring of municipal contracts and services. The impact of the most recent property market crash has also carried over into the virtual bankruptcy of states like California, visiting huge stresses in state and municipal government finance and government employment on almost everywhere in the US. The story of the New York City fiscal crisis of the 1970s eerily resembles that of the state of California, which today has the eighth-largest public budget in the world.7

The National Bureau of Economic Research has recently unearthed yet another example of the role of property booms in sparking deep crises of capitalism. From a study of real estate data in the 1920s, Goetzmann and Newman “conclude that publically issued real estate securities affected real estate construction activity in the 1920s and the breakdown in their valuation, through the mechanism of the collateral cycle, may have led to the subsequent stock market crash of 1929–30.” With respect to housing, Florida, then as now, was an intense center of speculative development, with the nominal value of a building permit increasing by 8,000 percent between 1919 and 1925. Nationally, the estimates of increases in housing values were around 400 percent over roughly the same period. But this was a sideshow compared to commercial development which was almost entirely centered on New York and Chicago, where all manner of financial supports and securitization procedures were concocted to fuel a boom “matched only in the mid-2000s.” Even more telling is the graph Goetzmann and Newman compile on tall-building construction in New York City (see Figure 2). The property booms that preceded the crashes of 1929, 1973, 1987, and 2000 stand out like a pikestaff. The buildings we see around us in New York City, they poignantly note, represent “more than an architectural movement; they were largely the manifestation of a widespread financial phenomenon.” Noting that real estate securities in the 1920s were every bit as “toxic as they are now,” they went on to conclude:

The New York skyline is a stark reminder of securitization’s ability to connect capital from a speculative public to building ventures. An increased understanding of the early real estate securities market has the potential to provide a valuable input when modeling for worst-case scenarios in the future. Optimism in financial markets has the power to raise steel, but it does not make a building pay.8

Figure 1 The Property Market Crash of 1973

Clearly, property market booms and busts are inextricably intertwined with speculative financial flows, and these booms and busts have serious consequences for the macroeconomy in general, as well as all manner of externality effects upon resource depletion and environmental degradation. Furthermore, the greater the share of property markets in GDP, the more significant the connection between financing and investment in the built environment becomes as a potential source of macro crises. In the case of developing countries such as Thailand—where housing mortgages, if the World Bank Report is right, are equivalent to only 10 percent of GDP—a property crash could certainly contribute to, but not likely totally power, a macroeconomic collapse (of the sort that occurred in 1997–98), whereas in the United States, where housing mortgage debt is equivalent to 40 percent of GDP, it most certainly could and did generate a crisis in 2007–09.

Figure 2 Tall Buildings Constructed in New York City, 1890–2010

THE MARXIST PERSPECTIVE

Since bourgeois theory, if not totally blind, at best lacks insights in relating urban developments to macroeconomic disruptions, one would have thought that Marxist critics, with their vaunted historical-materialist methods, would have had a field day with fierce denunciations of soaring rents and the savage dispossessions characteristic of what Marx and Engels referred to as the secondary forms of exploitation visited upon the working classes in their living places by merchant capitalists and landlords. They would have set the appropriation of space within the city through gentrification, high-end condo construction, and “Disneyfication” against the barbaric homelessness, lack of affordable housing, and degrading urban environments (both physical, as in air quality, and social, as in crumbling schools and the so-called “benign neglect” of education) for the mass of the population. There has been some of that in a restricted circle of Marxist urbanists and critical theorists (I count myself one).9 But in fact the structure of thinking within Marxism generally is distressingly similar to that within bourgeois economics. The urbanists are viewed as specialists, while the truly significant core of macroeconomic Marxist theorizing lies elsewhere. Again, the fiction of a national economy takes precedence because that is where the data can most easily be found and, to be fair, where some of the major policy decisions are taken. The role of the property market in creating the crisis conditions of 2007–09, and its aftermath of unemployment and austerity (much of it administered at the local and municipal level), is not well understood, because there has been no serious attempt to integrate an understanding of processes of urbanization and built-environment formation into the general theory of the laws of motion of capital. As a consequence, many Marxist theorists, who love crises to death, tend to treat the recent crash as an obvious manifestation of their favored version of Marxist crisis theory (be it falling rates of profit, underconsumption, or whatever).

Marx is to some degree himself to blame, though unwittingly so, for this state of affairs. In the introduction to the Grundrisse, he states that his objective in writing Capital is to explicate the general laws of motion of capital. This meant concentrating exclusively on the production and realization of surplus value while abstracting from and excluding what he called the “particularities” of distribution (interest, rents, taxes, and even actual wage and profit rates), since these are accidental, conjunctural and of-the-moment in space and time. He also abstracted from the specificities of exchange relations, such as supply and demand and the state of competition. When demand and supply are in equilibrium, he argued, they cease to explain anything, while the coercive laws of competition function as the enforcer rather than the determinant of the general laws of motion of capital. This immediately provokes the thought of what happens when the enforcement mechanism is lacking, as happens under conditions of monopolization, and what happens when we include spatial competition in our thinking, which is, as has long been known, always a form of monopolistic competition (as in the case of inter-urban competition). Finally, Marx depicts consumption as a “singularity”—those unique instances that together make up a common mode of life—which in being chaotic, unpredictable and uncontrollable, is therefore, in Marx’s view, generally outside of the field of political economy (the study of use values, he declares on the first page of Capital, is the business of history and not of political economy), and therefore potentially dangerous for capital. Hardt and Negri have therefore recently been at pains to revive this concept, for they see singularities, which both arise from the proliferation of the common and always point back to the common, as a key part of resistance.

Marx also identified another level—that of the metabolic relation to nature, which is a universal condition of all forms of human society and therefore broadly irrelevant to an understanding of the general laws of motion of capital understood as a specific social and historical construct. Environmental issues have a shadowy presence throughout Capital for this reason (which does not imply that Marx thought them unimportant or insignificant, any more than he dismissed consumption as irrelevant in the grander scheme of things).10

Throughout most of Capital, Marx sticks broadly to the framework outlined in the Grundrisse. He focuses sharply on the generality of production of surplus value and excludes everything else. He recognizes from time to time that there are problems in so doing. There is, he notes, some “double positing” going on—land, labor, money, and commodities are crucial facts of production, while interest, rents, wages, and profits are excluded from the analysis as particularities of distribution.

The virtue of Marx’s approach is that it allows a very clear account of the general laws of motion of capital to be constructed in a way that abstracts from the specific and particular conditions of his time (such as the crises of 1847–48 and 1857–58). This is why we can still read him today in ways that are relevant to our own times. But this approach imposes costs. To begin with, Marx makes clear that the analysis of an actually existing capitalist society/situation requires a dialectical integration of the universal, the general, the particular, and the singular aspects of a society construed as a working, organic totality. We cannot hope, therefore, to explain actual events (such as the crisis of 2007–09) simply in terms of the general laws of motion of capital (this is one of my objections to those who try to cram the facts of the present crisis into some theory of the falling rate of profit). But, conversely, we cannot attempt such an explanation without reference to the general laws of motion (though Marx himself appears to do so in his account in Capital of the “independent and autonomous” financial and commercial crisis of 1847–48, or even more dramatically in his historical studies of The Eighteenth Brumaire and Class Struggles in France, where the general laws of motion of capital are never mentioned).11

Secondly, the abstractions within Marx’s chosen level of generality start to fracture as the argument in Capital progresses. There are many examples of this, but the one that is most conspicuous, and in any case most germane to the argument here, relates to Marx’s handling of the credit system. Several times in Volume 1 and repeatedly in Volume 2, Marx invokes the credit system only to lay it aside as a fact of distribution that he is not prepared yet to confront. The general laws of motion he studies in Volume 2, particularly those of fixed capital circulation (including investment in the built environment) and working periods, production periods, circulation times, and turnover times, all end up not only invoking but necessitating the credit system. He is very explicit on this point. When commenting on how the money capital advanced must always be greater than that applied in surplus-value production in order to deal with differential turnover times, he notes how changes in turnover times can “set free” some of the money earlier advanced. “This money capital that is set free by the mechanism of the turnover movement (together with the money capital set free by the successive reflux of the fixed capital and that needed for variable capital in every labor process) must play a significant role, as soon as the credit system has developed, and must also form one of the foundations for this.”12 In this and other similar comments it is made clear that the credit system becomes absolutely necessary for capital circulation, and that some accounting of the credit system has to be incorporated into the general laws of motion of capital. But when we get to the analysis of the credit system in Volume 3, we find that the interest rate (a particularity) is set jointly by supply and demand and by the state of competition—two specificities that have earlier been totally excluded from the theoretical level of generality at which Marx prefers to work.