I want to thank the Cambridge Union Society for inviting me to debate this important issue, and give a shout out to the students in my economic crisis class who will watch it on YouTube.

Earlier this year, the Oxford Union considered the motion, “This House believes that capitalism has failed the poor.” Tonight, a quite different question is before you: has capitalism failed? It’s a difference between a transitive and an intransitive verb. Now, some of us think that capitalism regularly fails the poor, and most people in the world. But that doesn’t mean that capitalism has failed. If a person or social system doesn’t try to accomplish something, it can’t really fail to accomplish it.

John Stuart Mill said that it was doubtful whether new technology had ever “lightened the day’s toil of any human being.” In response, Karl Marx suggested that this was not a failure of capitalism: firms that adopt new technology aren’t trying to lighten the workers’ toil. To fail, you have to have tried.

In contrast, the Great Recession and the ongoing economic malaise are an enormous failure of capitalism. The system isn’t only failing us; it’s just failing––on its own terms. It’s been almost five years since the recession began, and capitalism has failed to rebound substantially. It’s still failing to do; and no one knows when it will stop failing to do so.

This economic crisis is what I want to focus on, because of its importance, and because it’s why we’re even having this debate. Whether capitalism has failed wasn’t debated five years ago. It’s not hard to imagine a debate back then on whether capitalism has failed the poor, but it is hard to imagine one on whether capitalism has failed.

John Maynard Keynes wrote that “The ideas of economists and political philosophers … are more powerful than is commonly understood. Indeed the world is ruled by little else.” A propos of this, I think the chief failure of capitalism is that it is losing the battle of ideas. Ever since the economic crisis erupted, capitalism is no longer being taken for granted, as just “the way things are.” Its foundations are being seriously called into question. For example, the question of whether capitalism has failed is being publicly debated in one of the world’s pre-eminent educational institutions. And a virtually unknown Marxist-Humanist from a little island off the coast of the mainland United States has been invited to debate it.

There are other examples. A main founder of the market-oriented field of “law and economics,” Richard Posner, titled his book on the Great Recession “A Failure of Capitalism.” He argues that “a capitalist economy is inherently unstable” “[b]ecause of the centrality of credit.” Similarly, when Ben Bernanke, chairman of the Federal Reserve, testified before the U.S. Financial Crisis Inquiry Commission, he said that “We should not imagine … that it is possible to prevent all crises.  … The provision of credit inevitably involves risk-taking.”

Coming from someone whose job it is to prevent crises, this is a striking admission. What failed wasn’t a particular set of policies or financial structure. No, Bernanke was saying, financial crises are part and parcel of capitalism and inevitable under it––it’s not possible to prevent them––because it is a credit-driven system. And he knows what he’s talking about. Bernanke isn’t only the chairman of the Fed, but a highly respected academic economist and leading expert on the Great Depression.

Capitalism is also failing to win people’s hearts and minds. Since the economic crisis erupted, the protests in the streets have been massive, and they’re continuing. There is even more widespread disgust at the great lengths to which policymakers have gone to keep capitalism afloat––by bailing out the worlds’ creditors. The discontent hasn’t typically had an explicitly anti-capitalist tone, but capitalism isn’t winning people’s hearts and minds either.

Governments throughout the world have been brought down or almost brought down by the crisis and disgust and protests. Policymakers didn’t plan for this to happen, and they don’t want it to happen––but it’s happening. When those in charge of managing the system lose their ability to maintain stability and make us accept our present conditions as inevitable––to the extent that they’ve lost this ability––I’d call that a serious failure.

Is it a failure of capitalism? Well, the failure to control the political situation and win hearts and minds isn’t confined to countries with a right-of-center government or those with a left-of-center government. They’re the results of the state of the economy, over which policymakers have little control. Recent experience has made their lack of control quite clear. Many governments have imposed austerity policies. This hasn’t caused their economies to rebound. In contrast, U.S. government policy has been wildly stimulative––since Lehman Brothers collapsed four year ago, U.S. Treasury debt has increased by two-thirds. It has borrowed more than $20,000 per person. Yet economic recovery in the U.S. has also been extremely weak.

Are the bailouts of creditors merely failed policies that we can blame on specific policymakers? I don’t think so. Policymakers tried mightily to avoid bailouts. They tried everything else first. But if the U.S. government hadn’t bailed out the creditors after Lehman went under, it’s very likely that the global financial system would have collapsed and that the economic slump would have been comparable to the Great Depression

So I don’t think particular policies or policymakers are really to blame for the bailouts, the failure to win hearts and minds, and the failure to control the political fallout from the economic crisis. So what’s left to blame? As Bill Clinton famously said, “it’s the economy, stupid.” The capitalist economy.

Capitalism’s not going to change. As Bernanke and Posner say, it’s inherently unstable. Policymakers can’t prevent all crises. So the bailouts will continue. James Bullard, president of the St. Louis Fed, admitted this forthrightly: “the financial crisis revealed that large financial institutions worldwide are indeed ‘too big to fail.’ … We can let [them] fail suddenly, but then global panic ensues.”

Such admissions of impotence, and the post-Lehman bailouts, have exacerbated the problem considerably. In early 2008, creditors of all “too big to fail” institutions weren’t sure that they will be bailed out when necessary. Now they are sure. This gives them an even greater incentive to engage in excessively risky behavior. In principle, this particular problem could be solved by breaking up “too big to fail” institutions, but don’t count on that happening. The dynamic of capitalism is that the big fish gobble up the little fish. Because big fish can produce more cheaply than little fish, they beat out the little fish and gobble them up. This dynamic is especially pronounced in the financial industry.

What about the causes of the Great Recession and continuing malaise? What makes them a failure of capitalism itself? In 2008 or early 2009 one could plausibly argue that the financial crisis was the fundamental cause. Five years on, this is no longer plausible. By the end of 2008, the U.S. government had quelled the panic in the financial markets. If that had been the fundamental problem, the economy should have rebounded smartly long ago. It hasn’t.

My recent book, The Failure of Capitalist Production, looks at the longer-term underlying causes of the Great Recession. The short version is that U.S. corporations’ rate of return on investment stated to fall in the mid-1950s and never recovered in a sustained manner. Profits increased more slowly than investment. And since there was relatively less profit available to invest, there was a slowdown in productive investment. But productive investment is the key driver of economic growth, so it slowed down markedly as well, in the U.S. and globally.

Since economic growth slowed down, incomes also grew more slowly. That caused the debt burdens of households and government to rise and rise. When your income grows more slowly, it’s harder to pay back your debts. And the debt rose even more because the U.S. government and the Fed tried to manage or repair the mess with policies that kicked the can down the road, papering over bad debt with even more debt.

The rising debt burdens led to a whole series of burst bubbles and debt crises. And as the can is kicked down the road while the underlying problems persist––low profitability, sluggish investment, weak growth of output and income––the burst bubbles and debt crises get worse. The recent financial crisis and Great Recession are the latest burst bubble and debt crisis, and by far the worst.

The underlying problems have persisted under left-of-center governments and right-of-center ones. They arose when policy was “Keynesian” and continued under neoliberalism. We’ve had financial crises caused by lax regulation and deregulation. But in the 1970s and 80s, a huge financial crisis in the U.S. mortgage-lending industry was caused by strict regulation. So, taking the long view, it becomes clear that the underlying situation represents a failure of capitalism itself.

I haven’t shown here that capitalism has failed at everything. It hasn’t. But it’s failed in some big ways. The Great Recession and its ideological and political consequences are no small matter. And I haven’t even mentioned capitalism’s failure to head off the crisis of climate change that it created––until now. So I urge a reasonable interpretation of “capitalism has failed” and a vote in favor of the motion. Thank you.

October 17, 2012