Costas Lapavitsas on Inflation and the State of Capitalism

Class Unity recently spoke with economist Costas Lapavitsas about inflation, the cost-of-living crisis, and the broader condition of contemporary capitalism. The conversation examines weak investment and productivity, corporate pricing power, financialization, global production chains, the expanding economic authority of the state, and the geopolitical challenge to American hegemony. It also considers the disconnection between the left and working people, the limits of identity politics, deglobalization, tariffs, public control of trade and finance, and the political role of small businesses. Later questions address asset managers, “neofeudalism,” the difference between banks and investment funds, China’s economic model, the dollar’s continuing international dominance, and Europe’s deepening crisis. Lapavitsas is Professor of Economics at SOAS University of London and coauthor of The State of Capitalism: Economy, Society, and Hegemony; readers can learn more about The Cost of Living Crisis and watch the original Class Unity conversation.

Class Unity: Welcome, everyone. Today we are joined by Costas Lapavitsas to discuss the pamphlet The Cost of LivingCrisis and inflation in the context of his recent book The State of Capitalism. Could you begin by summarizing your view of the recent inflation and the arguments of those two works?

Costas Lapavitsas: Thank you very much for the invitation. It is a pleasure to speak with socialists and activists in the United States and to find a common political language. I will begin with inflation and the short pamphlet I produced with colleagues in Britain, then place it in the broader context of The State of Capitalism. The two works are closely connected.

Our argument about inflation is straightforward. The cost-of-living crisis originated fundamentally on the supply side—in the sustained weakness of production and capital accumulation. The problem was not primarily excessive demand or an excessive quantity of money. It arose from capital’s inability to accumulate successfully and dynamically in the way it had during earlier periods.

The extraordinary power of the modern state is closely connected to this development. Contemporary capitalism depends crucially on the state despite endless talk about states and markets as opposing forces. One of the state’s greatest powers is its ability to create fiat money in enormous quantities. That power contributes to inflation, but not through a crude quantity theory in which too much money simply chases too few goods. State-created money makes large-scale economic intervention possible and supports aggregate demand. When supply fails to respond because profitability and accumulation remain weak, inflation may follow.

Inflation then redistributes income. Some parts of society gain and others lose. In the recent inflation, corporations gained while workers lost. Workers’ real wages and purchasing power declined; they could buy less for themselves and their families. That loss became corporate profit. It is no accident that company profits rose substantially during the early years of this decade. This was an income transfer out of wages and into profits.

Standard economic ideology says that capitalists earn profits because they invest, take risks, innovate, and create the future. Whatever one thinks of that account in general, it does not describe the recent rise in profits. Profits did not increase because of vigorous investment and dynamic risk-taking. They increased through an inflationary transfer from wages.

Governments responded by raising interest rates, squeezing workers still more severely, and attempting to reduce demand. A socialist response would instead control prices to limit the transfer from labor to capital and intervene directly in production. The objective should be to overcome supply-side weakness from the standpoint of workers rather than big business.

The larger book emerged from our attempt to explain the pandemic shock and the conduct of capitalism since the global financial crisis. It was a genuinely collective effort rather than a collection of separate essays. Eleven researchers coordinated their work because contemporary capitalism is too complex for any one person to command all the knowledge necessary to analyze it adequately.

The pandemic demonstrated the state’s enormous power. Governments closed cities, suspended parts of economic life, directed entire populations, created money, paid wages, supported corporate income, and managed capitalism for an extended period. Eventually inflation followed. We recognized that this intervention resembled what states had done during the crisis of 2007–09. We therefore analyzed the period from 2008 onward as a single historical phase.

We call it an interregnum, borrowing the term from Antonio Gramsci. In an interregnum, the old way of organizing society is exhausted and cannot continue, but a new way has difficulty being born. Society churns without moving decisively forward. This describes contemporary capitalism not only from the standpoint of workers but also from that of the ruling elite. The elite itself cannot identify a new stable path.

Gramsci also warned that an interregnum gives birth to political monsters. That danger is visible in extreme-right and fascist currents across many countries and in the international threat of war. I remember the Cold War, and the present situation seems more dangerous. The inability of the old order to reproduce itself and of a new order to emerge creates exceptionally volatile politics.

To understand why the old order no longer works, begin with capitalism’s historic core: the United States, Europe, Japan, and the other established centers of accumulation. The first central problem lies in production. Growth is weak. The 2010s were the worst decade for the core in roughly forty years, and the current decade appears still worse. Capitalism must grow; otherwise, it stagnates and decays. Yet private investment has remained weak, productivity growth has been poor, and the ordinary mechanism by which investment raises productivity and generates profit has faltered.

Capitalists consequently sustain profits by squeezing workers. When they cannot raise profitability through productivity-enhancing investment, they cut wages and working conditions or use inflation to reduce real income. But this cannot provide a dynamic and durable basis for accumulation.

Weak domestic accumulation has developed alongside an unprecedented globalization of production. Capital has always been international, but international trade, international finance, and international production are distinct. Producing across borders is organizationally difficult. Earlier multinational corporations usually established foreign subsidiaries that they directly owned and controlled. Over the last several decades, however, production has globalized through value chains without requiring direct ownership.

Independent capitalists in other countries enter contractual production networks led by major firms at the core. They may legally own their factories, but the lead corporation controls technology, finance, market access, product standards, and prices. Globalization therefore combines weak productive dynamism within the old core with vigorous international expansion through networks controlled by large corporations.

The second transformation of the core is financialization. The weakness of domestic accumulation has accompanied the growth of financial profit and the spread of financial practices within productive enterprises. Since the crisis of 2007–09, the principal agents of financialization have shifted from traditional banks toward investment funds, hedge funds, and other nonbank institutions—so-called shadow banks. They manage portfolios of shares, bonds, and derivatives and make money through market transactions and capital gains.

This shift has reduced the dynamism of financialization compared with the period before 2008, but it has also concentrated ownership on an extraordinary scale. A handful of large funds now hold a major share of corporate equity in the United States. Weak production, globalized value chains, and concentrated financial ownership together generate poor growth, weak investment, and relentless pressure on workers.

The interregnum has also produced a new relationship between the core and the periphery. Marxists have long used that distinction to analyze imperialism, treating the core as the commanding center of the world economy and the periphery as exploited and oppressed. Today, however, the entire periphery is capitalist. The distinction is no longer between a capitalist core and a not-yet-capitalist periphery; it is a hierarchy internal to global capitalism.

This changes the meaning of hegemony. The hegemonic power sets the terms under which globalized production and finance operate: legal rules, investment standards, commercial practices, and the measures governing international exchange. It also supplies world money. Those capacities define contemporary American imperial power. The United States establishes the framework for global capital and issues the dollar used within it.

Yet American hegemony is under pressure, and every serious challenge comes from the formerly peripheral world rather than from the old capitalist core. The United States dominates Europe and Japan. The challengers are China, Russia, India, Brazil, and the wider group of rising capitalist states. They do not seek a noncapitalist order; they seek influence over the terms of global economic interaction and a greater role in world money.

This is a hegemonic contest driven by economic interests and perhaps the most dangerous moment in the world economy since 1914. The United States no longer possesses productive predominance. China’s manufacturing capacity is greater than that of several leading countries combined, and China has also surpassed the United States in trade. The United States retains clear dominance in finance and through the dollar. That dominance is the chief economic foundation of its imperial power and the likely focus of future conflict. Military predominance ultimately supports economic hegemony, and American military power also faces serious challenges.

The left confronts this interregnum from a position of historic weakness. The 1930s were another interregnum in which the pre-1914 order had collapsed and the postwar order had not yet emerged. That period produced fascism and world war, but it also contained a powerful organized left. Today’s left is far weaker for two main reasons.

First, it has become socially detached from workers, the poor, and the oppressed. Many of those who staff left organizations come from other classes, speak another language, live differently, and sometimes look down on working people. Historically, even workers who did not accept socialist ideas could recognize a socialist organizer as one of their own. Much of the left no longer possesses that standing.

Second, the left is ideologically confused. Much of what passes for left politics consists of identity claims and moral statements about what is good or bad. The left certainly has a moral core, but it has historically defined itself by material analysis, class organization, and a willingness to challenge capitalist social relations directly. It sought not merely kinder conduct but a transformation of the institutions and relations that reproduce capitalism.

If the left is to prevent the interregnum from producing further monsters, it must reconnect with workers, the poor, and the oppressed and recover its historical radicalism. There is no shortcut. It must once again become part of the lives and struggles of the people whose emancipation it claims to pursue.

Class Unity: You describe inflation as an income transfer from workers to capitalist enterprises. Classical Marxism usually locates the central conflict over income in the wage relation and the production process. How does the distributive struggle expressed through inflation fit into Marxian economics?

Costas Lapavitsas: It is thoroughly Marxist. Some corporations certainly exploited monopolistic conditions and raised prices aggressively. Energy companies, for example, obtained enormous profits. But a sudden increase in corporate greed cannot explain a generalized inflation. If firms could arbitrarily raise prices during one year, why could they not do the same every year? The explanation must itself be general.

The structural context was the long weakness of production: low growth, low investment, weak productivity, and a supply side unable to respond dynamically. The pandemic then disrupted global value chains and shut down large parts of production. At the same time, states created money, supported wages and businesses, and boosted demand. When demand rose while production remained constrained, prices increased.

The income transfer occurred because wages did not rise at the same rate as prices. Workers did not cause the price rise, and maintaining living standards would have required nominal wages to keep pace. But labor lacked the organized power to demand that outcome. Capital could allow prices to outrun wages and retain the difference as profit. This is a direct expression of the balance of class power. When real wages fall, workers lose income and businesses acquire it. Other heterodox traditions may describe a similar mechanism, but nothing about it is foreign to Marxism.

Class Unity: You identified the class composition of left organizations and their ideological confusion as two sources of the left’s weakness. Class Unity has argued that these problems are connected: a predominantly professional or middle-class membership produces an ideology shaped by that social position. How should left organizations understand and address this problem?

Costas Lapavitsas: The left needs a serious forensic examination of its weakness. We should not spend all our time examining our own entrails, because positive political work must continue, but the imbalance between the scale of the crisis and the left’s capacity is undeniable.

Social composition and ideology are clearly connected, though I would not reduce ideological confusion to a simple claim that middle-class intellectuals caused it. We must specify both problems. Much of the contemporary left genuinely does not understand its separation from working people. Newer activists often assume that left politics means identity politics, normative declarations, and moralizing. There is a moral and normative dimension to socialism, but those elements do not define the left. Historically, the left challenged capitalism and organized to transform the structure of society.

Reconnection cannot occur through discussion alone. Working people will not trust organizers who remain socially distant, speak differently, and appear only to instruct them. Trust comes from participating in everyday struggles and remaining present over time. There was a period in Europe when workers respected known socialists even without agreeing with them, because they regarded those socialists as people from their own world. Recovering that relation requires patience, struggle, ideas, and practical solidarity.

Class Unity: What role do asset managers and financial expropriation play in recent inflation? Does the concentration of ownership in large funds point toward “neofeudalism,” or is that an exaggeration?

Costas Lapavitsas: Financialization has shifted relatively away from banks and toward investment funds and other shadow-banking institutions. I prefer to analyze their gains as financial expropriation rather than emphasizing rent. Finance extracts profit directly from wages, money income, and savings. These are often zero-sum operations: institutions obtain financial profit by taking interest, fees, or capital gains from the monetary resources of others.

Banks and fund managers have earned very large profits this way during the past forty years. But such extraction cannot sustain accumulation in the way new investment, production, and exploitation at work can. It redistributes existing income and wealth rather than generating a durable productive expansion.

The investment funds also represent a remarkable concentration of property rights. Yet they generally act as portfolio managers rather than active owners directing production. If they began systematically using their concentrated holdings to command corporations, American capitalism could change dramatically. Why they remain largely passive is an important analytical question.

This is not, however, the main explanation for recent inflation. That inflation transferred income through the price mechanism into the profits of functioning productive and commercial corporations. Financial expropriation is crucial to contemporary capitalism, but it was not the immediate driver of that episode.

Nor do I find “neofeudalism” or “technofeudalism” persuasive. Those terms sound more illuminating than they are. What we see is not a return to feudal social relations but an intensified capitalism: global production coordinated without direct ownership, financialization dominated by investment funds, and enormous concentrations of economic and political power. Capitalists have never been democratic or egalitarian. Their present power rests on capitalist property and market rights, not on feudal legal status. This is super-capitalism, not neofeudalism.

Class Unity: Globalization appears to have slowed, while industrial policy and labor militancy have gained some ground in the United States. Should the left advocate bringingproductive capacity back, breaking global production chains, and deglobalizing the economy?

Costas Lapavitsas: The recent American turn toward industrial support is not a reversal of globalization. It reflects globalization’s loss of dynamism and the ruling class’s response to challenges to American hegemony. The state has provided substantial subsidies to private investment because the United States is falling behind China in production. Europe, by contrast, has shown little comparable strategic capacity.

From a working-class standpoint, however, the left should argue for deglobalization. Globalization is not synonymous with socialist internationalism. Much of the professional left has absorbed the internationalism of big business and mistaken it for the internationalism of workers. Capital wants the right to move money and production across borders and to recruit labor without union rights, housing, education, or social protections. That is not our internationalism.

The left should support producing where people live and for the needs of their communities rather than chasing profit across the globe. Relocalized production could strengthen working-class organization. The argument is politically difficult because the far right also exploits opposition to globalization, but socialist arguments have never been easy. The left must establish an independent position against both liberal globalizing elites and the nationalism of the far right.

Deglobalization should be joined to definancialization. What those objectives require differs by country. The United States occupies the core of the world economy, so American socialists and workers must develop measures appropriate to that position. The program will not be identical in the United States, Egypt, or France, but the direction should be toward less dependence on global value chains and finance.

Class Unity: One policy used by the American right is tariffs. Some working-class voters credit the previous administration with abandoning a major trade agreement and renegotiating another, even if many threatened tariffs were temporary or never implemented. Should the left embrace tariffs and take that message away from the right?

Costas Lapavitsas: The left should not adopt a tariff ideology, but neither should it embrace free trade. The idea that the left is naturally committed to unrestricted trade is historically new and baffling. Socialists favor democratic control over economic life, and trade is part of economic life.

The right has identified a real grievance and then distorted it into nationalist politics. The left must recognize the real issue while developing an independent program. If restoring local production requires managing trade, then trade should be managed. If particular flows require tariffs, taxes, or price controls, those instruments should be used. The principle is not protection for its own sake but the reconstruction of productive capacity and secure employment where people live.

Class Unity: You have described changes in the forms of finance and production. But why do those changes alter their functions? A large investment fund might appear to exercise the same power once held by a major bank, while a lead firm can control a production chain contractually rather than through ownership. We would also like your view of a practical problem: how can a socially distant left become rooted among workers without either pretending to be something it is not or simply declaring itself a self-appointed vanguard?

Costas Lapavitsas: Changes in form often change conduct even when the underlying capitalist relation remains. An investment fund is primarily a portfolio manager. It does not directly create money or generally extend loans to productive enterprises. It buys securities, uses derivatives and repo markets to manage risk and liquidity, and earns returns through movements in asset prices. A bank may transact in those markets, but it also creates money through lending and directly supplies credit. The shift from banks to funds therefore changes money creation, access to credit, the sources of profit, and the way productive activity is financed.

The central bank is crucial to this new structure. It is a public bank and an arm of the state, regardless of the language of independence surrounding it. It stands at the center of the financial system, creates enormous quantities of fiat money, and supplies the liquidity on which shadow banks depend. After crises, the central bank draws new institutions into its protective orbit, but funds still do not become identical to deposit-creating commercial banks. The changed structure affects how contemporary capitalism operates.

The same applies to global production. A corporation that directly owns a foreign factory must invest in it, manage it, and integrate it organizationally. A lead corporation controlling an independent supplier through technology, finance, standards, and prices can shift investment burdens and risks outward while retaining strategic command. It can distribute more profits to shareholders, while the formally independent supplier reorganizes its own local production to meet the network’s demands. Contractual network power therefore produces a different capitalism even though the purpose remains profit.

As for political organization, I reject the old sectarian idea that intellectuals must imitate workers or artificially take factory jobs. We are what we are and must act from the lives we actually lead. Becoming part of working-class politics means persuading and recruiting workers, remaining near the poor, and participating in their activities and struggles. People will initially mistrust those with more money, different experiences, or several degrees. There is no trick that abolishes that distance. Presence and commitment over time may overcome it.

Class Unity: You have stressed the need to speak and live in ways that working people recognize. How is that different from identity politics? And what defines the working class when many college-educated white-collar employees earn less than some blue-collar workers?

Costas Lapavitsas: American political language produces extraordinary confusion around the “middle class.” Many people describe themselves as middle class when their actual relation to work, income, and power places them elsewhere. I do not want to draw a rigid sociological boundary and declare everyone on one side working class and everyone on the other side not. In practical politics, the class position of workers and the poor becomes visible through their dependence on wages, their lack of control over production, and the conditions of their lives.

I am not opposed to analyzing identity. Human beings act through identities, and great revolutionary struggles have often involved religious or national identity. But being working class is not primarily a personal identity; it is a social relation and position.

The problem with contemporary identity politics is not that identity never matters. It is that politics becomes organized around selective personal characteristics while social structures, collective agents, and class relations recede. Certain identities are elevated and others excluded. In the United States, racial, gender, and sexual identities have become extraordinarily powerful ways of framing left politics. Those questions belong in socialist politics, but their predominance becomes unhealthy when it prevents the left from analyzing capitalism and organizing around class power. The task is to broaden politics and restore its material and structural dimensions.

Class Unity: What prospects do you see for the BRICS countries, especially China? Can China or another coalition displace the dollar as world money? And what future awaits the European Union, particularly Germany, after the loss of cheap Russian energy and key export markets?

Costas Lapavitsas: Chinese capitalism is the great capitalist success of the last forty years, and it was created through the state. The Chinese state’s power differs from that of the American and European states. It controls money, but it also directly owns productive resources and maintains extensive controls over economic activity.

The easy phase of Chinese growth is over. Returns on capital have declined, and the old model has become exhausted. Investment remains around an extraordinary 45 percent of GDP, but its returns are increasingly problematic. China can still mobilize workers from lower-wage regions, yet that process also has limits. Rebalancing demand away from investment and toward consumption would require a profound social transformation, not a minor technical adjustment.

China also faces a huge and troublesome financial system. It is not financialized in the same way as the United States, but credit creation outside ordinary regulation—banks operating in the shadows rather than American-style shadow banks—has fed problems in real estate and elsewhere. Private and state capital are deeply interpenetrated. The expectation that a private capitalist class would simply overpower the state and remake China in the Western image has proved false. A more plausible tension lies within the state sector itself, where managers of giant energy, chemical, and industrial enterprises possess immense economic power and may seek greater autonomy while remaining connected to the state.

China has surpassed the United States in manufacturing and trade but remains far behind in finance. There is no immediate prospect that the renminbi will replace the dollar. The dollar’s share of global reserves has declined only modestly, not collapsed. China’s publicly controlled banking system, restrictions on cross-border capital movements, and less liquid financial markets make the renminbi unattractive as a universal asset for private capital. Moreover, Chinese banks and corporations themselves operate internationally in dollars and require dollar liquidity. China holds enormous dollar reserves but is also enormously exposed to the dollar system.

Central-bank digital currencies could eventually alter the picture. A widely usable digital renminbi built on a distributed system might develop some international role, but that remains speculative and distant. For the foreseeable future, the dollar retains its central position.

The European Union is the weakest major part of the world economy—economically, politically, and socially. Germany’s recent success rested heavily on two conditions: wage restraint from the mid-1990s into the 2010s and cheap energy from Russia. It remains concentrated in automobiles, chemicals, and machine tools and is not a leader in many new technological industries. By severing cheap energy while offering no new productive strategy, Germany’s ruling elite has undermined its own foundations. Europe has shown little capacity to challenge American power or define an independent path and is consequently vulnerable to the growth of far-right and fascist movements.

Class Unity: In the cost-of-living pamphlet, you propose that the workers’ movement might cooperate with small businesses also harmed by inflation. Why would their interests overlap, and what kind of political alliance do you envisage?

Costas Lapavitsas: Small businesses generally lacked the capacity of large corporations to raise prices and profit from inflation. Many faced the same squeeze as workers, especially when they supplied large firms that could dictate input prices. Capital is not equally powerful; its different components struggle with one another.

The issue is broader than inflation. This is the age of giant corporations. They dominate production, trade, finance, and public policy. Small enterprises face persistent difficulty obtaining credit, pressure from the large firms that purchase their goods, and a state whose policies are captured by big business.

There is no natural or permanent alliance between workers and small capital, and I am not proposing one. But confronting the aggressive power of large industrial, commercial, and financial corporations requires a broad social front. If the organized working class and socialist movement were stronger, they could lead such an alliance. They are not presently strong enough. The left must therefore develop messages and concrete policies capable of assembling a coalition against big capital while preserving an independent working-class direction. The middle layers of American society have suffered a tremendous blow, and there is substantial political scope for such a front.

Class Unity: Thank you very much. This has been an informative discussion. Are there any final thoughts you would like to leave us with?

Costas Lapavitsas: I am glad we have had this opportunity to exchange ideas, and I would be happy to speak with you again. I greatly respect what you are doing. It is striking that there is now more intellectual life around socialism in the United States than in much of Europe; I never expected to see that in my lifetime. You face powerful opponents and must confront the conditions where you live, but I would be delighted to continue sharing ideas in a comradely and fraternal way. Thank you very much.

Class Unity: We would be very happy to have you back. Thank you.