The question of class power has made a surprise return in crisis-era mainstream economics. There has been intensive debate over whether capital’s rising share of income is due to the growing ‘monopsony’ power of firms—that is, fewer companies offering jobs—or the declining bargaining power of workers. The interest in class reflects a turn away from representative-agent models to examine the conflicts unfolding in the actual world. Rising inequality was held to be an automatic process in Thomas Piketty’s Capital in the Twenty-First Century, the inexorable result of ‘returns greater than growth’, r >g. In Trade Wars Are Class Wars, Michael Pettis and Matthew Klein envisage lopsided class conflict in a more agentive way. They argue that, beneath the headline-grabbing trade tensions between Beijing and Washington, a more consequential class conflict is unfolding. In trade-surplus countries like China, capitalists are suppressing the incomes of workers and retirees; the workers in trade-deficit countries such as the United States are suffering collateral damage as a result. Today’s trade wars are in fact a ‘conflict between economic classes’.

Trade Wars Are Class Wars benefits from hands-on experience. Pettis cut his teeth in Wall Street’s trading and capital markets in the 1980s before moving to China, where he combines teaching at Peking University with an influential blog, China Financial Markets; he published The Great Rebalancing in 2013. His young co-author is a financial journalist, a former columnist at ft Alphaville and now at Barron’s, the Dow Jones investors’ weekly. Yet the book is also distinguished by a broad historical canvas and ambitious theoretical reach. Surprisingly, perhaps, its theoretical engine is supplied by J. A. Hobson’s passionately anti-financier polemic, Imperialism (1902). In Hobson’s view, late-nineteenth-century British imperialism was driven by class dynamics internal to the British economy. Capitalists had taken advantage of a weak working class to suppress wage growth, the money going instead to the pockets of London’s coupon clippers. As a result, workers were unable to buy much of what they produced, leading to over-production, crises and rising calls for socialism. Refusing to fix the problem at its root, capitalists responded to growing discontent with ‘violent conquest’, exporting excess capital abroad rather than distributing it as wages to workers at home. For a time, Hobson argued, foreigners were able to use cheap British loans to buy the products British workers could not afford. However, influxes of British credit far exceeded foreign countries’ ability to pay back their loans, with destabilizing consequences.

Pettis and Klein argue that Hobson’s insight applies just as well to modern Germany and China: once again, countries with underpaid working populations are exporting capital that scours the globe, blows up credit bubbles and explodes in crisis. (As they acknowledge, this neo-Hobsonite view had been advanced by Kenneth Austin in a 2011 paper, ‘Communist China’s Capitalism’.) They advance their argument through a critique of neoclassical trade theory, first targeting financial flows and second, global trade. Ricardo’s canonical theory of comparative advantage assumed that capital would not leave its origin-country in search of higher returns in other lands. Pettis and Klein demonstrate that it is not a demand for capital from abroad, but rather successive episodes of home-country credit creation—‘investment booms and collapses in the major banking economies’—that have driven global credit cycles. In the nineteenth century, interest-rate shifts, banking deregulation or receipt of war reparations at the Bank of England drove international investment surges in the 1820s, 1830s, 1860s and 1890s, all ending in crisis; recalibrations at the Federal Reserve unleashed floods of money in the 1920s, 1970s and 1990s, producing the Crash of 1929, the 1982 Third World debt crisis and the Asian Financial Crisis of 1997. While they acknowledge that such lending can be constructive—pointing to Dutch credit exported to England in the seventeenth century, and English to the us in the nineteenth—they argue that such flows typically originate in creditor countries’ search for yields, rather than debtor countries’ thirst for credit. In the aftermath of financial crises, capital-exporting countries predictably blame goods-importing countries for profligate spending; but this is just a way to avoid reckoning with their own underconsumption.

The discussion of global trade flows posits the opening of a new era in the last decades of the twentieth century, with the onset of ‘the great global glut’ in manufactured goods. Pettis and Klein exceed most of their contemporaries in identifying this; the great glut has been so damaging, they explain, ‘in part because standard economics has such difficulty describing it.’ Drawing on Keynes, they argue that the glut signals the end of capital scarcity and the arrival of an era of abundance, at least in developed countries. Opportunities for investment have dwindled, as manufacturing has become cheaper than ever before; companies have begun to spend less than they generate in cash flow. Workers’ bargaining power has weakened, due to a persistently low demand for their labour. Their argument puts a lot of weight on the internationalization of production, following the containerization revolution: the threat of relocation abroad helps hold down wages at home. As they note, more than half of today’s global trade involves the movement of unfinished goods circulating within three cross-border production networks, centred on the us, Germany and China (Japan dropped out of the picture after 2008 in their account). The internationalization of production not only violates the tenants of neoclassical trade theory; it also upends ‘trade and investment data’, making global statistics increasingly difficult to decipher. Pettis and Klein provide some fascinating detail on American multinationals’ use of tax havens and the trillion-dollar profits booked in low-tax jurisdictions such as the Cayman Islands, Ireland and Singapore.

How do these global patterns of capital and trade flows map on to national economies? Three countries—Germany and China, with their giant trade surpluses, and the trade-deficit us—get chapter-length studies. The discussion of the German economy ranges from post-reunification problems through the 2002 Hartz iv reforms to the role of German lending in the 2008 financial crisis. Trade Wars Are Class Wars targets the complacency of German policymakers who see trade surpluses as a natural reward for superior production techniques—‘total nonsense’, they aver. The reward for strong exports should be more imports—a growing capacity to consume the world’s products. Instead of raising consumption at home, German surpluses have been recycled into capital exports abroad, a major factor in the bubbles that inflated in Spain, Italy, Portugal, Ireland and Greece and then burst in 2008. Contrary to Schäuble’s protestations, these were not driven by the profligacy of borrowers but rather by German banks’ desperate efforts: ‘massive lending abroad was the only way the banks could reconcile weak German demand for credit and heightened German saving.’ The 2008 crisis offered Germany’s leaders the chance to rebalance the economy by raising workers’ wages and importing more goods from their neighbours. Instead, Berlin used eu structures to impose austerity on the crisis countries, forcing them to rectify trade and government deficits; unsurprisingly, they too experienced rising inequality and a decline in purchasing power for ordinary citizens. The effect was to transform the Eurozone from an internally trade-balanced regional economy into a titanic trade-surplus problem itself, generating even larger pools of capital hunting the world for yields.