The first decade of the 21st century witnessed two mass media events that stand out from the rest: the first was visible, the second was invisible. 9/11 and its aftermath offered a feast of visible shock and awe. These images were devoured by media consumers, but the human realities they portrayed remained at a safe distance from most of the spectators. The financial and economic crisis represents the opposite phenomenon: apparently touching the lives of all spectators but largely invisible.
There are only so many images of distressed traders, wiggly red lines, hyperbolic numerals and reporters standing outside large important looking buildings that can be drawn upon to illustrate these events. At the same time investment bankers who earned hero status by continuing to trade in a hotel lobby from laptops, as nearby the twin towers collapsed, are now viewed in a less favourable light. The time is out of joint. General understanding of precisely what is taking place is mired in a conceptual vocabulary few understand. Terms like: collateralised debt obligation, credit default swap, ratings agency, deflation and quantitative easing are all products of a particular consciousness, a “financial Latin” that guards its secrets from the uninitiated. Notwithstanding this, many people are getting very angry and they are not all the usual anti-capitalist suspects. Many of them are among the world’s most celebrated economists and politicians. Some have spent their lives as financial journalists or senior officials in global financial institutions. These are the post-neoliberal commentariat. So what are they saying?
Typically, the heat of their fury will receive this qualification: They are not saying that capitalism should be abolished. They blame the bankers and the new global class of plutocrats for creating conditions that may lead to economic, social and political devastation to rival or even beat the worst historical experiences, notably the Great Depression that unfolded in the 1930s. Politicians are also implicated for letting this happen. They fear a collapse of international trade, geopolitical fragmentation and the return of the ghosts of our past: nationalism and racism. They also cannot avoid observing the rampant criminality that is now revealed as the tide of easy money goes out: the Ponzi schemes of Madoff and others which operated colossal frauds on the rob-Peter-to-pay-Paul principle. Then follow their prescriptions for avoiding the impending calamity. Capitalism must be saved like it was before: by Keynes, by the Swedes, by Roosevelt, or whomever. It is even suggested that a little selective reading of Marx would not go amiss either (as long as we keep in mind that the goal is to save capitalism).
There is also growing popular anger which manifests through a fragmented diversity of issues-centred political concerns ranging from poverty to the environment. But recently a limited degree of political unity between the protesters and the commentariat has been emerging. This concerns an issue which typically arises in a banking crisis: “lemon socialism” or “socialism for the rich, capitalism for the poor”. Financial elites take risks during the boom that realise massive rewards for them, but when those risks crystallise the burden is borne by the taxpayer since governments must rescue failing financial institutions with copious public spending. The financial elites get to keep much of their gains, since they have acquired legal entitlement to them. The idea touted by politicians that government interventions (bank recapitalisation, buying toxic assets, temporary nationalisation of banks etc.) represent some kind of investment that will bring a substantial return to the public purse in the future, is entirely disingenuous. In 2008, as the crisis was unfolding, the IMF produced a comprehensive study of historical data on government intervention following systemic banking crises.
Governments have employed a broad range of policies to deal with financial crises. Central to identifying sound policy approaches to financial crises is the recognition that policy responses that reallocate wealth toward banks and debtors and away from taxpayers face a key trade-off. Such reallocations of wealth can help to restart productive investment, but they have large costs. These costs include taxpayers’ wealth that is spent on financial assistance and indirect costs from misallocations of capital and distortions to incentives that may result from encouraging banks and firms to abuse government protections. Those distortions may worsen capital allocation and risk management after the resolution of the crisis.
The database examined what the authors considered to be all the systemically important banking crises between 1970 and 2007, and set out the management strategies adopted in 42 systemic banking crises from 37 countries. Aside from the quantifiable costs of crises, the global nature of the current crisis and its unprecedented scale may give rise to effects that go far beyond those examined in the IMF study.
It can really no longer be claimed that this is anything other than an inveterate phenomenon which has always attended capitalism; its undeniable characteristic of privatising gains and socialising losses. The debate that then becomes central is the depth of this characteristic in the system itself. Is it an aberration, a short historical period of “crony capitalism” curable by a program of IMF style reform that will preserve basic principles; in other words a recoverable detour from a basically sound principle of market efficiency?
Or is lemon socialism rather the sine qua non of capitalism? This in turn relates to the legal and constitutional structures that have sustained and expressed economic liberalism. Can they be reformed to break the power of the rapacious and irresponsible oligarchs and ensure “fair markets” so that this never happens again? The economic predicament faced by the US and UK in particular has been compared by many, including a former IMF official, to those that would typically afflict an emerging economy, earning them the label: “banana republic”. In those cases governments and their private sector allies would run the country like a profit seeking company. Excessive risk-taking and borrowing inevitably leads to economic crisis and the country would seek the assistance of the IMF. The IMF would insist on public sector spending cuts and the sacrifice of at least some of the oligarchs. It would seem that we are all bananas now. But what political agency exists that will be capable of enforcing this adjustment in a state of affairs that is now truly global?
Obviously, there has been a major switch from saying that free markets are the essence of wealth generation, since that now appears to be an illusion born of the economic cycle. Governments are now urged to regulate and be more “countercyclical” like Pharaoh in Joseph and his Technicoloured Dreamcoat. But this return of biblical wisdom should not lead us into believing that countercyclical capitalism has ever actually happened. Keynesian economic policy made the attempt but it conspicuously failed and here we are again. The more honest among the commentariat acknowledge this as the natural feature of capitalism. They then tautologically restate this as the naturalness of capitalism as a social system. This leads to the key political division which is now breaking the years of consensus in mainstream politics that flourished during the “Great Moderation”. On the one hand there are those who still dream of a capitalism beyond boom and bust and support quantitative easing (“QEasing” – digitally creating or printing lots of new money); and on the other hand are those who are calling for “hard choices” involving public spending discipline and the discipline of labour through welfare reform (quantitative squeezing). Supporters of the queasy solution now call for a “global fiscal stimulus” to replace demand in the economy and get everyone lending, borrowing and spending again.
Why have there always been economic cycles in capitalism? An answer to this question was developed by Marx who was the first to observe and analyse these cycles. Whilst the well known theory in Marxian analysis concerned the creation of profit resting on a degree of exploitation of workers analysed in terms of working time, another equally, if not more, important aspect of Marxian economics concerns the recurring phenomenon of boom and bust in capitalist production. The Marxian economic analysis developed a number of models of crisis and cycle. The most famous and often quoted prediction concerns the millenarian demise of capitalism through the successive formation of monopolies. Whilst the formation of these monopolies is an economic dynamic of capitalism, the crisis itself is clearly political:
The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.
In the current crisis many expropriators are indeed being expropriated, but by whom and to what end? In all cases the goal of the Marxian critique was to show how the capitalist mode of production is inherently an unstable and inefficient system for organising production – contrary to the belief of prevailing economic theory. But alongside this was an ever-present regard for the inequities generated by the system particularly in terms of who bears the burdens of repeated productive failure.
Modern business cycle theory can be traced back to the Marxian model based on the rate of profit. In this model the period of boom involves increased production along with increased employment. This leads to a tighter labour market where wages are bid up restricting the share of income going to profit. Management then seeks to reverse the declining rate of profit by introducing new technology or production systems that require less labour. Employment is consequently curtailed and there is a slump. Profitability then returns as workers accept lower wages in fear of unemployment and the cycle resumes, seemingly in eight to ten year periods. The key feature of this model is the antagonism between capital and labour with some form of discipline ultimately falling on labour. This cycle may be complemented by a separate dynamic of crisis due to overproduction. In this the drive to accumulate more profits the expansion of production meets with the limits of demand for those products resulting in a collapse. These Marxian ideas have been largely absorbed into the mainstream and can be perceived unreferenced in much contemporary economic theory. They are all clearly observable in the current economic crisis in various ways.
We are told by the commentariat that the main feature of the current crisis is the excessive accumulation of debt in the economic system. This has been driven by financial speculation which has used money to make more money through leverage. In essence, financing investment through borrowing amplifies the rate of return to the borrower especially were the costs of the borrowing are relatively lower compared with the rate of appreciation of the investments. When money is cheap and prices are rising fast there are large gains to be made through speculation. This phenomenon has a long historical pedigree and its observation predates Marx. A famous instance was the South Sea Bubble of 1720, but there have been many other examples.
The commentariat believe that what we are now witnessing is simply another occurrence albeit on a global scale. They compare it to the Wall Street Crash of 1929 and their prescriptions for solving the crisis are often modelled on what they perceive to be the effective steps taken in the aftermath of that period of history. Marxist commentators point to an inconsistency here. The onset of the Great Depression happened before the Wall Street Crash. Something else was going on at the same time. It is suggested that a reappraisal of that period applying Marxian principles provides a better explanation of that crisis and the current one. But this involves discounting or ignoring many of the important features of the current situation. There is also the problem that no one really understands what happened during that period, even those who are recognised as experts in it. Whilst there may be some merit in looking back at that time it is unlikely that it will fully (or even partially) explain the present. Marx recognised that capitalism is in constant revolution and change so it must be examined in its immanent form.
The dominant idea now being sold is that capitalism can be cured by simply restraining such speculative excesses. This is based on the particular diagnosis of the crisis as a “financial crisis” with the economic crisis as its secondary effect. A new sacrificial class of bankers has been hastily created to preserve this diagnosis and to bear culpability for the crime. The bankers lend themselves well to this role but are shocked by the sudden reversal in their social fortunes from being the golden boys of capitalism to becoming its pariahs, almost overnight. They cling to their wealth and thus vindicate the approbation that politicians are relieved to be able to fix on them, diverting attention from the fact that the same politicians had long supported and venerated their wealth. Now the long intimacy between financiers and political elites is turning from revolving doors between private wealth and public office into a knife fight over the questions of nationalisation and regulation. The financial elites still have considerable power and many are resisting their proposed sacrifice ferociously. This is said to be crippling progress in taking the steps that economists are urging governments to take. Since time is seen to be of the essence, the commentariat fear that this in itself could bring the disaster everyone fears. Governments are suggesting that they are being held to ransom by the plutocrats. The financial institutions that the bankers looted and drove to the precipice are systemically too big to be allowed to fail. Lemon socialism is portrayed as a regrettable but necessary set of actions that must be taken pending the re-engineering of a global regulatory architecture that will prevent this from happening in the future.
It is odd that the very same people that created the political conditions for the crisis are now prescribing its solutions. Indeed many of the investment bankers turned public servants are among them. The commentariat that for so long affirmed the wisdom of the system now reappear as some of its most vociferous detractors. The tendency then is to start thinking in terms of conspiracy. The problem with this focus on capitalist conspiracy is that it rests on unstable political ground. Whilst there is no doubt that corruption and conspiracy flourish under a capitalist system of distribution, the focus on capitalist conspiracy encounters difficulties in terms of adopting the burden of proof in establishing connections between effects and outcomes that go to the heart of capitalist distribution. However, it is a fact that there is now a widespread acceptance that the activities of the bankers that led to global financial cardiac arrest were possible because of a ubiquitous “regulatory capture” where governments and regulatory authorities became subordinated to their regulatory subjects in finance. A conspiracy is depicted but at the same time it is limited to a financial sphere.
But is it not the case that the banana republic phenomenon of regulatory capture and the lemon socialism that follows from it are endemic features to be found at all levels of the capitalist system? This becomes clearer if we understand capitalism as primarily a redistribution of risks. Capitalism functions through an asymmetry of risk taking and risk bearing. Those who took up the work of Marx, and many who to varying degrees followed his lead have tended to focus on the distribution of bodies, assets and territories. This is because a body, asset or territory represents a manageable conceptual category. But with risk redistribution, rather than the capture of a positive term it is the functional distribution of risks which is captured, and risks are distributed on a privileged basis. This is supported by asymmetries in information and awareness. This kind of capture is more difficult to diagnose and often presents no clear autonomous agency of control. In fact, risk redistributing agencies may appear to be in conflict or competition with each other (as in war).
At the centre of this understanding is a recognition that the possession of wealth is as much a legally structured ability to call upon the mutual aid of others (to feed, shelter and care for us in periods of our native human frailty) as it is a drive toward conspicuous consumption and enhanced social status. Asymmetries of risk taking and risk bearing need legal and constitutional structures to perform this refraction. The maintenance of these asymmetries also requires an exterior into which the risks can flow. That exterior is composed of groupable individuals (mainly in terms of gender, race or social class) who can generate wealth and bear risks asymmetrically and a natural resource to draw upon. Inevitably they resist, provoking containments, different in each case. This leads to different experiences of resistance which are uneasily matched with each other. In the risk capture there is a point of unification between the sources of inequality that motivate identity based struggles for equality and those that were the principle concern of Marx and distributive egalitarians.
This explains why the excessive risk-taking of testosterone-fuelled traders has suddenly evaporated and been replaced by unmanly risk aversion. Not for all the tea in China, nor the liquidity of central banks, nor the Geithner-Summers “vulture finance relief fund” will they be tempted back into the freezing financial markets. This is because it is no longer clear that the risks they take will be distributable to others. There is fog of uncertainty that now obscures the activities of financiers and investors alike born of the very occult powers of capitalism that sustained the risk asymmetries. In addition to the effects of deleveraging debt, the current crisis has introduced a new dimension not present during the 1930s. The pricing mechanism itself has been damaged due to the scale and effects on the credit system of exotic financial derivatives. As a result, the intermediation of productive forces provided by the market under capitalism has become increasingly compromised. The certainty of the legal bond has been weakened by the sheer sophistication and velocity of capitalist revolution.
There is a new configuration of structural relationships emerging in the present contingencies of capitalism. Capital is attaching to sovereign structures via sovereign guarantees, ownership of safe-haven government securities and central bank intermediation. Profitability is being abandoned in favour of safety and the consolidation of gains at the same time as the socialisation of losses takes place. Naturally governments are resisting this process of loss socialisation to some extent since the political risks of mute acquiescence to private interests are rapidly increasing. As a result, governments are pretending to be doing more than they actually are to save private capital interests. They are taking collateral and charging fees, binding private capital ever tighter to state power. A natural consequence of this is a reversal of the situation that has existed where democratic institutions appeared as a hollow sideshow deferring determining power to the global free movement of capital. The struggle is therefore becoming structurally political once more as capital seeks to exert pressure on the state in favour of its private interests at the very same time that public dissent focuses on its democratic and state representative structures. Caught between these two overwhelming antagonisms, executive and democratic institutions are buckling and entering a condition of paralysis. In the meantime the circulation of productive forces becomes ever more brittle and faces the possibility of a disastrous shattering in a new round of crisis.
This state of affairs has arisen because capitalism is running out of exteriors. The historical exteriors for capitalist risk redistribution: colonial countries; women’s work; global soft-spots (such as pockets where there are supine labour markets); and household debtors in the west, are rapidly drying up. What will be the new exterior for capitalist risk redistribution? What commons remain yet to be enclosed? Are we not moving back to the same point reached in the nineteenth century in Britain where the external environment to capital becomes once again a class of society? As welfare spending in the west is cut; as the emerging economies stagnate and recoil; as global trade is desiccated in protectionist winds, are we not returning to a Marxian universe?