Capitalism in the wake of the financial crisis

Stephanie Blankenburg

In June 1931, J.M. Keynes warned a Chicago audience that

“today [we are] in the middle of the greatest catastrophe – the greatest catastrophe due almost to entirely economic causes – of the modern world. I am told that the view is held in Moscow that this is the last, the culminating crisis of capitalism, and that our existing order of society will not survive it”

and around the same time, the then Governor of the Bank of England, Montagu Norman, warned his French counterpart that

“[u]nless drastic measures are taken to save it, the capitalist system throughout the civilized world will be wrecked within a year. […] I should like this prediction to be filed for the future”

In hindsight, we know that such fears underestimated capitalism’s resilience. However, the premonitions of impending catastrophe – in the form of the rise of European Fascism and World War II - were, if anything, understated.

Perhaps the most startling contrast between 1931 and 2010 is the total absence of any sense of systemic crisis of capitalism today compared to assessments, such as the above, in the wake of the Great Depression. Quite the contrary: Despite continuing fears of a “double-dip” recession in the UK, in some Euro economies and now also in the US, the ideological momentum is, for now, very starkly with the advocates of free-market global capitalism under the leadership of financial capital. What is under attack are not the perpetrators of the current crisis but the public sectors of advanced capitalist economies – that is, the livelihoods, pensions, healthcare, education, public transport, theatres and cultural centres, and more generally the social and collective infrastructure, of those who rescued their failing banking and financial sectors from collapse only a two years ago. Officially, today’s crisis is not one of capitalism, but of public deficits.

Immediate outlook and policy alternatives

It is obvious that current policy initiatives, at the international as well as national level are either woefully inadequate or blatantly counterproductive. The starkest manifestation of the latter is, of course, the austerity hysteria that has gripped the UK and EMU economies, in particular Germany.

In the US, the Dobb-Frank bill potentially paves the way for a reform of the US financial sector that tackles the core problem, namely the separation of risk bearers from risk evaluators. Its main weakness is, however, that central features of the bill still have to be put into draft regulatory reform legislation that is more than likely to be watered down through lobbying by financial institutions and moderate senators. At their most optimistic, most commentators concede that this bill is unlikely to affect the US financial industry as it stands and may only affect potential future consolidation.

At the international level, the Basle III negotiations are still ongoing, but all signs are that a future agreement will fall far short of requirements for a fundamental re-organisation of the modern financial architecture and its structural inability to evaluate risk. The latest IMF paper on “Lessons from the crisis for central banks” (PIN dated 20 July 2010) concedes that Central Bank policy frameworks have to go beyond inflation targeting in the future, but its emphasis on a continuing primary concern with price stability, and its focus on a wide-ranging but limited-in-scope range of “macroprudential” tools signals the total failure to even begin to take account of the current structural imbalances of the world economy. The only initiative at the international level that goes beyond a patchy focus on half-hearted financial reform, is the call for the creation of a “Global Economic Coordination Council” of the Final Report of the UN Commission on the International and Monetary and Financial System, published in September 2009 and largely ignored since (http://www.un.org/ga/president/63/commission/financial_commission.shtml, see in particular pp. 87,90 f).

The immediate implication is that, in the de facto absence of any international policy project to tackle the structural flaws and imbalances of the international economy, financial capital remains at liberty to destroy core state and public capacities in advanced economies. Perhaps the most important policy insight to be drawn from the current situation is that what is under way, certainly in Europe (including the UK), is a concerted programme to roll back the state much beyond the tenets of conventional neoliberal programmes of the 1980s (and 90s): Initiatives, such as the upcoming Spending Review in the UK, or the adoption, in Germany, of a law that enshrines the requirement to balance the state budget year-by-year in the Federal Constitution (from 2016), are set not only to limit state intervention into the economy, but to destroy existing public infrastructure and the very capacity of states to intervene in the future, independently of which governments may be in power.

This programme evolves against the background of increasing economic instability and a sharpening of international economic imbalances, including:

• Major “double-dip” recession in the UK and in the US (where it is now clear that the fiscal stimulus programme of 2009 has failed to revive domestic investment (manufacturing) and consumer demand).
• In Germany, austerity hysteria in the form of the “balanced budget law” will lead either to a long-term deflationary spiral in Germany or else to an expansion of its trade surplus/dominance of the Eurozone. In both cases, the eventual collapse of the Euro becomes a much more likely prospect that is currently still the case. Whatever the inherent flaws for the EMU – and those have been obvious for some time – a collapse of the EMU primarily means the eradication of 60 years of economic and political integration in Europe, and a likely return to nationalistic fragmentation. The only winner here is, once again, financial capital faced with a large number of infighting small states, rather than at least the potential of a unified large state.
• A more difficult accumulation process in China, and a reinforcement of tendencies in the Asia Pacific region “to go its own way”, rather than this potential “powerhouse” of world economic growth being productively integrated in the global economy
• Continued downward pressures on growth in other LDCs, and concomitant increases in political instability
• Increasing political instability in particular in Southern Europe.

This may not compare to the disaster that followed 1931, but should be more than sufficient to concentrate minds. From a Left perspective, a number of closely related angles on the creation and systematic promotion of policy alternatives should be on the agenda:

• In Europe (including the UK), the core immediate policy task will, of course, be to oppose deficit and austerity hysteria. Importantly, for such opposition to be effective, it cannot simply be based on cries of “injustice”, however justified these may be. Rather, it requires a clear analysis of why state deficits can and should be financed and to what precise purpose. This means breaking the rightwing hold on hegemony over the deficit debate pro-actively and aggressively, not through defensive skirmishes about what not to cut, but through an all-round defence of the state as a forum for the political negotiation of collective interests. Perhaps ironically, the economic argument for an extended role of the state in crisis-ridden capitalist economies is easily put. There is contention about detail, but clear overall theoretical as well as empirical support for more rather than less state. What matters will be putting these (all to often still academic) arguments into clear political language, and to focus on re-conquering the very idea of the state as a collective political arena.
• National opposition to austerity programmes must, from the start, be linked to wider argument about contemporary capitalism at the international level: Neoliberalism has, for now, successfully neutralised national policy debate about the state (and deficits) by taking international capital mobility as a given: Any reform proposal that defends public spending at the national level but ignores the fact that such initiatives will only be successful in the presence of an international reform to govern (financial) capital mobility and to co-ordinate expansionary fiscal/monetary policy moves, will fail. Left counter-initiatives need not immediately have complete politically and economically feasible recipes of how to curb international capital mobility. For a start, it will suffice simply to attack neoliberalism on its weak flank: Its lack of an international equivalent to Adam Smith’s national “system of liberty” on which its advocacy of free markets is still based.
• In the medium run, a core concept to focus on for the development of policy alternatives will have to be that of economic democracy in core capitalist economies: Neoliberalism has not only successfully suppressed national economic policy over the role of the state. It also has managed to sell its anti-state stance as the epitome of political democracy (see, e.g. Camerons’s “Big Society” of volunteers). What neoliberalism, or any legitimising capitalist scheme before it, has never managed, is to defend or legitimise the total absence of economic democracy from capitalist societies, other than through the (now stalled) rise of mass consumption. But markets function like undemocratic voting systems: The individual vote is weighed by the amount of money the market participant can spend/ has access to. Your money is your voice. Focusing on the lacunae that is economic democracy in capitalist societies would to-date mean not only to revive trade unionism, but also to introduce the concept of active participation to debates about what the mass demand that drives capitalism should look like, i.e. the formulation of new forms and structures of demand and the type of markets we want to create and expand, on the basis of progressive income distribution: Demand for an expansion of social infrastructure, environmental protection, extended community services, participatory institutions, demand also for redistribution towards other, developing, economies. If the first point above is clearly enough argued, it will be obvious that the problem is not one of the availability of resources (finance), but of democratic decision-making about their use, and about the risks entailed in putting these resources to differing uses.

All of this is stuff for debate, of course. But unless we want commentators and analysts in 2087 to look back to 2010 to try and understand how the seeds of disaster were sown, we better get on with it fast.

* This is an edited version of the paper Dr Blankenburg delivered at the July LEAP meeting.