Much more than Lehman Brothers Holdings Inc. collapsed last year. An entire ideology went under.
It’s difficult these days, while keeping a straight face, to talk about free markets. Economists who preached the virtues of the Efficient Markets Hypothesis are in hiding. The reputation of Wall Street, the Mecca of financial capitalism, lies in shreds. What the fall of the Berlin Wall did for Soviet state capitalism, the Lehman Brothers bankruptcy did for neo-liberalism.
Even maestro-turned-villain Alan Greenspan, newly outfitted in sackcloth and ashes, was forced to admit: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”
Was it just a question of misplaced incentives? Was it the fat bonus that did it? Or was it the greedy banker? Or could the crime have been committed by those sinister “global imbalances”? Perhaps it was just a question of central bankers not doing their job and withdrawing the punch bowl when the party was getting too wild? Or is it part of the natural order of finance that bubbles form and collapse as it was in the beginning, is now, and ever shall be, world without end, amen.
But perhaps it’s best to begin with the birth of neo-liberalism. The world in the 1960s and early 1970s was a dangerous place for capital. Labour had grown very powerful and all kinds of radical movements were on the rise. The share of profit in the Western economies had plumbed new depths. Add to that the sharp rise in oil prices in the 1970s and it was clear the old ways were no longer working. Capitalism needed a new fix.
And this is what they brewed up: shift production to low-wage countries—that would break the back of the powerful unions in the developed world; find new markets in areas that had earlier been reserved for the state—in the UK, sectors such as power utilities, water and telecommunications; overcome the limitations of a home market soured by stagnant real wages by creating a mountain of consumer debt; and finally, create vast new markets in financial instruments such as derivatives. This new strategy was helped by a revolution in information technology and communications and by lower transport costs, which is how globalization came about. This was the agenda—the ideology was just a smokescreen.
Capital, severed from its moorings, was free to roam the world, as barriers to its entry were pulled down. Had this happened before? Of course it had—the world before World War I was an even friendlier place for capital. At that time too it had led to a huge credit bubble and a spectacular bust. What else was the Great Depression but a credit boom gone wrong? That experience led to Keynes’s famous comment “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” And in 1984 James Tobin warned “we are throwing more and more of our resources...into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity”. We seem to forget these lessons with every boom and remember them during every bust.
But it’s not a question of learning or forgetting lessons. The point about the change of direction in the economic system during the 1970s was that it was a response to a previous crisis. Similarly, the point about the regulated capitalism that we had in the 1950s and 1960s was that it was a response to the horrific experience of the Great Depression. Crises of global proportions are capitalism’s way of freeing itself from the fetters of the past and of searching for another way of accumulation.
So now that neo-liberalism has been discredited, what is the alternative? There is no dearth of prescriptions. Some suggest more regulation, others point to the necessity of de-leveraging the over-indebted financial systems in the West. Some say the way out is to balance the global economy by getting the US consumer to spend less and for the Chinese consumer to spend more. Others look at the relatively insulated public sector banking systems in Asia and feel that the West could learn something from them. But change will not come from suggestions—as always, it will be the result of political battles.
One thing is certain—any effort to correct the excesses of the financial system will be temporary, to be discarded at the first opportunity. As Karl Marx wrote long ago in Das Kapital, to a capitalist “the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.”
Manas Chakravarty takes a weekly look at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org