The blogosphere is filled with outrage at Wall Street’s “privatization of profits and socialization of losses” and the fat bonuses paid to incompetent chief executives of banks. Sections of the Left are celebrating the implosion of neo-liberalism and are calling it a crisis of capitalism. The notions that the markets know best, that deregulation and privatization are the way forward and that governments need to get out of the way, nostrums that have been dogma for the last 30 years, are being seriously questioned.
Some free-marketers have responded by saying that the financial system in the US can hardly be described as free market, ruled as it is by a government organization called the US Federal Reserve. They put the entire blame for the fiasco on the artificially low policy rates that the Fed used to stimulate the economy.
The received wisdom for the last three decades has been that competition will discipline market players far better than any regulator can, that markets are the best judge of prices and of risk and return and, most important of all, they will return to a state of equilibrium if left to themselves.
New financial products were supposed to add to the stability of the system by dispersing risk to those best able to bear it. For instance, in April 2002 Alan Greenspan confidently talked about the “dispersion of risk to those willing and able to bear” it and how this acts like a shock absorber to prevent “cascading failures”.
Leave the economy to itself, says the theory, and the invisible hand will ensure that it is stable. But what we have seen in the last few decades is a series of crises where markets seize up and fail to function, where the invisible hand periodically becomes a very visible fist and where free-marketers suddenly perceive the virtues of not just government intervention but of wholesale nationalization.
No wonder that the theories of Hyman Minsky, famed author of the Financial Instability Hypothesis, have become so popular. Minsky’s thesis was that capitalism was an inherently unstable system, subject to periodic booms and busts. Regulation was thus necessary to correct excesses and rein in the tendency towards instability. Unsurprisingly, Karl Marx’s quotes are enjoying a new lease of life, with his thesis on the destruction of capital in a crisis as a means through which capitalism regenerates itself getting wide play. Joseph Schumpeter’s “creative destruction” is often referred to. The only thing common among these very dissimilar prophets is their insistence that the system is not self-correcting.
But consider the genesis of the current system. In the 1960s, the Keynesian welfare state had started hurting the interests of the elite. The share of profits in national income was going down and worker militancy was growing. The welfare states of the period were proving to be extremely inefficient in the task of capital accumulation.
What was needed was a political solution. That came about through a revolution in the 1980s, with the destruction of trade union power and the freeing of the markets.
Naturally, the new paradigm needed a theology to make it palatable to the masses, and it resuscitated the free-market one.
Ideologies are weapons, serving the interests of particular interest groups and neo-liberalism was no exception. As David Harvey put it, it was a project “to re-establish the conditions for capital accumulation and to restore the power of economic elites”.
The new system soon resulted in the proportion of profits in GDP rising sharply, while the share of wages went down. In the US, the Mecca of neo-liberalism, real wages rose very slowly, while profits multiplied. But how do you sell things to people without raising incomes? Why, get them into debt, of course. The incomes of the masses may not be rising, but their credit card bills certainly were. The upshot: the present empire of debt.
Also, in spite of all the talk of American hegemony, the rest of the world had a vested interest in keeping the arrangement going.
As economist Sam Gindin has pointed out, “A further prerequisite for global accumulation has been the Federal Reserve’s central role in the provision of overall global liquidity. By throwing liquidity at every financial tremor and hint of recession in the US since the early 1990s, it has not only sustained American demand, but has also kept liquidity high around the world; and this in turn has contributed to bringing vast pools of Asian labour into production—for export to an American market, sustained by the Fed’s policy”. Countries such as India and China have been big beneficiaries.
In short, there are strong vested interests propping up the system. The ideology is a mere fig leaf. Corporations in the US, as indeed anywhere in the world, have no problem railing against government intervention when it suits them and seeking their help when required. That is why neither the US government nor the big banks have the slightest compunction in jettisoning their so-called free-market principles whenever crisis strikes. Because what is at stake is not an ideology, but the system itself.
All this talk about capitalism versus socialism is hokum. If anything, the system has always been corporatist. And, most importantly, where’s the opposition? Do you see anybody manning the barricades anywhere? If the system has to change it has to be done politically and there are no signs of that happening.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at firstname.lastname@example.org
Also Read Manas Chakravarty’s earlier columns