The Global Economic Crisis: 2009.

I fear thee, ancient Marin

I Fear thy skinny hand!

               (Rime of the Ancient Mariner: Samuel Taylor Coleridge).

              TOWARDS A MODERN PRIMER IN POLITICAL ECONOMY.

I

The January 2009 edition of the US magazine, Vanity Fair, published an article by the Nobel Laureate, economist Joseph Stiglitz, provocatively entitled Capitalist Fools. The article discusses the current global financial and economic crisis.

Towards the end of the article Stiglitz says:

“Was there any single decision which, had it been reversed, would have changed the course of history? Every decision – including decisions not to do something, as many of our bad economic decisions have been – is a consequence of prior decisions, an interlinked web stretching from the distant past into the future…

“The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said.

“The embrace by America – and much of the rest of the world – of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.”

The question therefore arises – would it have been wiser for America and the rest of the world to embrace another economic philosophy other than the one which, belatedly, Alan Greenspan found to be flawed!

II

Karl Marx lies buried under a heavy tombstone at the Highgate Cemetery in London. Humanity faces no threat that he will arise from his tomb, and like the spectre of which he and Frederick Engels wrote in The Manifesto of the Communist Party, return to haunt the world of the living.

And yet, in the context of the current global economic crisis, there may very well be some, who have read his magnum opus, Das Kapital, and repudiated it, who might now be saying – I fear thee, ancient Mariner! I fear thy skinny hand!

Naturally, there exists a huge and continuously expanding volume of literature that discusses the various and multiple elements of the current global financial and economic crisis.

This crisis has hit the world almost 20 years after the collapse of the Soviet Union and “socialism in Europe”. Many understood that this epochal event buried in its ruins not only a social system, but also the ideas that gave birth to that system, such as those contained in Das Kapital.

Today, demonstrators in many countries, who take to the streets to protest against the impact of the current global economic crisis, which has impoverished millions, carry banners which proclaim the “failure of capitalism”.

Thus the questions are being posed once again – was Karl Marx right after all, and should not today’s policy-makers not take the trouble to study Das Kapital!

This article makes a few assertions with which perhaps Karl Marx would not disagree, and which, hopefully, will help to deepen understanding of the global economic crisis and therefore assist in answering the question – what is to be done?

Some of these assertions are:

(a) the crisis originated from the United States and contaminated the world from the United States;

(b) it first expressed itself as a crisis affecting the financial system, but was, in fact, a crisis of the capitalist system;

(c) two of its dialectically interconnected factors were a bankrupt financial sector and a bankrupt consumer working population;

(d) it arose from a disequilibrium immanent in the capitalist system, which can only be ameliorated by vigorous state intervention driven by pursuit of the objective of “the common good” or the “summum bonum”;

(e) this state intervention would seek to achieve at least two objectives, viz, the containment of the pursuit of personal wealth at all costs, and the reduction of the radically unequal distribution of wealth and income;

(f) such interventions as would be made would have to be global in character, given the reality of the process of globalisation which has created a global economy, characterised by its own imbalances and disequilibria;

(g) fundamentally, the matters at issue are systemic and structural in nature, objective and ineluctable manifestations of the nature of the capitalist system;

(h) accordingly, the crisis has not arisen essentially from subjective failures in individual morality, leading to such phenomena as unbridled greed and dishonesty, but from an objective social (capitalist) process which defines such unbridled greed and dishonesty as a distinguishing and inalienable part of the social process itself, without which it cannot be; and,

(i) a better life for all is a public good which all governments must pursue, at all times striving to act in cooperation with the partners which are also important social actors, including civil society, trade unions, and business.

Because this paper essentially relates to matters economic, it is important that we make the observations which follow immediately below.

It is true that greed and dishonesty among the upper echelon that daily manages and trades assets worth trillions of dollars is an important part of the current global financial economic crisis. Among other things, these practices have led to reckless lending, trading of worthless financial products, falsification of corporate accounts, and an ever-expanding disjuncture between the financial and the real economy, which created a continuously ballooning bubble (casino) economy which was bound to burst, sooner or later, with the consequences which now face the whole of humanity.

All these constitute symptoms of the underlying disease. However, much of the effort to answer the question – what is to be done! – has focused on treating the symptoms rather than the disease, failing to make the distinction between essence and phenomenon!

The real challenge is to confront both symptom and disease, both phenomenon and essence!

Of course the related challenge is whether the decision-makers are capable of breaking free from the current historically derived and embedded global intellectual paradigm, and thus categorically diagnose the disease, separating essence from phenomenon!

The deification of greed in a capitalist society was put in stark terms in comments made by one Marc Lewis, described as “a 28-year-old millionaire entrepreneur”, as reported in the February 18, 2002 edition of the Financial Times.

The newspaper quoted Mr Lewis as saying, “the attitudes we have inherited from religion are all about constraining people. But vice has a positive side. You cannot aspire to be successful – and it is up to individuals to define what success means to them – unless you believe in yourself, grab every opportunity and have no regrets. We have to use sin, not waste it. Self-interest is eternal – everybody always wants more…What I am saying is that we have got the wrong idea of sin – vice is essential to success and no one should feel guilty about it. Coveting stops you being complacent…(The reward of what is described as sin, such as avarice, gluttony, anger and self-love is that): “You control the world. You choose how to live your life. You have the power to believe in yourself. You are number one. You are a god! You are your god!…Naked self-interest is the only criterion of truth.”

III

An appropriate response to the assertions we have made clearly demands that, to use a popular phrase, we must ‘go back to basics’. The fundamental question, however, is, necessary and desirable as this may be – is it possible!

However, whether this is possible or not, as practitioners in the field of political economy, we must, at this early stage of this monograph, confess our methodological sympathy with a particular philosophical view which Karl Marx in his “Theses on Feuerbach” expressed as follows:

“All social life is essentially practical. All mysteries which lead theory to mysticism find their rational solution in human practice and in the comprehension of this practice.”

Accordingly, the discourse below, relating to the current global financial and economic crisis, is informed by the understanding that this crisis harbours no mysteries that cannot be unravelled, provided that we take the trouble to understand human practice in all its complexity.

In this context, regardless of all the mathematical constructs that have been described as econometrics, we proceed from the proposition that economics, the comprehension of social activity in the context of the creation of “the wealth of nations”, constitutes a rational attempt to understand this particular form of social life.

Accordingly, in the end, the criterion of truth that must determine whether what we say is true or false must be decided by whether it coincides with observable and evolving human practice or not, rather than consistency with any particular ideological proposition.

In this regard, we must be ready to subject all general, and therefore philosophical propositions we advance, to the test that the philosopher, Karl Popper, suggested – of making propositions that are capable of verification and therefore have the inherent character of falsifiability.

IV

The German Das Kapital translates into English as Capital. Accordingly what Das Kapital is about is the origin, development and nature of capital as a distinct and defining material force in post-feudal society, and therefore capitalist and putative post-capitalist society.

Das Kapital is a treatise in political economy, rather than merely an economics textbook. In this treatise, Karl Marx presents a successive progression in interdependent human economic exchange represented by the formulae – C-C, C-M-C,  M-C-M,  M-M.

Simply put, this represents the following progression in terms of economic exchanges within interdependent human society:

  • Commodity to Commodity, (C-C), or exchange of commodities through ordinary barter;
  • Commodity to Money to Commodity, (C-M-C), representing a more complex society in which barter has become impracticable, but is still focused merely on exchange of “use-values”, with monetary instruments serving as tokens accepted by society as representatives of “use-values” to facilitate the exchange of commodities of comparable “value”;
  • Money to Commodity to Money, (M-C-M), representing an even higher stage of social development, in which money has emerged as a “store of value” distinct from its function as a medium facilitating the circulation of commodities, thus acquiring the nature of capital; and,
  • Money to Money, (M-M), in which Money itself, detached from any Commodities, becomes a tradable commodity, capable of giving birth to profit: in reality, Marx represents this as M-M’.

Our concern is about the last of these formulae – M-M’.

In this regard, and of particular importance in the context of the current global economic crisis, we would like to quote Das Kapital in extenso, to ensure that we capture the logical integrity of its argument. Across two of its Chapters it says:

“Interest makes out of money, more money. Hence its name ([greek: tokos] interest and offspring). For the begotten are like those who beget them. But interest is money of money, so that of all modes of making a living, this is the most contrary to Nature.” (Aristotle)…

“In the case of interest-bearing capital, the circulation M-C-M’ appears abridged. We have its result without the intermediate stage, in the form M-M’, “en style lapidaire” so to say, money that is worth more money, value that is greater than itself.

“M-C-M’ is therefore in reality the general formula of capital as it appears prima facie within the sphere of circulation…

“The circulation of money as capital is, on the contrary, an end in itself, for the expansion of value takes place only within this constantly renewed movement. The circulation of capital has therefore no limits.

“As the conscious representative of this movement, the possessor of money becomes a capitalist. His person, or rather his pocket, is the point from which the money starts and to which it returns. The expansion of value, which is the objective basis or main-spring of the circulation M-C-M, becomes his subjective aim, and it is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist, that is, as capital personified and endowed with consciousness and a will.

“Use-values must therefore never be looked upon as the real aim of the capitalist; neither must the profit on any single transaction. The restless never-ending process of profit-making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser.

“The never-ending augmentation of exchange-value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation.

“The independent form, i.e., the money-form, which the value of commodities assumes in the case of simple circulation, serves only one purpose, namely, their exchange, and vanishes in the final result of the movement. On the other hand, in the circulation M-C-M, both the money and the commodity represent only different modes of existence of value itself, the money its general mode, and the commodity its particular, or, so to say, disguised mode. It is constantly changing from one form to the other without thereby becoming lost, and thus assumes an automatically active character.

“If now we take in turn each of the two different forms which self-expanding value successively assumes in the course of its life, we then arrive at these two propositions: Capital is money: Capital is commodities.

“In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus-value, is its own movement, its expansion, therefore, is automatic expansion.

“Because it is value, it has acquired the occult quality of being able to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs.

“Value, therefore, being the active factor in such a process, and assuming at one time the form of money, at another that of commodities, but through all these changes preserving itself and expanding, it requires some independent form, by means of which its identity may at any time be established.

“And this form it possesses only in the shape of money. It is under the form of money that value begins and ends, and begins again, every act of its own spontaneous generation.”

In an interview in the magazine Der Spiegel published on September 15, 2009, the Harvard University historian, Niall Ferguson, reflected on this same matter of the place of money in the evolution of human society. He said;

“The ascent of Man is coupled with an increase in the importance of money. Barter – the direct exchange of one commodity for another – was not particularly efficient. The shortcomings began to appear with the division of labour, when some people became farmers, some craftsmen, and others traders. Money helped them to do business with one another. I believe that money is the source – or rather the midwife – of nearly every advance throughout history…There’s a financial secret behind every major historical event.”

V

First of all we are here concerned with the phenomenon described by Aristotle in which “Interest makes out of money, more money”, represented by Karl Marx as “It is under the form of money that value begins and ends, and begins again, every act of its own spontaneous generation.”

Elsewhere in Das Kapital Marx discusses the emergence, growth and the role of credit and therefore the emergence of the financial sector, (including the phenomenon of ‘the national debt’.)

We do not need to revert to this discussion, given the fact that the reality of the importance and dominance of financial capital, in all its forms, is now a generally recognised fact of life. During the last century, political economy identified the dominance of financial capital, as opposed to commercial and industrial capital.

The critical issue is to understand the implications of the impulse identified by Karl Marx according to which,

“It is only in so far as the appropriation of ever more and more wealth in the abstract (M-M’) becomes the sole motive of his operations, that he functions as a capitalist, that is, as capital personified and endowed with consciousness and a will…

“The restless never-ending process of profit-making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value (as opposed to use-value), is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser.

“The never-ending augmentation of exchange-value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation.”

In September 2007, the Bank for International Settlements (BIS) published its “Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2007: Preliminary Global Results”.

One summary of the Survey said:

“Daily turnover in global currency markets rose to $3.2 trillion in 2007, which is a 71% increase since the last survey in 2004, when daily foreign exchange trading volume was $1.87 trillion. The 71% increase is the largest percent jump in daily currency trading since the BIS began conducting its benchmark survey in 1989…

“Trading in financial derivatives linked to currencies soared to $2.1 trillion a day, the report said, a rise of more than 70% since 2004. Large companies are also taking a more active and sophisticated approach to managing currency exposure.

“Currency trading in the U.K. ($1.359 trillion per day), the world’s largest currency center, represented 42.5% of world currency volume, and trading in the U.S. (ranked #2 at $664 billion daily) represented about 21% of world currency volume. Together, the U.K. and U.S. account for more than 63% of the world’s currency trading every day.

“To put $3.2 trillion of daily currency trading in perspective, consider that $3.2 trillion is greater than the ANNUAL Gross Domestic Product of Germany ($2.9 trillion), China ($2.6 trillion) and the U.K. ($2.4 trillion). In the U.K., more currency is traded in London in two days ($2.77 trillion) than the value of all goods and services ($2.4 trillion) produced in the country in a year!”
(Our emphases.)

The central purpose of making the preceding presentation of what is contained in Das Kapital, as well as the statistics provided by the BIS, reflecting trade in money, is to draw attention both to the immanent and ineluctable behaviour of finance/financial capital, given its objective operation within the context of exchange-value, and therefore the formula, M-M’, and the fact of the enormous space that financial capital occupies in the daily operations of the global economy.

The point is that, inevitably, the owner of money will do everything possible to increase the value of his/her stock of money, with no regard as to whether this money constitutes a true representative of existing wealth as manifested by commodities and services produced by the real economy.

The critical significance of this, relative to all economic activity, is underlined by the fact that globally, trade in money, and therefore the movement of financial capital, is many times larger than trade in goods and services. In this regard, we must also pay due consideration to the fact that many tradable industrial and service activities can only take place on the basis of credit provided by financial sector.

Thus it becomes clear that precisely because the owners and managers of this financial capital (M-M’) will inevitably engage in a “restless never-ending process of profit-making alone”- (M-M’) – they will infect the rest of the economy with this disease, and therefore society as a whole.

VI

This is exactly what happened in the United States. Because the State allowed it the space to operate virtually without let or hindrance, according to its immanent impulses, financial capital did everything possible to engage in a “restless never-ending process of profit-making alone”.

Unlike the process of evolution in nature, which takes place independent of human consciousness, economic activity constitutes a succession of actions born of human cognition and the purposeful pursuit of definite goals determined by such human cognition.

The behaviour of the State in the United States with regard to financial capital to which we have referred was therefore a product of human decisions based on a particular cognition of the economic process – the thought process which Congressman Waxman characterised as an “ideology”.

In an important September 6, 2009 article in the New York Times, the Nobel Laureate in Economics, Paul Krugman, discussed elements of this ideology. Significantly, the article was entitled: “How Did Economists Get It So Wrong?”

Immediately below we reproduce relatively extensive extracts from this article because of its importance in drawing attention to the struggle of ideas which will continue to characterise the effort so to govern the economy that it serves the objective of creating a better life for all.

In essence Krugman discusses the contest between the “neo-classical” ideology which projects the “free capitalist market” as the optimal paradigm for the management of the economy, on one hand, and the propositions of John Maynard Keynes on the other, which argue the inevitability of “market failures” which necessitate the intervention of government in the economy.

Among other things, Professor Krugman said:

“Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations…

“Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation…

“But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.

This faith was, however, shattered by the Great Depression. Actually, even in the face of total collapse some economists insisted that whatever happens in a market economy must be right…

“But many, and eventually most, economists turned to the insights of John Maynard Keynes for both an explanation of what had happened and a solution to future depressions. Keynes did not, despite what you may have heard, want the government to run the economy… He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps…

“Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism…

“Among financial economists, Keynes’s disparaging vision of financial markets as a “casino” was replaced by “efficient market” theory, which asserted that financial markets always get asset prices right given the available information. Meanwhile, many macroeconomists completely rejected Keynes’s framework for understanding economic slumps. Some returned to the view of Schumpeter and other apologists for the Great Depression, viewing recessions as a good thing, part of the economy’s adjustment to change. And even those not willing to go that far argued that any attempt to fight an economic slump would do more harm than good…

“This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in…

“Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center…

“So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions…

“When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.”

As Krugman has argued, the ideological proposition which has resulted in the “vision of capitalism as a perfect or nearly perfect system” is wrong. Adherence to this view resulted in the failure to regulate the financial services sector in the US and elsewhere in the West, which led to the current global financial and economic crisis.

The neo-classical/neo-liberal ideological paradigm from which this failure originated came to be known as the Washington Consensus. In essence, this Consensus argued that the best and most efficient way to create “the wealth of nations” was to give free and unfettered reign to capital to pursue its immanent objective, the maximisation of profit.

The Consensus therefore argued for “minimal government” as well as privatisation of state assets, and the deregulation and liberalisation of the market, virtually as an infallible dogma.

(Wisely, other economic gurus, certainly in terms of their textbooks intended for undergraduate students, have traditionally protected themselves from criticism that their theories do not reflect objective reality by advising – caveat emptor! buyer beware! In this regard they have attached to their theories the warning that what they say is true and correct – ceteris paribus! other things being equal! To the contrary, the gurus of the Washington Consensus presented their propositions as though they were akin to such Combat Orders as might be elaborated by a regimental Chief of Staff, which, if implemented faithfully, would guarantee victory on the battlefield!)

VII

The Reagan and Thatcher administrations in the US and the UK respectively acted as the spearhead for the implementation of the propositions of the Washington Consensus, to the point that they, with the support of various economists and the Bretton Woods institutions, succeeded to impose this ideology as the dominant world view about how best to manage the domestic and global economies.

The collapse of the Soviet Union and “socialism in Europe” thus appeared to serve as practical confirmation of the correctness both of the Washington Consensus and the actions taken by the Reagan and Thatcher administrations.

It has taken the near-collapse brought about by the current global financial and economic crisis to interrupt the advance of the neo-classical/neo-liberal project, and obliged the US and other Western governments, like Alan Greenspan, to admit that their faith in the “self-correcting free capitalist market” was wrong.

Whatever its declared intentions, objectively the Washington Consensus was about the promotion of the interests of capital, and therefore the capitalists. To this must be counter-posed the interests of the majority, the working people who are not owners of capital.

The Reagan and Thatcher administrations, in particular, relentlessly promoted the interests of capital with no apology. Subsequent Western governments fell in step with the agenda set by these administrations, however muted their own presentations of this agenda might have been.

The argument could therefore be advanced that practice had demonstrated that it was indeed possible to have democratically elected governments committed to advance the interests of capital, which nevertheless acceded to power on the basis of broad-based popular support. 

However, logic would suggest that having experienced the negative results of the imposition of the prescriptions of the Washington Consensus, the working people would rebel and vote into power governments committed to serve their interests.

In this regard, it may very well be that, fundamentally, this is what led to the historic election of Barack Obama as President of the United States!

However it is also necessary to make the point that the failure to regulate the economy, which led to the current financial and economic crisis, was not a fault only of the “political class” in the US and other Western countries.

It was also a “fault of the masses”, who did not use their democratic power, as they did with the election of President Obama, to challenge the prescriptions of the Washington Consensus.

Among others, Professor Noam Chomsky, viewed by many as an enfant terrible, has, over the decades, sounded the alarm bells about the disempowerment of the people under the guise of democratic practice.

In an October 29, 2004 article entitled “The Disconnect in US Democracy”, he wrote:

“Americans may be encouraged to vote, but not to participate more meaningfully in the political arena. Essentially the election is a method of marginalising the population. A huge propaganda campaign is mounted to get people to focus on these personalised quadrennial extravaganzas and to think,

“That’s politics.” But it isn’t. It’s only a small part of politics.

“The population has been carefully excluded from political activity, and not by accident. An enormous amount of work has gone into that disenfranchisement. During the 1960s the outburst of popular participation in democracy terrified the forces of convention, which mounted a fierce counter-campaign. Manifestations show up today on the left as well as the right in the effort to drive democracy back into the hole where it belongs.

“Bush and Kerry can run because they’re funded by basically the same concentrations of private power. Both candidates understand that the election is supposed to stay away from issues. They are creatures of the public relations industry, which keeps the public out of the election process. The concentration is on what they call a candidate’s “qualities,” not policies. Is he a leader? A nice guy? Voters end up endorsing an image, not a platform.

“Last month a Gallup poll asked Americans why they’re voting for either Bush or Kerry. From a multiple-choice list, a mere 6 percent of Bush voters and 13 percent of Kerry voters picked the candidates’ “agendas/ideas/ platforms/goals.” That’s how the political system prefers it. Often the issues that are most on people’s minds don’t enter at all clearly into the debate…

“So in the election, sensible choices have to be made. But they are secondary to serious political action. The main task is to create a genuinely responsive democratic culture, and that effort goes on before and after electoral extravaganzas, whatever their outcome.”

The point we are arguing is that the current and disastrous global financial and economic crisis was born of a particular ideological perspective denounced as misguided by the two Nobel Laureates in Economics, Joseph Stiglitz and Paul Krugman, among others.

To avoid its recurrence will therefore require that a different ideological and political paradigm should prevail. This can only be achieved through an ideological and political contest that would end the dominance of the neo-classical/neo-liberal economic construct.

Given the fact of the democratic setting within which this contest must take place, due consideration must be given to the roles both of the “political class” that leads political parties, and the masses of the people who vote the various factions of this “political class” into power.

After all, the people, the masses, must be their own liberators!

After this necessary “digression into politics”, which is not a digression, we must return to the main thesis of this monograph – the economic crisis generated by the behaviour of financial capital.

VIII

To indicate the difficulty that attends the task successfully to challenge the “market fundamentalist” paradigm contested by Krugman and Stiglitz among others, we should say something about the “laissez-faire economics” which informed the policies pursued by the Reagan and Thatcher administrations in the US and the UK respectively.

A central feature of the collapse of feudalism and its replacement by capitalism was the abolition of the rigid caste system which defined the place of each citizen, and its replacement by a system which celebrated individualism.

That individualism posited the thesis that each person now had the liberty to achieve the goals they set themselves and therefore that all social differentiation would be based on the proposition – to each according to his/her ability!

In this context the assertion was made that liberty for the citizen as an economic actor meant creating the conditions for each freely to engage in any enterprise of their choice, without let or hindrance.

Thus emerged the thesis that all economic activity in a capitalist system, consistent with the liberation of the individual from the fetters of feudalism, required that such activity should be allowed free reign, not bound by any external regulation, since such regulation would be a denial of the liberty achieved through the defeat of feudalism.

Thus it came about that “free enterprise” came to be understood as an inalienable part of the process of guaranteeing the political freedom of the individual, and therefore of democratic rule, and therefore that as much as democracy made individuals equal, so does “free enterprise” make the economic citizens equal.

Of course others emerged to challenge this thesis, essentially arguing that inequality in society would now be defined by the divide between those who owned capital and those who did not, with the latter obliged to make their living by working for the owners of capital, and that this was inherently an unequal relationship which would benefit a minority and disadvantage the majority.

The response of the adherents of the thesis of the desirability of “free enterprise” responded by arguing that economic benefit to the individual would be delivered by “the market”, the sum total of the free activities of the citizen, each acting as a sovereign economic player.

Indeed the argument was that the greatest good is but a sum total of the good accruing to each individual in society, deriving from the activities of each of these individuals. Accordingly, to obtain the greatest good for society the best and rational thing to do would be to allow the freedom to every individual to pursue what was good for himself or herself. The individual would do this because it would obviously be absurd for a rational individual to pursue other than what would be good for him or her.

Thus would the greatest benefit to society arise from the aggregate outcome of the pursuit of profit by many owners of capital, each in his/her own interest.

The famous Scottish economist and thinker, Adam Smith, argued that “the market” was guided by “an invisible hand” which ensured that despite the seeming chaos of the independent actions of the sovereign economic players, in the end “the market” would serve the interests of society as a whole.

In his famous 1776 book, “An Inquiry into the Nature and Causes of the Wealth of Nations”, Adam Smith argued that:

“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good…

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love…

“It is the highest impertinence and presumption, therefore, in kings and ministers to pretend to watch over the economy of private people, and to restrain their expense…They are themselves always, and without exception, the greatest spendthrifts in the society.”

The English philosopher, Jeremy Bentham (1748 – 1832), took this argument further arguing that this “impertinence and presumption of kings and ministers”, of interfering in economic matters, constituted the very denial of the liberty of the individual in post-feudal society, and therefore amounted to unacceptable oppression of the individual.

In his 1787 treatise, “In Defence of Usury”, he argued for an unregulated financial (money) market, allowing lender and borrower to enter into such private contract as they wished, including the interest the borrower would pay. Stating that any external intervention to regulate such agreements would constitute a denial of liberty, he said:

“Among the various species or modifications of liberty, of which on different occasions we have heard so much in England, I do not recollect ever seeing any thing yet offered in behalf of the liberty of making one’s own terms in money-bargains. From so general and universal a neglect, it is an old notion of mine, as you well know, that this meek and unassuming species of liberty (of freely lending and borrowing money) has been suffering much injustice…

“In a word, the proposition I have been accustomed to lay down to myself on this subject is the following one, viz. that no man of ripe years and of sound mind, acting freely, and with his eyes open, ought to be hindered, with a view to his advantage, from making such bargain, in the way of obtaining money, as he thinks fit: nor, (what is a necessary consequence) any body hindered from supplying him, upon any terms he thinks proper to accede to.”

Thus both Adam Smith and Jeremy Bentham argued that for the capitalist economy to function effectively, serving the greatest good, as well as guaranteeing the liberty of the individual, it was imperative that the state should not intervene to regulate the economy, leaving everything to “the invisible hand” which would ensure the achievement of the summum bonum – the greatest good.

This argument was further propagated by such eminent 20th century economists as Ludwig von Mises, whose 1956 “The Anti-capitalistic Mentality” we quote below in extenso. Among other things, von Mises wrote:

“The characteristic feature of modern capitalism is mass production of goods destined for consumption by the masses. The result is a tendency towards a continuous improvement in the average standard of living, a progressing enrichment of the many. Capitalism deproletarianizes the “common man” and elevates him to the rank of a “bourgeois.”

“On the market of a capitalistic society the common man is the sovereign consumer whose buying or abstention from buying ultimately determines what should be produced and in what quantity and quality…

“It is this ascension of the multitude in which the radical social change brought about by the “Industrial Revolution” consists. Those underlings who in all the preceding ages of history had formed the herds of slaves and serfs, of paupers and beggars, became the buying public, for whose favor the businessmen canvass. They are the customers who are “always right,” the patrons who have the power to make poor suppliers rich and rich suppliers poor.

“There are in the fabric of a market economy not sabotaged by the nostrums of governments and politicians no grandees and squires keeping the populace in submission, collecting tributes and imposts, and gaudily feasting while the villeins must put up with the crumbs. The profit system makes those men prosper who have succeeded in filling the wants of the people in the best possible and cheapest way…The control of the material means of production is a social function, subject to the confirmation or revocation by the sovereign consumers.

“This is what the modern concept of freedom means. Every adult is free to fashion his life according to his own plans. He is not forced to live according to the plan of a planning authority enforcing its unique plan by the police, i.e., the social apparatus of compulsion and coercion. What restricts the individual’s freedom is not other people’s violence or threat of violence, but the physiological structure of his body and the inescapable nature-given scarcity of the factors of production. It is obvious that man’s discretion to shape his fate can never trespass the limits drawn by what are called the laws of nature.

“The much talked about sternness of capitalism consists in the fact that it handles everybody according to his contribution to the well-being of his fellow men. The sway of the principle, to each according to his accomplishments, does not allow of any excuse for personal shortcomings. Everybody knows very well that there are people like himself who succeeded where he himself failed…

“What makes many feel unhappy under capitalism is the fact that capitalism grants to each the opportunity to attain the most desirable positions which, of course, can only be attained by a few. Whatever a man may have gained for himself, it is mostly a mere fraction of what his ambition has impelled him to win. There are always before his eyes people who have succeeded where he failed. There are fellows who have outstripped him and against whom he nurtures, in his subconsciousness, inferiority complexes. Such is the attitude of the tramp against the man with a regular job, the factory hand against the foreman, the executive against the vice-president, the vice-president against the company’s president, the man who is worth three hundred thousand dollars against the millionaire and so on. Everybody’s self-reliance and moral equilibrium are undermined by the spectacle of those who have given proof of greater abilities and capacities. Everybody is aware of his own defeat and insufficiency.”

The essential argument in all this is that the capitalist system is best left to its own devices, with no intervention by the government. It is the best system for the ordering of economic relations among the citizens, the great leveller which treats all individuals as equals, ensuring that each succeeds according to his or her ability and application.

This is an argument against the regulation of the market which, to this day, harks back to Adam Smith’s “invisible hand” as the only reliable regulator that ensures the achievement of the greatest good.

The simple fact is that capital is happiest when it is allowed to go about its purposes without restriction, thus to enjoy the greatest freedom to achieve its expansion through the acquisition and accumulation of profit.

From its earliest days capital has therefore been very vocal in demanding that it should be allowed this freedom. It has also had its intellectual spokespersons who have advanced the philosophical arguments to substantiate the correctness of the demands of capital, urging that government regulation of the market, and therefore the capitalists, is inimical to the achievement of the greatest good.

In his novel, “Hard Times”, first published in 1853, Charles Dickens reflected on the antipathy of capitalists to any interventions to limit their possibility to maximise profit at all costs. Commenting on the capitalists of “Coketown”, he wrote:

“(Coketown) has been ruined so often, that it was amazing how it had borne so many shocks. Surely there never was such fragile china-ware as that of which the millers of Coketown were made. Handle them never so lightly, and they fell to pieces with such ease that you might suspect them of having been flawed before. They were ruined when they were required to send labouring children to school; they were ruined when inspectors were appointed to look into their works; they were ruined, when such inspectors considered it doubtful whether they were quite justified in chopping up people with their machinery; they were utterly undone, when it was hinted that perhaps they need not always make quite so much smoke…Whenever a Coketowner felt he was ill-used – that is to say, whenever he was not left entirely alone, and it was proposed to hold him accountable for the consequences of any of his acts – he was sure to come out with the awful menace, that he would ‘sooner pitch his property into the Atlantic’. This had terrified the Home Secretary within an inch of his life, on several occasions. However, the Coketowners were so patriotic after all, that they never had pitched their property into the Atlantic yet, but, on the contrary, had been kind enough to take mighty good care of it.”

The combined weight of the protestations of the capitalists and the learned arguments of important sections of the intelligentsia resulted in the virtually theological belief in “free markets”, the “market fundamentalism” represented in the Washington Consensus, which has played a major role in generating the current global economic crisis.

In the Preface to his 2003 book, “The Roaring Nineties”, the economist Joseph Stiglitz writes:

“Both the left and the right have lost their bearings. The intellectual foundations of laissez-faire economics, the view that markets by themselves will lead to efficient, let alone fair, outcomes, has been stripped away. As the world went into crisis after September 11, we realized that we had to act together. The corporate scandals that rocked America, and to a lesser extent Europe, made even conservatives realize that there was a role for government. The collapse of the Soviet union, bringing with it the end of the Cold War, had taken away the economic underpinnings of he left: support for socialism, at least of the old-fashioned variety, waned even in those countries where it previously had had enormous strength. Today, the challenge is to get the balance right, between the state and the market, between collective action at the local, national and global levels, and between government and non-governmental action…We need more collective action at the international level, and we cannot escape issues of democracy and social justice in the global arena.”

In this book Stiglitz describes how the cumulative process of deregulation, culminating in what was done in the United States during the 1990s, which he characterises as “the greediest decade in history”, led to various crises affecting, among others, financial and industrial capital and the accounting profession, leading to “irrational exuberance and irrational pessimism”, resulting in costly global economic recessions, and major disasters in the developing countries.

And yet, despite these observations, “laissez-faire economics” continued to rule the roost, permitting the attendant deregulation to persist and therefore allow “the invisible hand” to continue to regulate global economic activity, thus to pacify Charles Dickens’ “fragile millers of Coketown”, the huge concentrations of capital which continue to believe that liberty itself is defined by their unbound freedom to maximise profit at all costs.

That cost has been the global economic crisis which, among other things, has thrown millions of working people in all countries into deep poverty, while the capitalist conglomerates that are “too big to fail” have been bailed out of their misery by using public funds to rescue them from bankruptcy.

Thus has the response to the current global economic crisis confirmed that despite its supposedly militant opposition to government interference in the economy, capital understands the need for government intervention, provided that such intervention socialises the losses of private business and allows business to privatise its gains.

There is no reason to suppose that capital will abandon its demand to be given the liberty to maximise profit using all means at its disposal.

Similarly, we must presume that the political and intellectual establishment in many countries will continue to support and advance the argument that “the market” performs best in terms of an efficient allocation of resources when it is largely left to its own devices.

Evidence of this is provided by the persistent calls that have been made that given the positive impact of the stimulus packages that were put in place to ameliorate the impact of the global economic crisis, governments should put in place plans as soon as possible to extricate governments from their forced involvement in the economy.

In the United States, which led the world in the campaign to deregulate the economy, using its influence to achieve this objective globally, the demand to minimise government intervention in the economy has generated a mass movement, the Tea Party Movement, which, as Jeremy Bentham did, argues that to allow the unfettered activity of capital constitutes the very essence of the defence and promotion of the liberty that is a cornerstone of the United States Constitution and democracy everywhere in the world.

In this regard, in his 2009 book, “Too Big to Fail”, Andrew Ross Sorkin writes that:

“But there was another kind of fallout, too (after the economic interventions made by the US government) – one that had a more profound effect on the American psyche than did the immediate consequences of the dramas being played out daily on Wall Street. In the days and weeks that followed the first payouts under the bailout bill, a national debate emerged about what the tumult in the financial industry meant for the future of capitalism, and about the government’s role in the economy, and whether that role had changed permanently.

“A year later such concerns remain very much in the forefront of the national conversation. As this book was going to press, a raucous public outcry, complete with warnings about creeping socialism, questioned the government’s role not just in Wall Street, but in Detroit, (since the bank rescue, the government also supplied billions of dollars in aid to two automotive giants, General Motors and Chrysler, to restructure in bankruptcy court) and in the health care system. Washington has also named an overseer, popularly known as a ‘pay czar’, to review compensation at the nation’s bailed-out banks.” 

The “Coketown millers” will continue to threaten disaster if they are subjected to regulation. Now they will enjoy the political support of “the masses” who have been persuaded to accept the specious argument that all government intervention in the economy constitutes the establishment of an impermissible “socialism”, which would result in the denial of their democratic rights.

The challenge therefore persists, that the necessary intellectual and political forces should be developed to engage the struggle that has raged for over 200 years, to manage the relationship between the interests of capital on one hand, and those of society on the other, in a balanced manner, limiting the possibility for the unbridled pursuit of private accumulation of capital to impose on society as a whole an avoidable burden of poverty and suffering.

IX

It is now universally accepted that the financial sector, certainly in the US, came to outpace the real economy, accounting for a disproportionate and unrealistic share of the Gross Domestic Product.

It was inevitable that sooner or later a disequilibrium would emerge between the operations of financial capital, driven by ‘autonomous’ profit-seeking trade in money and financial instruments, and the reality of the industrial and service sectors of the economy involved in producing goods and services required by consumers and society as ‘use-values’.

Add to this the centrally important consideration that financial capital, characterised by trade in money, can only acquire profit on a sustainable basis if property owners in the industrial and service sectors, and workers in these sectors, dispose of sufficient income to enable them to service the credit extend to them by the financial capital sector.

Logically it is obvious that a disequilibrium, and therefore an economic crisis, would emerge if a significant disjuncture occurs between the real and the financial economy, given the dialectical interconnection between the two.

In this regard, in September 2009, UNCTAD, (the UN Conference on Trade and Development), said:

“UNCTAD economists cite deregulation of financial markets as the main cause of the global financial and economic crisis. Absence of regulation allowed uncontrolled innovation in financial instruments that obscured creditor-debtor relations and invited irresponsible risk taking. As a result, finance came to predominate over the “real” economy; a large part of the financial sector became detached from productive sectors; and the influence of speculative forces — not only in financial markets, but in currency and commodity markets — was strengthened, the report contends…”

We must therefore ask and answer the question – what happened in the United States, which has plunged the world economy into a crisis?

Our answer to this question is the following:

  • the US financial institutions ineluctably behaved ‘as to the manner born’, devising and marketing products and programmes that would earn them more money from the sale of money: the products and programmes themselves were marketed as tradable and therefore profitable commodities, with no regard as to whether they bore any balanced relationship with the real economy of the United States; the US economy acted under the edict that “it is under the form of money that value begins and ends, and begins again, every act of its own spontaneous generation”; the owners and managers of financial capital behaved according to “the restless never-ending process of profit-making alone…(and the) boundless greed after riches, (the) passionate chase after exchange-value (as opposed to use-value)”, and thus emerged the phenomenon of unsustainable sub-prime lending and even unreasonably large debt portfolios of actors in the real economy, especially in the context of very low interest rates: and,
  • over a relatively long period, the majority of the US working population, consistent with the perspective presented elsewhere in Das Kapital, did not enjoy any significant increase in real incomes, making its impossible for them to improve their standard of living by relying on their earnings; this obliged them to increase their incomes by taking on multiple jobs, obliging the (women) spouses to get jobs, and especially by extensive borrowing; sooner or later this section of the population proved that it could not sustain a standard of living based on (credit card) credit, and therefore dropped out of the demand side of the US economy, necessarily inspiring an economic slowdown because of the contraction of the domestic market. (NB: at the same time, proportionally, the US was exporting less to the rest of the world than it was importing. This resulted in a sustained adverse trade balance, with the deficit financed by inflows of foreign savings/capital.)

In search of profit, (and therefore competition for market share among the various actors), financial capital gave loans to people who could not afford to service these loans, least of all repay them. The more the relatively poor increased their debt burden, the less they were able to inject resources into the US economy as ‘normal’ participants on the ‘demand-side’ of the US economy.

Thus US financial capital ended up with large volumes of debt it had to write off, eroding its capital base and therefore its ability to extend credit even to deserving borrowers.

To the extent that the US financial institutions owed large sums of money to other institutions, such as through inter-bank lending, and carried large amounts of irredeemable debt, it was inevitable that, to avoid bankruptcy, they would have to appeal to the state both to pay or service their debts to other financial institutions, and to extend support to depositors who might have lost assets as a result of the crisis affecting the legally authorised deposit-taking institutions.

Subsequently, the state would also have to address the challenge of such ordinary citizens as would fall victim to the resultant economic crisis.

Accordingly the central point we are making is that the financial and economic crisis now confronting the world is inherent to the capitalist system and can only be avoided/ameliorated in the long term by implementing such measures as would increase conscious, purposive and qualitative restructuring of the system.

Necessarily, this means repudiation of any absolute notion that the capitalist market is a self-correcting and beneficial mechanism, guaranteed automatically to serve the objective of achieving a better life for all on the basis of a growing, wealth-sharing and employment-creating economy, and therefore, in this regard, internally capable of correcting “market failures” without imposing too high a social cost as a result of such “failures”.

When Alan Greenspan agreed with Congressman Henry Waxman that ‘his view of the world, his ideology, was not right; it was not working’, he was admitting that capitalism does not function as such a benign and self-correcting social mechanism.

Consequently the reality must be taken on board that the capitalist market, based on each maximising his/her personal benefit, must, of necessity and in the interest of all, be regulated in a manner and for the purpose of achieving the objective of maximising benefit for all.

                                                             X

Each successful enterprise in the capitalist economy, governed by the pursuit of profit in the short and long term, succeeds because of perfectly rational decisions taken by the managers and owners of the enterprise, based on their necessarily imperfect understanding of market conditions, resulting, among other things, in the provision of the social goods of employment creation, tax contributions to public revenues and the creation of commodities and services required by society.

However, this individual enterprise operates within a context of others like it. Paradoxically, whereas the activities of the individual enterprise might serve both the private and public good, the simultaneous activity of many such enterprises, because of the contradiction inherent in the fact that they have to compete against one another, may result in a conflict which negates their collective capacity to serve the public good.

Put in other words, in principle the individual company may function as an entity that operates according to a purposive and normative plan capable of implementation and capable of addressing the needs both of the capitalist and society at large.

However, once this company operates in a market consisting of many other similar players, what we then have is “chaos” – the contradictory interaction among many independent antagonistic entities, which interaction necessarily expresses itself as a chaotic process which can only resolve itself into some “order” when some among the contending entities emerge as victors over the rest, manifesting itself as the victory of the strong over the weak.

Order and predictability can only be achieved when “chaos” is ended. Monopolies and oligopolies, born of the “free market” concentration and centralisation of capital in ever fewer companies, signify an end to, or amelioration of the “chaos” of the capitalist market.

However, at the same time, these signify such concentration of power in particular agglomerations of private capital that it becomes very difficult to ensure that the owners of capital and society as a whole both benefit from economic activity.

Society as a whole will therefore have to answer the questions:

  • are the interests of society best served by the “chaos” immanent in the existence of unregulated multiple competitors in a genuinely free market?;
  • are the interests of society best served by the “order” that results from the emergence of monopolies and oligopolies?;
  • are the interests of society best served by the regulation by the State of both modes of the existence of private capital?; and,
  • are the interests of society best served by the State taking control of all or the most strategic segments of productive property?

With regard to these questions, and particularly relevant to the discussion of what should be done to respond to the current global financial and economic crisis, two important issues have presented themselves as requiring specific policy responses. These are the related matters of:

  • corporations that are too big to fail; and,
  • the “moral hazard” that arises from the socialisation of private risk.

XI

It has long been accepted that, especially with regard to the financial sector, there may be companies (banks) that are ‘too big to fail’. This consideration arises from the acknowledgement of the fact that such failure may result in a systemic collapse as would happen when the failure of one bank brings down the entire financial system.

This eventuality was painfully demonstrated when the US government allowed the investment bank, Lehman Brothers, to collapse in September 2008, sparking the global panic which has led to the current global economic crisis.

The central point to bear in mind in this regard is precisely the fact that this issue arises because of the size of the relevant affected corporations in the context of the sectors in which they operate, and the significance of these sectors to the political economy as a whole.

These become ‘too big to fail’ because of the high social cost of such failure.

It follows from this that on the basis of a cost-benefit analysis, governments decide that it is more economic to use public funds to save the failing private company rather than spend even larger sums of public money to deal with the consequences of the failure.

As a consequence of this, it is argued that a moral hazard arises, in terms of which companies, and in this case financial institutions, might engage in irresponsible practices, such as reckless lending, because they know that government would save them from bankruptcy precisely because they are ‘too big to fail’.

A number of policy questions have arisen as a result of this practical reality. These include:

  • is it not necessary to limit the size of companies so that none becomes ‘too big to fail’?;
  • given that doing business necessarily includes taking risks, in expectation of profit, is it not correct that companies that fail because of bad business decisions should be allowed to fail?;
  • given the “desirability” of allowing the market to sort itself out, is it not correct to allow both for the success and the failure of individual companies, avoiding government intervention which would “distort” the functioning of the “free” market?;
  • since profit in a capitalist economy accrues to the private owners of capital, is it correct to “socialise the risks” private companies necessarily take, by making public funds available to rescue them if the risk-taking backfires;? and,
  • since there may be companies that are indeed ‘too big to fail’, what should government do to ensure that the socialisation of risk also brings social benefits that are beyond such contributions to the public good as would attach to ordinary business activity?  

Of course, the difficulty in answering these questions is further compounded by the “free market” arguments that government has no business in intervening in business.

The fact of the matter however is that even at the “best of times”, it is practically not possible for government to stay out of business. This is much more so in times of crisis, as has been demonstrated during the current economic crisis.

To respond to this crisis, governments have correctly even gone as far as taking substantial equity in or nationalising various private companies, extending credit, and imposing regulations.

On the face of it, this should put paid to the “market fundamentalist” ideological argument that government should stay out of business.

However it is clear that so pervasive and entrenched is this ideology that even now, when the global economic crisis has not been overcome, the demand has already been made that governments should determine “exit strategies” to reduce government intervention in the economy.

It is also argued that such new regulation regimes as may be instituted should be relatively “light”, ostensibly to allow business the necessary space for innovation and entrepreneurship.

The fact of the matter however is that, quite correctly, governments have intervened massively in the economy, precisely to save economies from collapse.

As an example of this, the reality is that today 90% of housing mortgages in the United States are funded or guaranteed through the public purse. Thus, inadvertently, housing has come to be treated as a public good, making the statement that all citizens have a right to decent accommodation.

It is difficult to understand why this is necessarily a wrong proposition, as a result of which government must extricate itself from this activity as quickly as possible.

The same consideration holds true for other sectors of the economy which may have a large social impact, such as job creation.

XII

With regard to the financial sector, certainly in the United States, the government, working to contain the economic crisis, has encouraged a few banks to grow even larger than they were before the economic crisis.

An August 28, 2009 article in the Washington Post entitled “Banks ‘Too Big To Fail’ Have Grown Even Bigger” says:

“When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system. Today, the biggest of those banks are even bigger.

“The crisis may be turning out very well for many of the behemoths that dominate US finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit…

“In Santa Cruz, Calif., Wells Fargo, Bank of America and J.P. Morgan Chase hold three-quarters of the deposit market. Each firm was given tens of billions of dollars in bailout funds to help it swallow other banks…

“Many of the largest banks reported a surge in profit during the most recent quarter, including J.P. Morgan Chase and Goldman Sachs. They are prospering while many regional and community banks are struggling. Nearly three dozen of the smaller institutions have failed since July 1, including Community Bank of Nevada and Alabama-based Colonial Bank just last week.”

Another important matter that has arisen as a result of government interventions to mediate the economic crisis, certainly in the US, is, as we have said, the issue of the role of government in the economy.

In this regard in its September 14, 2009 edition, the New York Timespublished an article byEdmund L. Andrews and David E. SangerentitledU.S. Is Finding Its Role in Business Hard to Unwind.” Among others, the article said:

“One year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.

“Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government…

“It will probably be several years before the government can begin to sell its stake in G.M. back to the public…

“Obama administration officials bristle at even the hint that their rescue measures have ushered in a new era of “big government.”

“But supporters and critics alike worry that it will be difficult to shrink the government to anything like its former role. For one thing, Mr. Obama is determined to expand government regulation of business and to beef up federal protections for consumers…

“But the much bigger puzzle is how the government will untangle Fannie Mae and Freddie Mac, with their combustible mix of taxpayer support, public policy goals and for-profit structures.

“It will be very difficult to unwind, having stepped in as big as they did,” said Howard Glaser, a senior housing official during the Clinton administration and now an industry consultant in Washington. “There is no structure, no mechanism, for private investors to come back into the market.”

The article also reported that, “Mr Obama is determined to expand government regulation of business and to beef up federal protection for consumers.”

XIII

With regard to the complex issue of the regulation of the financial sector, and indicating how extensive it should be, in its 2008-2009 Annual Report, the Bank for International Settlements said:

“The starting point for building a comprehensive framework that safeguards financial stability is to identify the sources of systemic risk in each of the financial system’s three essential elements:

  • instruments, including loans, bonds, equities and derivative instruments;
  • markets, ranging from bilateral over-the counter (OTC) trading to organised exchanges; and,
  • institutions, comprising banks, securities dealers, insurance companies and pension funds among others.

“All three elements – instruments, markets and institutions – can generate systemic risks that require mitigation if the financial system is to be safe from collapse. And, importantly, addressing risk in only one area will not ensure the safety of the others.

“Furthermore, making all three parts of the financial system more stable and more resilient to systemic events diminishes the problem of a porous regulatory perimeter. No part of the financial system should be allowed to escape appropriate regulation.”

XIV

We must now draw some conclusions from the observations made in the last few pages.

The process of the concentration and centralisation of capital, and therefore the emergence of very big companies, is a natural tendency in any capitalist economy. It accelerates during any period of recession as smaller and weaker companies fail. At worst, the interventions of the US government in this regard further accelerated a process that would have happened “spontaneously”.

It would therefore seem obvious that the reality of companies that are “too big to fail” cannot be avoided, however desirable this might seem. It is unlikely that the subjective desire to ensure that no company becomes “too big to fail” will prevail over the objective process of individual corporate capital accumulation which leads to the emergence of such companies.

Accordingly the issue of “moral hazard” also cannot be avoided. What perhaps will require further reflection is how society should define the benefits that should accrue to the public in all instances of the “socialisation of risk”, when the State intervenes to save companies that are “too big to fail”. It would probably be that this would have to be done on a case-by-case basis.

Equally important is the consideration that these companies cannot continue to be allowed to operate as they wish, precisely because their failure imposes a high social cost.

It may also be that, even in a country such as the US, characterised by a widespread ideological belief in “the free market”, government intervention in the economy through both equity holdings in various companies and greater regulation, may increase rather than diminish.

The imperative for governments to intervene in the economy to respond to the global economic crisis has therefore created the space to subject to rational discussion such articles of faith of the “market fundamentalists” as privatisation, deregulation and liberalisation, which are part of the problem.

Surely there should be no need even for the US to have to experience another recession to arrive at the point when a devotee of the “free market”, such as Alan Greenspan, confessed that he had “found a flaw” in his “view of the world”.

Difficult as it might be, especially for the “market fundamentalists”, everybody will have to make a serious effort to understand the world economy as it is, taking on the reality that it has become more complex since the onset of the global financial and economic crisis.

That complexity will not disappear by trying to superimpose “neat” ideological constructs which will not help with regard to the management of this economy, such that it serves the goal of changing the lives of the people for the better on a sustained and sustainable basis.

What follows below is a further attempt to respond to the imperative of understanding the world economy. We begin immediately by reflecting on what happened a decade ago.

East Asia was plunged into a financial and economic crisis in 1997-1998, which impoverished millions of people in this region and threatened to spread contagion to the rest of the world.

XV

In many respects this crisis of a decade ago mirrors the current crisis. However, it is clear that human society did not learn the lessons it should have done from that particular experience.

It is obvious that one of the reasons for this is that the East Asia crisis originated in and occurred at the ‘periphery’ of the global economic system, while the current crisis originated in and is located at the ‘centre’ of the global economic system, and therefore will cause much greater damage than could have been generated by the East Asia crisis.

We argue that the East Asia crisis mirrors the current one because the behaviour of financial capital stands at the centre of both crises, and expressed itself not only as a financial crisis, but also resulted in economic recession in the countries concerned, leading to widespread bankruptcies in the productive sector, unemployment and the impoverishment of millions of people.

It is common cause that at the base of the East Asia crisis was the excessive influx of short term capital and its efflux at a later stage, driven by a ‘herd instinct’.

In this regard, we will take the liberty to quote at some length the observations made by K.S. Jomo in his March 2001 Research Paper, prepared under the auspices of the “Intergovernmental Group of Twenty-Four on International Monetary Affairs, entitled Growth after the Asian Crisis: What Remains of the East Asian Model?”

During the 1990s, the East Asian countries came to be admired internationally as “the Asian tigers” because of their high economic growth rates and the process of industrialisation on which they had embarked. Their achievements were described by the World Bank, and then the rest of the world and in popular parlance, as “the Asian miracle”.

In good measure their achievements derived from significant inflows of foreign direct investment (FDI) and the consequent construction of an export-led model of economic growth and development. To attract and retain this foreign capital, and pressurised by the Bretton Woods institutions, the East Asian countries liberalised their capital markets, to enable especially financial capital to move freely in and out of their borders.

The combination of these circumstances led to the region being an attractive destination not only for FDI but also for short term capital in the form of loans and portfolio investment.

In this regard K.S. Jomo wrote:

“Portfolio equity flows into all four economies (South Korea, Indonesia, Thailand and Malaysia) grew greatly in the mid-1990s. External debt as a share of export earnings rose from 112 per cent in 1995 to 120 per cent in 1996 in Thailand and from 57 per cent to 74 per cent over the same year in the Republic of Korea, but actually declined in Indonesia and grew more modestly in Malaysia. By 1996, reserves as a share of external debt were only 15 per cent in Indonesia, 30 per cent in the Republic of Korea, 43 per cent in Thailand and 70 per cent in Malaysia. By 1997 this ratio had dropped further to 15 per cent in the Republic of Korea, 29 per cent in Thailand, and 46 per cent in Malaysia, reflecting the reserves lost in futile currency defence efforts…

“Growing attention has been given to the role of reversible capital flows into the East Asian region as the principal cause of the 1997/98 crisis. It is increasingly widely accepted that the national financial systems in the region did not adapt well to international financial liberalization (Jomo, 1998). The bank-based financial systems of most of crisis-hit East Asia were especially vulnerable to the sudden drop in the availability of short-term loans, as international confidence in the region dropped suddenly during 1997. Available foreign exchange reserves were exposed as inadequate to meet financial obligations abroad, requiring governments to seek temporary credit facilities to meet such obligations mainly incurred by their private sectors.

“Data from BIS (Bank for International Settlements) show that the banks were responsible for much of this short-term debt, though, of course, some of it consisted of trade credit and other short-term debt deemed essential to ensuring liquidity in an economy. However, the very rapid growth of short-term bank debt during stock market and property boom periods suggests that much short term debt was due to factors other than trade credit expansion…

“The non-bank private sector was the major recipient of international bank loans, accounting for more than 50 per cent of total foreign borrowings by the end of June 1997, i.e. well above the developing country average of slightly under half…Government borrowings were low, and lowest in Malaysia and the Republic of Korea, although the data does not allow us to differentiate the state-owned public companies or partially private, but corporatised former fully state-owned enterprises…

“Undoubtedly, international financial liberalization succeeded in temporarily generating massive net capital inflows into East Asia, unlike many other developing and transitional economies, some of which experienced net outflows. But it also exacerbated systemic instability and reduced the scope for the developmental government interventions responsible for the region’s economic miracle. In South East Asia, FDI domination (well above the average for developing countries) of internationally competitive manufacturing had weakened domestic industrialists, inadvertently enhancing the dominance of finance capital and its influence over economic policy making…

“IMF prescriptions and conventional policy-making wisdom urged bank closures, government spending cuts and higher interest rates in the wake of the crisis. Such contractionary measures transformed what had started as a currency crisis, and then become a full-blown financial one, into a crisis of the real economy. Thus, Indonesia, Malaysia and the Republic of Korea – that had previously enjoyed massive capital inflows in the form of short term bank loans or portfolio investments – went into recession during 1998, following Thailand, which went into recession in 1997…

“Financial capital developed a complex symbiotic relationship with politically influential rentiers, now dubbed “cronies” in the aftermath of 1997/98…Transnational domination of South-East Asian industrialization facilitated the ascendance and consolidation of financial interests and politically influential rentiers.

“This increasingly powerful alliance was primarily responsible for promoting financial liberalization in the region, both externally and internally…

“After months of international speculative attacks on the Thai baht (pegged to the US dollar), the Bank of Thailand let its currency float from 2 July 1997, allowing it to drop suddenly. By mid-July 1997, the currencies of Indonesia, Malaysia and the Philippines has also fallen precipitously after being floated, with their stock market indices following suit. In the following months, currencies and stock markets throughout the region came under pressure as easily reversible short term capital inflows took flight in herd-like fashion…

“However, contrary to the popular impression promoted by the Western-dominated financial media of “crony capitalism” as the main culprit, most serious analysts now agree that the crisis began essentially as a currency crisis of a new type, different from those previously identified with either fiscal profligacy or macroeconomic indiscipline. A growing number also seem to agree that the crisis started off as a currency crisis and quickly became a more generalised financial crisis, before impacting in the real economy because of reduced liquidity in the financial system and the consequences of inappropriate official policy and ill-informed herd-like market responses.”

                                                              XVI

With regard to the foregoing, we would like to summarise as follows:

  • in time, attracted by the performance of the East Asian economies, foreign short term capital flowed into these economies in search of ‘super profits’;
  • this caused an asset bubble that did not reflect the performance of the real economy;
  • as the local currencies weakened relative to the US dollar, global financial capital engaged in speculative trading against these currencies, forcing the financial authorities to use their foreign currency reserves to defend the local currencies;
  • when this proved unsustainable, the local currencies depreciated sharply;
  • to guarantee the value of its investments, foreign financial capital began selling its local currency holdings to buy foreign currency, thus accelerating the process of the depreciation of the local currencies;
  • in turn this communicated the message to foreign financial capital that the local economies were in crisis;
  • because of this, foreign short term capital went into a stampede to leave the East Asian countries;
  • this caused a collapse of the credit market and mass insolvency;
  • as a result of this, the real economy went into contraction and recession;
  • this was exacerbated by IMF conditionalities in return for its ‘rescue packages’, which among other things, demanded reduction in public expenditure, bank closures and increased interest rates: these pro-cyclical prescriptions could not but worsen the economic recession;
  • the situation was worsened by the focus of the IMF on using its resources to compensate the creditor banks/financial institutions and their ‘mother’ countries, rather than support the debtor countries and indebted institutions; and,
  • consequently the state was required to take responsibility for the debts of the private sector, limiting the possibility of the governments to use their resources to resuscitate their economies.    

From this we can see the differences between the East Asian and the current financial and economic crisis. Schematically we might present these as follows:

  • the current crisis began directly as a financial crisis, rather than a currency crisis;
  • like the earlier crisis, it soon developed into a crisis in the real economy, and therefore a recession;
  • with the support of the IMF, the governments of the developed countries intervened to support their countries’ financial institutions;
  • rather than reduce public expenditure, with the support of the IMF, the developed countries have implemented stimulus packages, which have meant increasing budget deficits and increasing the capacity of the central banks to inject extra liquidity into the economy; and,
  • the developed countries have injected more capital into the IMF and the World Bank to enable them to help limit economic contraction in the developing countries, to ensure that these countries continue to be viable participants in the global economy, as commodity producers, producers of cheap manufactured goods, markets for goods and services from the developed world, and a continuing source of savings especially for the US economy, especially given its increased borrowing requirements.   

With regard to the IMF, Jomo wrote: “While the IMF insisted on greater transparency by the affected host governments and those under their jurisdiction, it continued to operate under considerable secrecy itself.

“Such IMF double standards, reflected by its priority in protecting the interests of foreign banks and governments, also compromised its ostensible role as an impartial agent working in the interests of the host economy. (Emphasis added.)

“The burden of IMF programmes invariably fell on the domestic financial sector and, eventually, on the public at large, which has borne most of the costs of adjustment and reform. The social costs of the public policy responses have been very considerable, usually involving bailouts of much of the financial sector and the corporate sector more generally…

“Liabilities and other commitments to foreign banks have invariably been given priority by the Fund, even though both foreign and domestic banks may have been equally irresponsible or imprudent in their lending practices.

“As BIS (1998) noted: “In spite of growing strains in South East Asia, overall bank lending to Asian developing countries showed no evidence of abating in the first half of 1997” (Raghavan, 1998).

“In the year from mid-1996 to mid-1997, the Republic of Korea received US$ 15 billion in new loans, while Indonesia received US$ 9 billion from the banks. Short-term lending continued to dominate, with 70 per cent due within one year, while the share of lending to private non-bank borrowers rose to 45 per cent at the end of June 1997.

“The banks were also actively acquiring “non-traditional assets” in the region, for instance in higher yielding local money markets and other debt securities. Most of this lending was by Japanese and continental European banks. Thus, Western and Japanese banks will emerge from the crisis relatively unscathed and stronger than the domestic financial sectors, which have taken the brunt of the cost of adjustment.

“Some merchant banks and other financial institutions will also be able to make lucrative commissions from marketing sovereign debt, as the short-term private borrowings – which precipitated the crisis – are converted into longer-term government-guaranteed bonds under the terms of IMF programmes. Hence, IMF programmes have been seen as primarily benefiting foreign banks, rather than the East Asian economies or people.”

The foregoing account about how the IMF treated the East Asian countries contains important lessons about what the global community should now do to respond to the concerns of the developing countries in the context of the current global economic crisis.

XVII

On March 31, 2009, the President of the World Bank, Mr Robert Zoellick, addressed a meeting at the Canary Wharf in London. Among other things he said:

“In this crisis, developing countries are being battered by successive waves.  These waves emanate from the sharp contraction in economic growth and tightening of credit in the developed world.  Just as the global economy once helped to lift hundreds of millions out of poverty, today there is a risk of development in reverse, as our interconnected world transmits negative shocks with greater power and velocity…

“We have seen over the last six decades how markets can lift hundreds of millions of people out of poverty while expanding freedom.  But we have also seen how unfettered greed and recklessness can squander those very gains.  For the 21st Century, we need market economies with a human face. Human market economies must recognize their responsibility to the individual and society.”

Consistent with these views, Mr Zoellick detailed various funded programmes to support Africa and the rest of the developing world, within the context of the global economic crisis. It must surely be the task of the African governments to ensure that the World Bank meets the obligations into which it has entered.

In its April 2, 2009 Global Plan for Recovery and Development Statement, the London G20 Summit Meeting said:

“We reaffirm our historic commitment to meeting the Millennium Development Goals and to achieving our respective ODA pledges, including commitments on Aid for Trade, debt relief, and the Gleneagles commitments, especially to sub-Saharan Africa.” It then detailed various measures that would be taken to honour this commitment.

Again it will be the responsibility of the governments of Africa and the rest of the developing world to ensure that the G20 meets these commitments. What is encouraging is that they represent an approach that is very different from the approach adopted by the IMF, with the support of the developed world, towards the countries of East Asia in 1997/98.

However we must also make the point that the welcome initiatives announced by the President of the World Bank and the G20 fall firmly within the structural framework which positions the developed and developing countries towards one another as long term donors and recipients.

It is therefore important to recognise the reality that the current global economic crisis has served further to underline the historic challenge to build a true partnership between the developing and the developed, focused on ensuring that the former take responsibility for their destiny, including achieving sustained progress having overcome the challenges of poverty and underdevelopment.

XVIII

After the conclusion of the April (2009) G-20 Summit Meeting in London, UK, the British Prime Minister, Gordon Brown, announced that the “old Washington Consensus is over”.

Before the Summit Meeting, Prime Minister Brown had said:

“I think we are recognising that the Washington Consensus on economic policy is over – that the old world has gone, that we have got to build a new consensus on economic development for the future. And the message to every country, I think, is that doing nothing is no longer an option.”…

After the meeting, among other things, he said that the “old Washington Consensus is over…Today we have reached a new consensus”, and added: “I think a new world order is emerging with the foundation of a new progressive era of international cooperation. New reforms of the global banking system, including institutions such as hedge funds, and other parts of the so-called ‘shadow banking system’ are coming under global regulatory control for the first time.”

It is also clear from the remarks made by Prime Minister Brown as well as the “Leaders’ Statement” issued on 2 April, 2009 after the Summit Meeting that the Meeting sought principally to respond to the current global financial and economic crisis. In this regard and significantly, the Statement said:

“We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.”

At face value, all this communicated the message that the leaders of the 20 largest economies in the world, accounting for the bulk of global economic activity by far, had agreed that humanity had resolved to repudiate a doctrinaire ideological paradigm which prescribed:

  • a global era of an unregulated capitalist ‘free market’;
  • restricted intervention of the state in national economies, including through state ownership of productive assets in strategic sectors of the economy;
  • a similarly unregulated process of globalisation; and,
  • the dominance of a neo-liberal/conservative ideology that celebrates ‘free enterprise’, unfettered freedom to capital to pursue is central purpose, profit maximisation, and therefore, among other things, the prohibition of social intervention in the most essential elements relating to the creation, the circulation and the appropriation of ‘the wealth of nations’.

The truth is that this was not the case. Rather, as reported in the “Leaders’ Statement”, the Summit Meeting agreed that:

“In addition to reforming our international financial institutions for the new challenges of globalisation, we agreed on the desirability of a new global consensus on the key values and principles that will promote sustainable economic activity. We support discussion on such a charter for sustainable economic activity with a view to further discussion at our next meeting. We take note of other work started in other fora in this regard and look forward to further discussion of this charter for sustainable economic activity.”

Thus, despite all the brave words Prime Minister Brown uttered about an ‘end to the Washington Consensus’, that ‘end’ was marked by a needlessly (and perhaps deliberately?) wordy paragraph in the “Leaders’ Statement”, which promised that at a later date, the G20 leaders would discuss “the key values and principles that will promote sustainable economic activity”, whatever this means.

                                                            XIX

Before the first G20 Summit Meeting in Washington last year, French President Nicolas Sarkozy, had made bold to assert that the global financial and economic crisis necessitated the ‘reform of the capitalist system’!

The German Der Spiegel (December 11, 2008) had quoted President Sarkozy as saying that a “new Bretton Woods” must “lead to a new founding of capitalism.” The British Economist (October 16, 2008) reported that President Sakorzy had said, “Self-regulation is finished…Laissez-faire is finished.”

In an article by Edward Cody headed “Sarkozy Advocates Systemic Change After Crisis”, published in its September 26, 2008 edition, the Washington Post had reported President Sarkozy as having said:

“Self-regulation to solve all problems, it’s finished. Laissez-faire, it’s finished. The all-powerful market that is always right, it’s finished…Self-regulation is sometimes insufficient. The market is sometimes wrong. Competition is sometimes ineffective or disloyal. It is necessary then for the state to intervene…There has been too much abuse, too many scandals.”

After the G20 Summit Meeting, President Sarkozy characterised the meeting as a success, and hailed the end of “the madness of this time of total deregulation”. He also said: “We would never have hoped to get so much. This is not the victory of one camp against the other, but shows the growing awareness that the world needs to change…

“Getting ourselves to agree with the British and Americans on a reasonable trade remuneration regime, if that isn’t capitalism with a conscience I don’t know what is. Sixty percent of hedge funds are registered in tax havens. Putting hedge funds under supervision isn’t going to generate jobs in the textile industry. But we have to put behind us the madness of this time of total deregulation. We can’t say that this won’t have an impact on people’s lives.”

These comments confirm that, as reflected in the “Leaders’ Statement”, the differences at the London G20 Summit Meeting were about the tactics of managing the current crisis of the capitalist system, rather than a strategic assessment that examines the very drivers of the system, such as the proposition that the pursuit of self interest is the best available impulse to ensure the realisation of the goal of a better life for all.

(Of course, it will be important also to assess the extent to which the regulatory processes agreed at the Summit Meeting help to contain the negative results of this fundamental capitalist proposition, which defines the inalienable and necessary condition for the very existence of capital as profit maximisation. And yet this is exactly what has given birth to the current global economic crisis!)

XX

In its June 11, 2009, Volume 56, Number 10 edition, under the title, “The Crisis and How to Deal with It”, The New York Review of Books published excerpts from a discussion that had taken place on the current global economic crisis.

One of the participants, Professor Niall Ferguson, pointed to the difficulty that will necessarily arise as the effort is made to elaborate “a new global consensus on the key values and principles that will promote sustainable economic activity”. Professor Ferguson said:

“Well, I tell you what, I feel depressed after what I’ve heard tonight. We are now contemplating a massive expansion of the state to substitute for the private sector because that’s the only thing Paul (Krugman) thinks will deliver growth. We’re going to reregulate the markets, we’re going to go back to those good old days. Where were you in the 1970s when all these wonderful regulations were in place? I don’t remember that going too smoothly. But what else are we going to do? We’re going to print money. Almost limitlessly we’ll print money. That’s going to be fine, too. And when we’re done with that, we’re going to raise taxes. What a fabulous package we have in store for us. You know, back in late 2007, I was asked what my big concern was, and I said, “My concern is that we’re going to get the 1970s for fear of the 1930s.” It’s very easy to forget, in your iron indignation at the failure of the market, where the true mainsprings of economic growth lie. The lesson of economic history is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from the private sector, not from the state.”

Nevertheless, despite this cri de coeur, we return to the assertions we made earlier, and therefore the basics to which we referred.

We have described one of these as “a bankrupt consumer working population.” We will now discuss this phenomenon as it has manifested itself in the United States.

The September 27, 2008 edition of the Canadian Globe and Mail newspaper published an article by Margaret Wente entitled, “Financial turbulence: pass the airsick bags”, in which she reported on the fundamental challenge of the high debt burden which the US working population carries. She wrote:

“Both the Republicans and Democrats enthusiastically endorsed the idea of using government power to expand home ownership to people who had been shut out of the market. But laissez-faire capitalism made the problem much worse. Reckless lenders, operating completely free of oversight, began pushing mortgages at people who got in way over their heads…People bought more expensive houses than they could afford, gambling that prices would keep going up. They maxed out their credit cards and bought more TVs and bigger cars. Why not? So long as money was free to all comers, America could gorge on debt…

“ ‘Reckless people have deluded themselves that this was a subprime crisis,’ said economist Nouriel Roubini, who, not so long  ago, was accused of being overly pessimistic. ‘But we have problems with credit-card debt, student-loan debt, auto loans, commercial real estate loans, home-equity loans, corporate debt and loans that financed leveraged buyouts.’ In other words, the problem isn’t just a subprime mortgage market. It’s a subprime financial system. And whoever gets elected is doomed to wear it.” (Emphasis added.)

We will now detail some macro-economic facts that substantiate the argument presented by Margaret Wente about what we have described as “a bankrupt consumer working population.”

On February 23, 2006 CNNMoney.com carried an article by Jeanne Sahadi, and on February 24, 2006 the Wall Street Journal (WSJ) published an article on the Typical US Family’s Net Worth written by Christopher Conkey both dealing with the same issue.

These articles summarised the findings in a Federal Reserve Reportentitled: Recent Changes in U.S. Family Finances: Evidence from the 2001 and 2004 Survey of Consumer Finances. (The Federal Reserve said “Brian K. Bucks, Arthur B. Kennickell, and Kevin B.Moore, of the Board’s Division of Research and Statistics, prepared this article with assistance from Gerhard Fries and A. Michael Neal.”)

Among other things, the WSJ said:

“The net worth of the typical family in the richest 10% rose to $831,600, a 6.5% increase from 2001, adjusted for inflation. In contrast, the net worth of the typical family in the bottom 25% fell 1.5% to $13,300.”

“The report, the most comprehensive survey of household wealth, also found a widening of the gap between households at the top and the bottom of the economic ladder. ‘While the typical American household basically ran in place, less affluent households actually lost ground,’ said Stephen Brobeck, executive director of the Consumer Federation of America.”

“The stock market was not a big plus for the typical American family in the early part of this decade — in contrast with the late 1990s — and the share of families owning stock or mutual funds, including retirement plans, declined to 48.6% in 2004 from a peak of 51.9% in 2001. And among those families owning stock, the value of the median portfolio fell to $24,300 from $36,700 in 2001, adjusted for inflation.”

“Meanwhile, the typical family took on more debt. After declining for years, mortgage and other debt as a percentage of total family assets rose to 15% in 2004 from 12.1%, the Fed said. “The largest part of that increase was attributable to debt secured by real estate,” the report said. “As debt rose over the period, families devoted more of their incomes to servicing their debts, despite a general decline in interest rates.”

“Some racial disparities narrowed, the Fed noted. The percentage increase in the net worth of the median nonwhite family was three times as large as it was for a white family between 2001 and 2004. Still, the median white family’s net worth, at $140,700, compared with $24,800 for the typical nonwhite family.

For its part, CNN reported:

“A decline in wages also helped account for the slow growth in net worth. While the median income rose 1.6 percent, to $43,200, after adjusting for inflation, median wages fell 6.2 percent. Wages make up the largest part of family income.”

“The percent of families who said they’d saved in the preceding year fell 3.1 percentage points, to 56.1 percent.”

“Despite lower interest rates between 2001 and 2004, families spent more of their incomes paying off their debt…The share of families with debt rose 1.3 percentage points to 76.4 percent.

“Among families with debt of any kind – including mortgages, other loans and credit cards – the median level rose 33.9 percent to $55,300, far greater than the 9.5 percent increase seen between 1998 and 2001. The median level of mortgage debt increased 27.3 percent to $95,000.”

The Financial Times had reported on these negative trends during the previous year. On May 11, 2005in an article entitled Real Wages Fall at Fastest Rate in 14 Years, Christopher Swann wrote:

“Real wages in the US are falling at their fastest rate in 14 years, according to data surveyed by the Financial Times.”

“Stingy pay rises mean many Americans will have to work longer hours to keep up with the cost of living, and they could ultimately undermine consumer spending and economic growth.”

“Many economists believe that in spite of the unexpectedly large rise in job creation of 274,000 in April, the uneven revival in the labor market since the 2001 recession has made it hard for workers to negotiate real improvements in living standards.”

“There is still little evidence that workers are gaining much traction in their negotiations,” said Paul Ashworth, US analyst at Capital Economics, the consultancy. “If this does not pick up, it raises the prospect of a sharper slowdown in consumer spending than we have been expecting.”

An even broader perspective has been presented by Professor Rick Wolff, Professor of Economics at University of Massachusetts at Amherst. In an article entitled “The Fallout from Falling US Wages”, he wrote:


“Real wages in the US rose during every decade from 1830 to 1970.  Then this central feature of US capitalism stopped as the figures below show:

1964 $302.52
1974 314.94
1984 279.22
1994 259.97
2004 277.57
Source: Labor Research Associates of New York based on data from the US Department of Labor, Bureau of Labor Statistics; wages expressed in constant 1982 dollars.

“No comparable steady rise in real wages has occurred since.  The most recent data from the Bureau of Labor Statistics indicate real weekly wages declined again over the last year (2005-2006).

“Not surprisingly, the debt service portion of disposable income has also reached historic heights.  Over 15 percent of after-tax personal income repays debt (despite current low interest rates).  Borrowing has thus heaped the costs and anxieties of debt on top of those flowing from increased external work time by family members.”

Addressing the short term, and confirming the continuation of this gloomy picture, the Chairperson of the Board of the Federal Reserve, Ben Bernanke, said in December 2008:

“Household spending likely will continue to be depressed by the declines to date in household wealth, cumulating job losses, weak consumer confidence, and a lack of credit availability.” (Austin, Texas: Greater Austin Chamber of Commerce, December 1, 2008).

A September 11, 2009 article in the Washington Post written by Carol Morello and Dan Keating, headed “Millions More Thrust Into Poverty” said:

“A new comprehensive economic survey shows that the recession has plunged 2.6 million more Americans into poverty, wiped out the household income gains of an entire decade and pushed the number of people without health insurance up to 46.3 million.

“The grim economic statistics unveiled Thursday in the Census Bureau’s annual report on income, poverty and health insurance are destined to grow bleaker. Since the data were collected in the spring, millions of people have lost their jobs.”

The preceding citations should be sufficient to substantiate what Margaret Wente had said, that “the problem isn’t just a subprime mortgage market. It’s a subprime financial system” and much more!

The point is that, consistent with what Marx said in Das Kapital, “It is only in so far as the appropriation of ever more and more wealth in the abstract (M-M’) becomes the sole motive of his operations, that he functions as a capitalist, that is, as capital personified and endowed with consciousness and a will…The restless never-ending process of profit-making alone is what he aims at.”

US (and other) financial capital behaved in a manner immanent to its nature. It extended credit to all that it could persuade to borrow, informed by the fundamentally correct proposition that it could only make money by selling more money.

The more borrowers each financial institution could put on its loan-book, the more it would guarantee itself increased profit. In addition, the fatter the loan-book, the more this book itself became a tradable commodity, based on the number of those who were indebted to the institution! 

Margaret Wente made the statement – “They maxed out their credit cards and bought more TVs and bigger cars. Why not? So long as money was free to all comers, America could gorge on debt…”

The point however is that financial capital was extending credit to people who were too poor to borrow, but nevertheless had to borrow to live in a manner consistent with what a powerful media and society in general, projected everyday as ‘the American way of life’ or ‘the American dream’.

Margaret Wente wrote of what the US political leadership had done to “expand home ownership to people who had been shut out of the market.”(NB: naturally, given the finding by the Federal Reserve about racial disparities in wealth distribution, the African-Americans have been the worst losers in terms of home repossessions.) The real substance of her argument, however, and as substantiated by what we have said earlier, is that the capitalist system had expanded access to credit in general, and not just mortgages, to large segments of the US population which had objectively been “shut out of the market.”

The processes described by the Federal Reserve in its Report on “Recent Changes in U.S. Family Finances:…” are immanent to the capitalist system. They are not merely a subjective outcome of hard-headed individual capitalists who wilfully and consciously decide that their employees should not enjoy a continuously improving standard of living.

Similarly, the striving for ever-greater market share by the financial institutions, resulting in them extending credit to consumers who cannot afford to borrow, is not merely a consequence of personal greed on the part of managers who take the decisions to lend to individual borrowers. This striving is also immanent to the capitalist system.

It is therefore also true that the irreconcilable or antagonistic contradiction between the lender hungry for profit on one hand, a fundamental condition for the existence of financial capital, and the poor borrower, inevitably intent to realise the objective of a better life on the other, precisely to escape from poverty or a low standard of living, is itself inherent to the capitalist system.

This fundamental contradiction, which is an important element of the current global financial and economic crisis, cannot be solved through amicable negotiations between lender and borrower. Society itself, through the state, has to intervene, as it has in fact been doing in response to the current global financial and economic crisis.

XXI

The question that arises, especially in the context of what is being done through the various “stimulus packages”, which include the takeover of banks by the state in many Western countries, is whether this is sufficient to address the fundamental contradiction of the capitalist system we have indicated above!

(In this regard we must note that, in the US, this kind of state intervention was started by the Bush Administration, which was ideologically, unequivocally and unashamedly committed to the ‘free market’. At the November 2008 G20 Summit Meeting in Washington D.C, the first of its kind, President George W. Bush said:

“Those of you who have followed my career know that I am a free market person – until you are told that if you don’t take decisive measures, then it is conceivable that our country could go into a depression greater than the Great Depression.”

These comments by President Bush correctly indicated that state ownership of particular companies, or even a significant number of major corporations, does not indicate the onset of ‘socialism’. (NB: seemingly, taking into account the controversy that has arisen in the US about the health reform proposed by President Obama, the majority or many among the “democratic masses” in the US have been persuaded to accept that “big government” = “socialism”!)   

Indeed, in the context of the current global financial and economic crises, capital itself is keen that the state should play a significant role in the economy, among other things by investing public money especially in major corporations that face bankruptcy, taking up such equity as would be consistent with such investment!)

We must now reflect on the behaviour of financial capital, if only to demonstrate that what we have said about its natural pursuit of ever-increasing exchange value at all costs is both real and a challenge that society must address, without acting in a manner that destroys this particular manifestation of capital, without which no economic activity would be possible.

(The social evolution from C-C to M-M’ is inevitable and cannot be reversed without disastrous consequences. The Khmer Rouge in Cambodia, based on a criminally ‘vulgar’ understanding of Das Kapital and its derivatives, attempted exactly this. Thus they decided to abolish money, arguing that only commodities (merchandise) and services contain true economic value, whereas money was merely a nefarious class instrument to expropriate surplus value from the producers of the use values represented by commodities and services. As an aside, it is interesting to note that the principal leaders of the Khmer Rouge were former students whose education in France, the outgoing colonial power, where they got exposed to Marxism, was financed by scholarships provided by the Cambodian royal house, which was interested in the modernisation of Cambodia. Thus, indeed, might it be said – the road to hell is paved with good intentions!)

However interesting this diversion into the recent history of Cambodia and Marxism might be, if it is, we must return to the challenge of the meaning of the formula – M-M’, and its consequences with regard to the current global financial and economic crisis.

XXII

Addressing the Economic Club of New York on October 14, 2008, the President of the European Central Bank, Jean-Claude Trichet, a critical player in the global economy, said:

“We are experiencing a very challenging and demanding episode of the market correction which started more than a year ago and was due to a significant under-assessment and under-pricing of risk in global finance. This fostered extremely high risk-taking behaviour, excessive leverage and a widespread use of toxic, obscure, and abnormally sophisticated financial instruments. In this regard, global finance was potentially unstable before the start of the turbulence…The sub-prime mortgage crisis has therefore played the role of a trigger, but there was a good deal of explosive around…

“This is no time for complacency. Central banks will remain solid anchors of stability and confidence. Public authorities must be alert, decisive and effective at a global level: this is not a problem of the industrialised countries alone; this is a global issue that has to be addressed with the full participation of the emerging countries. At the same time, private financial institutions and market participants must behave wisely, prudently and with a solid sense of responsibility. It is time to keep our composure.”

For his part, the Chairperson of the Board of Governors of the US Federal Reserve System, Ben S. Bernanke, addressed the Texas Greater Austin Chamber of Commerce on December 1, 2008 and said:

“The Federal Reserve’s efforts in conjunction with other agencies to prevent the failure of systemically important firms have been controversial at times. One view holds that intervening to prevent the failure of a financial firm is counter-productive, because it leads to erosion of market discipline and creates moral hazard. As a general matter, I agree that preserving market discipline is extremely important, and, accordingly, the government should intervene in markets only in exceptional circumstances. However, in my view, the failure of a major financial institution at a time when financial markets are already quite fragile, poses too great a threat to financial and economic stability to be ignored. In such cases, intervention is necessary to protect the public interest. The problem of moral hazard and the existence of institutions that are “too big to fail” must certainly be addressed, but the right way to do this is through regulatory changes, improvements in the financial infrastructure, and other measures that will prevent a situation like this from recurring. Going forward, reforming the system to enhance stability and to address the problem of “too big to fail” should be a top priority for lawmakers and regulators…We at the Federal Reserve, and our colleagues at other federal agencies, will carefully monitor the conditions of all key financial institutions and stand ready to act as needed, to preserve their viability in this difficult financial environment.”

In a later speech, at Morehouse College, Atlanta, Georgia on 14 April 2009, Chairman Bernanke drew attention to an important part of the current global financial and economic crisis, viz, its global nature, and therefore a manifestation of the process of globalisation.

He pointed to the impact of large inflows of foreign capital into the US. Among other things he said:

“The net inflow of foreign saving to the United States, which was about 1-1/2 percent of our national output in 1995, reached about 6 percent of national output in 2006, an amount equal to about $825 billion in today’s dollars.

“Saving inflows from abroad can be beneficial if the country that receives those inflows invests them well. Unfortunately, that was not always the case in the United States and some other countries. Financial institutions reacted to the surplus of available funds by competing aggressively for borrowers, and, in the years leading up to the crisis, credit to both households and businesses became relatively cheap and easy to obtain.

“One important consequence was a housing boom in the United States, a boom that was fueled in large part by a rapid expansion of mortgage lending. Unfortunately, much of this lending was poorly done, involving, for example, little or no down payment by the borrower or insufficient consideration by the lender of the borrower’s ability to make the monthly payments…

“Mortgage markets were not the only ones caught up in the credit boom. The large flows of global saving into the United States drove down the returns available on many traditional long-term investments, such as Treasury bonds, leading investors to search for alternatives.

“To satisfy the enormous demand for investments both perceived as safe and promising higher returns, the financial industry designed securities that combined many individual loans in complex, hard-to-understand ways. These new securities later proved to involve substantial risks – risks that neither the investors nor the firms that designed the securities adequately understood at the outset.”

Mr T T Mboweni, Governor of the South African Reserve Bank, also referred to the matter of globalisation when he addressed the 48th ACI World Conference in Cape Town, South Africa, on 13 March 2009. He said:

“With hindsight, it is clear that, although individual institutions hedged, transferred and managed their risk exposures in very sophisticated ways, at a systemic level a point is reached at which it becomes impossible to fully diversify or transfer risk.

“The global financial system is a finite entity, and although risk can be passed around, it does not disappear. We had probably underestimated the inter-linkages of financial systems across the globe, and the extent to which globalisation had created a complicated network of circuits for the contagion of financial risk…

“The current crisis resulted from a specific combination of a number of causes. For years, liquidity in global financial markets was mispriced, and therefore generally taken for granted. Interest rates were low, and huge profits were locked in through carry trades where funding could be obtained at a minimal cost in overnight markets, and invested in high-yielding longer-term assets, be it emerging-market financial assets, equities, securitised mortgage loans or asset-backed securities.

“South Africa was a beneficiary of this trend… However, we have been abruptly reminded that portfolio flows are fickle, and cannot be relied upon as a source of external funding when the tide turns… In addition, funding in the international markets has become much more expensive.”

The Governor of the Bank of England, Mr Mervyn King, addressing the Worshipful Company of International Bankers in London on 17 March 2009,also spoke about the “inter-linkages” to which Mr Mboweni had referred. Specifically, he said:

“(The ‘cross-section’ of banking behaviour)…reflects the extreme interconnectedness of banks. Each individual institution can appear relatively safe while the links between them mean that the system as a whole is vulnerable. Any shock could lead banks to fail through a domino effect. The superstructure of complex transactions within the financial sector (in derivatives for example) greatly increased this interconnectedness.”

XXIII

We can quote other central bank governors who would essentially say the same thing as these four important economic players, Jean-Claude Trichet, Ben Bernanke, Tito Mboweni and Mervyn King. The challenge however is to indicate the response of these and other important players in the world economy.

In essence this response has boiled down to four interventions, these being:

  • provision of finance by the public sector to ensure the recovery of the private financial sector;
  • provision of stimulus packages by the public sector to finance the recovery of the real economy as well as the demand side of the national economies;
  • a public sector review of the regulatory infrastructure relating to the financial sector; and,
  • increasing the resources available to the multilateral institutions, the World Bank and the IMF, to increase their capacity to respond to the challenges facing the developing countries.

With regard to the foregoing, Mr Lucas Papademos, Vice President of the European Central Bank, had told the 7th European Business Summit organised by the European Business Forum, Brussels, 26 March 2009:

“The economy’s recovery requires the simultaneous implementation of macroeconomic policies to stimulate aggregate demand and of measures that will help repair banks’ balance sheets and encourage the provision of credit to the economy. In this way, a potential vicious circle can be prevented.

“Second, concerted policy efforts in all economies, especially the large ones, are necessary so that world trade can be revitalised and financial capital flows stabilised. This will help support the emerging market economies and global growth. The policy strategies pursued need not be identical across countries and regions and the required size of the economic stimulus and the nature of the other measures taken need not – and should not – be the same, as structural and conjunctural conditions differ. Nevertheless, a similar orientation and consistency is warranted…

“Since last autumn, governments have supported the banking system through various measures: by injecting new capital, by providing guarantees on new bank debt issuance and, more recently, through asset relief schemes (involving the removal of impaired assets from the banks’ balance sheets or the provision of guarantees to limit the valuation losses of such assets). These measures have succeeded in stabilising the banking system, by reducing systemic risks and strengthening confidence.

“The support provided has been substantial, for example banks in the euro area have received 115 billion euro of capital injection from governments (of which 75 billion euro were provided to the major banking groups) and 217 billion euro of funding guarantees.”

XXIV

With regard to the important matter of regulation of the financial sector, in the 17 March, 2009 speech we have quoted, BoE Governor, Mr Mervyn King, said:

“Because charges are often structured so that investment managers receive more of the upside from risky behaviour than they share in the downside, they have an incentive to promote the risky investment strategy. That, allied to a massive increase in the complexity of financial products and instruments in recent years, has meant that investors have, perhaps unwittingly, aided an enormous increase in the risks being run in the financial system.

“Given these problems, it seems to me that regulation should aim to be simple and robust. Overly complex measures of risk and capital adequacy are rarely robust to developments that are easy neither to anticipate nor calibrate. And robust rules for regulation will of necessity need to be simple or supervisors will be lost in a morass of unnecessary detail.

“For the same reasons we should not expect too much of regulation. Conventional judgment is a safe haven for bankers and regulators alike. It is not easy to persuade people, especially those who are earning vast sums as a result, that what looks successful in the short run is actually highly risky in the long run.

“As in monetary policy, it is unlikely that prudential supervision can be implemented as a set of rules to be applied mechanically. Nevertheless, to rely solely on the discretionary judgment of individual bankers and regulators is asking too much of human capabilities. This suggests that the principle of constrained discretion, applied so successfully in monetary policy, needs to be applied to banking regulation.

“That is not to say that a similar institutional apparatus would be appropriate, but we need to build into the system some simple and robust impediments to excessive risk-taking that can be monitored.

“And we must ensure that an institutional memory is maintained so that the lessons from the crisis are not forgotten and those impediments to excessive risk-taking are not swept away once memories of the crisis recede…

“The introduction of simple and robust policy tools into a regulatory regime based on the exercise of constrained discretion would make it easier to resist overly rapid expansion of financial institutions. In particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs – liquidity and leverage. It should be intrusive, in the sense of knowing what is going on, but not bureaucratic.”

Given the central importance of public sector regulation of the financial sector, to avoid global economic crisis in future, it is necessary to understand the core message communicated by BoE Governor, Mervyn King, in the preceding extract.

Mr King makes the important statement – “Conventional judgment is a safe haven for bankers and regulators alike.” Practically, this makes the assertion that other things being equal, rational business practice within the financial sector normally results in outcomes that do not pose any challenge to the health of the lender, the borrower and the overall economic system within which both must operate as successful economic players.

But of course the problem is that it was precisely the reliance on “conventional judgement” which led to the current economic crisis from which humanity is trying to extricate itself!

Beyond this, Mr King’s comment fails to take into account the objective reality immanent in the capitalist system that financial capital will consistently tend towards “exuberance”, producing the unsustainable leverage levels which have brought the financial system virtually to its knees.

It is the accumulated effect of “conventional judgements” of individual financial capitalists, each acting rationally in his/her interest, that has produced the global economic crisis which has led Mr King himself to say, “to rely solely on the discretionary judgment of individual bankers and regulators is asking too much of human capabilities.”

Add to this the ready availability of funds that can be made available as credit, which, as Mr Bernanke observed, enabled the US financial institutions, including the Federal Reserve, to be as profligate as they were in terms of their lending practices.

Relevant to this, in the discussion reported by The New York Review of Books to which we have referred, the Nobel Laureate, the economist Paul Krugman, said:

“One way to think about the global crisis is a vast excess of desired savings over willing investment. We have a global savings glut…There are more savings than we know what to do with.”

With these savings placed in the hands of the financial institutions, it follows that these institutions will seek to increase their value by lending them out as interest bearing assets, or trade them at a profit. The “savings glut” cannot but generate intense competition among the lenders, resulting in such phenomena as ninja loans – loans extended to people who have no income and no jobs!

Add to this the problem that contrary to what Mr King suggests, the “conventional judgement” of the regulators on which Mr King says society must depend is itself subject to question.

In the article Capitalist Fools to which we have referred, Mr Siglitz says: “In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do…In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand…The Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get…Greenspan over not one but two bubbles. After the high-bubble popped, in 2000-2001, he helped inflate the housing bubble.”

So much for the “conventional judgement” of the regulators!

XXV

It is inevitable that we must agree with President Sarkozy, as reported by The Washington Post“Self-regulation to solve all problems, it’s finished. Laissez-faire, it’s finished. The all-powerful market that is always right, it’s finished…Self-regulation is sometimes insufficient. The market is sometimes wrong. Competition is sometimes ineffective or disloyal. It is necessary then for the state to intervene…There has been too much abuse, too many scandals.”

In this context, the two G20 Summit Meetings concentrated on the intervention of the state to regulate the financial markets, and therefore the financial institutions. There was nothing wrong in this, per se.

The fact, however, is that finance is but part, a very important part, of complex economies made up of interdependent parts which are driven by and bound together in a dialectical relationship.

To elaborate “the key values and principles that will promote sustainable economic activity”, as the London G20 Summit Meeting said, will require that much, much more must be done than focus merely on the financial sector, important as this is.

The current global economic crisis made it imperative and inevitable that the state should intervene in the various ways and for the various purposes indicated by Mr Lucas Papademos, Vice President of the European Central Bank, as reported above.

Many Western political leaders make it a point to emphasise that these interventions are a very temporary response to a crisis, and that they will ensure that as soon as possible, they will leave the economy to private individuals, and therefore reaffirm the sanctity of “the market”, as quickly as this is practicable.

The fact of the matter is that this argument and perspective is based on the “flawed economic philosophy” that “markets are self-adjusting and that the role of government should be minimal”, as Joseph Stiglitz put it. This philosophy, repudiated even by Alan Greenspan, is bound to lead to yet other global economic crises, which, like the current crisis, will impose a high cost of impoverishment and suffering on billions of human beings throughout the world.

As human beings who can think, we cannot argue that the lesson we have learnt from the current global crisis is that we must repeat the central mistake which caused the crisis – the mistake of enslavement to what Congressman Waxman described as an “ideology”, that markets are self-adjusting, that, on their own, they are capable of ensuring welfare for all human beings, and that the state should play a minimal role in the social sphere of economic activity!

In this regard, the last nine decades of human history communicate the unequivocal message that it is fundamentally wrong to place on their respective absolute pedestals with regard to economic activity, the state on one hand, and the private sector on the other, as opposed and antagonistic social forces.

The essential challenge is to find the correct balance of power between these two social forces, understanding that at all times their relationship would be characterised by inevitable tension or a non-antagonist contradiction which would be managed within the context of a democratic society. In this context, the contending class and other forces would engage in a permanent struggle each to advance its interests and each to establish its hegemony over the process of national and international social development.

(Of course there are others who argue that this contradiction is inherently antagonistic and irreconcilable. Accordingly they assert that this contradiction can only be resolved through the defeat of capitalism and the victory of socialism. These continue to face the challenge to answer the question as to why the Soviet Union and “socialism in Europe” collapsed, and what they would do to mobilise the majority in the capitalist world to support the revolutionary overthrow of the capitalist system.) 

XXVI

A starting point in constructing the non-antagonistic relationship we have described must be a repudiation of the false ‘free market’ notion that the democratic concept and practice of individual human and political rights includes denial of the right of the democratic state to intervene in economic matters to ensure that the social activity to produce the goods and services without which life is not possible serves the common good – the summum bonum.

The current state interventions to address the current global economic crisis, which are supported by the majority of humanity, prove that the democratic state and the private sector have great need of each other, and that none can succeed in its objectives without the support of the other.

If these two are elephants, we dare say that the saying is applicable – when elephants fight, it is the grass, (the billions of working people), that suffers!

What, then, should be done to “promote sustainable economic activity”, as the London G20 Summit Meeting promised, so that the ordinary people do not suffer as a result of the disjointed and mutually antagonistic actions of the democratic state and the private sector!

Before we answer this question, it is necessary that we now indicate what the London G20 Summit Meeting decided.

In the area of strategy, the G20 Summit Meeting decided that:

  • the current financial and economic crisis is global in nature and therefore necessitates a coordinated global response;
  • the response to this crisis should be based on the activation of a long term economic infrastructure based on national governments, multilateral institutions, and the private sector;
  • this infrastructure should work on the basis that all humanity is tied together in a process of globalisation;
  • the policy framework within which this infrastructure should work should be made up of the three elements of (i) a market economy, (ii) government regulation of the market at the national level, and (iii) effective international monitoring and support especially by the IMF;
  • prosperity for one can only be guaranteed on the basis of prosperity for all, thus indicating that the poor and the rich, globally, share a common interest in working for a thriving world economy whose benefits are shared by all;
  • with regard to the current crisis, urgent measures should be taken to (i) rescue and strengthen the financial sector; (ii) reflate/stimulate the real economy, focusing on job creation and human resource development; (iii) put in place regulations to curb the excesses of the financial sector; (iv) provide resources for the developing countries to weather the current storm; (v) ensure that national fiscal and monetary policies address these objectives; (vi) ensure that, in addition to banks and ‘traditional’ financial institutions, the regulatory framework includes such operations as hedge and private equity funds, tax havens, rating agencies, and accounting processes; (vii) institute ‘green’ programmes within the process of economic growth and development which address the challenge of climate change, as well as encourage the development and use of the necessary resource efficient, and low carbon technologies and infrastructure;
  • work to achieve global consensus on the principles and values that would inform the building of a global sustainable economy;
  • empower and democratise the Bretton Woods institutions to ensure that they support the recovery programme and enhance their legitimacy by improving the effective participation of the developing countries in decision-making in these institutions; and,
  • meet later in the year to ensure the implementation of the agreed Programme of Action.

The Global Plan does not address the critically important issue of what structural changes might be necessary to ensure that humanity is not, once again, condemned to confront the eventuality of the current global economic crisis, and indeed something akin to the 1929/33 World Depression.

The closest it comes to making an all-encompassing statement of strategic importance in terms of reconstructing the political economy is the commitment that:

“We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.”  

The moral strength of this statement is that it holds out the hope of a more humane society. Its fatal weakness is that it says absolutely nothing about what would be done globally to ensure the achievement of the objectives it identifies.

XXVII

We must therefore venture to make some suggestions about what needs to be done exactly to achieve these objectives and to ensure that humanity is not, once again, confronted by the crisis which is described in the opening substantive paragraph of the G20 Global Plan. This paragraph says:

“We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men, and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution.”

While this is true of the world economy, it says nothing about the fact that for billions of people especially in the countries of the South, a seemingly permanent economic crisis of hunger, unemployment and relentless misery is but part of their daily fare. Accordingly, for millions of our own people, the economic crisis of which the G20 spoke is nothing more than an existential crisis that predates and accompanies the current global crisis.

It is therefore natural that we must speak for ourselves about what should be done to end the crisis in which millions of our people are and have been immersed for many generations. At the same time, we must accept as a self-evident truth that, indeed, the global crisis of poverty requires a global solution.

What, then, should be done!

For the poor of the world it is critically important that they answer this question during the period of the global economic recession, not later.

This is because once the world economy emerges from the current crisis, as it will, complacency will set in, which will discourage and frown upon any suggestion that the capitalist system contains within it structural faults that need to be addressed.

Already many are talking about “green shoots” which they claim indicate the recovery of the capitalist system and the capitalist economies.

This feeds the notion that the current global economic crisis is but an exception to the rule, imposing no obligation on human society to address the challenge of what President Nicolas Sakorzy had described as “a new founding of capitalism.”

Already the public discourse, for instance in the United States, is being informed by the propagation of the notion that the fault lies in the immoral behaviour of a few incorrigible individuals rather than a structural fault immanent in the capitalist system.

As an example of this, the September 2, 2009 edition of the Washington Post carried an article headed “So you just squandered billions…take another whack at it”. Among other things it said:

“Back during the heyday of the credit bubble, they (people it named) were the financiers who earned huge bonuses for creating, trading and investing other people’s money in those complex securities that resulted in trillions of dollars in losses and brought global financial markets to their knees.”

The newspaper then proceeds to report on the activities of four of these financiers and says:

“And now they’re out there again hustling for investors and hoping to make another score buying and trading the same securities…The maddening thing is that they’re getting away with it and nobody seems to care.”

There is no reason to question the accuracy of this Washington Post report. The point however is that the activities of the individuals concerned reflect both personal predilection and a systemic fault which makes it possible for the tarnished financiers to succeed in their new ventures.

The newspaper says: “The money (they manage) isn’t coming from savvy outsiders; it’s coming from other members of the Mulligan Club – members who are lucky enough to have money to manage, and clever enough to know that some day they, too, might be looking for a second swing at the ball.”

The “tarnished financiers” continue to “play the market” successfully because no structural change has taken place to change this “market”. Financial capital continues to behave as it did before the onset of the global recession and therefore remains open to the same manipulation, moderated by such new regulations as might have been put in place, as arose from its immanent nature as financial capital.

The challenge correctly posed in the Washington Post article is that it is not a credible proposition to blame the crisis in financial capital on individual misdemeanour rather than the systemic failure immanent in the functioning of this segment of capital.

In this regard the Washington Post article said, correctly:

“It’s hard to believe that large (financial) organisations could really go from being smart and honest one day to being stupid and deceitful a year later. Nor is it credible that the money they earned during the good years was the result of individual brilliance while the money lost in the bad years was the result of uncontrollable market forces.”

Reflecting this view, in an article entitled “US Financial Power in Crisis”, Martijn Konings and Leo Panitch wrote:

“The current crisis is a serious one that has laid bare some key networks of the central nervous system of global finance. Moreover, it is one that emanated from the heart of empire – unlike the crises during the previous decade (such as the Mexican, Asian, Russian and Argentinian ones), which seemed bound up primarily with the inability of developing countries or emerging markets to shoulder the discipline needed to participate in a fully liberalized world order. Other crises – such as the LTCM crisis – played themselves out entirely at the level of high finance. The end of the dot-com boom and the stock market run-up it sustained already had a serious impact on the value of Americans’ investment portfolios. But it is the sub-prime crisis that has really exposed the connections between such a key component of the American dream as home ownership and the mechanisms of financial expansion and innovation. To many, the situation is yet another illustration of the fundamentally unsustainable nature of the neo-liberal system of Americanized global finance, reliant as it is on massive mountains of virtual money and paper-debt created through financial engineering and speculative practices that appear so disproportionate in relation to the wealth-generating capacity and manufacturing competitiveness of the US economy.”

The problem, however, is that, despite these analyses, the view is taking root that the root cause of the current global crisis is the greed of various individuals, who can be identified by name, rather than a fault in the system. This creates the atmosphere in which issues such as bonuses are seen as a fundamental cause of the problem rather than as a mere symptom and limited manifestation of the systemic malaise.

This creates the conditions for everybody to respond with all necessary vigour and passion to the symptoms, giving the space for everybody to walk away from the infinitely greater challenge to address the permanently threatening structural faults immanent in the operations of financial capital in a capitalist system.

The emergence of real “green shoots”, indicating progression out of the global recession, will confirm the view that after all there is nothing to worry about with regard to the functioning of the capitalist system.

This will not help the poor of the world, especially and particularly those in the countries of the South, to use the proven fact of the failure of “the Washington Consensus” to present an alternative agenda relating to the world economy, which would serve their interests.

XXVIII

Part of the challenge that faces the poor is that they should take the trouble to understand the totality of the human condition, going beyond what might constitute the daily items in the media, which, naturally, will report efforts to restore the capitalist system to its normal “health” condition.

For instance, a July 2009 report issued by the US Pew Charitable Trusts, written by Assistant Professor Patrick Sharkey, entitled “Neighborhoods and the Black-White Mobility Gap” tells a detailed story about the continuation of structural and racist discrimination against the African-American population.

In this regard, suffice it to quote only a portion of some of the telling observations in the Pew report, thus:

“Four in five black children who started in the top three quintiles experienced downward mobility, compared with just two in five white children. Three in five white children who started in the bottom two quintiles experienced upward mobility, versus just one in four black children…Black children born from the mid 1950s to 1970 were surrounded by poverty to a degree that was virtually nonexistent for whites. This degree of racial inequality is not a remnant of the past. Two out of three black children born from 1985 through 2000 have been raised in neighbourhoods with at least 20 percent poverty, compared to just 6 percent for whites…Even today, thirty percent of black children experience a level of neighborhood poverty – a rate of 30 percent or more – unknown among white children.”

The fact is that what is “healthy” for the haves is in many instances “unhealthy” for the have-nots.

Taking this to its broader human setting, we would like to cite some comments made by the World Bank and UNCTAD relating to the developing countries.

In a September 2009 Background Paper prepared for the G20, the World Bank says:

“While the global economy is showing tentative signs of recovery, low-income countries (LICs) continue to suffer the consequences of the global recession which has left them with both external and fiscal financing gaps…With large portions of their populations clustered around the poverty line, even brief periods of economic slowdown can result in long-lasting impacts on poverty and longer-term economic growth. By end-2010, 89 million more people are expected to be living in extreme poverty, less than $1.25 per day, than would have been the case without the crisis.

“The World Bank estimates that financing shortfalls to cover at-risk core spending on health, education, safety nets, and infrastructure amount to about $11.6 billion for the poorest countries. Unless these shortfalls are covered, achievements to date in reducing poverty and establishing the foundations for longer-term development will be eroded. Even more will be needed if additional progress is to be made in reaching the MDGs…

“While the relative significance of particular channels of impact differ enormously across LICs, and high frequency data are elusive, available evidence confirms that the impact is both real and large, potentially threatening gains in jobs, poverty reduction, and human development.”

For its part, UNCTAD has said:

“Almost all developing countries have experienced sharp slowdowns in economic growth since mid-2008, and many have also slipped into recession…

“Developing regions most severely hit by the global crisis include Latin America, where GDP is likely to fall by around 2% in 2009, with Mexico undergoing a particularly deep recession. Also strongly affected are West Asia, where several economies have been hurt by tumbling prices for financial assets, real estate, and oil, and South-East Asia, where many countries rely heavily on exports of manufactures. These regions are expected to see negative GDP growth in 2009. In Africa, output growth is expected to slow sharply in 2009, but remain positive, with anticipated growth of 3% in North Africa and 1% in sub-Saharan Africa. In the latter region it has now become virtually impossible to achieve the United Nations Millennium Development Goals by the stated 2015 deadline…”

It is inevitable that the recovery from the global recession will bring differentiated and unequal benefits to the haves and the have-nots. The challenge facing the have-nots is to take advantage of the obvious disastrous failure of “the Washington Consensus”, as admitted and proclaimed by British Prime Minister Gordon Brown, to indicate what should be done to end poverty and underdevelopment globally.

Thus must be return to the question – what is to be done?

XXIX

Earlier in this presentation we quoted from Das Kapital which, without doubt, will have resulted in prejudicing some of the readers to proclaim to themselves – Down with the Marxists! – as much as Marx himself might have proclaimed – God save us from the Marxists!

One of the critical challenges today’s genuine intelligentsia faces is to respect the strictures that govern genuine intellectual inquiry. During an age characterised in part by the enormous influence of the mass media, which encourages adherence to “established truths”, regardless of their scientific provenance, the intelligentsia has an obligation to fight hard to protect the space it needs, to engage in a serious process of unrestricted inquiry, which necessarily includes the right and duty to question or re-examine all “established truths”.

In this context, asserting the right and duty to maintain an open mind as a necessary condition for all intellectual inquiry, we would like to cite observations made by the “founder” of the discipline of “political economy”, Adam Smith, concerning the critical issue of the governance of the “free market” and thus the capitalist economy, relating in this instance to financial capital. Of importance in this regard, is the general acceptance that Adam Smith was the quintessential “free marketeer”, to whom Karl Marx would be an unrelenting opponent.

And yet Adam Smith wrote:

“To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law, not to infringe, but to support.

“Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.”

(Adam Smith: Wealth of Nations, Book II, Chapter 2.)

The central burden of the argument we have sought to advance relates to what Adam Smith, not Karl Marx, characterised as “those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, (which) are, and ought to be, restrained by the laws of all governments”.

Surely, given the conduct that has resulted in the current global economic crisis and recession, no thinking and responsible person anywhere in the world can now argue that “the market” should be left to its devices and therefore that “those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society” should not be “restrained by the laws of all governments”.

XXX

The enormous damage caused by the global economic crisis has obliged many political leaders to recognise the correctness of the view advanced by Adam Smith and therefore to abandon ideological positions which had been treated as being virtually sacred.

When he addressed the Foreign Press Association in London on 26 January 2009, British Prime Minister Gordon Brown said:

“Now more than half a century ago world leaders, educated by the mistakes of the 1930s, concluded that the era of a failed laissez faire and of absentee government was over.”

Returning to this theme at a G20 press conference on 2 April 2009, he said:

“The old Washington consensus is over.”

Speaking as it were in the lion’s den, on November 23, 2009 he told the Confederation of British Industry (CBI):

“In countries like ours, public and private sector: business and government – can no longer engage in a sterile battle for territory with each other: as increasingly is being proposed in America, in France, Germany, China and India, public and private sectors have to work together for the national interest and in particular to promote the common purpose of growth. And more so now than ever before, we cannot hold on to old dogmas and walk away from co-operation in Europe and beyond, and from creating an effective partnership between government and business.”

Arguably, the September 24 – 25, 2009 G20 Summit Meeting held in Pittsburgh, USA, took some concrete decisions to give effect to this outlook, namely to elevate government intervention in the economy. In this context the Meeting launched what it called a Framework for Strong, Sustainable, and Balanced Growth.

In this regard it is important to quote the Pittsburgh Leaders’ Statement at some length. It said:

To put in place this framework, we commit to develop a process whereby we set out our objectives, put forward policies to achieve these objectives, and together assess our progress. We will ask the IMF to help us with its analysis of how our respective national or regional policy frameworks fit together. We will ask the World Bank to advise us on progress in promoting development and poverty reduction as part of the rebalancing of global growth. We will work together to ensure that our fiscal, monetary, trade, and structural policies are collectively consistent with more sustainable and balanced trajectories of growth. We will undertake macro prudential and regulatory policies to help prevent credit and asset price cycles from becoming forces of destabilization. As we commit to implement a new, sustainable growth model, we should encourage work on measurement methods so as to better take into account the social and environmental dimensions of economic development.”

Among other things the Leaders’ Statement also said:

“G20 members with sustained, significant external deficits pledge to undertake policies to support private savings and undertake fiscal consolidation while maintaining open markets and strengthening export sectors.

“G20 members with sustained, significant external surpluses pledge to strengthen domestic sources of growth. According to national circumstances this could include increasing investment, reducing financial market distortions, boosting productivity in service sectors, improving social safety nets, and lifting constraints on demand growth.”

The Leaders’ Statement went further to say:

We call on our Finance Ministers and Central Bank Governors to launch the new Framework by November by initiating a cooperative process of mutual assessment of our policy frameworks and the implications of those frameworks for the pattern and sustainability of global growth… G-20 members will agree on shared policy objectives. These objectives should be updated as conditions evolve…

“This process will only be successful if it is supported by candid, even-handed, and balanced analysis of our policies. We ask the IMF to assist our Finance Ministers and Central Bank Governors in this process of mutual assessment by developing a forward-looking analysis of whether policies pursued by individual G-20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy, and to report regularly to both the G-20 and the International Monetary and Financial Committee (IMFC), building on the IMF’s existing bilateral and multilateral surveillance analysis, on global economic developments, patterns of growth and suggested policy adjustments. Our Finance Ministers and Central Bank Governors will elaborate this process at their November meeting and we will review the results of the first mutual assessment at our next summit.”

As they were directed, the G20 Finance Ministers and Central Bank Governors did indeed meet in the UK on 7 November 2009.

In their Communiqué they said:

“To underscore our new approach to economic cooperation, we launched the G20 Framework for Strong, Sustainable and Balanced Growth, adopted a detailed timetable and initiated a new consultative mutual assessment process to evaluate whether our policies will collectively deliver our agreed objectives. We will be assisted in our assessment by IMF and World Bank analyses and the input of other international organisations as appropriate, including the FSB, OECD, MDBs, ILO, WTO and UNCTAD. We agreed a compact:

• to set out our national and regional policy frameworks, programmes and projections by the end of January 2010;

• to conduct the initial phase of our cooperative mutual assessment process,

supported by IMF and World Bank analyses, of the collective consistency of our national and regional policies with our shared objectives, taking into account our institutional arrangements, in April 2010;

• to develop a basket of policy options to deliver those objectives, for Leaders to consider at their next Summit in June 2010; and,

• to refine our mutual assessment and develop more specific policy recommendations for Leaders at their Summit in November 2010.

“Our first challenge in using the Framework will be the transition from crisis response to stronger, more sustainable and balanced growth, consistent with our goals of sustainable public finances; price stability; stable, efficient and resilient financial systems; employment creation; and poverty reduction…

“The International Financial Institutions (IFIs) will play an important role in supporting our work to secure sustainable growth, stability, job creation, development and poverty reduction. It is therefore critical that we continue to increase their relevance, responsiveness, effectiveness and legitimacy.”

Thus, at the Pittsburgh Summit Meeting, the G20 decided:

  • to constitute the G20 virtually as the world centre to coordinate the global economy;
  • to reaffirm that the G20 governments will intervene in both their national and the international economy to achieve Strong, Sustainable and Balanced (Global) Growth, to secure sustainable growth, stability, job creation, development and poverty reduction;
  • to act together to ensure that each of their national economies is managed in a manner that is consistent with and contributes to such Growth: one of the objectives they would pursue in this regard would be to ensure that countries with large trade deficits would reduce these, as would those with large surpluses;
  • to agree on other necessary policy options;
  • to establish a system of mutual assessment to ensure compliance with the agreed Growth programme, using the IMF and other multilateral organizations; and,
  • to change the agreed policy options as need arises as dictated by changing circumstances.

By any measure these are very significant decisions because they go beyond a mere expression of desirable outcomes. Rather, through these decisions countries that account for 85% of the world economy have decided to act in concert to build a global economy that guarantees a better life for all, and to police themselves to ensure that they live up to their commitments.

The decisions suggest that the G20 leaders indeed took to heart what they said in their April 2, 2009 London Communiqué, that:

“We face the greatest challenge to the world economy in modern times; a crisis which has deepened since we last met, which affects the lives of women, men and children in every country, and which all countries must join together to resolve. A global crisis requires a global solution. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared…”

It remains to be seen whether the G20 will honour the decisions they made in Pittsburgh. Among other things it will be interesting to see how each of the G20 countries assesses its economic policies and programmes within the context of the global goals that have been set by the collective.

This will include how they respond to views of the collective where the latter proposes significant policy changes, as would for instance, relate to those with large trade deficits or surpluses. Also of importance will be what processes the G20 puts in place to measure actual progress achieved with regard to the goals of sustainable growth, stability, job creation, development and poverty reduction.

XXXI

It has long been recognised that the process of globalisation necessitated the construction of an equivalent governance architecture to manage this process. The current global economic crisis made it imperative that action should be taken to address this need.

The G20 has constituted itself as a central component part of this architecture. It is admitted that the G20 represents a better alternative to the G8. However the question remains to be answered – is the better best!

The Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System, (the Stiglitz Commission), published on September 21, 2009, says:

“Global economic integration (“economic globalisation”) has outpaced the development of the appropriate political institutions and arrangements for governance of the global economic system. Economic globalisation means that actions that occur in one country have effects on others. There is a need for global collective action to address not only these issues of global “externalities” but also the provision of global public goods. Among the global public goods are the stability of the global economic system and fair trading rules…

The underlying challenge to effective global economic governance originates from the absence, in a world of sovereign states, of an adequate body or bodies as a locus of coordination and accountability and no way to enforce transparency and elicit compliance. A series of issues, including cooperation in trade in goods and services, cross-border environmental goods, cross-border labor policies, payments and clearing, regulation, contract enforcement, exchange rates, and other related cross-border matters, have to be addressed through coordinated arrangements which involve negotiated derogations (or better, sharing) of sovereignty in specific areas.”

To respond to this challenge, the Report suggests the establishment of a Global Economic Coordination Council (GECC), supported by an International Panel of Experts and says:

In the longer-term, a Global Economic Coordination Council should be established at a level equivalent with the UN General Assembly and the Security Council. Its mandate would be to assess developments and provide leadership in addressing economic issues that require global action while taking into account social and ecological factors. Based on this mandate it would promote development, seek consistency of policy goals and policies of major international organizations, and support consensus building among governments on efficient and effective solutions for global economic, social, and environmental issues. Its work would go beyond simply the coordination of existing institutions. With the support of the Panel of Experts, the GECC could also promote accountability of all international economic organizations, identify gaps that need to be filled to ensure the efficient operation of the global economic and financial system, and make proposals to the international community for remedying deficiencies in the current system.

“The Council would have a mandate over the UN System in the economic, social, and environmental fields, which include the Bretton Woods Institutions (BWIs) and should include the WTO by bringing it formally into the UN System…”

The Report also states its position with regard to the G20 in unequivocal terms and says:

“Neither the G-7 industrialized countries nor the G-20 represents a sufficiently inclusive global steering group for addressing global systemic challenges. The G-7 has taken a number of initiatives that are important for developing countries and is engaged in a systematic dialogue particularly with African countries. While the G-20 (which actually has 22 members) is more broadly based, there is still no representation of the remaining 170 countries.”

In the end, to emphasise its point of view, the Report concludes by saying:

“If we are to live together in peace and security on this planet, there must be a modicum of social justice and solidarity among the citizens of the world. We must be able to work together to protect the world from the ravages of climate change, to help each other in times of global crisis such as that confronting the world today, and to promote economic growth and stability in the long run.

“The UN is the one inclusive international organisation with the political legitimacy and the broad mandate to address all these issues and to take into account, in a comprehensive way, all the relevant dimensions of the policies designed to address these global economic, social and environmental challenges…This global crisis provides an occasion to strengthen the UN and its role in global economic governance.”

It is a matter of common cause that the process of globalisation has not benefited the peoples of the world equally. The 2000 Millennium Declaration put the matter thus:

“We believe that the central challenge we face today is to ensure that globalisation becomes a positive force for all the world’s people. For while globalisation offers great opportunities, at present its benefits are very unevenly shared, while its costs are unevenly distributed. We recognise that developing countries and countries with economies in transition face special difficulties in responding to this central challenge. Thus, only through broad and sustained efforts to create a shared future, based upon our common humanity in all its diversity, can globalisation be made fully inclusive and equitable. These efforts must include policies and measures, at the global level, which correspond to the needs of developing countries and economies in transition and are formulated and implemented with their effective participation.”

The Declaration did not say specifically that the biggest beneficiaries of the process of globalisation are the developed countries many of which belong to the G20.

What has happened is that once these experienced the negative effects of the process of globalisation, they indeed took action to establish some system of governance to manage this process. However they also took the deliberate decision that that governance system should include only the most powerful economic players, the eminent beneficiaries of the process of globalisation.

When the leaders of all countries that are members of the UN General Assembly adopted the Millennium Declaration they said that to ensure that globalisation benefits all, those who benefited least from this process should be directly involved in any governance system to manage it.

The Stiglitz Commission reiterated this call and proposed that rather than the G20, the UN should establish the GECC which would derive its legitimacy and therefore its effectiveness deriving from its universal acceptance from the fact of its inclusiveness.

It is virtually certain that the G20 will ignore this proposal and will proceed to implement the decisions of the Pittsburgh Summit Meeting, only responding to the demand that the poor should represent themselves in all institutions of global governance by improving representation in the governing structures of the Bretton Woods institutions, but not the G20 itself.

The question therefore still remains to be answered – has enough been done to build “appropriate political institutions and arrangements for governance of the global economic system?” Will it take yet another destructive global economic crisis to persuade the powerful that not only should they break ranks with the market fundamentalist Washington Consensus, but also that, on the global plain, they should practice the democratic system of government which they loudly proclaim to value and cherish!

XXXII

The book, The Gods that Failed: How the Financial Elite have Gambled Away our Futures, by senior British journalists Larry Elliot and Dan Atkinson was published in 2009. (Vintage Books, 2009). Because of the important suggestions made by these Economics Editors of the Guardian and the Mail on Sunday respectively, this section will focus exclusively on their book.

In the book they urge that society should take action to contain what they characterise as the New Olympians. In this regard they say:

“Democratically elected governments have, over the past three decades, willingly ceded control of the world economy to a new elite of freebooting super-rich free-market operatives and their colleagues in national and international institutions. We call these people the New Olympians, so named because of their remoteness from everyday life and their lack of accountability and because of the faith to which they subscribe…

“They roll their eyes in despair when they hear that the Detroit car worker, the Argentinian shopkeeper or the Cornish fisherman is complaining that their way of life is under threat. Like it or lump it, that’s the way it is and has to be, the New Olympians say…

“The charge sheet is as follows:

“They promised economic stability, and have delivered chaos and volatility. They promised an economic order based on enterprise, thrift and personal effort and have delivered one based on chronic indebtedness and wild speculation…

“They promised a greatly expanded middle class of property and share-holding individuals, a New Yeomanry of sturdy, independent citizens. They have delivered the unleashing of havoc on professional and white-collar career structures, smashed up the pension schemes of the middle class and forced their children deep into debt for the privilege of attending university.”

To respond to this disaster, which has also impoverished and disempowered the working class, Elliot and Atkinson say:

“In place of the New Olympianism we propose a New Populism, a creed that puts ravenous finance back into its cage and concentrates on a real-world agenda of jobs, living standards and security in retirement instead of the Olympian agenda of free trade, free capital movements and the primacy of finance.”

Specifically they make the following suggestions:

# Governments should act to ensure “the subordination of finance…(that) financial sector activities (are) kept on a tight rein…and their proper, auxiliary role in relation to the real economy kept firmly in focus.”

# Society must pursue the goals of personal and social security, to “insure its members against misfortune, protect their savings and make proper provision for their old age.”

# Society must pursue the principle and practice of “accountability, or ‘democracy’, to put it slightly differently…The leeching away of powers from national parliaments to the New Olympians’ mandarin allies in bodies such as the IMF…is…the Olympians’ anti-democratic project…So great is the democratic deficit that increasingly people either do not bother to vote or vote for non-mainstream parties.”

# The “semi-detached super-rich class” is “undesirable”. “Not only does such a class pull money values completely out of shape…but it tends to be the fons et origo of the horrendous errors from which the world economy is now reeling.”

# To counter-balance this class, society should ensure “the protection and strengthening of an independent middle class…Professions must be subject to public scrutiny – they should be subject to sensible independent regulation, too. But they cannot be adequately replaced by corporate forms of employment.”

# “To the specific protections from the market for the professions ought to be added a general protection for everybody…Social stability and tranquillity are more important than market efficiency or shareholder value.”

# Society should ensure the “liberty of the person”. “The New Olympians have been keen to assert that their right to move colossal sums around the world, to speculate and to generate credit, is indivisible from the right of humbler folk to live their lives as they choose, but we argue otherwise…As the financial interest has been progressively freed over recent decades, the liberty of the person has been increasingly restricted.”

The authors of The Gods that Failed say quite correctly that “our principles would give rise to much greater control of finance and big business. The ‘liberty’ of the Olympian institutions would be severely restricted.” Specifically, in their words, they suggest:

  • tighter controls on lending and on the generation of credit;
  • the forced demerger of large banking and finance groups, splitting retail banking from both corporate finance and from securities dealing;
  • breaking banks that are ‘too big to fail’ into smaller corporations and downsizing the financial sector;
  • subjecting all derivative products and other exotic instruments to official inspection;
  • offering protection for the remaining top-class industrial companies against speculators;
  • sharply increasing taxes on hedge fund operators and private equity partners; and,
  • deregulating genuinely private businesses and the self-employed: such deregulation may divert many talented people from the Olympian status to gentler, more rewarding and more socially useful business careers.

Clearly Elliot and Atkinson would like to see a radically transformed capitalist system based on:

  • restricting the emergence of monopolies and oligopolies, certainly in the financial sector, thus freeing the economy from the domination of companies that are ‘too big to fail’;
  • a freer market composed of large number of companies that can compete against one another on a more equitable basis;
  • a downsized and regulated financial sector, with the real economy taking precedence; and,
  • greater and sustained intervention by the state to regulate the economy so that it serves the greater good – the summum bonum – and results in a more equitable distribution of wealth.

Obviously they realise that much work would have to be done to secure acceptance of their ideas. In this regard they say: “there is likely to be plenty of work to do in terms of spreading the word.”

For this purpose they propose the formation of a coalition/alliance to “spread the word” and thus defeat the New Olympian perspective and paradigm which have, in their view, dominated the global economy for the last 2 – 3 decades.

They suggest that this coalition should include small business people and farmers, independent middle class professionals, shopkeepers, managers at the supervisory level, manufacturing and exporting businesses and trade unions.

Explaining the rationale for this coalition they write:

“Industry and those working in it have been the biggest losers from the Olympian experiment as productive capacity has been destroyed and millions of manufacturing jobs wiped out. Those owning, running and working in industry know better than anyone the virulence with which New Olympianism has blighted the economy. Both union members and managers have much to gain from a more sensible attitude to industry.

“And those within such a coalition will always have the inestimable advantage of the fact that, beneath the shiny packaging, the Olympians’ creed is and always has been the reverse of their own. It is Unpopulism, the belief system that sacrifices jobs and productive assets on the alter of deal-making, that demands schools and Post Offices be ‘rationalised’ (i.e. closed), that insists on  lower tax rates for the rich than for their domestic servants, that has created a vast debt bubble and chronic global instability and which, even at this late hour, has the effrontery to suggest that the answer to the crisis lies in the even more enthusiastic application of New Olympian ideas in terms of untrammelled free-market activity…

“The gods promised us paradise if only we would obey and pamper their hero-servants and allow their strange titans and monsters to flourish. We did as they asked…Had they delivered, there would, at least, be a debate to be held as to whether the price was too high, in terms of the loss of democratic control and widening social inequality. But they have not…These gods have failed. It is time to live without them.”

In two Afterwords they write:

“Capital’s winter (and spring) of discontent (have) provided both a challenge and an opportunity. Would elected governments seize the chance fundamentally to reform an economic system shattered by the excesses of the New Olympians?…At the time of writing, the question remains open…

“The world has changed utterly during the past 15 months. For the disciples of anything-goes finance, the events of 2007 and 2008 have been as traumatic as was the demolition of the Berlin Wall in 1989 to communist apparatchiks and the western apologists. The collapse of communism marked the dawn of market fundamentalism; the necessity for the US government to take a stake in Goldman Sachs and Morgan Stanley saw the sun going down on that era.”

Time will tell whether that sun has indeed set, and whether the coalition Elliot and Atkinson propose actually forms and therefore whether it develops sufficient strength to oblige governments to act in concert radically to transform and manage the capitalist system.

XXXIII

Thus to answer the question – what is to be done? – we would like to say:

# Society must liberate itself from the false notion that “the market” is an autonomous social process that has an inherent ability to meet the objective of achieving the greatest good – the summum bonum.

# This means that the only existing and theoretically all-inclusive social institution, the State, should intervene in “the market” to facilitate the achievement of the summum bonum, described as achieving the objective of a better life for all, equitable distribution of wealth, and all-round human fulfilment.

# In turn this means that the State must be so constituted that it represents the people as a whole and not serve as an instrument for the exclusive protection and advancement of the interests of particular social classes and/or ethnic groups.

# The intervention of the State should pursue the related and inter-connected objectives of ensuring the continuous expansion of the “wealth of the nation”, and the equitable distribution of this wealth to realise the objective of the all-round development of the citizen.

# Given the fact of the process of globalisation, an ineluctable part of the process of human development, the intervention we have spoken of should be a central element in the system of global governance.

# Given the central importance of capital in the process of socio-economic development, and therefore the development of societies, with such capital now existing in large concentrations as financial capital, the State, globally, must intervene to ensure sufficient transfers of capital to all countries to ensure the achievement of the universally accepted goal of the global eradication of poverty and underdevelopment.

# The realisation of this objective presumes the democratisation of the system of global governance, which would enable even the poor to impact on the global financial and economic architecture, side by side with the rich, to ensure that the central issue of the eradication of poverty and underdevelopment occupies its rightful place in the world agenda.

# Given the fact of the existence of powerful vested interests that are opposed to the perspective we are proposing, with the poor disempowered by their poverty, extraordinary and principled steps will have to be taken to mobilise the poor of the world, in both the South and the North, to act in unity to struggle for the objectives we have indicated.

# The modern world economy disposes of sufficient capital, intellectual, human, natural and other resources to eradicate poverty and underdevelopment globally.  That this objective has not been achieved is a result of an entrenched and strategic power imbalance within and among the nations. To correct this, the poor of the world will have to devise ways and means to ensure that they act as a united force, capable of decisively intruding into the hegemonic space currently occupied by the dominant political and economic forces which have constructed and defend a world order that guarantees the continuing impoverishment of the poor and the enrichment of the rich.

# To achieve their objectives, the poor of the world will have to elaborate their own coherent theory and programme of development, and propagate these so that they make the necessary impact with regard to the required and necessary evolution of human society.

# The question that remains to be answered is – what steps should the poor take, the overwhelming majority of humanity, to establish their rightful place with regard to defining what should be done today and tomorrow to achieve the goal of the realisation for all humanity of the goals of freedom from oppression and tyranny, freedom from hunger and want, freedom from ignorance and fear, freedom from war and insecurity, and freedom from social exclusion and the fragmentation of human society in favour of the rich!

XXXIV

The Stiglitz Commission reflected on the role of the subjective as one of the causes of the global economic crisis. With regard to the role of economic doctrines in this regard it said:

“Part of the explanation of the current crisis may be found in the underlying economic fundamentals. Another is in the economic theories that motivated the financial and economic policies that produced the crisis…These same economic doctrines – the belief that economic agents are rational, that governments are inherently less informed and less motivated by sound economic principles and therefore their interventions are likely to distort market allocations, and that markets are efficient and stable, with a strong ability to absorb shocks – also affected macroeconomic policies.

“One of the most important lessons of the Great Depression was that markets are not self-correcting and that government intervention is required at the macroeconomic level to ensure recovery and a return to full employment.”

In an interview with Der Spiegel published on September 14, 2009, the IMF Managing Director, Dominique Strauss-Khan, said:

“The financial crisis was a catastrophic event, but one created by human hand. The lesson we all need to learn is that even a free market needs some regulation, otherwise it cannot function. All these ideas about deregulation – that more deregulation is always better and that the market can solve every problem – are fine on paper but they do not work in reality.

“There are very few people today who say you should not have a market at all. And there are also very few who want absolutely no regulation.”

XXXV

The question is – is this all that we should learn?

What place in the taming of the ‘New Olympians’ will the programme of action proposed by Elliot and Atkinson take, in which they say, relating to the UK (and perhaps other developed countries?:

“The independent professionals need to grasp the dangers of being assimilated by commercial entities and to cease to regard Corporate Britain as an essentially friendly place, respectful of the status of lawyers, accountants and the rest. Similarly, liberal writers, artists, senior left-leaning white-collar personnel – those that tend, lazily, although not entirely inaccurately, to be labelled with the names of their presumed favourite newspapers or with the London boroughs where they like to live, need to be made aware of the urgent need to build alliances with the remnants of organised labour. Export-oriented business needs to agitate for a state system that supports them rationally and effectively, in terms of financial support, trade policy and the exchange rate. State employees need to recognise that the notion of a ‘public sector’ as traditionally understood is under attack, from New Labour as much as from the right. Rather than support either ‘market reforms’ (which often mean worse services provided by lavishly rewarded private contractors) or the bloated social-engineering sector (which seems designed, in part at least, to soak up many of the additional graduates generated by the breakneck expansion of higher education), public sector workers should call for more democratic accountability and the re-establishment of incorrupt, cost-effective and competent public services, provided on clear and, as far as possible, non-discretionary premises on the straightforward basis of entitlement.

“This may sound like hard, dusty work. Certainly it does not offer the excitement of revolutionary agitation. But it is a political response to the current situation that offers some chance of success. All those who met on Mont Pélerin (to plan for the promotion of the neo-liberal agenda) all those years ago were not daunted, and neither should we be.”

Can the inter-governmental organisations such as the G20 be trusted to elaborate such a programme of action, including for the poor billions in the countries of the South who have been among the worst victims of the predatory actions of financial capital?

Can the working people of the world, in both North and South, count on their governments to defend and advance their interests, determined to oppose the power of the New Olympians?

Has the time not come that these working masses take to heart what Noam Chomsky said, that: “The main task is to create a genuinely responsive democratic culture, and that effort goes on before and after electoral extravaganzas, whatever their outcome.”?

“All previous philosophers have sought to interpret the world: the point however is to change it!”

(Karl Marx: Theses on Feuerbach.)

ends

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