Sunday, March 22, 2009

The Crisis of Neo-liberalism

R. Ramakumar

The global economic crisis – reflected in stock market crashes, growth slowdowns, banking crises, capital flights and large job losses – has indeed halted the march of neo-liberalism as the dominant ideology of our times. It marks the end of a phase in which finance capital enjoyed historically unprecedented rights and privileges in deciding economic policy. Whether it leads to a total collapse of the present financial system or not, it also marks the end of a phase where the “minimalist role” of the state was hailed as supreme. The crisis has forced the governments of many developed nations to intervene, regulate, and even nationalise financial institutions; as French President Nicholas Sarkozy was to admit, “laissez faire is finished.”

This is not the first time in its history that capitalism has faced such a massive crisis. The Great Depression of the 1930s was a classic demonstration of the consequences of the domination of finance capital over the production sector. To “save” the capitalist system from collapse, John Maynard Keynes had recommended “a somewhat comprehensive socialisation of investment” in the economy. Nation states intervened with massive public investment, raised levels of employment and moved out of recession. After the War, Keynesian demand management and the provision of a host of welfare measures were central to economic policies in both the developed and developing world. This conjuncture was highly favourable to growth and employment generation, leading some to refer to the 1950s and 1960s as the “golden age of capitalism.” Importantly, this period was marked by a shift in the balance of class forces in favour of the working class, which wrested major concessions from the ruling class making use of their stronger bargaining position.

However, the neo-classical counter-revolution in the 1970s and 1980s ensured the return of “laissez faire capitalism” as the guiding ideology of world capitalism. The neo-classical counter revolution was associated with concrete changes in the material conditions under which economies across the world operated. There was a radical transformation of both the structure and management of the world economy, beginning from the late-1960s. The above transformation, both quantitative and qualitative, was significant in that it finally seemed to offer the historic possibility of creating a truly unified global capitalist economy. In other words, it was the new stage in the “centralization of capital” that shaped the material ambience for the neo-classical counter-revolution. In theory, monetarism returned with a vengeance. In policy, laissez faire capitalism was packaged into the Washington Consensus.

The counter-revolution unleashed from the 1970s onward did not simply return global capitalism to its pre-Keynesian form of organization. While capitalism before the First World War was marked by the global mobility of “capital for production”, the new form of capitalism was marked by the global mobility of “capital as finance.” It was not a merger of identities of finance and industry, but a condition where finance dominated the sphere of production. The new mobility of capital was not characterized by rising trade transactions across the globe, but by short-run speculative capital flows. Alongside, a slew of innovative financial instruments were unleashed to meet the growing needs of financial mobility as well as to hedge against the rising risks.

A corollary to the domination of globally mobile finance was the shrinking of the space available for the state for autonomous economic policies. Growing economies that are open on the capital account invariably attract capital inflows, whose size is often significant relative to the GDP. This turns into a Gordian knot. The sustenance of capital inflows becomes dependent on certain parameters of the economy. Any effort by the state to expand economic activity, or to adopt a redistributive social policy, makes speculators uneasy. The speculators begin to worry about inflation, fiscal deficit, exchange rate depreciation and above all, political radicalism. Capital flight begins, and as volatility in financial flows leads to dampening of growth, governments try to stem the capital outflow by rolling back their policies. As Prabhat Patnaik has noted, “state intervention presupposes a ‘control area’ of the state over which its writ can run; ‘globalization’ of finance tends to undermine this ‘control area.’”

For the developing world, the era of finance capital implied the death of the “development project.” By the development project, we refer to the set of socio-economic policies and national goals that the newly independent colonies pursued in the 1950s and 1960s. In these countries, such as India, the bulwark of the development project was the nation state. Indeed, most of these nation states were elite-controlled, and pursued elite interests. Agrarian reforms were only sparsely undertaken in the developing world, and consequently the agrarian question remained a critical unresolved issue. Nevertheless, there were limited gains. Import substituting industrialization created a protective environment in which the industrial sector expanded and self-reliance grew, albeit slowly and unevenly. The banking sector was brought into the public domain and regulated, which contributed to investment credit needs to a significant extent. In many countries, banks were actually nationalized. The limited welfare state regime protected workers to some extent from the aggressive exclusiveness of the market.

Of course, the real task of nation-building required more than a mixed economy. The contradictions left behind by the mixed economy-path, themselves generated new fetters to growth. Yet, the mixed economy path also sustained an important nationalist platform in the political arena, from where deeper struggles to complete the development project could be launched.

In the new era of finance, however, the role of the nation state stood undermined vis-à-vis the development project. With the “confidence” of international speculative investors attaining the status of a policy imperative that could not be questioned, other domestic policy measures were dovetailed to this end. As a result, interest rates were kept high (to incentivize financial inflows), the financial sector was deregulated (to ensure retention and prevent outflow of finance), government expenditures were compressed (to keep fiscal deficits controlled), labour rights were restricted (to allow free entry and exit of firms), public enterprises were disinvested or sold off (to ensure financial discipline in the public sector) and external trade was liberalized (to attract inflows of foreign capital in export oriented sectors and encourage export growth). This set of policies was packaged as the Washington Consensus (WC) by the World Bank and the IMF, and forced to be implemented by the developing world in the 1980s and 1990s. The supplement of the Post-Washington Consensus (PWC) was primarily intended to render the package more palatable; without deviating from the central ideas of stabilisation and structural adjustment, the PWC was an attempt to integrate the state and a minimum of anti-poverty measures into the framework of WC.

The actual experience with the WC in the developing world has been profoundly negative. Levels of economic growth in the 1990s and 2000s have been typically below the levels of 1950s and 1960s. Rates of poverty reduction have slowed down. The number of people forced to live in income-poverty (even if a destitution cut-off of $1 a day is used) continues to be appallingly large. Inequalities and economic insecurities have been fostered on a massive scale. The fiscal conservatism of the WC has led to relative declines in development expenditure, particularly in social welfare. The liberalisation of trade has been deeply asymmetric, and this has had deeply adverse impacts. The neo-liberal promise that trade liberalisation would lead to expansion of world trade in primary commodities, and thus export-led growth, has remained unfulfilled. Indeed, the most perfect demonstration of the disaster unleashed by the WC comes from the transition to full-fledged capitalism in the Eastern bloc countries.

The current financial crisis has thrown into sharp relief the abject failure of the economic model championed under the WC. It is clear now that it was not just the livelihoods of large sections of people that were rendered fragile and vulnerable, but the economic system itself was rendered so.

Reading Marx in the Times of Global Financial Crisis

R. Ramakumar

In a system of production, where the entire continuity of the reproduction process rests upon credit, a crisis must obviously occur when credit suddenly ceases and only cash payments have validity…The credit system appears as the main lever of over-production and over-speculation in commerce solely because the reproduction process is here forced to its extreme limits…The credit system accelerates the material development of productive forces and the establishment of the world market…At the same time, credit accelerates the violent eruptions of this contradiction – crises – and thereby the elements of disintegration of the old mode of production.

Karl Marx, Capital, Volume III

The interest in Marx seems a vindication, as his analysis of capitalism put its finger on globalisation and periodic crises and instabilities…It is fun to discover that what one has been saying for a long time, and others have been pooh-poohing, is being taken seriously. But that is not the important thing; [the important thing] is to recognise that a phase of this particular world system has passed and we must think of another one. It will take a long time for it to settle down, but there is no way we are going back to where we were in the 1980s and 1990s, and that's a good thing.

Eric Hobsbawm, The Times, 21st October, 2008

The continuing global financial crisis has indeed halted the march of neo-liberalism as the dominant ideology of our times. Whether it leads to a collapse of the financial system or not, it marks the end of a phase where the “minimalist role” of the state was hailed as supreme. It also marks the end of a phase in which finance capital enjoyed historically unprecedented rights and privileges in deciding economic policy.

In this context, it is but natural that leaders of capitalism remember that man who praised capitalism for its great productive flourish, and yet like a prophet, predicted its long run lurch from one crisis to another. George Soros, the infamous speculator, reportedly told Eric Hobsbawm recently: “I have just been reading Marx and there is an awful lot in what he says.” From London, The Times reported on October 20th that President Nicholas Sarkozy of France was seen reading Marx’s Capital, while Peer Steinbrück, the German Finance Minister, said that “certain parts of Marx’s thinking are really not so bad.” In the last few weeks, the European media is awash with reports that there is a sudden rise in interest in the writings of Karl Marx. One is tempted to say that the specter of Marx is haunting Europe and the United States!

However, even while there is renewed interest in Marx’s writings, there is also a tendency to attach some of his quotes to the present financial crisis in a superficial and simplistic manner. This tendency is notable in the writings of people on the right as well as on the left. In both cases, the danger is of trivializing Marx’s argument. Marx did note certain definitive tendencies in capitalist dynamics. His treatment of the role of credit under capitalism, in some detail, is in Volume 3 of Capital. After Marx, writers like Hilferding and Lenin enriched his writings with historical and contemporary studies of the capitalist system. The analysis of the present crisis would be incomplete if we do not place it in the context of the body of subsequent work in the Marxist tradition.

Marx on the role of credit under capitalism

As the Marxist scholar Ernest Mandel put it, while trade was born from the uneven development of production across communities, credit was born from the uneven development of production across producers within the same community. The modern credit system historically developed alongside the breakdown of primitive communities, in which mutual aid and exchange labour were common. With the growth of production for exchange-value, free advances of loans were increasingly replaced by credit, which was charged for. In the initial phases of mercantilism, a prominent role in money-exchange was accorded to temples, monasteries and other religious institutions. Kings and traders stored their large stocks of precious metals in these institutions for safety. These institutions were also the first moneylenders in many parts of the world.

With the slow geographical expansion of trade, there was a need to deal with a large number of coins of different origins and amounts. In order to exchange these coins at their true values, specialized money-changers and traders emerged. These money-changers were the first professional bankers. The word “bank” reportedly comes from the Italian word “banco”, which was the name of the table on which money-changers carried out their operations.

With large-scale expansion of international trade, an inherent need arose for credit. Purchase and delivery were separated in time; buyer and seller were separated in space; money had to be transported across large distances; and the fluctuation in values of different coins had to be dealt with. Thus, there emerged the need for circulation credit. Societies that were involved in international trade began to develop new financial instruments for this purpose, such as “bills of exchange” and “letters of credit.” By the middle of the 18th century, as the circulation of money and the demand and supply of money-capital increased, local private banks began to be formed. These banks began to accept deposits, issue bank notes and discount trade bills.

Nevertheless, a full-blown expansion of the credit system had to wait till the industrial revolution. Under industrial capitalism, as opposed to merchant capitalism, the credit institutions began to play the critical role of an intermediary between those who held unproductive money and those who were trying to increase their capital base with borrowed capital. In this way, bank capital initially emerged as the hand-maiden of industrial capital. Marx saw that the banker in this new role played a dual social role. On the one hand, he mobilized the fragmented sources of capital and centralized that capital. On the other hand, he made available this centralized capital to the industrial capitalist, who was looking for large sums of credit. In this centralizing role under capitalism, banks did not allow any money to remain unproductive; they immediately “capitalized” the money for the capitalist.

It was under industrial capitalism that stock exchanges and negotiable financial instruments also matured in form. These instruments were important to meet the long-term investment credit demands of the infant joint-stock companies. But there was a risk in lending money to firms for long periods. As a result, additional guarantees were asked for, and direct shareholding in companies by share-owners became common. The development of joint-stock companies and stock exchanges was a special way of centralizing idle money in the society for the investment needs of capitalist firms.

According to Marx, the formation of joint-stock companies was an important stage in the socialization of production under capitalism. Joint-stock companies presupposed a social concentration of the means of production and labour power. They were directly endowed with a form of “social capital” as distinct from “private capital.” Its evolution represented the abolition of capital as private property within the framework of capitalist production itself. Capital was no longer the private property of individual producers, but it became outright “social property.” The capitalist himself is transformed into a mere manager of capital owned by other people. As Marx noted in Chapter 27 in Volume 3 of Capital,
“…credit offers to the individual capitalist…absolute control within certain limits over the capital and property of others, and thereby over the labour of others. The control over social capital, not the individual capital of his own, gives him control of social labour…What the speculating wholesale merchant risks is social property, not his own…Success and failure both lead here to a centralisation of capital, and thus to expropriation on the most enormous scale…It is the point of departure for the capitalist mode of production; its accomplishment is the goal of this production.”

At the same time, the real owner of capital is totally divorced from the actual process of reproduction. The real owner may own shares, but it is only a claim on a part of the future profits of the company. Even when the share is later sold at a higher price, the difference in price does not enter into the circuit of capital of the company. That is why Marx said: “all this paper (the share) actually represents is nothing more than accumulated claims, or legal titles, to future production whose money or capital value…is regulated independently of the value of real capital which it represents.”

Where is the “crisis” here? In the joint-stock companies, capitalists and credit institutions invest their money in the form of shares and debentures. These investors would make sure that they obtain at least the “average rate of interest” on these investments. However, shares and debentures are also bought and sold in the stock exchange. The prices of these instruments are nothing but the “capitalization of the annual dividend (income) at the average rate of interest.” In a sense, this should be the actual value of the share in the stock exchange. But in most cases, the market value of the share exceeds the value of capital that is invested in the company.

Let us take an example. Suppose a company has a capital of Rs 10 crore, and its average rate of profit is 20 per cent per year. Thus, its profit is Rs 2 crore a year. This company has 10 lakh shares, and each share has a claim of Rs 20 as dividend every year. The average rate of interest in the market is 5 per cent per year. There is a risk of the dividend fluctuating year after year. Let us assume that the returns from the share should be at least 10 per cent per year, which is the bank rate of interest of 5 per cent plus the risk premium. In other words, each share would be priced in the market at Rs 200, assuming an average return of 10 per cent on real capital. Thus the stock market value of all the 10 lakh shares would be Rs 20 crore. The excess of Rs 10 crore over the original capital of Rs 10 crore is nothing but “fictitious capital”, as Marx called it. According to Marx,
“Even when the promissory note — the security — does not represent a purely fictitious capital, as it does in the case of state debts, the capital-value of such paper is nevertheless wholly illusory…The independent movement of the value of these titles of ownership, not only of government bonds but also of stocks, adds weight to the illusion that they constitute real capital alongside of the capital or claim to which they may have title…Their market-value is determined differently from their nominal value, without any change in the value of the actual capital… Since property here exists in the form of stock, its movement and transfer become purely a result of gambling on the stock exchange, where the little fish are swallowed by the sharks and the lambs by the stock-exchange wolves.”

Marx dismissed the argument that socialization of capital under joint-stock companies helps it to overcome crises. The contradictions of private property do not disappear even when private property is apparently transformed into social property. He said that “instead of overcoming the antithesis between the character of wealth as social and as private wealth, the stock companies merely develop it in a new form.” Here, Marx used the comparison of a capitalist stock company and a co-operative factory of the labourers themselves. He concluded that “the capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”

It is from the concept of “fictitious capital” that Marx arrives at the possibility of credit crises in capitalist societies. Because much of the inflated value of shares is fictitious or illusory, a crisis occurs when loans turn sour, lender confidence collapses, expectations fed by an irrational speculative orgy collapse and traders and lenders and sellers start demanding hard cash for every transaction. In other words, credit suddenly collapses and everyone starts demanding cash. When every agent in the economy tries to turn credit into cash, there would be a massive liquidity shortage. This is the beginning of a credit crisis. The liquidity shortage first leads to a rise in interest rates. But when rise in interest rates cannot stop the crisis, bankruptcies result and there is a generalized banking collapse.

Thus, according to Marx, credit system becomes extremely useful for the capitalist mode of production in continuously breaking the barriers to the material development of productive forces. The credit system achieves this feat by nothing but “the purest and most colossal form of gambling and swindling”. But this only postpones the crisis. The more the crisis is postponed, the greater the strength with which the crisis would inevitably strike.

After Marx: Hilferding and Lenin

I dealt with Marx’s writings in great detail above only to explain the broad contours of the crisis. After Marx, Marxist scholars like Hilferding and Lenin had worked out in great detail the contradictions immanent in finance-driven capitalist expansion. For reasons of shortage of space, I can only provide their arguments in summary.

Hilferding’s main contribution was to theorise the idea of “finance capital” from the concept of “financial capital’ that Marx used. Hilferding saw that most of the big banks also owned a large number of shares in joint-stock companies. He wrote of “an ever more intimate relationship” between banks and industrial capital. According to him, “taking possession of six large Berlin banks would mean taking possession of the most important spheres of large scale industry.” This collusion, Hilferding said, represented “the latest phase of capitalist development”. This was the phase of imperialism, which Lenin was to later describe famously as “the highest stage of capitalism.” Hilferding’s book was described by many as a continuation of Volume III of Capital. Lenin himself called it a “very valuable theoretical analysis.” (Due to his reactionary positions later, Lenin himself was to describe Hilferding as an 'ex-Marxist').

Lenin’s theorization of the idea of finance capital is in his book Imperialism: The Highest Stage of Capitalism. In his detailed analysis of data regarding the links between banks and joint-stock companies of that period, Lenin noted that (a) banks owned significant shares in the jointstock companies; (b) the people who owned shares in banks also owned shares in companies; (c) banks appointed members to the boards of companies, thereby strengthening the links between the two; (d) as banks handled the financial transactions of the companies, they had intimate knowledge of the working of the company. In Lenin’s work, this stage of development of capitalism was the stage of “monopoly capitalism” or “imperialism.” The dominance of finance capital was an important feature of this stage; it was in Lenin’s words, “the bank capital of a few very big monopolist banks, merged with the capital of the monopolist associations of industrialists.”

The works of Lenin and Hilferding actually linked two features of industrial capitalism that Marx had developed: one, the growth of joint-stock companies and second, the growth of the credit system. The growth of links between these two entities was what Lenin and Hilferding saw as central to the stage of imperialism. As Lenin noted, “the characteristic feature of imperialism is not industrial but finance capital.”

The character of finance capital has significantly changed in the decades after Lenin and Hilferding wrote. The "merger of identities" of finance and production has been replaced by a greater freedom from, and dominance of, finance over production. It was about this historical condition that the anti-Marxist economist John Maynard Keynes wrote. Keynes noted that markets would fail to distinguish between enterprise (production) and speculation.

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism...”

The predominant role that finance capital plays in the modern-day mergers and acquisitions as well as industrial restructurings remains an undoubted fact. Also, it is widely accepted that finance capital in itself holds tremendous economic and political power, and this power has to be weakened if capitalism is to be weakened.