Watching the corporate media report the ‘financial crisis’ is instructive. From the perspective of power, it is important that a steadying hand is applied to the tiller of news and commentary on the crisis, and the global economy itself.
And so columnist Martin Wolf took a ‘measured’ view in the Financial Times. There have been 100 “significant” banking crises in the past thirty years, he noted, making them almost routine. Authorities have had to intervene to “rescue” the US financial system from four crises over that period: the developing country debt and also the “savings and loan” crises of the 1980s; the commercial property crisis of the early 1990s; and now the subprime and credit crisis of 2007-08. As Wolf observed correctly of the banking sector: “No industry has a comparable talent for privatising gains and socialising losses.”
Wolf’s big “fear”, though, is that the crumbling financial system will destroy “the political legitimacy of the market economy itself.” Why this “political legitimacy” should not be challenged is left hanging in the air.
And what Wolf terms the “market economy” is an extreme variant of capitalism known as ‘neoliberalism’ which is massively subsidised and protected by powerful states. Again, all this is left unsaid. Wolf turns instead to bankers’ pay which, he asserts, lies at the root of the problem:
“By paying huge bonuses on the basis of short-term performance […] banks create gigantic incentives to disguise risk-taking as value-creation.” Official intervention to regulate bankers’ remuneration is a “horrible” solution. But the alternative, an endless series of financial crises, is “even worse.” (Wolf, ‘Why regulators should intervene in bankers’ pay’, Financial Times, January 16, 2008)
Wolf’s “solution”, however, is hugely impractical. Defining a link between bankers’ performance and remuneration would be immensely difficult, involve unlikely international regulation of global markets and require complex mechanisms to police. As this simply is not going to happen in the current political climate, given the certain massive resistance of financial interests, we can expect similar and maybe worse crises in the future.
Over at the Times, another useful gauge of establishment thinking, the title of Anatole Kaletsky’s column summed up the required pacifying message: ‘Relax. Our economy isn’t manic depressive.’ Happily, according to Kaletsky’s “hunch”, it will all turn out fine: “a combination of monetary and fiscal easing, along with some regulatory changes […] will lessen the credit crisis and prevent a world recession.” (Kaletsky, The Times, January 24, 2008). The message was buoyant, but it was also superficial.
The Independent’s economics commentator, Hamish McRae, pinned blame for the crisis simply on “mistakes”:
“Bankers, like the rest of us, make mistakes, but the scale of the mistakes, particularly in US banks, has been enormous. We won’t fully understand for some time quite how they could persuade themselves that bundles of housing loans to clearly uncreditworthy borrowers should be ranked as almost as good as government securities.”
The “legitimate question” now, asserts McRae, is “whether the continuing banking weakness has become so serious as to transfer what is still a financial market problem into a more general economic problem.” His reassuring conclusion:
“Banking troubles will be a drag on the world economy, slowing it down. But they won’t stop it in its tracks.” (McRae, ‘The markets are bad, but don’t panic just yet’, Independent, January 23, 2008)
This would be comforting news for the ‘masters of the universe’ who were meeting in Davos, many of them in sombre mood: 27 heads of state; 113 cabinet ministers; hundreds of chief executives, bankers, fund managers, economists and journalists: about 2,500 participants in all. Sean O’Grady, the Independent’s economics editor, was enthralled by the “concentrated, eclectic mix of the top slice of humanity” that “is part of the ‘magic’ of this mountain redoubt”; all twinkling under a “sprinkling of stardust” brought upon proceedings by the likes of Bono.
The stardust was clearly affecting O’Grady’s vision as he proposed we should rely on western political and corporate leaders to “balance the needs and aspirations of the old economies of the West, the emerging economies of the east and the still poor billions in the south.” (O’Grady, ‘Davos. Wealth, power and a sprinkling of stardust’, The Independent, January 22, 2008)
In the Guardian’s comment pages there was at least a glimmer of dissent from columnist Jonathan Freedland. “Turbo-capitalism is not just unfair,” he wrote, “it is dishonest and dangerous.” He pleaded: “surely this is the moment when Labour and the centre-left can dare to question the neoliberal dogma that has prevailed since the days of Thatcher.”
Freedland’s dissection was limited, though, cautiously proposing that “you could argue” that “capitalism is always […] parasitical on the state.” What he sought was a kinder, gentler form of capitalism instead of the “turbo-capitalism” which is happy to rely “on us, the public, and our instrument, the state, when it gets in trouble.” Thin on details, he concluded weakly: “Now we should demand a say the rest of the time, too.” (Freedland, ‘The free-marketeers abhor the crutch of the state – until they start limping’, Guardian, January 23, 2008)
The above sample indicates the narrow spectrum of corporate media opinion on the ‘financial crisis.’ Viewpoints are heavily biased towards the status quo, with only occasional fig leaves of mild dissent. This is a misleading picture, avoiding scrutiny of an economic system that is both fundamentally flawed and stacked against the majority of humanity.
Financial and political elites are at pains to convince the public they +can+ get things ‘back on track’ by tweaking interest rates, ‘stimulating’ the economy and only infrequently having to intervene to make a heroic “rescue”. Thus, although the occasional financial crisis cannot be prevented – just as a flu virus might afflict a healthy body – the economy itself is presumed to be “inherently strong.” (President George W. Bush, quoted, Democracy Now!, January 23, 2008; http://www.democracynow.org/ 2008/1/23/recession).
This is a vital illusion; the required view of wealthy investors and corporations. After all, a basic requirement for powerful authority to prevail is the mythical projection of a benign force in control of events. Western leaders and their faithful retinue in the media are deceptively reassuring about the global economic situation – because profits and power demand it. Otherwise they run the serious risk of a huge slump in public confidence in the current economic system and even in what passes for ‘democratic’ politics. Corporate reporting of the ‘financial crisis’, then, is yet another example of how reality is distorted in service to power and profit.
Boom And Bust
Despite the huge scale of yet another financial crisis, and the threat of an impending severe global economic recession, the major political parties and elite media refuse to address the possibility of fundamental weaknesses and inequality at the very heart of modern ‘capitalism.’ In reality, the current system, driven by private profit far beyond environmental sanity, is incapable of meeting the needs and aspirations of humanity.
The inherently unstable and destructive behaviour of capitalism derives from its inevitable cycles of “boom and bust.” We can see this in both theory and practice. Corporations operate for the primary benefit of their shareholders, as demanded by company law. The priority of shareholders is to maximise profits. The capital that they invest must increase in value to justify the risk undertaken. Demand for products and services thus needs to expand. The profits gained, or part thereof, can then be reinvested to generate further profit.
But the process is unsustainable because markets become saturated as consumers reach the limit of their demand capacity. Intense competition impels producers to drive down costs, especially labour, to make a profit. As profits become squeezed, and dividend-hungry shareholders threaten to take their investment elsewhere, producers become desperate to push up total sales. They pump out ever greater volumes of commodities and spend billions on advertising to boost demand. Inevitably, the flood of commodities surpasses the capacity of the market to absorb products. Sales collapse, unemployment rises and a full-blown recession ensues: this is the ‘bust’ part of the cycle. Surplus productive capacity then has to be destroyed before a new ‘boom’ can begin.
That is the theory, and it is borne out by historical experience. Since the industrial revolution, around 200 years ago in the West, boom-and-bust cycles have recurred with varying intensity. The most destructive bust occurred in the 1930s Great Depression, leading to World War Two and the deaths of over 60 million people.
Historically, as Karl Marx recognised, capitalism can also be seen as the driver of technological revolutions and in boosting human powers of production. And, at least in the West, it has been associated with past increases in the living conditions of a sizeable fraction of the population. So perhaps we should accept that capitalism, with all its flaws, +is+ the best we can do. Perhaps we should believe the official argument that governments have largely learnt to cope with boom-and-bust cycles through judicious planning.
For example, a huge crisis +was+ averted in the 1970s. However, this was only possible because, as British economist Harry Shutt explains: “the authorities were determined (as never before) to use the forces of the state – through fiscal and monetary manipulation (including massive but unsustainable government borrowing) – to try and keep the show on the road.” (Shutt, email, January 28, 2008)
But these were only short-term ‘fixes’ at best. Gerry Gold and Paul Feldman sum up:
“Attempts to resolve the simultaneous stagnation and inflation of the 1970s through high interest rates produced a recession in the US in the early 1980s. Parallel deflationary policies imposed by the UK’s Thatcher government from 1979 led quickly to a recession and a fullblown slump by 1985. Attempts to overcome this only led to a further recession in 1991-2.” (Gold and Feldman, ‘A House of Cards: From fantasy finance to global crash’, Lupus Books, London, 2007, p. 28)
Moreover, Shutt exposes the “coping strategies” promoted over the past twenty years by government authorities in cahoots with Wall Street and the City. These have “all involved pumping up credit bubbles around various fantasies – ‘emerging’ markets, dot.com, housing – which had about as much substance as the original South Sea [Bubble] and could only be sustained even for a few years by a similar level of fraud and misinformation.” (Shutt, email, January 28, 2008)
In 1997, a major financial crisis erupted, starting in East Asia. Currencies collapsed, businesses went bankrupt and millions of people lost their jobs. Many Asian enterprises were subsequently snapped up at rock-bottom prices by corporations and investors in the West. Soon after, in 2000, the speculative bubble of investment in internet-related companies burst spectacularly. This ‘dot-com’ bust saw a lengthy recession ensue in the developed world.
Historical evidence shows, then, that governments have been largely powerless to combat capitalism’s inevitable and damaging ‘business cycles’. However, this should not be confused with the resiliency of capitalism; the system has demonstrated a repeated capacity to reform itself sufficiently to allow renewed growth and to survive further rounds of business cycles. So it would be wrong to assume that the whole capitalist system, unstable and unfair as it always will be, is on the verge of total collapse.
Official Fraud And Propaganda
An alarming symptom of what is wrong with current economics is the increasingly desperate and cynical measures taken by powerful states, corporations and investors to maintain faltering public confidence in global capitalism. Just as Enron, Worldcom and a host of other large corporations have committed accounting fraud, so governments have falsified figures on inflation, output and unemployment to present a false picture of a healthy economy. (See Shutt, ‘The Decline of Capitalism’, Zed Books, London, 2005, pp. 104-5)
For example, the US government has deliberately exaggerated GDP growth rates in order to disguise the economy’s poor performance since the mid-1970s; in the developed world, growth rates have actually declined over the past three decades. As David Harvey reports, aggregate global growth rates stood at around 3.5 per cent in the 1960s. Even during the difficult 1970s, marked by energy shortages and industrial unrest, it fell only to 2.4 per cent. But the subsequent growth rates have languished at 1.4 per cent and 1.1 per cent in the 1980s and 1990s, respectively, and has struggled to reach even 1 per cent since 2000. (Harvey, ‘A Brief History of Neoliberalism’, Oxford University Press, 2005, p. 154)
In terms of public perception, however, the authorities have largely succeeded. They have maintained the fiction that they +can+ manage the economy effectively and that global capitalism is the only game in town. How has this been possible? Shutt points to a “media campaign of uncritical propaganda and pro-market hype.” This “sustained act of mass deception (in which the establishment has seemingly come to believe in its own propaganda) has had disastrous consequences.” (Shutt, op. cit., pp. 36-37)
Those consequences include crushing levels of poverty and inequality; wars motivated by the desire for strategic control, hydrocarbon resources and economic markets; climate instability; and the most rapid loss of species in the planet’s history.
The Neoliberal Nightmare
To complement the above picture, and in contrast to corporate media coverage, we must also critically describe the political-economic process summed up by that innocuous-sounding word, ‘neoliberalisation’. This serious attack on democracy, the latest stage in advanced capitalism, took root in the Reagan-Thatcher era of the 1980s, and has accelerated ever since. Proponents of neoliberalism tell us that human well-being flourishes best within an institutional framework characterised by strong private property rights, ‘free’ markets and ‘free’ trade. But what has it meant in practice?
First, recall that after the trauma of the Depression and WW2 in the 1930s and 1940s, Western governments used Keynesian fiscal and monetary policies (named after the British economist John Maynard Keynes) to try to dampen business cycles and to ensure reasonably full employment. There was significant state-led planning, and even state ownership, of key industrial sectors such as coal, steel and cars. Governments also made huge investments in health care, education and infrastructure. As David Harvey explains, this system of “embedded liberalism” involved “market processes and entrepreneurial and corporate activities [that] were surrounded by a web of social and political constraints and a regulatory environment.”(Harvey, op. cit., pp. 10-11)
During the 1950s and 1960s, embedded liberalism delivered high rates of economic growth in the West. But in the 1970s, given the inevitability of boom-and-bust, a serious crisis of capital accumulation arose. Inflation and unemployment soared, and labour unrest threatened business interests. The free-market and monetarist financial centres, notably the City of London, had never been enamoured of the postwar welfare state and were increasingly antagonistic towards state Keynesian policies. As Harvey notes, “the nationalized industries were draining resources from the Treasury.” (op. cit., p. 57). With the oil shocks and economic stagnation of the 1970s, powerful business and political forces mobilised to set a course for the next stage of capitalism: to regain the elite class power that had been dissipated, to some extent, by postwar policies of wealth redistribution and social welfare. Neoliberalisation was born.
A wave of deregulation of financial markets swept the world, and transnational mobility of capital rapidly rose. Corporate pressure intensified on governments to create a ‘good business climate’ and to adopt neoliberal ‘reforms’ that routinely squeezed state spending. Wall Street-IMF-Treasury policy measures came to dominate US economic policy and many developing countries were driven down the neoliberal road, creating social havoc and environmental disasters. Neoliberalism became the new economic orthodoxy, exerting a powerful ideological influence in the media and academia.
The whole process has been a form of ‘creative destruction’, weakening or even breaking down existing institutions and state powers, social welfare, health care, education systems and culture – even modes of human interaction, behaviour and thought.
In some countries, certainly, there have been ‘successes’ during the initial stages of neoliberalisation in lifting people out of poverty and in raising living standards for many – just as past capitalism generally did in the West. However, this has certainly not been the motivating intent of corporations and investors, despite much pious rhetoric about ‘solving poverty’. Any localised ‘success’ has typically been achieved at the expense of people elsewhere, in regions where neoliberal ‘development’ has not been as advanced. China’s achievements, for example, have been gained to the serious detriment of neighbouring economies.
A persistent and deep-rooted characteristic of neoliberalisation has been its strong tendency to worsen social inequality, as we will see later. Social progress achieved during neoliberalisation of previously poor countries has not been sustained. Typically, state intervention has been required to maintain any semblance of a social welfare safety net – or the net has simply been left to fray in the chill winds of economic ‘progress’.
At the other end of the social spectrum, neoliberalisation has generated spectacular concentrations of wealth and power that have not been seen since the 1920s. In China and Russia, new and powerful economic elites have been created. Harvey sums up:
“The flows of tribute into the world’s major financial centres have been astonishing. What, however, is even more astonishing is the habit of treating all of this as a mere and in some instances even unfortunate byproduct of neoliberalization. The very idea that this might be – just might be – the fundamental core of what neoliberalization has been about all along appears unthinkable. It has been part of the genius of neoliberal theory to provide a benevolent mask full of wonderful-sounding words like freedom, liberty, choice, and rights, to hide the grim realities of the restoration or reconstitution of naked class power […].” (Harvey, op. cit., pp. 118-119)
The above is but a hint of the stark reality underpinning the ‘flourishing’ of the global economic system; a reality that is shamefully missing from broadcast headlines and newspaper front pages. The current system of economics, particularly the latest stage of “turbo-capitalism”, known inoffensively as “neoliberalism”, is built upon painful boom-and-bust cycles fuelled by corporate greed and maintained by cynical deception of the public. The costs to the planet – in terms of human suffering and environmental collapse – are staggering.
Part Two Will Follow