Stuart Hall: Thatcherism

During the 1980s, living in England during the Thatcher years, one of the most profound influences on my intellectual development were the writings of Stuart Hall -- one of the original founders of New Left Review. Hall confronted the 1980s, to borrow from Gramsci, 'violently': unwilling to subscribe to old and outmoded shibboleths, his understanding of the rise of what we now call neoliberalism, but which he at the time called, more accurately, 'authoritarian populism', was accurate, accessible and prescient. I had the great privilege of hearing Stuart Hall speak several times (and met him on a couple of occasions). In this clip, based upon the reissuing of one of his key books, Policing the Crisis, Hall reflects upon the rise of Thatcherism and the implications for our understanding of the present. I cannot but reflect about how much I wish someone with his clarity, commitment, and intellectual rigor was helping us understand the current conjuncture, 'violently'.

Marx's theory of crisis

This is, without doubt, the best short exposition of Marx's theory of crisis that I have ever heard. It is brilliant, and congratulations to Cliff Bowman of Cranfield University for being so succinct.

Crash club: when sputtering economies collide

Trust Mike Davis to tell it like it is. It is going to be a difficult few years.

Crash club: when sputtering economies collide - Opinion - Al Jazeera English

"Every 30 minutes": crushed by debt and neoliberal reforms, Indian farmers commit suicide at staggering rate

A quarter of a million Indian farmers have committed suicide in the last 16 years—an average of one suicide every 30 minutes. The crisis has ballooned with economic liberalization that has removed agricultural subsidies and opened Indian agriculture to the global market. Small farmers are often trapped in a cycle of insurmountable debt, leading many to take their lives out of sheer desperation. Democracy Now! speaks with Smita Narula of the Center for Human Rights and Global Justice at New York University Law School, co-author of an excellent new report on farmer suicides in India.



Thanks to Peter Mollinga for drawing my attention to this.

false economy: why the cuts are the wrong solution

An excellent illustration of how to challenge the perverse deflationary logic that now governs economic policy making in the developed capitalist countries.

the rage of the ignorant

Transiting through Dulles Airport in Washington, DC on my return from Dakar on Sunday, I was struck by the titles of the mass-market books on US politics in the bookstore. The shelves were full of books fulminating against US President Barack Obama; the rage was so palpably strong I could almost taste it.

That rage appears to be reflected in the results of the US mid-term elections on Tuesday. The media has been proclaiming the Republican triumph as the most dramatic mid-term swing since the 1930s, although the fact that only 37 per cent of the eligible electorate actually voted makes this result far less dramatic than the media would like. The mid-terms represent the rage of the white, socially conservative, Christian fundamentalist right, commonly called the Tea Party, which clearly represents a minority of the US electorate.

It seems to me that the rage of the Tea Party movement is the rage of the ignorant. While supporters of the Tea Party movement claim that they are interested in limited government and reduced regulation (although they love Federal entitlement programs that proffer largesse to their core constituency, such as Medicare) they seem to forget that in late 2008 US capitalism was in the midst of its worst crisis since the 1930s. Obama did not cause the crisis, which originated in the financial market de-regulation engineered by Alan Greenspan under Bill Clinton following Clinton's rightward tack after the 1994 mid-term elections. De-regulation was designed to address the dramatic rise in US social and economic inequality, and was predicated upon the type of policies the Tea Party supports, most notably the liberalization of US financial markets. True to his neoconservative ways, George Bush recognized that the crisis of US finance capital was turning into a crisis of US capitalism, which he and Hank Paulson therefore attempted to shore up by a massive injection of government spending designed to stabilize the US economy: at a cost of US$700 billion the Troubled Asset Relief Programme was enacted by Bush, in the face of Congressional hostility, a hostility that was only overcome in the wake of a stock market panic and a huge sell-off of equities as US financial markets plunged.

TARP was barely underway when Obama entered the White House, but to the 'right Keynesians' that populated his economic team following his inauguration, it was clear that TARP was, on its own, inadequate to sustain the resurgence of US capitalism. More was needed, especially as banks, fearful for their existence under the weight of so-called 'ninja' mortgages, has stopped lending. The Obama administration therefore enacted a second fiscal stimulus, the Recovery Act, worth some US$787 billion, within a month of his inauguration. The Recovery Act cut taxes, raised government spending and transferred money to cash-strapped states.

The Tea Party movement may not like government, but US finance capital knows that most of the 7800 banks in the US still exist because of the various liquidity interventions engineered by the Federal Reserve, along with guarantees, loans and outright bail-outs engineered by the US state. Obama did not take the banks into public ownership, as some were advising him to do. Drastic bank reform was off the table as the Federal Reserve embarked on a round of 'quantitative easing' to flood markets with cheap money designed to complement the Recovery Act. Instead, the Treasury designed 'stress tests' to increase the capital reserves of banks, with the result that US banks are now better capitalized –and financially healthier – than at any time in recent decades.

The companies that relied on those banks would have gone down if the financial system had collapsed. Instead, with cheap money, low interest rates, and rising unemployment not only have the companies, for the most part, remained in business, but profits after taxes in the US during the worst crisis in decades have actually increased by one-third. Consider the case of General Motors and Chrysler. The Obama administration brought GM in temporary public ownership under stringent conditions that allowed the company to rewrite its labour contracts, fire its ineffectual management, and quickly close its less efficient lines and activities. Placing GM in short order into such a favourable corporate environment allowed the company to quickly repay its government loans and rapidly return to profitability.

Strong profitability across the US corporate sector has produced a predictable result: equity prices in stock markets have boomed. From March 2009, some 7 weeks after Obama's inauguration, equity prices have nearly doubled. Booming profits and equity prices were not translated by the Obama administration into a tax grab: in the second quarter of 2010 total corporate taxes in the US were, at about US$442 billion, almost the same as during the peak of the credit boom in 2007, prior to the crisis; the US corporate sector is paying a lower share of its income in tax.

Of course, part of the discontent that the Tea Party has played to is high unemployment. Yet increased unemployment has been pivotal to the success of the US corporate sector since the depths of the crisis were breached. Unemployment disciplines the labour force and in so doing sustains the corporate profits that have restored the vigour of US capital. Indeed, according to the Congressional Budget Office, a non-partisan body, far more would have been out of work without the stimulus and quantitative easing.

Claims that Obama is the first US president not to believe in the US Constitution, that Obama is committed to fundamentally rewriting the relationship between the US state and civil society, and that Obama is a socialist thus seem to brazenly ignore what Barack Obama has done since he became President. In the face of a crisis of US capitalism, under the advice of his 'right Keynesian' economic team Obama's actions have robustly restored the reign of capital – and particularly finance capital – in the US. Indeed, the new round of quantitative easing announced on the day of the US mid-terms is great for finance capital – it is good for equities, for bonds, as well as real assets, while at the same time cheap money will depress the US dollar, stimulate exports, and stimulate corporate profits in circumstances where labour has been fiercely disciplined by increased economic insecurity. The US has gone back to the future, facilitating the continued rise of the plutocrats that increasingly shape the operation of the US political economy, and in so doing directly shape the process of global development.

how not to solve an economic crisis

Thirty months ago the contours of the global economic crisis began to become apparent. Twenty-two months ago the developed capitalist countries came exceedingly close to a private sector financial collapse. The causes of the global economic crisis have been laid out, in full, in previous entries to this weblog. What is remarkable, however, is how little has been learnt by global economic policymakers.

Outside of the United States, where the fiscal stimulus designed to offset the worst possibilities of the crisis is gradually winding down but is nonetheless still having an impact, there has been a move to 'fiscal consolidation'. In Europe in particular--Germany, Britain under the Conservative-Liberal Democrat coalition, the Netherlands and elsewhere--economic policymakers seem to be blithely unaware of the grievous state of their economies. In an effort to cut government budgetary deficits sooner rather than later, European economies are slashing government spending and raising taxes as their attempt to steer their countries out of the crisis. I have seen economic incompetence amongst policymakers in the developed capitalist countries before: but never on this scale.

Consider: the current driver of global economic growth are the developing capitalist countries, and in particular China, India, Brazil. All of these countries have an economic model predicated upon producing goods and services for the developed capitalist countries that are comparatively cheap because of their lower unit labour costs. For these countries to continue to grow, and pull the world economy along with them, they need to be able to sell their products. Who are supposed to be buying these products? We are: the developed capitalist countries where we live.

However, the withdrawal of the fiscal stimulus and the shift to fiscal consolidation has to make one wonder how we are supposed to buy these products that the developing capitalist countries are supplying to us. As budget cuts hit Germany, Britain and elsewhere, this is a stark question. It is, however, most starkly posed by the most important developed capitalist country of all: the United States.

How are Americans going to buy the products of China, India and Brazil in the current economic climate? Consider these findings of a recent Pew survey on how the recession has affected Americans:

* more than 50% of all American workers have either experienced a period of unemployment, taken a cut in working hours or rates of pay, or have been forced to go part-time since the onset of the crisis
* an average unemployed worker in America has been out of work for almost 6 months
* collapsing share and household prices have destroyed 20% of the wealth of an average American household, making them effectively poorer than they were 35 years ago
* 60% of Americans have either cancelled their holidays or have cut back on their holidays, in a country with the shortest holidays in the developed capitalist countries
* 25% of those between 18 and 29 have had to move back in with their parents
* less than 50% of all American adults believe that their children will have a higher standard of living than theirs, and more than 25% believe that their children will have a lower standard of living

One does not have to be an unreconstructed Keynesian to see that the only way that this crisis will not be borne by those least capable of bearing the costs of the it is to maintain the purchasing power of households that have been hit hardest by the crisis. Chinese, Indian and Brazilian goods need people to buy them: but right now governments in the wealthiest parts of the world seem to be doing everything in their power to ensure that those that would most want to buy goods and services from the developing capitalist countries are not able to do so. Weak consumer demand for wage goods is no way to solve the crisis; it is a recipe for deepening the crisis.

David Harvey and the crises of capitalism

pessimism of the intellect, optimism of the will

Many people find the times that we live in to be profoundly disempowering. Despite the fact that the social and economic system under which we live is, at less than 300 years, relatively new, in human terms, too many people feel that the world is as it is and will never change--even though it needs to!

I have just come across a remarkable BBC/GlobeScan poll, conducted in the summer of last year, which shows that a large number of people around the world thinks that there is a need for fundamental change. Take a look at the chart above. It really is quite remarkable. It suggests that in the United States alone almost 40 million people think the social and economic system has to change. It suggests that in Canada 6 million people think that the social and economic system has to change. Around the world, millions want a different world--one that they think will be a better world.

Who would have thought. There are lots of folk out there that want to see the kinds of changes that you do!

global economic crisis and the case for nationalization

March 1 2009 was an awful day on financial markets around the world. The economic crisis that erupted into the public eye on September 15 2008, and which fundamentally transformed the dominant approach to governing neoliberal capitalism in the developed capitalist countries, is deepening. Let there be no doubt: things will get worse, because this crisis has been a long time coming. Over the course of this decade the developed capitalist economies allowed current account deficits to build up, in large part because they imported consumer goods from China to a far greater degree than they were exporting to the rest of the world. Normally, such a deficit would have put pressure on currencies: but with the Chinese accumulating foreign exchange reserves, this safety valve did not work. China thus sustained global imbalances.

At the same time the developed capitalist economies let investment outpace the savings needed to pay for the investment; in the US in particular, savings rates are dismal. Notwithstanding the creation of ‘innovative’ financial products designed to attract savings (such as sub-prime mortgages) but which instead turned into ‘financial weapons of mass destruction’, to borrow Warren Buffet’s phrase, investment was financed by attracting inflows of capital into the US from the oil producers, China and other developed capitalist economies. Such inflows were never sustainable in the long term without major adjustments in the US economy. Moreover, that investment that did take place was often channelled into unproductive residential construction rather than productive capacity expansion. Similar patterns were witnessed elsewhere: the UK, Ireland and Spain come to mind. The developed capitalist economies did not enhance the productivity of capital but rather allowed financial accounting profits to boom.

Concurrently, governments in the developed capitalist economies, most notably the US under George Bush, introduced government spending and taxation policies that reinforced the consumer-led boom that they were creating. By not considering the relationship between spending and taxes, governments produced a slide into budgetary deficits that will only be corrected through, at some point, a severe structural adjustment.

Capping all this was business. Finance capital was neither regulated nor supervised, allowing credit and house-price booms, booms that morphed into bubbles that were sustained by flows of Chinese money into the US dollar and into US Treasury bills. Companies became even more led by the short-term dictates of senior managers that had to show ever-increasing profits and dividends to major shareholders. In order to do this, increasingly private capital started engaging in financial activities of questionable morality. They did this because the ethics of business during the decade deteriorated behind the mask of ‘corporate social responsibility’, encouraging corruption on a scale that, in the Madoff affair, is historically unparalleled. This is the world that we have allowed to be created in the early years of the 21st century.

The inauguration of Barack Obama and the introduction of his economic recovery plans have not stopped the rot, as witnessed by yesterday’s chaos on global financial markets. In the last few weeks the deepening crisis of the American and British financial sectors in particular has led to widespread speculation that in both the US and the UK there is going to have to be some kind of nationalization of it. Nationalization is needed because certain banks, particularly in the US and the UK but also in other parts of Europe are all but insolvent, having too little capital and too many bad debts. They will go under unless taken over by the government, and, in the eyes of many, they cannot be allowed to go under, because the web of finance capital is so tightly interwoven into the interstices of our society that their failure might threaten the very viability of capitalism as a mode of organizing social and economic life. In a very real sense, banks such as Citigroup are ‘too big to fail’.

Of course, nationalization has already, to a degree, happened, if we define nationalization as the systemic transfer of the ownership of assets from the private to the public sector: the UK government owns 95 per cent of the Royal Bank of Scotland, all of Northern Rock, and in the US the government already controls 36 per cent of Citigroup, with probably more to come. Around the world major financial institutions now rely on large amounts of taxpayer money. Increasingly, government is needed to save capitalism from itself.

In the US in particular nationalization is viewed with dismay by many as a harbinger of ‘socialism’. Despite the fact that Alan Greenspan, the former Chairman of the US Federal Reserve, whose belief in the self-regulating power of the market set the tone for the excesses of the decade, now believes that nationalization may be necessary, and despite the fact that some Republicans in the US Congress believe nationalization is needed, there is still reluctance to bite the bullet. Ben Bernanke, Greenspan’s successor as Chairman of the Fed, has been at pains to claim that nationalization is not on the cards: but he has defined nationalization as governments seizing banks and starting to directly run them. This is definitely not on the table: if nationalization occurs, it will see governments around the world stepping in to temporarily take over financial institutions in order to clean up their balance sheets and make them viable once more, before eventually privatizing them. Social democratic Sweden of the 1990s is the model for the policy-makers advocating this kind of intervention, for this is exactly what Sweden did.

In the developed capitalist economies there is a fundamental belief that private capital does a better job of allocating financial and physical resources than governments using state-owned enterprises to pursue a set of economic objectives. This is the reason that private ownership in developed capitalist economies is preferred to public ownership--nationalization--by the government. However, the supposed benefits of having private capital dominating business decision making in developed capitalist economies are not what they seem. I can think of 4 supposed benefits from having private capital dominate the business affairs of the developed capitalist economies:
1. Private firms have to respond to market demand for their goods and services, which means that firms must respond to the preferences of consumers. Government companies, subsidized by the state, do not have to respond to consumers. Allowing consumers to express choice fosters competition between private firms and in so doing increases efficiency, leading to the creation of more goods and services for everyone than would be the case if state-owned enterprises dominated the developed capitalist economies.
However: the efficiency of capital has nothing to do with the ownership of capital. Efficiency, which should be sought, requires competition; many private sector companies operate in oligopolistic markets with only a few rivals, with whom they often collude implicitly and explicitly. When this happens, private capital does not have to respond to the needs of consumers any more than monopolistic state-owned enterprises have to respond to the needs of consumers. In this instance, it is the lack of competition that precludes efficiency improvements, not ownership.
2. Private capital cuts government interference in the economy.
However: private capital has to be heavily regulated, in order to prevent oligopolistic abuses of corporate power, and such regulations represent government intervention in the day-to-day running of capital. Indeed, the history of the decade is that regulation has to be substantially enhanced if the abuses of the past few years are not going to be repeated. Private capital and state-owned enterprises are both subject to government regulation.
3. Private capital has to raise investment capital on financial markets, and to do this they must secure the confidence of financial markets that they are well run and effective in the markets in which they operate. State-owned firms, on the other hand, can raise money from governments and do not have to demonstrate to disciplinary financial markets that they are well run.
However: investment capital from financial markets for private capital may not be available to firms seeking to make long-term investments because of the short-run profit-obsessed time horizon of the financial markets. The lure of quick returns for the financial markets got us into this mess; it also guides how they allocate money to private capital.
Which means that: financial markets cannot be relied upon to make good decisions about the investment needs of private capital.
Moreover: in many instances private capital does not turn to financial markets to raise investment capital; instead, they reinvest their profits. This source of finance is available regardless of the character of corporate ownership.
Finally: in some countries the only reason state-owned enterprises cannot not raise investment capital in financial markets is because of government regulations which prevent them from doing so. This need not be the case, in which financial markets can still discipline the activities of state-owned enterprises. Suggestions by some that state-owned enterprises, by competing for investment capital with private capital, ‘crowd out’ investment, have been demonstrated to not be true.
4. While private capital does not require government resources, state-owned enterprises do. State-owned enterprises therefore increase government spending, weakening monetary policy and forcing central banks to set higher interest rates in order to sustain monetary policy.
However: if private capital does not invest in expanding productive capacity, as was the case during this decade, growth will eventually deteriorate because of a lack of corporate investment, with implications for jobs, equity and social justice.

It is clear to me that the case in favour of the private ownership of capital is not what it is made out to be. There is a strong case that can be made that the financial system as a whole should be treated as a public utility, in which the distribution of investment capital would be done on the basis of democratically-established criteria. This would of necessity involve controls on the international movement of capital and controls over the pattern and pace of investment within a country. As Leo Panitch and Sam Gindin have recently noted, ‘the point of making finance into a public utility is to transform the uses to which it is now put.’

slavery's ground zero

I have been spending the holiday season in Richmond, Virginia, my first trip to the former capital of the Confederate States of America and my first trip to the U.S. South in almost 30 years. Before I came to Richmond, I had not thought much about the significance of the trip from an international development perspective, but for the past week I have not been able to avoid it. The reason is simple: in one of my early first year lectures I focus my attention on the role of slavery in facilitating the rise of industrial capitalism in Europe and the United States, and Richmond is the ‘ground zero’ of the American slave trade.

The U.S. stopped the international trade in slaves in 1808. It was Virginia’s slaveholders that stepped in to replace international trade by transforming Richmond into one of the biggest, if not the biggest, slave markets in the U.S., particularly in the neighbourhood known as Shockoe Bottom. What Île de Gorée in Dakar, Senegal, is to the slave trade from Africa, Shockoe Bottom is to the slave trade in the U.S. Owners of slaves from Virginia plantations brought them into Richmond to sell to owners developing new plantations in the Deep South. As a result, between 1808 and 1865 anywhere between 300000 and 3500000 slaves were sold out of Richmond’s slave markets. Considering that in 1865 the African-American population of the U.S. stood at around 4 million, this means that today hundreds of thousands, if not millions, of African-Americans can today trace their ancestry back to the slave markets of Richmond.

However, slavery in Richmond was not only about securing unfree labour for agricultural export production from the South. It was also about ‘developing’ the economy of a Virginia witnessing declining soil fertility and a decaying agrarian economy. Granted, a large proportion of Richmond’s slave population worked as ‘domestics’. Nonetheless, the development of industrial capital in Richmond—a legacy that can still be witnessed today—was predicated upon unfree slave labour. Hired slave labour was an important part of the work force at the Tredegar Iron Works, and the other iron foundries, that provided the industrial basis of the Confederacy’s attempt to sustain the class power of agrarian elites. Hired slaves also dominated the labour force in Richmond’s tobacco industry, performing the hard, back-breaking work needed to process tobacco. Finally, slave labour was necessary to create and maintain Richmond’s transportation networks. Unfree labour worked on the construction of the James River and Kanawha Canal, the first canal in the U.S., while crews of slaves, alongside free African-Americans, made up the bateau crews that navigated cargoes into Richmond.

The truth is thus that the history and development of Richmond, like the United States as a whole, and indeed the North, was, to a large extent, built by slave labour. As I try to argue in my lecture on colonialism and slavery, a convincing case can be made that industrial capitalism in its infancy required slavery in order to gain economic ascendency in the North. Capital was built, initially, on slavery.

This reality demands two final comments. The first is that slaves incessantly resisted their unfree status. Richmond paradigmatically illustrates this. Following the Haitian Revolution of 1792, the first major slave revolt in the south was led by a 24 year old slave named Gabriel (often, incorrectly, named Gabriel Prosser), a deeply Christian blacksmith. In 1800, disgusted by the slavery that bound him, Gabriel made plans to take the city of Richmond by force. By August of 1800 Gabriel had thousands of slave supporters and had secured a cache of weapons, including guns. Gabriel’s plans came to naught: he was betrayed by two of his ‘followers’ and, moreover, on the day of the planned revolt, the bridges into Richmond were destroyed in a flood. The Virginia militia attacked Gabriel and his thousand followers the next day; they were captured, and he and his followers were hanged. Gabriel’s revolt, little acknowledged outside African-American historiography, was the closest the U.S. came to a home-grown slave-led revolution.

The second comment follows from the fact that Gabriel’s revolt is little acknowledged. The history of capitalism’s development, and our globally-privileged life, is predicated upon slavery; yet this is not discussed, freely and openly. Our lives are built on a hidden history of power and privilege, a transcript that needs to be revealed and confronted if the poverty that stalks the world is to be eliminated.

Postscript: It should be acknowledged that Richmond was, in 2007, the first city in the U.S. to formally apologize for slavery. In mid-2008 Gabriel was informally pardoned by the Governor of Virginia. In late 2008, in the Shockoe Bottom area, a Slavery Reconciliation Statue was unveiled. These acts, which are about revealing a hidden transcript, do not come about autonomously, but as the result of citizens seeking to reclaim history. Such acts are a precondition of further, deeper social change.

remembering Samuel Huntington

Samuel P. Huntington, one of the most influential and important American political scientists in the field of international development studies, died on Christmas Eve at the age of 81. Huntington embodied the contradictions of the U.S. intelligensia towards international development: a lifelong Democrat, with ideas that many of his friends and colleagues considered quite liberal, and an ability to move between the academic and the political world, he nonetheless throughout his life articulated a set of ideas that apologized for the powerful and accommodated authoritarianism.

Huntington's first book, The Soldier and the State: The Theory and Politics of Civil-Military Relations, published in 1957, was still required reading when I was an undergraduate. In it, Huntington argued that the U.S. had to protect conservative military institutions and individuals because they in turn protected the U.S. from the foibles of human nature: 'irrationality, weakness and evil'. The argument was developed in relation to the U.S., but it was one that could be used more broadly, in both developed and developing societies. However, it was, in effect, an ideological apology for what Eisenhower had called 'the military-industrial complex': the economic fractions that dominated U.S.--and hence global--capital and shaped a set of hegemonic ideas that sustained their own power.

These ideas were further crystalized in Huntington's Political Order in Changing Societies, published in 1969. In this hugely important book, Huntington argued that international development had not taken place in the South because of a lack of political 'order'. 'Order' mattered, and not the character of the political governance: and thus, for the good of 'development', the U.S. could support authoritarian dictatorships such as those in South Vietnam, Zaire, Iraq and beyond because they brought 'order', which was more important than 'democracy' (however defined). These were the ideas that had allowed Huntington to advise the unsuccessful presidential campaign of Democrat Hubert H. Humphrey in 1968, a campaign that was, in part, based upon ensuring that the Vietnam War was continued until military victory was ensured--and 'order' established.

Huntington will, however, be best remembered for 1996's The Clash of Civilizations and the Remaking of World Order, which argued, well before the September 11 attacks, that differences in history, tradition, language and religion would be the cause of wars to come. Huntington asserted that these differences were particularly evident in the 'continuing and deeply conflictual relationship between Islam and Christianity'. He also asserted that these differences would produce essentially unresolvable conflicts that would continue until one side had secured victory. In essence, Huntington was arguing that as a consequence of this 'clash of civilizations' one side would have to impose order on the other. He was thus providing the intellectual justification for the invasion of Afghanistan and, before the mistruths of the Bush Administration were revealed, the invasion of Iraq.

Samuel Huntington was extremely influential in the world, even if few have heard of him. He provided the intellectual justification for the imperial misadventures of the early 21st century, just as he provided the intellectual justification for the imperial misadventures of the 1960s and 1970s. He was, in the sense of Antonio Gramsci, an organic intellectual of the ruling class: an individual who propogated a set of ideas that shaped the way people think and facilitated their willingness to accede to the deployment of class power, no matter how much it was not in their interest and no matter how relentless it might be.

regime change for global finance capital

My undergraduate students commonly seem to think that the world doesn't change very much. Yet last week, between 14 September and 18 September, the world changed in quite dramatic ways. The era of free market fundamentalism, ushered in globally with the election of Ronald Reagan on 4 November 1980 and the continuing tenure of then-US Federal Reserve Chairman Paul Volcker at the time, has, without doubt, come to an end. It was, as Mohamed El-Erian, chief executive of the bond fund manager Pimco, said in the Financial Times, 'regime change'. Nouriel Roubini of New York University put it this way in The Globe and Mail: 'this financial crisis signals the beginning of the decline of the American empire'. To adapt the words of Gil Scott Heron to fit the times, the revolution was televised on MSNBC; but many people missed it.

The origins of the events last week have been well-rehearsed in previous entries on this weblog. The US financial crisis has multiple origins, but two dates stand out. Eight years ago Alan Greenspan, the former Chairman of the US Federal Reserve, argued that over-the-counter (OTC) derivatives, the contracts between banks, insurance companies and other non-bank financial firms, should not be subject to US government regulation. As a consequence, OTC derivatives have not been subject to oversight by the Commodities Futures Trading Commission. A year later, in 2001, the same Alan Greenspan started cutting US interest rates in the wake of the September 11 attacks. Greenspan's role in these two events, in that they laid the groundwork for the creation of a huge speculative financial bubble amongst global finance capital searching for profits and households searching for livelihood security, has meant that the man who was once the hero of global finance capital is now a man whose reputation stands, at long last, in tatters.

As US interest rates went lower, US mortgage providers started to look for new markets for their products: and the principal market turned out to be cheap mortgages that could be offered under the low-interest rate regime to people that, for various reasons, could never before in their life have thought about owning a home. The result: too many Americans started buying homes (and, through re-mortgaging, other big purchases like cars) with loans that they could not afford. These mortgage providers then 'bundled' these mortgages together, and sold them to investment banks, who started to repackage the mortgages into a set of increasingly arcane products that could be sold to investors such as non-bank financial institutions looking for 'safe' products with a better rate of return than that offered by 'conventional' investment products such as US government bonds.

In doing this, the investment banks started entering into a world in which they had little experience. Moreover, in order to continue doing this business, investment banks and other non-bank financial companies (like American Insurance Group [AIG]), who do not have deposits that they can tap into as an inexpensive source of money, depended upon continually securing short-term loans from other financial institutions, which they would secure by using the assets that they held--the 'bundled' mortgages. Investment banks and non-bank financial institutions were thus borrowing against assets that were ultimately held by less-creditworthy consumers. In essence, the investment banks and the non-bank financial companies that bought their products were counting on home prices continuing to rise, and thus that the holders of the mortgages being able to meet their debt obligations; the financial alchemy behind the crisis sees finance capital shuffling risk like a juggler keeping balls in the air, while all the while not really understanding the complex products--and obligations--that they were peddling. Indeed, as John Gapper writes in the Financial Times, it was as if finance capital had become addicted to complexity.

The house of cards started to collapse last year, when American mortgage holders who had been paying sub-prime interest rates suddenly found out that, as a consequence of the terms and conditions of their mortgage, their interest rates ratcheted up, and they were now paying far, far more in repayments than that for which they had budgeted. They couldn't afford it; and a wave of foreclosures followed. US house prices of course started to tumble; and the investment banks and non-bank financial companies were left holding bundled complex financialmort products predicated upon bundled mortgages that no one wanted to buy. These are the 'toxic assets' that people talk about now: bad loans rooted in the decision of US mortgage providers to provide home loans for consumers that were not adequately solvent, with such loans being then converted into bonds and other securities and being traded in a way that, in effect, spread their poison throughout the financial system. As a result, finance capital increasingly had trouble securing the short-term loans that they needed to stay afloat; and thus, for many companies, a crisis of liquidity opened up, as they became unable to borrow to meet their day-to-day needs. This was the background to last week's events, a process that had been unfolding slowly for more than a year.

One irony of recent events was that the American financial system's liquidity crisis took place in a world awash with money. The excess savings of China and other Asian countries, as well as that of the petro-economies, means that globally their is lots of money sloshing about (it is very fortunate for the US that China is not prepared to sell its holdings of US government Treasury bills and bonds; were such to happen, the crisis would be infinitely worse, becoming, no doubt, one of global capitalism). However, increasingly, US investment banks and non-bank financial institutions had a difficult time accessing that money as the awareness of their toxic assets grew. Growing legions of sovereign wealth funds, who at first seemed the most likely corporate partners to solve the crisis, balked when confronted with the true extent of what was going on; hence, the Korea Development Bank walked away from Lehmann Brothers, sealing its fate. In this way, overleveraged US finance generated the foundations of an economic panic amongst global finance capital.

Last week was one of high drama. After the rescue of Fannie Mae and Freddie Mac the previous week, the US government ended up guaranteeing almost half the mortgages in the US. However, the fun really started on Sunday, when Lehmann Brothers (founded 1850) collapsed and Merrill Lynch (founded 1915) was forced to welcome being bought out by Bank of America at a fraction of the stock market value that it had been worth just weeks before. AIG then required a stringent loan of US$85 billion (with the effect that the US government owns one of the largest insurers in the world). Financial markets started to panic. On Wednesday, the 'flight to safety' was so severe that the interest rate on one-month US Treasury bills turned negative, meaning that finance capital would rather lose money holding a safe asset than invest in financial markets awash with unforeseen toxic assets. The yield on three month Treasury bills that day was 0.02 %, the lowest rate since 1941, before the entry of the US into World War Two. Global finance capital was running for cover.

On Thursday and Friday, the US Treasury had no choice: with the financial system threatening to seize up, the world's central banks pumped US$180 billion into global money markets, the US government pledged US$50 billion to guarantee money-market mutual funds, US Treasury Secretary Hank Paulson unveiled a plan to mop up toxic assets with government money, and in both the US and London the short-selling of stocks is halted. In effect, the US government has socialized the US financial system, to deal with toxic assets whose worth has been estimated to be anywhere between US$500 billion and US$1 trillion. Of course, many of these assets will be sold at a fraction of the value; nonetheless, the cost of this socialization of US finance will run into the billions of dollars. The US government acted to save American finance capital.

Perhaps of all varieties of economists a Marxist economist would understand the causes of the crisis best. US finance capital has become increasingly divorced from the real economy where goods and services are produced. As such, it is increasingly having to slice and dice ever smaller amounts of the surplus value that is produced in the real economy and then redistributed from the productive economy into the financial sector. As it has to slice and dice, it was finding ever-more esoteric ways of trying to make money on top of an asset base that was not fundamentally changing. It was, in effect, a massive Ponzi scheme, and was bound to come crashing down.

Many things are going to change for global finance capital as a consequence of the past week. No doubt other financial institutions may fail. Investment banking is, as a business, finished, and global finance will start to shift back towards using assets based in the real economy as the basis of its activity. Thus, the market for credit derivatives is also finished, for now, and if it is revived, it will be very, very different. There is also little doubt that for the next little while the ability of consumers and firms to access credit will be heavily constrained; the US government has seen its public debt increase substantially with the socialization of US finance, which suggests that increases in US interest rates will be forthcoming, with implications for economic growth in the US economy, because it is so heavily reliant on debt, and for the rest of the world, because it is so heavily reliant on the US economy.

However, the most critical outcome of this past week is that the era of free market fundamentalism, in which is was believed that the system would work best if left to its own devices, has drawn inexorably to a close in the home of capitalism, the US. If the US government believes the only way to save finance capital is to nationalize assets on a scale greater than that witnessed in Russia under Vladimir Putin, then the era of free market capitalism is finished.

We should not be surprised. This past week has highlighted the fact that in deregulated financial markets market-based outcomes are not necessarily the best for society. If they were, there would have been no need for the socialization of US finance. Those who participate in markets are often motivated by private and professional greed, and will try and do what they can get away with, even if regulatory laws are in place. The financial bubble is a clear demonstration of this greed: financiers chased their astronomical bonus payments, and households jumped at the chance to buy something valuable--their homes--that they never thought they could afford because the mortgage providers told them they could afford it. As Adam Smith said, 'people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public'. Today, Smith might put it thus: markets cannot be trusted to work in the public interest, because they are a function of the legal and social environment within which they are created, and that environment may encourage actions that are detrimental to the public good in the pursuit of private profit. That has happened, recklessly, in the US over the past 5 years. The truth of Smith's insights have once again been revealed this past week.

globalization and labour

The International Monetary Fund has, in its most recent edition of the semi-annual World Economic Outlook, made an astonishing, if not, for them, heretical, discovery: that globalization, that great force for worldwide economic prosperity and social justice, has reduced the share of national income going to labour, and, as a consequence, increased the share of national income going to capital, in the form of profits. Has the IMF discovered that globalization is bad for global labour?

Not quite. The IMF argues that while labour's share of income has gone down, the total size of national income has gone up: in other words, the elasticity of income with respect share is both positive and greater than one. This means that labour's income has still gone up, because of the increase in national income, even though the fraction of national income accruing to labour relative to capital has gone down. In a sense, then, the IMF is proposing that globalization is producing an economic valhalla--more money for workers, more profits for capital. Talk about a virtuous circle that global capitalism creates!

The IMF also evaluates what is driving changes in the labour share of income: technological change, an expansion of the global labour force, or labour market policies. The Fund finds, consistent with the dominant economic orthodoxy, that technological change benefits capital and that the expansion of the global labour force benefits capital, but that liberal labour market policies benefit labour. So technological innovation and technical change benefits firms, the expansion of the global labour force as a result of the 'entry' of China and India onto the world stage benefits capital, by driving down global wages, but political economies where it is easy to 'hire and fire' benefit labour.

The IMF has, for the most part, apparently re-discovered elements of classical and Marxist political economy! Marx was, along with some of the classical adherents of the labour theory of value, extremely clear that technological change was biased in favour of capital. Marx's revenge on this point, however, was that as the share of labour in commodities declined, and the organic composition of capital rose, this would lead to a fall in the extraction of surplus value, and hence a fall in the rate of profit. This, according to Marx and others, could, to an extent, be partially offset by tapping into new labour forces had the benefit of increasing the reserve army of labour, fostering competition amongst the labour force that could generate relative, if not absolute, cuts in wages. This could counter, temporarily, the decline in the rate of profit. As for liberal labour market policies, this had a similar effect: disciplining labour so as to offset declines in the rate of profit. Thus, from a Marxist point of view, the Fund has discovered long-standing cyclical and counter-cyclical tendencies within capitalism which were already known by some but which were not accepted by the global economic orthodoxy.

Of course, it is important to stress that Marxist and Marx-inspired measures of the rate of profit are not the same as the profits reported by companies in the Standard and Poors 500. Thus, although Marx believed in a falling rate of profit, this is perfectly compatible with an increasing rate of profit amongst global firms. The two are measuring quite different things; and estimates of Marxian-based profits drawn from conventionally-based measures demonstrate that the increasing profitability of the corporate sector is perfectly compatible with Marx's theory of crisis.

Of course, the IMF does not see its findings as heralding a crisis. Far from it. What is interesting is the extent to which the Fund, the Bank and other global institutions feel the need to justify policies in the face of widespread discontent with the downside of globalization. In an era when resistance is widening, there is a need to shore up the defenses. The IMF offers a fresh pillar for the defense. However, the redoubt is extremely weak. Moreover, it is unlikely to convince global labour, excluded as they are from the prosperity that is accruing to the few during the latest bout of neoconservative globalization.

microfinance and the mystery of capital

I was struck in a student seminar this week when we were talking about microfinance. I was discussing the underlying assumption, noted in a previous devlog, that behind microfinance is the idea that every poor person is a budding entrepreneur waiting to be unleashed so that they could accumulate. What struck me, as I was saying it, was the relationship between this assumption and the ideas of Hernando de Soto, the widely-lauded author of The Mystery of Capital. De Soto's basic proposition is very straightforward: poor people are not poor. Rather, poor people lack effective and enforceable ownership of the resources that they use to construct a livelihood. Therefore, according to de Soto, the most important policy response to poverty should be to vest property rights amongst the poor in those assets that they use, day in and day out, to manage, but which they do not own. Property rights are the key out of poverty.

Property rights are the way out of poverty, though, for what reason, according to de Soto? The reason is that people with property can get loans, their incentives to accumulate are stronger, and they have a deeper need to make sure that their assets are used in the best possible way. In other words, according to de Soto, poor people are petty entrepreneurs waiting to be unleashed, and all that is required to unleash them is giving them vested ownership in the things that they already use, day in and day out.

For both the microfinance industry and de Soto, then, poor people make the best possible choices they can, given the circumstances they face. Alter the circumstances--by giving them a loan, or by giving them an asset--and their choice set will change, in the effort by them to accumulate using their latent entrepreneurial abilities. Both approaches are, then, deeply neo-classical in their approach to international development issues. People are not structurally subordinate for systemic reasons; they are simply making choices that could be made better by altering their circumstances. That the poverty of some is built on the wealth of others is something that these approaches do not accept.