'The current crisis of capitalism': what sort of crisis?

Introduction

Despite the growing problems created by the global financial crisis, whether there is a crisis of capitalism is not easy to determine. There is an apocryphal story that Zhou En-Lai, when asked by Kissinger about the impact of the French Revolution, commented 'it is too early to tell'. Although this extremely long-term view does not help us right now, it is of concern that many commentators are taking firm positions, forgetting that many of us mistakenly assumed previous financial crises would be turning points. During the Asian financial crisis and collapse of Long-Term Capital Management (LTCM) in 1997-98, similar debates revolved around whether financial dominance would be reduced (at least) or whether business as usual would revive. Governments talked sternly about a 'new financial architecture'. Analysing the current situation when it changes weekly is hardly easy. Credit-money has collapsed, but what context and methodology should we use to understand this predicament? Suddenly 'the state' is again a major actor, and theories of money are again important, but in a situation where organisational inter-dependence and competition remain high in the financial industry.

Both nation-states and capitalism have changed sufficiently that the status quo ante of 30 years ago is not retrievable (nor desirable). As Anglo-American governments ceased to be cast as national-economic coordinators, at worst there was a loss of the democratic bonus that governments could be thrown out at election time if they made mistakes. Instead, unelected economic policymakers assumed that markets were the best possible coordinators in an imperfect world, and greed became the fall-back explanation for mistakes, scandals and crises. Governments were still blamed, but the democratic process was weakened by the massaging of public opinion to accept state imposition on whole populations of competition, financial choice among private services and risk-taking. The financial sector apparently enjoyed this development from 'organised to disorganised capitalism' (Wagner 2008) although many senior financiers, let alone academics, expressed concern that states were ceding democratically-instituted control to 'the market'. Asian and European policy-makers forged different compromises, but this only reinforces the point that world configurations and social integration have changed since the 1970s.

Inside the financial industry, there is now a need for a new professionalism that accepts and addresses uncertainty. The past twenty or so years have seen a diminution in professionalism, despite a greater than ever use of techniques with which to assess the future. Where cautionary discretionary judgment had traditionally been the principal modus operandi of the banking industry, intuition and the emotions of trust and distrust have for two decades been the basis for decision making. This over-reliance on the elusive ties of 'trust', rarely admitted or stressed in public, was a response to the increasingly impersonal nature of financial relationships. It was masked by positivist hopes that the future could be predicted and seemed to reduce the former necessity of taking a cautionary approach to the future. So, as with long-term weather forecasts, if one trusts them, one does not take the precautionary umbrella.

Over the past twenty years, practitioners have coped with a spiral of 'impersonal trust' relations by deploying armies of assessors of trustworthiness, while economists have ignored or despised these decision-making practices. So, the main question addressed in this article is whether orthodox economic theorists and policy-makers share the same world view as professional bankers and central bankers. Certainly since the current 'credit freeze', more people admit something approximating the thesis of this article, that bankers' reliance on emotions (such as their collective trust in impersonal assessments of a firm's future prospects) has given a sense of stability to fraught decisions which are invariably leaps into the darkness of an unknown future. Organisational forms may provide rationalisations before and after, but these can be more deceptive and destabilising than emotions, and thus the notion of 'rational choice' and 'irrational anomalies' are both implausible bases for facing uncertainty (Pixley 2004, 2009).

Practical Expertise and Coping versus Economic Liberalism

In evidence against orthodox economics' positivist faith in the market, we see how in the actual banking industry, trust in private credit-money diminished, for example after BNP Paribas 'stopped the music' in August 2007. Inter-bank overnight lending on occasions actually halted after that, and such lending remains generally very expensive (Ellis 2007; Guha 2007). (1) Distrust holds sway among the big banks, particularly because they do not know their own exposures and new exposures turn up on a weekly basis. After this about-turn from trust and often fatal gullibility to distrust, the efficient market hypothesis makes little sense. That hypothesis says new information is immediately incorporated into market prices. And yet the evidence shows trust and hope keep money markets operating, not information per se. Although everyone knew property prices had been falling since 2006 at least, no one factored that information into prices until Paribas said that CDOs on mortgaged properties could not be priced (Nason 2007). In addition, 'transparency', that great call by the orthodox, makes little sense when competitive rules vouchsafe commercial confidentiality--also imposed by orthodoxy. Second, and more importantly, 'the state' stepped in after lending ceased. Therefore, what began with, and primarily became, a run on the banks by the banks, cannot be explained by market orthodoxy and rational choice.

In addition, only economic liberals and libertarians are aghast at this entry of the state. The big banks hardly exhibit such views (now) and their current problems are daily cast in sociological (not individualistic) terms, such as the 'stigma' facing a big bank that asks for help, the inter-relations between banks where they are all counter-parties to each other, and the global anarchy of banks competing until, possibly having become 'too big to fail', they rush to their own nation-states for help (Hoenig 2009). (2) Although the double standards practiced by the financial industry are plain, orthodoxy is too compromised to admit this. So there is a broader consensus that 'something' has to be done. The question is, not as economic liberals ask, whether the 'market' will resurrect itself from the rubble, but rather whether nation-states, in spending huge sums--allegedly to save millions of people from unemployment, homelessness and loss of pitiful savings--might only save the banks from their own over-lending. Whether banks are engaging in 'moral hazard' or holding governments to ransom is a question that economic liberalism cannot seriously explore because of the primacy it gives to rational (consumer) choice in markets. On the other hand, this is not a real concern of the actors, namely the global banking industry.

The crisis applies both to orthodox economic policy failures, and to the populations who are suffering the fall-out. Economic liberals oppose bail-outs (moral hazard) on the grounds that markets are self-correcting. This callous view is irrelevant to democratic governments, which cannot contemplate the economic disaster such a long process would impose on populations. One informed British financier says (approvingly) that the UK's Prime Minister, Gordon Brown, implicitly likens the current credit-money network to a sewer. Its failure brings typhoid and death. So it must be put right no matter the cost. (3)

Yet analysts, chief economists and executives are displaying breath-taking lack of humility in their claims from the financial industry. Economic professionals of every political/theoretical bent, after all this, are still claiming to know the future. And yet, neither financial practitioners nor economic policymakers (or would-be policy-makers) believe or listen to each other. Financial practitioners no longer believe the efficient market hypothesis, any more than they believe that governments can restore business confidence. Big banks have their own logic which is global; they 'march in step' either in trust or distrust, and they act according to the structure of competition. They have used government hand-outs and deposit guarantees for further concentration (maybe misguidedly). If the state can be used for survival, it will be used.

In successive post-war moves, Keynesian and economic liberal policymakers succeeded only in capturing the state. Neither 'captured' the financial industry. Keynesian policy-solutions became suspect because banks and non-bank intermediaries evaded war-time and later Bretton Woods controls. Money moved behind the backs of central banks and tax offices. Likewise, when economic liberalism was in place, every crisis saw financial practitioners and central banks tear up the rules of the new orthodoxy. The struggle today among professional economists is over state policy turf. It seems pointless for Keynesians to pronounce on the end of economic liberalism, as if that is the same as saying that the financial industry is now under state control. The double standards in economic liberalism involve further attacks on the democratic process, while offering no alternative to the financial industry's failure to act as gateways to social development. Governments remain under-theorised by both sides of the debate, while nation-states have suffered attacks on democratic principles. If we cannot trust the market after the utopian free market experiment, the problem is how we can regain trust in governments--if indeed, that conception of the problem is sufficient or possible.

Money

The nub of the question about a 'crisis of capitalism' we may be facing, is how nation-states can possibly control money. Money is the most anarchic and global social relation in the world today. The most defunct definition of the situation, which few have criticised strongly enough since this potential crisis started, is to view money as a tradable commodity. Even so, it is not enough to say that money rests on trust/distrust, though this lesson is rapidly being re-learned across the world. It is true that believability in money is difficult to build and easy to lose, and money's existence as such depends on confidence in it. But neither economic side wishes to admit the other: state-money and private credit-money are both created through uncertain promises into the future. Here, the bald alternatives are the central bank printing press and state borrowing through the bond markets, to create more state-money, or the currently discredited private credit-money created in spades up to August 2007. Which is likely to create credible money? Since governments have compulsory powers to tax populations (in each government's own currency), at least the printing-press thesis agrees that tax is a debt owed by corporations and populations that maintains the credibility of state-money (fiat or high-powered money: for example, Wray 2003). Yet government creditors (bond-holders) can still contest the ability of central banks to 'accommodate' the 'near-money' generated by private banks' capacity to charge interest, take collateral and to load up on a never-never system of deferred repayments (which was claimed to have been securitised).

Thus, the interesting sociological questions are whether nation-states are any longer the major stabilising entities, and what sort of believable money is possible at present. These are two versions of the same question. As theories of money are not only contentious but also completely submerged in public discourse, I outline the theory that seems most plausible.

Geoffrey Ingham's (2004) sociological analysis of money, inspired and historically reconstructed from theories of Schumpeter and Keynes, as well as Weber and other sociologists, is my starting point. He primarily points out that a 'sovereign monetary space' developed slowly out of Elizabeth I's England, and eventually, within a new nation-state system, came to 'maintain the integrity of the payments system, which constitutes capitalist credit-money' (Ingham 2004: 130-1). The first question, now that banks have visibly returned to these sovereign monetary spaces, is how to understand these spaces in the current situation. As he says, the main successful states in the capitalist era have been Britain and the USA, a 'significant' point being that they were the most indebted:

The relationship between power, success, debt and the creation of money is complex. It involves virtuous cycles in which debt finances successful state activity and enables further credit to be extended on favourable terms to the borrower. Economic activity is stimulated and taxed at a rate which gives confidence that revenues are adequate to service the debt. On the other hand, of course, it may equally end in disaster: ventures may fail, taxes cannot be collected, debts cannot be repaid and a vicious cycle of decline sets in (Ingham 2004: 132-3).

Ingham also stresses that one cannot understand the long fixation on government taxes and 'sound finance' without acknowledging that 'the production of money involves a struggle between the state and its creditors (buyers of government stock) and (debtors) taxpayers. In capitalism, taxation is also a part of the settlement with the state's creditors--the rentiers, whose dividends are believed to be secured by taxation' (p. 79, Ingham's emphasis). Therefore, in the absence of government assurances and taxes, printing money can lead to a rentiers' strike against lending to governments. He concludes by again emphasising a Weberian social theory of value, in which 'calculability in money terms (stable money) of the capitalist economy is the result of the underlying predictability of the clash of interests in which money is a weapon. Stable money expresses a stable, but not necessarily equal, balance of power' (p. 203).

So, stability in money terms arises from whatever balance of power between creditors (rentiers), debtors and the state pertains. Keynes said much the same in reference to interest rates: whichever rate is believed to provide stability will do so but, crucially, is subject to changes in an ever-changing society (Keynes 1936: 203). My only caveat is that Weber is unwarranted in his assumption that interest conflicts are predictable (Weber 1978: 93). Creditors and debtors can lose unpredictably, at any moment, and so can nation-states. It may therefore be best to focus concern on these state entities and the concept 'sovereign monetary space'.

For example, the most powerful nation-state--the USA--is in hock to creditors which mainly comprise Sovereign Wealth Funds and central banks of many, increasingly emerging 'large' economies. This is unprecedented though some creditors, like China and Japan seem to remain national economies. (4) Moreover Europe has a regional, collective economy, a European Central Bank (ECB) and currency, even if fiscal, regulatory and tax agencies remain national. However, it is unclear what can stop one 'rogue bank' from pulling down all the others to a lowest common denominator in the absence of global regulatory, CB and fiscal agencies. The ECB is, therefore, not alone in this lack of fiscal agency even if it is a brave experiment. The nature of the global financial arena and nation-states' changed relations to their populations is an important question (against 'business as usual' views), considered in the next section.

The Nation-State and its Populations

Banks are intermediaries between creditors, debtors and the state. Since many recent non-bank, 'shadow' banks seem already defunct or bankrupt, banks may again resume primacy in this role. Banks' alleged risk-spreading and off-balance sheet entities are now obvious fictions. But global banks appear to be rapidly concentrating (care of bail-outs), and this coupled with recent mergers (e.g. Bank of America with Merrill Lynch) are resulting in even larger banks that may later, again, be deemed 'too big to fail'. A situation of increasingly uncontrollable global financial oligopolies is not a desirable outcome of the massive government bail-outs, particularly by the USA and the UK (Hoenig 2009). (5) How then can Keynesian measures 'work', given they rely on nation-state boundaries? How can states force global banks to take the risks of lending for development (Schumpeter) in an anarchy where rogue banks can engage in innovative arbitrage and act as merchants of debt (Minsky)?

This question, unanswerable for the time being, nevertheless needs to be posed in face of the increasing confidence among Keynesian and economic liberal policy-makers in their new struggle for policy relevance. The point here is that we need to concentrate on banking practices, their massively complex international networks and the way 'banks march in step' (Keynes) now on the global stage more than ever before.

A further question then arises which economic liberalism cannot answer. We arrive at it by building on the Weberian insight that stable money is only achieved--if fleetingly--from outcomes of conflicts. What, then, were the conflicts in Anglo-America around 30 years ago? Rentiers claimed they were being repressed by feudal sovereignage, onerous taxes (on them) and CB printing presses debasing the currency and, all in all, by the rigidities of post-war organised capitalism ('Fordism' or 'industrial society' Bell 1976). If, among these rigidities, there was little space or voice for popular expression (certainly in the 1950s), rentiers and their intermediaries, the banks, did not want an extension of self-determination in the political sphere. Rentiers (again, hardly as lone individuals but in growing organisational forms of Goldmans, Bear Stearns, later fund managers et al.) wanted a wider space to manoeuvre. The 'fiscal crisis of the state' was created by tax revolts (e.g. California) and social conflicts which drew in minimum wage workers to spread its appeal (e.g. setting white against black workers in the USA). This conflict was successfully won by collective rentiers regardless of whether there were actual or accounting 'limits' to state debts, as James O'Connor (1973) probably diagnosed incorrectly at the time, before economic liberalism won the policy turf. The rentier strike started earlier, with the Eurodollar markets (as more suggest today) and off-shore tax havens. The later collapse of full employment is well-known.

Although economic liberalism seemed to give theoretical justification to the roll-back of Keynesian rules, and substitution of competitive, agent-principal rules, its advocacy of market solutions was as totalising as command economy solutions. Every aspect of life was to be put for sale for profit on the market: child-care centres, friendly societies and mutually-owned pension and insurance firms. Fragile bulwarks of democracy were debased most in the English-speaking countries. These market rules threw the whole financial industry into crisis after crisis of new uncertainties, promises unmet and dog-eat-dog impersonal competition. Gradually, governments had to offer much more than went with economic liberal rules, to both rentiers and to populations. More groups were enfranchised than ever before, after the women's and civil rights movements swept the USA and far beyond to '1968', to South Africa and South America. New legitimacy and democratic deficits faced governments--not rentiers--as labour was further marketised and so too, credit. Selling credit came unstuck in 2007, but meanwhile economic liberals complain about 'moral hazard' on the grounds that dire 'adjustments' for populations will clear all the markets. Banks cannot cope with massive disruption by adhering to orthodox principles on other grounds.

For example, why would banks care any more about moral hazard (or what was formerly called rent-seeking by the public choice variant of orthodoxy) than the former industrialists who basked in Keynesian managed national economies? Keynesian management never went away, but simply shifted to providing business confidence to the financial sector while leaving industry to sink, particularly in Anglo-America.

The problem facing us now, however, is that the new, unholy settlement between 'the state' (and its now questionable sovereign monetary space), the banks, rentier-money management firms and SWF, and the unprecedented numbers of rentiers (however pitifully modest their holdings) and lowly debtors, remains. We should forget economic liberalism because that rhetoric and dogma is not (now) the world's problem: rather, it is the undemocratic nature of the banking industry under hyper-competitive rules, and the huge rise in unemployment around the world. This is a potential moment of transformation (banks want Keynesian policies!) that could easily come unstuck, and time should not be wasted on arcane disputes about the 'efficient market hypothesis'. Such in-house fighting could be dispelled by brave and creative political leaders insisting that uncertainty cannot be overcome by probability models.

The really difficult story is in the heartland of the financial industry. Pension and superannuation funds are invested everywhere (regardless of any nation-state), with commissions and fees going to the armies of money managers. (Look at the difference in the modest fees of Vanguard founded by John Bogle, still a genuine mutual fund in the USA, in this respect. (6)) Are banks going to invest in development, require nationalisation, or revert to business as usual? The worst outcome is a return to closed national economies which would see more international conflict than already faces the new US President. Hopes are here high, but our liberal democracies are thin reeds after such weakness in the face of financial 'interests'--class conflicts in the other sense of creditors and debtors, now depersonalised into a huge financial industry, which enmeshes billions more people and diverse nation-states than before.

Perhaps the European Union does provide a model, but that depends on whether a larger number of governments collectively offer their electorates a new social settlement, because markets are intrinsically unable to create new political arrangements. Firms are driven by profits through creative ideas (not utility maximisation), whereas markets obey the rule of buying cheap and selling dear. Although this could be fine in ordinary contexts it is not, however, when money as promise and obligation becomes problematic. In contrast, original ideas also arise from political practitioners (true public servants), not those who ignore their democratic deficits. Creative consensus politics is the main hope, rather than ideas from economic technocrats facing their own crisis, nor more seriously, from the financial industry in its bi-polar relation to governments.

References

Bell, D. (1976) The Coming of Post-Industrial Society, Basic Books, New York.

Ellis, S. (2007) 'Despite investor reaction, reducing interest rates may not be the answer', The Australian, 23 August 2007, p. 30.

Guha, K. (2007) 'Bourse fallout to dampen global growth', The Australian/FT, 23 August 2007, p. 23.

Hoenig, T. (2009) 'Troubled banks must be allowed a way to fail', Financial Times, 4 May 2009, p. 11.

Ingham, G. (2004) The Nature of Money, Polity, Cambridge.

Keynes, J. M. (1936, reprinted 1964) The General Theory of Employment, Interest, and Money, Harbinger/Harcourt, New York.

Nason, D. (2007) 'Central banks act in bid to arrest slump', The Weekend Australian, 11-12 August 2007, p. 40.

O'Connor, J. (1973) The Fiscal Crisis of the State, St. Martin's Press, New York.

Pixley, J. F. (2004) Emotions in Finance: Distrust and Uncertainty in Global Markets, Cambridge University Press, Cambridge.

Pixley, J. F. (2009) 'Time orientations and emotion-rules in finance', Theory and Society, 38, pp. 383-400.

Wagner, P. (2008) Modernity as Experience and Interpretation, Polity, Cambridge.

Weber, M. (1978) Economy and Society, G. Roth and C. Wittich (eds), University of California Press, Berkeley, CA.

Wray, L. R. (2003) 'The neo-Chartalist approach to money' in S. A. Bell and E. J. Nell (eds) The State, the Market and the Euro, Edward Elgar, Cheltenham.

Jocelyn Pixley *

* Department of Sociology, Macquarie University

Notes

(1.) At the time, a rising fear was of counterparty risk, according to a senior IMF official--that is, it was not a lenders' strike a.k.a. liquidity problem (Guha 2007). Actors might ask whether the problem was insolvency (from counter-party risk), and not just a collapse of willingness to borrow (Ellis 2007).

(2.) Hoenig, president of the Federal Reserve Bank of Kansas City argues that the US bail-outs have made matters worse: 'Certain companies have not been allowed to fail ... So-called "too big to fail" firms have been given a competitive advantage and, rather than being held accountable for their actions, they have actually been subsidised in becoming more politically and economically powerful. The US government has poured billions of dollars into these firms without a defined resolution process ...' (Hoenig 2009).

(3.) Personal discussion, London, 1 May 2009.

(4.) These countries are politically poles apart, one armed and with a command economy, and the other with at least 150 years of capitalism and post-WW2 American influence.

(5.) There is widespread discussion about reducing the size of banks, but right now the German banks are already at a disadvantage from minimal state support as opposed to the British and American banks. Personal discussion with a German banker in London 1 May 2009.

(6.) My interviews with Bogle before the dot com crisis (Pixley 2004), and his tireless criticism of the marketing of Wall Street products, testifying to Congress and in many other public activities, are evidence.