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Subject: 	[Marxism] Crisis: the motor of capitalism
Date: 	Fri, 02 Apr 2010 19:46:42 -0400
From: 	Louis Proyect <lnp3 at panix.com>
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http://www.truthout.org/the-crisis-motor-capitalism58234
Crisis: The Motor of Capitalism
Monday 29 March 2010

by: André Orléan   |  Le Monde

Capitalism's history coincides with the history of its crises. Over the
1970-2007 period, there were at least 124 banking crises, 208 exchange
rate crises and 63 sovereign debt crises! Even though most of those
crises remained restricted to peripheral countries, this nonetheless
remains a very alarming fact.

In the face of such figures, the idea of market self-regulation appears
inadequate. To understand how capitalism manages its excesses, it seems
that the alternative theory of regulation through crises does not lack
for arguments. If one needs proof, one need only consider those crises
we call "great" or structural crises. Since they are periods of deep
transformation, their role in the historic development of capitalism is
crucial. The most famous of these great crises is the Great Depression
(1929-1939).

At issue are deep crises, not only quantitatively by their intensity,
but also in the scope of the institutional transformations that they
initiate. These crises originate in the exhaustion of a growth model
that no longer succeeds in containing its own imbalances. To pick up
again, the economic system needs new rules of the game, new
institutions, new compromises. That is what's at stake with the great
crises: reinventing a new growth model.

Thus, during the 1929-1945 period, capitalism had to transform itself by
putting forward a plan no longer based on all-out competition, but on a
permanent adequacy - centered around the big industrial company -
between real salary increases, productivity gains and growth. This model
that emerged at the end of the Second World War was designated by terms
such as "Fordist regulation," referring to Henry Ford, who had
understood that in order to be able to sell his cars and make profits,
his workers had to be well-paid.

After leading to an exceptional prosperity, known in France as the
"trente glorieuses" [thirty glorious years] (1945-1973), the Fordist
regime in its turn entered a crisis. That was the stagflation of the
1970's (1973-1982), which combined weak growth and inflation in an
unprecedented way. Although that great crisis differed from that of
1929, its significance remains the same: the end of an era and the
advent of a new form of capitalism. Consequently, in the beginning of
the 1980's after stagflation, financialized capitalism, also called
"patrimonial capitalism" or "neoliberal capitalism," emerged.

The rupture with the preceding regime was colossal, especially in the
scope of financial deregulation. We witnessed the progressive
dismantling of the regulatory framework which - a significant fact - had
led to the elimination of any banking crisis during the Fordist period
between 1945 and 1970. Politically, it was the ascension of the
neoliberal governments of Margaret Thatcher in the United Kingdom (May
1979) and Ronald Reagan in the United States (January 1981) that marked
the outset of this new phase. However, from the viewpoint of economic
regulation, the origins of this new capitalism were to be found in the
revolutionary transformation which characterized monetary policy.
Inflation had become the primary target.

To fight it, Paul Volcker, who was installed at the head of the American
Federal Reserve (Fed) in 1979, proceeded to an astonishing increase in
short-term interest rates, which reached 20 percent in June 1981. That
policy generated a complete and definitive change in the balance of
power between borrowers and lenders - in favor of the latter. From then
on, holders of financial assets no longer risked seeing their
profitability eroded by inflation. Their field was clear. That was the
beginning of a twenty-five year period the central characteristic of
which was to place market finance at the center of regulation, well
beyond the mere technical question of financing. In simple terms, from
then on it was the financial markets that controlled property rights,
something never known before.

In the preceding capitalisms, capital ownership was exercised in the
form of majority control within specific structures outside the market,
as for example in the German Hausbank ("house bank") or family control.
The emblematic representative of patrimonial capitalism is the
institutional investor. The institutional investor is the bearer of a
new form of corporate governance, centered on "shareholder value."

The crisis that began in August 2007 must be understood, I believe, as
marking the onset of the limits to patrimonial capitalism and its entry
into a great crisis. Like the preceding capitalisms, it succumbed when
the very principle of its dynamism turned against it to become the
source of imbalances. In this case, it was the financial question that
proved decisive. Patrimonial capitalism no longer succeeds in
controlling the expansion of its financial sector, the weight of which
became a handicap at a certain threshold.

To see that, let's consider the total indebtedness of the United States,
adding up all sectors. Between 1952 and 1981, during the Fordist period,
the growth of total debt remained moderate, from 126 percent to 168
percent of GNP. During the neoliberal phase, that same ratio exploded,
to reach 349 percent in 2008! The same was true for the total of US
financial assets. That aggregate remained stable throughout 1952 to
1981, at four to five times GNP, to start growing subsequently to over
10 times GNP in 2007. At the global level, one sees the same thing:
total financial assets, worth 110 percent of global GNP in 1980, reached
346 percent in 2006.

Although initially financial expansion actively contributed to the
formation of neoliberal growth, it appears that it has become
disproportionate today. Think that this sector appropriated 40 percent
of total American profits in 2007, versus 10 percent in 1980, while it
represents but 5 percent of salaried employment. The disproportion and
excess are extreme. The financial sector weighs down the rest of the
economy through numerous channels. First, through profitability
requirements. The financial globalization of property rights has given
shareholders - with institutional investors acting as surrogates -
unprecedented power. It has allowed the emergence of normative returns
for listed companies of around 15 percent. This profitability
requirement is untenable in the long term. Too few industrial activities
offer such elevated profitability.

Consequently, in the absence of [sufficiently] profitable employment for
it, companies have been led to return capital to shareholders in the
form of dividends and stock buy-backs. We know that in the United States
net issues of shares have been negative for about fifteen years. In
other words, the American stock market is financing shareholders and not
the opposite. Because it impedes the growth of developed countries and
feeds outsourcing strategies, this required profitability leads to an
important reduction in manufacturing employment in Europe and the United
States.

The second consequence may be deduced immediately: strong pressure on
salaries. It results from a very unequal balance of power between
shareholders' unified representation and an extreme fragmentation of
union organizations. In consequence, while under the Fordist regime a
significant share of productivity gains went to employees, which fed the
dynamism of demand, that is no longer true under patrimonial capitalism.
Real salaries stagnate, which constitutes a permanent brake on economic
growth; hence households' recourse to debt, with the effects that we know.

The third consequence is a massive rise in inequalities. In fact, an
essential characteristic of the new corporate governance is to have
swung senior management over to the owners' side. That's the entire
issue of new compensation rules that aim to align management's interest
with those of the shareholders. The result has been an explosion of
inequalities in developed countries. The multiplier of the average
worker's salary to reach the top managers' salary has gone from 40 to
500 in the United States.

Even more disturbing: if one considers the 90 percent of less-rich
workers and compares their average income to the average income of the
richest one percent, then - although during the 1933-1973 period a
certain catching up was observed - over the 1973-2006 period (33 years),
one observes that in real terms, the average income of the former has
shrunken slightly even as it has increased 3.2 times for the latter.
Such inequalities have political effects as well as economic impacts.
Ultimately, the unity of society as a whole is imperiled.

It is striking to observe to what extent the markets have shown
themselves incapable of deflecting or even of simply moderating these
imbalances. It's a lesson that must be kept in mind. So, according to
the theory of financial efficiency, competition should have increased
consumers' (in this case, mortgage borrowers') well-being by supplying
them with good-quality products capable of containing the risks
associated with acquiring property at low cost.

It was in the name of such a result that market liberalization was
justified, not to increase bankers' bonuses. None of it happened.
Similarly, attracted by the high compensation, a great many of our
best-trained engineers migrated to the financial sector. Is that a
satisfactory situation when we think about all the technical challenges
we have to confront? The onset of the crisis corresponded to the moment
when these imbalances took on such a magnitude that the cohesion of the
whole found itself at risk. Then the question of a new regulation was
posited.

However, the crisis does not offer any ready-made solution. Far from it:
initially, the crisis does nothing but aggravate the problems, since it
accentuates the tendencies peculiar to patrimonial capitalism. Let's
take the financial question, the critical role of which we've seen.
During the last fifteen years, the banking sector has evolved towards a
high degree of concentration around a small number of very big banks.
This development is problematic, because it produces giants which, by
virtue of their size, carry systemic risk.

In consequence, the public authorities find themselves forced <i>de
facto</i> to come to these institutions' assistance should difficulties
arise. All economists agree that such a situation is not acceptable. It
leads these actors to take excessive risks, since their profits revert
to themselves, while their losses are socialized. Yet the crisis and the
emergency measures taken by the public authorities have accentuated
concentration in the banking sector. Bear Stearns, Lehman Brothers,
Merrill Lynch, Wachovia and Washington Mutual having disappeared; the
remaining banks have become even more sizable.

In other words, the banks that were already too big to fail have become
even bigger! Under these circumstances, to dismantle enormous
conglomerates, for example by separating investment banks from deposit
banks, should be a primary objective. A bank too big to fail should also
be too big to exist. But such a policy presupposes a profound change of
mind. At present, that seems a very remote prospect. Overall, the G20
continues to think within a neoliberal capitalist framework. However, if
this diagnosis is correct, the persistence of the crisis will
necessitate a paradigm change.

The difficulties to come are of two orders: not only the maintenance of
massive unemployment in developed countries, but also the development of
significant monetary difficulties. Note that up until now, the crisis
has been primarily of a financial and banking nature. The public
authorities have succeeded in controlling it thanks to their vigorous
wielding of the monetary weapon. Simply put, they've drowned the
difficulties in liquidity with the active help of central banks.

However, today, the mass of liquidities thus produced, associated with
the vertiginous growth in public debt, brings the crisis into a new
stage in which the question of currency values enters the spotlight. In
this matter, the sites for a possible rupture exist: for example, the
dollar's hegemony, the unity of the Euro zone, the parity of the yuan -
or the weakness of the pound Sterling? Should such a rupture occur, then
the cohesion of international neoliberalism would find itself called
directly into question.

The forces of shock that surfaced in August 2007 have not yet finished
making felt their devastating effects.


André Orléan is an economist. Born in 1950 in Paris, administrator of
the Insee [French national institute of statistics and economic
studies], this former polytechnicien has been director of research at
CNRS [French national center for sociological research] since 1987. He
has also been a member of the scientific council of the Commission des
opérations de Bourse [Commission for stock exchange operations], which
merged in 2003 with the Conseil des marchés financiers [Financial
Markets Council] to form the Autorité des marchés financiers [Financial
Markets Authority] (AMF). Since 2006, he is director of studies at the
Ecole des hautes études en sciences sociales [School for advanced
studies in the social sciences] (EHESS). He is on the management
committee of the review, "Annales. Histoire, sciences sociales" and the
author of several books, including "Le Pouvoir de la finance" [The Power
of Finance] (Odile Jacob, 1999).

Translation: Truthout French Language Editor Leslie Thatcher.

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