Monday, April 20, 2009

Our Own Transition

There was a time when Ronald Reagan could claim that “Government is part of the problem, not part of the solution.” [1] Bill Clinton and Tony Blair endorsed and replicated Reagan’s contempt for government. Now the financial crisis that began in August 2007 in the USA and the UK, and exploded globally since September 2008, has spectacularly reversed this proposition.

Governments have become the sole, large-scale actors in the search for a solution to global crisis problems, through initiatives for new, stricter market regulations; large injections of liquidity by central banks (whose cherished independence of over twenty years has gone by the board or has been practically suspended); expansionary fiscal policies far beyond what until now was regarded as prudent, for instance by the EU now softened Growth and Stability Pact; through bail-outs of banks, insurance companies and other financial institutions, then even of productive enterprises making cars and other durables, also newly supported by previously unthinkable government subsidies. There have also been outright nationalisations, qualified as “temporary”.

No wonder many observers have talked of “The End of Capitalism”, with or without a question mark, or qualifications such as “American”, “financial”, “as we know it” or “knew it” [2].

Risk-bearing, i.e. appropriating profits and suffering losses, is a fundamental feature of private property and enterprise. When losses occur they eat up enterprise capital. When liabilities exceed the value of capital assets, the enterprise goes bankrupt; an established ranking of secured creditors (wage employees, mortgage lenders) satisfy their claims first, as far as they can, while unsecured creditors satisfy a fraction of their claims on the residual, if any, owner(s)/shareholders being last. Before that happens the enterprise may be liquidated; if it is still viable as a going concern (under Ch. 11 Bankruptcy in the US) it might continue to operate after being sold as such or relieved of the burden of net debt.

One way or another, the “exit” of insolvent, non-viable enterprises is the essence of the capitalist system, together with the associated market discipline, competition, evolutionary survival of the fittest – all good things that are presumed to be alien to state enterprises.

“Temporary nationalisation” of those banks that risk bankruptcy is meaningless, or positively misleading. “Temporary” here involves an indefinite period, without specification of the precise circumstances in which re-privatisation might occur, without the subsequent re-instatement of the initial position, for there will be different owners, who will have paid a different price, or a price bearing a different ratio to the underlying assets, from the nationalisation price. Presumably nationalisation will happen at an over-inflated price (otherwise there would have been no need for nationalisation), that involved a subsidy to shareholders and/or to depositors, plus often a separate additional subsidy in the form of free, retroactive insurance (which is an oxymoron, indeed the caricature of insurance) on deposits. Like death, nationalisation is irreversible; we can always be reborn, in another life or on the Day of Judgement, but that’s something else.

Nevertheless, the End of Capitalism has been grossly exaggerated. An overwhelming share of GDP is still produced in the private sector. There are still domestic and international markets for goods and services, and markets for labour and other productive factors. Their degree of competition may disappoint, but they are there, and mostly private subjects buy and sell inputs and outputs in those markets. We are certainly not under a socialist system of any description, nor is a new system in sight. The blogger[3] who asked whether “the USA should now be known as the USSA (United Socialist States of America), and the UK as SUK (Socialist United Kingdom)”, is out of order.

All the same, we are in a middle of a New Transition. Not from capitalism to socialism, as some observers hope or fear, but from financial hyper-liberalism to state financial capitalism; as Willem Buiter argues, “From financialisation of the economy to the socialisation of finance” (op.cit.). But there is a big problem: the widespread pretence that either this is not happening, (or if it is, it is a momentary reversible morphism of no consequence, almost an optical illusion); or that this is part of a new socialist revival, instead of the degeneration of the welfare state towards the protection of capitalists in place of workers and the poor. Both delusions are equally false and most dangerous.

[1] Godfrey Hodgson, The true legacy of Ronald Reagan, The Independent, 8 June 2004.

[2] References abound. Just to give a few examples: Phillip Blond, Outside View: The end of capitalism as we know it?, The Independent, 23 March 2008; Willem Buiter, The end of American capitalism (as we knew it), The Financial Times, 17 September 2008; Anthony Faiola, The End Of American Capitalism?, The Washington Post, 10 October, 2008; Saskia Sassen, Too big to save: the end of financial capitalism, Open Democracy, 1 April 2009.

[3] Mike Talbot, 18 September 2008,

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