The
Great Depression of the 1930s was a spectacular practical demonstration
of the contradictions of “laissez-faire capitalism”. John Maynard Keynes,
the renowned economist, writing in the midst of the Depression, had attributed
the failure of markets, especially financial markets, to their intrinsic
incapacity to distinguish between “speculation” and “enterprise”, and
to get dominated by the activities of speculators to a point where “enterprise
becomes the bubble on a whirlpool of speculation”. As a result, the level
of employment and output in the economy, and hence the livelihoods of
millions of people, became dependent on the whims and caprices of a bunch
of financial speculators, “a by-product of the activities of a casino”.
Keynes was opposed to socialism and was a defender of the capitalist system,
but he saw that major repair had to be done to the capitalist system if
it was to survive. The repair he recommended was “socialization of investment”,
i.e. state intervention to ensure that the level of investment in the
economy was such as to achieve “full employment”.
The basic argument that “laissez faire capitalism” is fundamentally irrational
(in so far as it makes employment and output the by-product of the activities
of a casino) and hence needs to be replaced by state intervention, has
never been successfully refuted by neo-liberalism. Indeed, intellectually,
neo-liberalism has always been vacuous, in the most elementary sense that
the assumptions required by neo-liberal theory to show the salutary consequences
of the unfettered operation of markets, are either palpably unreal, or
at palpable variance with other assumptions required for the same demonstration,
making the argument logically inconsistent.
The resurgence of neo-liberalism against the Keynesian position therefore
was a result not of its intellectual persuasiveness, but of its being
promoted by the new hegemonic entity in world capitalism, namely international
finance capital, whose ideology it constituted. Of course, the Keynesian
prescription for capitalism, i.e. state intervention in demand management,
had ceased to work. But this fact did not mean that the Keynesian diagnosis
was wrong, and nobody has succeeded in proving otherwise. What is more,
the fact of the Keynesian medicine not working any longer was itself the
result of the emergence of international finance capital.
The state whose intervention Keynes had advocated was necessarily a nation-State,
and in a world where finance was globalized, i.e. in a world characterized
by international finance capital, the capacity of the nation-State to
pursue policies of its choice was necessarily undermined: any set of policies
not to the liking of international finance capital would provoke the flight
of such capital to other shores, reducing the original host economy to
dire straits. Keynes was aware of this constraint upon demand management
and hence was very particular that “finance above all must be national”.
But the spontaneous tendencies of capitalism, towards the concentration
of finance in larger and larger blocs and its deployment all over the
world in quest of speculative gains, operated even within the regime of
Keynesian demand management, and ultimately undermined it from within.
Undermining the old regime however was not enough for finance capital.
An alternative new regime had to be erected, which would facilitate the
global movement of finance by removing all barriers to such movement;
which would permit finance capital to pick up “for a song” profitable
public sector enterprises and scarce and valuable natural resources that
had been largely nationalized, following decolonization in the third world;
and which would turn the State from being a Keynesian (or for that matter
a Nehruvian) State into one that was actively engaged in promoting the
interests of international finance capital, of which the domestic financiers
and high bourgeoisie constituted a component part. This transformation,
which required not just the thwarting of Keynesianism (or of Nehruvianism
or of third world nationalism, generally) but actually transcending the
latter, institutionalizing an alternative regime to the ones that were
in force, had to be sustained by an ideology. Neo-liberalism was that
ideology.
Neo-liberalism had not disappeared during the heyday of Keynesianism.
It had been overwhelmed, but it continued to exist, pushed to the fringes
and advocated by die-hard believers like Milton Friedman who were looked
upon with amused tolerance by “mainstream” economics, even as debates
within the latter centred on different versions of Keynesianism. Even
Richard Nixon had famously said in 1971: “we are all Keynesians now”.
Neo-liberalism’s emergence from the shadows was the theoretical counterpart
of the emergence to dominance of international finance capital, through
inter alia the progressive removal of capital controls, which had characterized
the Bretton Woods System, first in the advanced countries during the sixties
and later in the developing countries.
What is occurring in world capitalism now is a re-affirmation of Keynes’
proposition that financial markets, precisely because they get dominated
by speculators, function like casinos. Financial crises, resulting in
severe Depressions, are inherent to the functioning of this “free market”
system. In fact, efforts by the State to prevent such crises, through
“bail-out” packages, when successful in the short-run, have the perverse
effect of further emboldening the speculators to become even more reckless,
and hence creating the potential for even more severe crises in the future.
Financial crises in this sense resemble earthquakes: if they do not happen
for some time, then when they do happen they are even more severe. Government
intervention to prevent such crises in an economy dominated by finance
capital and hence open to speculation, prevents a current crisis by creating
the conditions for a far more severe future crisis. To say this is not
to suggest that the government should allow financial crises to occur,
but to argue that the neo-liberal regime that permits financial crises
to occur at all should be transcended. (Many including myself would argue
that this is not possible without transcending capitalism itself, but
that discussion need not detain us here).
Keynes had said with remarkable prescience: “As the organization of investment
markets improves, the risk of the predominance of speculation does, however,
increase.” One of the “improvements” in the organization of financial
markets in recent years has been the development of the “derivatives”
market, the total value of trade in which in 2007 was 40 times the total
gross domestic product of the world economy! And confirming Keynes’ prognosis,
this has been a major stimulus to speculation and hence a major factor
behind the severity of the current financial crisis. Loans made by investment
banks for instance are “cut up” and re-bundled for sale to others in the
derivatives market. This has two important consequences: first, the risks
associated with holding claims upon the ultimate borrowers get hidden
from those who hold these claims. Derivatives in short lead to risk-concealment,
which means that the euphoria of a boom in the prices of assets, against
which loans are made, continues much longer than would have otherwise
been the case. Secondly even when the risks are not concealed but are
known, the market ensures that the least risk-averse are left holding
the maximum risk. This too, by lowering the general level of risk-aversion
in the economy, implies that speculation continues much longer than would
have otherwise been the case. It follows that the development of the derivatives
market has the effect of prolonging speculative booms, and hence intensifying
the magnitude of the crash when it finally comes.
All these factors have been at work in the current financial crisis. Its
root cause lies in the unfettered operation of financial markets, which
is an essential part of the neo-liberal package and which is promoted
by finance capital. The fact that Indian financial institutions have largely
escaped this crisis is precisely because, thanks to the pressure of the
Left, “financial liberalization” has been somewhat checked, despite the
best efforts of Manmohan Singh and the other leading luminaries of our
neo-liberal contingent. Not that India will escape the consequences of
the world financial crisis, but this is because the shifting of funds
by the Foreign Institutional Investors will result in a mutually-reinforcing
downward movement in the prices of stocks and of the rupee, and also because
any recession in the world economy within the neo-liberal regime will
entail the import of unemployment into our economy and a crash in the
prices of cash crops for the peasantry. (The collapse of the financial
giants on the Wall Street has already put a question mark over the employment
prospects in BPOs and Call Centres).
But this transmission mechanism will at least not be supplemented by an
additional imported financial crisis, as is happening with British and
continental banks, because financial liberalization has not proceeded
far enough, and certainly not as far as our domestic neo-liberals would
have liked. Likewise, if capital account convertibility had gone through,
as those setting up the successive Tarapore Committees had wanted, then
the collapse of the stock market, and the threat to the value of the rupee
in the foreign exchange market, would have been far greater than now,
since it is not just FIIs but even the domestic wealth-holders who would
be shifting funds out of the country. Similarly, if pension funds had
been deployed on the stock-market as the neo-liberals had wanted, then
the loss in their value would have meant either acute suffering for the
old-age pensioners or an inordinate drain on the government’s budget for
rescuing pension funds.
Ironically, Chidambaram has been reportedly shoring up the stock-market
by asking public sector banks to buy up stocks, an option that would have
been denied to him if his own advocacy for privatizing public sector banks
had succeeded. Ironically too, the most ardent advocate of privatizing
insurance in the country was the AIG, the world’s largest insurance company,
which is at present in the doldrums and rescued only through a loan of
$85 billion by the U.S. government.
The country has been spared all this because of the stout opposition mounted
by the Left and other progressive forces against neo-liberal policies.
But it is also important to draw a salutary lesson from all that has happened.
Any economy is ill-served when its affairs are entrusted to a group of
persons who are wedded to an ideology that is intellectually vacuous,
and owes its apparent triumph only to the fact of its being promoted by
the self-serving needs of international finance capital.
That ideology however has run its course. The solution to the crisis that
its triumph has precipitated is increasingly being seen to lie in the
part-nationalization of financial institutions in the capitalist world,
which represents a negation of its basic premise. Originally it was thought
that an “injection of liquidity” was all that was needed to overcome the
crisis. But the obvious question was: injection of liquidity where? The
reason why credit has dried up all over the capitalist world is an increase
in the lenders’ perception of risk, since the solvency of the borrowers
has become suspect owing to the presence of a plethora of “toxic” securities
in the system. If A does not have the confidence in the solvency of B
so as to be willing to lend to B, then simply improving A’s access to
liquidity is unlikely to make any difference. Of course if B’s access
to liquidity can be improved, then, since B is of dubious solvency and
hence cash-strapped, this may help overcome the crisis, provided that
this liquidity is available on a fairly long-term basis and provided that
B uses it wisely. The only way that such liquidity can be made available
without arousing public ire is through part-nationalization, whereby the
government injects funds in lieu of equity. The European governments,
especially U.K. and Germany, have accepted this idea, and Gordon Brown
has already put it into practice. The Americans however have been reticent,
which is why Treasury Secretary Paulson’s original “bail-out package”
(involving simply the government’s buying out “toxic” securities) had
such a rough weather (though Paulson now seems willing to consider nationalization).
Likewise even measures like guaranteeing inter-bank loans, which European
governments have announced, are unlikely to get public support unless
control over the behaviour of banks is exercised as a quid pro quo. The
rescue operation from the crisis therefore will entail in a basic sense
an abandonment of neo-liberalism.
If nothing else, the extreme public anger against the international financial
oligarchy will ensure this. In the face of this anger, directed against
a bunch of greedy speculators who have brought the world economy to the
brink of ruin, the hegemony of finance capital that underlay neo-liberalism
is unlikely to persist in the old form. How the crisis and its sequel
unfolds remains to be seen, but the world will not go back to what it
was before.