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Neoliberalism, Finance Capitalism, and Crisis

I offer a proposition worthy, perhaps, of consideration. Several major, powerful blocs of countries have changed from societies with economies characterized by industrial capitalism to a new kind of society one might call finance capitalism. In the United States, the timing of this transformation is clear. Profits from manufacturing were far larger than profits from other corporate sectors until the 1980s, when profits in FIRE corporations (finance, insurance, and real estate) all of a sudden grew rapidly. They overtook those in manufacturing in the 1990s and have remained greater ever since. Financial corporations are now the dominant economic institutions in capitalist societies that have transitioned from production to the provision of services, especially financial services (Peet, 2011).

This transition results from secular change in the distribution of income. Figure 5.1, derived from U.S. income-tax statistics computed by Emmanuel Saez from the University of California, shows that the 1 % of the U.S. population at the highest end of the income scale received 15-25 % of total income in the Liberal period of U.S. capitalism (1917-1941). For the subsequent 40 years under Keynesian capitalism, that group received a fairly steady 10 %, a figure that began to rise suddenly in the early 1980s, under Neoliberalism, reaching 20-24 % in the 2000s. Economic growth since 1980 has almost exclusively produced higher incomes for the already rich (Piketty & Saez, 2003). At the other end of the class spectrum, real incomes have fallen for the poor and have remained steady for just about everyone else. Increasing inequality is the central socioeconomic characteristic of finance capitalism.

Finance capitalism exercises power by controlling access to the markets through which capital accumulations become investments, directing flows of capital (e.g., equity purchases, bond sales, and direct investment) to places and users approved by the financial analytic structure of the banks, investment firms, and bond sellers on Wall Street and in the City of London. In terms of expertise, it is the investment analyst’s global gaze, representing the confidence of the market, by which societies and economies are ordered, ranked, and adjudicated. Although investor confidence is presented by the business media as a neutral, technical, and necessary factor—in everyone’s best long-term interest—it is actually a committed, financial capitalist interest based on utterly biased knowledge. An instructive example is the global bond market. The interest paid on sovereign bonds is determined by the risk of

Percentage income (including capital gains) going to the three highest income groups, United States, 1917-2008. (Source

Fig. 5.1 Percentage income (including capital gains) going to the three highest income groups, United States, 1917-2008. (Source: Designed and drawn by the author. Statistical data from Alveredo, Atkinson, Piketty, & Saez (2011))

default, with experts employing formulae stemming from long experience measured statistically—apparently scientific and necessary. Yet it is actually a few thousand experts representing the interests of accumulated capital who tell governments how to run their economies. At the very least, they represent undemocratic expertise.

At the confluence of knowledge and action lies expertise, by which is meant high-quality, specialized, theoretical, and practical knowledge. The process that produces sophisticated, but inimical, knowledge is what I call perverse expertise. It is expertise in that some of the world’s finest minds, such as professional economists, do the intellectual and practical modeling and are well paid and respected for doing so. The process is perverse because knowledge is accumulated in order to continue augmenting the incomes of already wealthy people, the capitalist class. The only valid economic reason for gross distortions in income distribution of the kind that characterizes neoliberal, finance capitalism is that wealthy people are so rich that they cannot possibly spend all the money they receive and are therefore forced to save. The resulting vast accumulation of saved incomes becomes the main source of investment capital. Properly invested, capital can be used for research and innovation that results in more productive or sustainable economies. Badly invested, capital can be used for speculation that results in unstable economies. Knowledge and expertise make the difference.

Accordingly, Neoliberalism is a way of running the economy that produces dramatic price rises on the stock exchange, where the rich put their money to make ever more of it. But stocks and shares are a relatively safe bet compared to Neoliberalism’s irrational exuberances, such as the sprawling financial apparatus surrounding the swollen credit market. Disaster strikes when, as in 1929 and 2007, the amount of money going to the 1 % superrich approaches 25 % of total income generated in the country, far exceeding requirements for productive investment and necessitating speculation to enhance returns. For the price of high returns is eternal risk. Any investment fund that does not generate quick and large returns and that thereby avoids extreme gambles suffers disinvestment in highly competitive markets, where money changes hands in a computer-aided flash. There is thus a competitive compulsion for experts to be ever more daring as they seek to maximize returns that temporarily attract investment. Financial managers, who oversee capital accumulations, compete for control over assets by promising these high returns. Those who fail to deliver high profit rates disappear to be replaced by even more aggressive investment analysts. Debt, speculation, hazard, and fear are thereby structurally endemic to finance capitalism in what Walks (2010) calls “Ponzi Neoliberalism.” Fear itself becomes the source of further speculation, as with buying gold or futures. Debt and gambling spread from Wall Street into all sectors of society—house prices, state lotteries, casinos, numbers games, bingo at the church hall, sweepstakes, and Pokemon cards. Everyone gambles, even children. Production, consumption, economy, culture, and the use of environments are subject to an ever more removed, abstract calculus of power in which ability to contribute to short-term financial profit becomes the main concern. The structure of the system compels expertise into perversity. The particular thinker, with his or her own psychological structure and thinking processes, has little to do with structural compulsions in the relations between knowledge and action.

The interlocking of these speculations is the source of their intractability. The financial crisis that began in 2007 was thus marked by vastly overpriced housing, particularly near booming financial centers; competition among financial institutions to offer easy credit that made many people hopelessly indebted; the bundling of home mortgages and other debts into tradable paper; exorbitant levels of leveraging; and the use of assets whose value can disappear in an instant to securitize other, even chancier investments. It was not just that crisis spread from one area to another. It was that crisis in one area (such as the inevitable end to the housing price bubble) had exponential effects on the others (investment banks that were overextended into high-risk speculation) to the degree that accumulated losses tested the capacity of even client states and governance institutions to rescue the situation. In a nutshell, inequality is not merely unethical, it is dangerous. The combination of debt and speculation, deriving from inequality, produces an inevitable tendency toward repeated financial crises.

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