Dr Adrian Pabst, Senior Lecturer in Politics, School of Politics and IR, University of Kent; Visiting Professor, Institut d'Etudes Politiques de Lille (Sciences Po), specially for wpfdc.org
Five years after the fall of Lehman Brothers triggered the global financial crash and the Great Recession of 2008-09, there are some faint signs that the fledgling recovery is gaining momentum in some advanced economies and emerging markets. However, already before the government shutdown in the USA the growth in US national output and the decline in unemployment had begun to slow down. The eurozone as a whole may have exited the recession but the periphery is stuck in a vicious circle of debt and depression. Emerging markets such as Russia or Brazil are seeing a marked slowdown in economic activity and struggling to contain growing levels of capital flight. China’s expansion continues apace but there are increasing risks related to credit and real estate bubbles that could burst and bring down much of the debt-fuelled growth.
The fundamental problem is the continual disconnect of finance from the real economy and the bubble cycle of boom, bust and bailout that new rules and regulation won’t prevent. For the regulatory response at the level and supranational levels such as the G20 merely addresses certain symptoms such as overleveraged balance sheets or some tax loopholes. What is missing is a break with the culture of debt (household, corporate and public) and a shift towards investment in productive activities. Crucially, new rules and regulation have not transformed the prevailing system that privatises profit, nationalises losses and socialises risk. The key move is to mutualise the economy by entangling capital in productive investment and social relationships on which trust and cooperation depend.
1. The double divide of the current recovery
Even though the economy is improving both nationally and globally, this is turning out to be ‘a recovery but not as we know it’. By any historical comparison since the Great Depression of 1929-32, unemployment remains very high, and both asset and income inequalities are soaring in advanced economies and emerging markets alike. Levels of social mobility and entrenched poverty are lower in many countries than in the 1920s. Crucially, national output may be growing but most people are getting poorer, as the costs of living continue to go up much more rapidly than incomes. In short, we are facing the paradox of a richer economy with poorer people. There is a very real prospect that this generation of 18-25 year olds will be worse off than their parents’ and grandparents’ generation.
Part of the reason is the financialisation of the whole real economy, which is the product of securing the exponentially growing volume of virtual global capital against physical, material assets. For example, various financial instruments such as derivative trading or ‘naked short-selling’ need to be secured against some fundamental value such as natural resources or commodities. Clearly ordinary demand and supply forces cannot account for what’s going on. Like other commodities, the price of energy and foodstuffs is not exclusively determined by the interaction of natural and demographic factors or the imperfections of distribution networks. Rather, growing financial speculation is exacerbating price fluctuations and injecting further volatility into the international system.
What’s the evidence? Well, the parabolic shape of price movements suggests that speculation is an important driver. The underlying fundamentals of demand and supply matter, but frenetic speculative activity at the margin exacerbates price hikes and subsequent drops. This is evinced by the sharp movement in commodity prices like oil, skyrocketing to US$148 in July 2008 before tumbling to below US$35 in January 2009 and reaching again around US$100 in the past twelve months or so. What we are seeing is a rapid succession of booms and busts – not a regular business cycle, but instead an extreme bubble cycle.
Bets on commodity prices are a substantial source of trading revenue for global banking conglomerates like Goldman Sachs or Morgan Stanley but also major banks in emerging markets such as Alfa Bank in Russia. This involves financial instruments like derivatives – so-called proprietary bets on price movements using futures and swaps. In addition, many banks also trade in real, physical assets, buying and selling actual shipments and deliveries of primary commodities. Banking groups store diesel aboard tankers and make a killing when fuel prices rebound.
Paradoxically, the financial crash has reinforced commodity speculation. Now that interest rates are low and stock markets volatile, unprecedented volumes of money are poured into commodities. And with growth so sluggish and the spectre of a downturn in advanced economies or emerging markets looming large, global finance has an ever-greater preference for short-term speculative profits instead of long-term investment in the real economy.
Moreover, every crisis is followed by a concentration of ownership and market control. For instance, JPMorgan acquired in 2009 commodity businesses from UBS and Bears Stern. In 2010, it took over RBS Sempra Commodities’ global oil, global metals, including Henry Bath, global coal and European power, gas, and non-U.S. emissions assets. By integrating these assets into the investment bank’s existing commodities trade, the combined platform has given J.P. Morgan physical access to new markets around the globe – with 26 locations in more than 10 countries, and more than 130 storage and warehousing facilities.
Likewise, large food retailers, backed by corporate banks, are squeezing small and medium-sized farmers and exploiting their dominant market position to raise higher consumer prices. In this manner, large retail conglomerates form cartels and exert monopsony – excessive buying power through market dominance that crowds out small and medium-sized enterprises and drives down prices paid to farmers. All this is hurting both the producers and the consumers – with only the managerialist middleman benefitting.
Little wonder that the recovery is ‘jobless’ and accompanied by a cost of living crisis. There is thus a double divide dominating the global economy – a deepening disconnect of finance from the real economy and a growing gulf that separates an increasingly super-rich oligarchy from ordinary people who ate trapped in poverty or struggle to make ends meet.
2. The failure of outdated economic orthodoxies
In an age of austerity, politicians and pundits on all sides of the political spectrum remain prisoners of outdated socio-economic orthodoxies. Since the late 1970s both left- and right-wing thinking has extended little beyond the monetarist doctrine of the Reagan-Thatcher period and the ‘privatised Keynesianism’ of the Clinton-Blair years. Both bank bailouts and austerity in the aftermath of the 2008-9 economic crash are of a piece with the convergence of the liberal left and the liberal right towards activist monetary policy and a growing focus on both credit and debt.
As we have seen over the last decade or so, the dominant policy regime since 1979 consists of three main elements. First of all, it privileges both public and private consumption over strategic investment. Second, it favours short-term financial gains over long-term productive growth, as the boom in financial services has neither stimulated overall economic production nor trickled down to other sectors (except perhaps corporate law, insurance and real estate). Third, it prefers redistributing income to distributing assets (except for isolated initiatives such as New Labour’s Child Trust Fund in the UK). All these elements involve putting pressure on pay and working hours (including the boom in zero-hour contracts) instead of raising wages in line with higher productivity. That, in turn, would require a long-term strategy of investing in innovation and proper skills – especially the much-neglected vocational skills that are needed not just in services (including law and banking) but also in high-tech manufacturing and industry.
Taken together, these three elements have produced a model that is economically inefficient and morally bankrupt. By promoting the collusive convergence of the central bureaucratic state with the globalised ‘free market’, ‘privatised Keynesianism’ and the monetarist doctrine helped fuel a bubble cycle of boom and bust that burst with devastating economic and social consequences in 2008. For example, perverse incentives (including cheap credit based on artificially low interest rates or tax exemptions on short-term corporate profits) led to the channelling of unprecedented amounts of capital into largely unproductive financial services. The evidence presented by the economist Duncan Weldon is staggering:
£1.3 trillion of loans were extended to British residents by UK banks in the 10 years before 2007, around 100 per cent of GDP, and 84 per cent of this went into either property or to financial companies. The banking system’s focus on property and finance contributed to regional inequalities, to the UK’s low level of investment and to the asset price boom, which sowed the seeds of the crisis .
So when the bubble finally burst in 2008, the ensuing recession left an output gap of over 4 per cent of GDP – not to mention much lower living standards and higher long-term unemployment. The dominant forms of monetarism and Keynesianism have engendered a low-wage, low-productivity, low-innovation and low-growth model that is now undergoing a ‘zero hours’ intensification.
3. New structural problems of neo-liberal capitalism
More specifically, the endemic problems of advanced economies such as Britain include the following features and structural developments. First of all, the continual deindustrialisation since the onset of financial capitalism in the 1970s has reinforced a two-tier economy and labour market that are increasingly divided between high-skilled, high-income groups, on the one hand, and low-skilled, low- (or no-)income groups, on the other hand. For instance, many middle-skilled, middle-income groups have been left behind, with former machinists and tradesmen becoming cashiers and call-centre workers. Moreover, the low-skilled, low-income groups are part of a new underclass or ‘precariat’ for whom opportunity and flexibility is synonymous with insecure employment and pay – as exemplified by so-called ‘zero-hour contracts’.
Second, along with house prices the cost of living continues to soar – especially energy, transport, food and especially rent in light of fast-growing demand and flat-lining supply. To this we must add the rising cost of childcare and other family-related expenses All this, coupled with stagnant or declining real wages, hits hardest the low- and middle-income families who struggle to make ends meet but do not qualify for welfare benefits following the coalition cuts.
Third, the incentives to maximise short-term profit have produced an economy that cuts wages while pushing up prices. Connected with this is the ever-increasing dependence on the service sector that discourages an effective industrial policy and drives out skilled jobs in the middle, as I have already indicated. It also puts a premium on immigration – whether cheaper high-skilled or very cheap low-skilled labour. The influx of migrants not only drives down wages and leads to the exploitation of foreign workers but most of all benefits the affluent in metropolitan areas, especially London.
Fourth, the growing precariousness and the increasing cost of living are fuelling the vicious cycle of debt and demoralisation. After three years of austerity and public retrenchment, UK households’ financial (non-mortgage) liabilities rose by over 10 per cent from about £86bn to nearly £95bn according to Britain’s Office of National Statistic – with only half of all households bearing this burden and the poorest 10 per cent owing four times as much as they owe in financial assets. With the retail banking sector desperate to reduce its exposure to unsecured loans and keen to reward institutional investors, people in dire need have had no choice but accept the usurious lending practices of payday loan companies such as Wonga, Ramsdens and the Money Shop. While the Chancellor of the Exchequer George Osborne boasts about the recovery, the reality for most Britons is that the country is fast becoming an ‘Alice in Wongaland’ economy, as Ann Pettifor has rightly remarked .
Fifth, the dominant model of globalisation has engendered a ‘great risk shift’, transferring risk and insecurity from government and business to families and individuals. This has created more opportunities for the few while increasing the vulnerability of the many and plunging the lower middle classes into poverty. Paradoxically and perversely, the mantra of personalisation in both the public and the private sector (whether at work or receiving benefits or buying goods and services) has led to ever more impersonal, anonymous relations. Likewise, being free to choose is increasingly synonymous with being free to lose.
Just as the state is cutting back, the family and the workplace are under increasing pressures from the global race to the bottom. Bound up with this is the fact that privatisation, liberalisation and deregulation have led to the ‘great divestiture’. Indeed, the transfer of previously public assets into private ownership has not had a lasting, positive effect on lower prices for consumers and higher productivity. Instead, it has significantly contributed to regressive redistribution, with levels of inequality and social immobility not seen since the 1920s.
4. The primacy of the economic and the political over the social
The dominant model of globalisation has established the primacy of the economic and the political over the social and the ethical. It has imposed rights and contracts at the expense of social ties and civic bonds. As a result, the economy and polity are uprooted from their traditional culture. Production and trade are disembedded from society, and social relations are re-embedded in an increasingly abstract, financialised economy. Short-term transactions take precedence over long-term relationships. Moreover, this logic promotes a purely self-reflexive, negatively choosing individual who is abstracted from the relational constraints and opportunities of family, locality, tradition and the natural world.
In this process, globalisation has hollowed out substantive virtues such as justice as the right ordering of relations within the polity. In other words, true justice is a universal principle embodied in particular practices. By contrast, globalisation has replaced the virtue of justice with formalist, procedural norms and values of impartiality and fairness that are centred on individual rights and entitlements. Similarly, globalisation is imposed unilateral standards masquerading as global values – irrespective of cultural diversity and plural ways of life. Indeed, it defines freedom in terms of ‘negative liberty, i.e. the absence of constraints except for the law and perhaps private conscience. It also reduces democracy to a set of procedures such as free elections – important though these are. It promotes an impoverished utilitarian ethic that maximises private choice and the pursuit of personal pleasure. The ancient notion of happiness as eudaimonia, which means the flourishing of the person, is thus reconfigured as the pursuit of power and pleasure. All this brackets questions of the substantive common good out of the picture.
Crucially, the person is no longer regarded as the union of body and soul but divided into a merely physical brain and a bag of bones and flesh – essentially just an amorphous mass of cells that can be manipulated at will by both the centralised national state and the globalised free market.
5. Alternatives to neo-liberal globalisation
However, there is another possibility. This is that transport and communications could truly provide the pre-conditions for the emergence of a global village, that is to say, where the local is more primary than the global and where social bonds and cultural ties embed economic transactions and political cooperation. The current mode of globalisation mostly destroys locality, but also renders it more and more possible for one locality to communicate directly with another in a totally distant part of the world. In this way it just could once more come to seem ‘common sense’ that the entire economy should be subordinate to social reciprocity and that the polity reflects the relational nature of mankind.
Such a model of globalisation would promote a plural search for the shared common good and substantive ends that can mediate between the individual and the collective will and thus help bind together members of diverse bodies and polities. It challenges the view that the incommensurability of rival values either requires central sovereign power to arbitrate conflict or else leads to a fragile modus vivendi – a situation in which peaceful coexistence merely regulates a violent state of nature that rules out the ontological possibility of a just, harmonious order.
Thus, the genuine alternative to the hitherto hegemonic neo-liberal settlement (which is variously more market-driven or more state-centric) is a political economy that promotes investment in productive activities, distributes assets and seeks to re-embed the global ‘market-state’ in the interpersonal relationships and the social bonds holding society together. Such a political economy requires a fundamental rethink of the dominant orthodoxies. The right has been almost exclusively wedded to free-market economics, aided and abetted by the bureaucratic collectivisation of the strong central state. Similarly, the left has focused too much on statist politics, which has nonetheless opened up new areas of the public sector and the private sphere to market commodification. In so doing, both right and left have converged and colluded far more than they recognise.
The challenge now is not between either more state or more markets but primarily how to protect both community and society against the double-headed hydra of the global ‘market-state’ and how to nourish the interpersonal relationships and social ties on which a vibrant market economy and democracy rely. If the left wants to shape the next political paradigm, then it must uphold the primacy of the social over the economic and the political – the interpersonal relationships, social ties and civic bonds on which both trust and cooperation depend.
 Duncan Weldon, ‘A Diverse Banking System’, in The Great Rebalancing: how to fix the broken economy, edited by Andrew Harrop (London: The Fabian Society and Foundation for European Progressive Studies, 2013), pp. 35-41(quote at 36), available online at http://marianamazzucato.com/file_upload/000000000074.pdf
 Ann Pettifor, ‘No, this is not the road to recovery. It’s the road to Wongaland’, The Guardian Comment is Free, 16 August 2013, available online at http://www.theguardian.com/commentisfree/2013/aug/16/not-road-to-recovery-but-wongaland