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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.
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