Earthquakes on a fault zone
Back in March, the chief economics correspondent of the Financial Times, Martin Wolf, wrote: “Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Sterns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank, that ‘I no longer believe in the market’s self-healing power’. Deregulation has reached its limits”.
The events of the last two weeks, which have the seen the disappearance of two of the four remaining major independent Wall Street investment banks, with the two left voluntarily giving up investment bank status and scurrying toward the Federal Reserve for protection ; the biggest bank failure in US history, and large scale state intervention the world over to prevent the total collapse of the global financial system (the bailout of AIG following the de-facto nationalisation of Freddie Mac and Fannie Mae; the injection of billions upon billions of pounds of taxpayers funds into the money markets by the world’s major central banks to prevent those markets from grinding to a halt, because “nobody trusted any credit other than the government’s” ; the temporary banning of short-selling on both sides of the Atlantic; the state co-ordinated takeovers of Merrill Lynch by Bank of America and of HBOS by Lloyds, which was waved through by the British state on public interest grounds in order to “ensure the stability of the UK financial system”, and now the nationalisations of Bradford & Bingley here and Fortis on the continent) represent the final nail in that dream’s coffin. This has all culminated in the extraordinary bail-out plan, devised by the most right-wing administration in US history in collaboration with Wall Street, to spend $700bn of taxpayers money on the systematic nationalisation of risk in the US financial system, a plan described by the Financial Times as “the most extensive peacetime expansion of the role of government in the financial system since the Great Depression”.
Indeed, there is only one possible criticism that can be made of Wolf’s coroners report: rather than a ‘dream’, the concept of ‘free-market capitalism’ is perhaps better thought of as a hallucination, or an oxymoron. There is no such thing as a large-scale industrial free-market economy, and there never has been, something the economist William Lazonick refers to, quite correctly, as ‘the myth of the market economy’. It has been rhetorically useful for the right, from Hayek onwards, to equate the private control of capital with free markets, and free markets with individual liberty, but in reality capitalist development has always depended upon state assistance and the abrogation of free-market principles1, as current events are amply demonstrating. The neo-liberal experiment with deregulation of the financial sector of the economy that we have seen over the last thirty years has been taken as far as possible, and will now be reined back in: as Wolf has put it, “In deregulated financial systems crises are inevitable, like earthquakes on a fault zone. Only timing is uncertain”
But what does this mean for the rest of us? Will the crisis of finance capital cross over to the real economy and result in recession, large scale unemployment and a drop in living standards for the mass of the population? Are we going to see some repeat of the depression that followed the great crash of 1929, the last time Anglo-Saxon capitalism suffered a comparable financial shock? It should be pointed out that even during the so-called ‘boom’ of recent years, the benefits were largely confined to the upper income brackets. The real story of the last 30 years of neo-liberalism is not rising prosperity for all, but rather the utter destruction of the wealth and savings of the bottom half of the population. Outside of property, 50 per cent of the population now own just 1 per cent of the wealth whereas in 1976 it was 12 per cent. Back in July, Ernst and Young reported that average household disposable income after tax and bills had fallen by 15% since 2003 ; a report by the Campaign to End Child Poverty in late August declared that “Poverty is now one of the greatest dangers faced by our children. If poverty were an infection then we would be in the midst of a full-scale epidemic with all the attendant public health measures, including vaccination” ; meanwhile, Guardian columnist Polly Toynbee has written several times since June that in the five years between 2001/2 and 2006/7 those on median incomes of around £23,700 had seen their incomes grow by less than 1% a year, while between 2004/5 and 2006/7 those in the bottom third of the income distribution saw their incomes fall . For much of the population the downturn has long since begun (or never ended), but this has apparently not been considered as newsworthy as the travails suffered by the masters of the universe currently sucking on the taxpayers teat on Wall Street, Canary Wharf and the Square Mile.
But from even this inauspicious starting point, a downturn in the real economy is already in evidence. The last monthly unemployment figures showed a rise of over 80,000 to 1.7m, with both the Confederation of British Industry and the Trades Union Congress predicting the figure will hit 2m before the end of the year, and incomes growth excluding bonuses has fallen to zero (link and link). Manufacturing is experiencing its “worst operating conditions” in 17 years (link and link), economic growth has ground to a halt and the European Commission is predicting a recession , and yet inflation continues to rise toward 5% (significantly higher over the past year in the case of fuel and food: those who were so quick to pass on the rise in oil prices to the consumer have being a good deal less willing to pass on the subsequent falls). The turn toward neo-liberalism was supposed to eliminate such ‘stagflation’ but, now faced with it, the Bank of England has thus far refused to cut interest rates because containing inflation is more important than containing unemployment (inflation is bad for business, unemployment is not). Somewhat surprisingly, consumer spending appears to be holding up, at least according to governmental statistics (although these figures have been greeted with some skepticism by retailers, link and link). This, surely, cannot last: as we have seen, bubbles always burst and economic gravity cannot be defied forever. The Bank of England’s chief economist Spencer Dale has warned of an ‘adverse feedback loop’, or negative multiplier effect, wherein the downturn in property and banking will impact on banks’ ability to create credit and to lend, resulting in lower spending and ‘bringing painful adjustments for many households and businesses’. Likewise the Bank’s deputy governor, Sir John Gieve, has warned that “damage to bank balance sheets would lead to tighter credit conditions, lower asset prices, lower consumption and investment and to a severe feedback loop into more losses for banks and so on down a spiral”.
Herein lies the rub: the boom, and subsequent bust, was driven not by growth in the productive sector of the economy, but by speculation in property and finance which was largely fuelled by the easy availability of cheap credit, which of course is not and will not be so easily available from now on: as the governor of the Bank of England, Mervyn King, has said, the economy will have to adjust to “a more realistic pricing of credit”. With a contraction in the supply of credit, what else is there to sustain current levels of effective demand and fuel economic growth? At the time of writing, the British FTSE 100 index had dropped 23% over the previous year . The most optimistic predictions are that, after a short, sharp period of painful readjustment, there will be a return to business as usual. But what else is there to replace financial and property speculation as engines of growth? There is no significant manufacturing or industrial sector left to fall back on: on the continent and in Scandinavia, the industrial working class has been accommodated to a certain extent, whereas here and in the US it had to be smashed, with the result that finance has come to dominate the economy, something New Labour has been perfectly content to live with. The unusually high level of ‘financialisation’ in the UK economy (which has the additional attraction to capital of tending to concentrate wealth at the top, as outlined above, whereas manufacturing disperses it more widely) means that, contrary to Brown’s protestations, we are more vulnerable to any major financial downturn than comparable economies. Brown, the great Alan Greenspan devotee, bears personal responsibility for allowing what he has the nerve to call the ‘age of irresponsibility’ to happen on his watch, by enthusiastically embracing the deregulated, pro-capital model that has brought us to this pass.
Thanks to prompt and large-sale government intervention funded out of the public purse, we are unlikely to see a repeat of the Great Depression when capitalism went to the brink of annihilation. The lessons that were hard learnt in the 1930s have not been forgotten: regardless of the idiotic blatherings of free-market ‘libertarians’, the wiser heads at the top from John Maynard Keynes and Franklin D. Roosevelt up to Hank Paulson today have always understood that capitalism cannot survive without state support and systematic regulation and intervention -what the historian Michael Hogan calls ‘corporative neo-capitalism’- to ensure the socialisation of costs and risks whilst still guaranteeing the privatisation of profits and control (which is why the bail-out plan will be forced through, over-riding formal democracy if need be). But with nothing obvious on the horizon to make up for the credit shortfall, it is entirely possible that rather than booming again after readjustment, the economy will flatline in the longer term and we will have to get used to lower rates of accumulation, resulting in even less wealth trickling down the economy than now, with the increased distributional struggle that will come with it. Similarly, the downturn will see a decrease in the government’s tax take, resulting in either tax rises (which will fall disproportionately on those on low to median incomes) or cuts in public services, particularly if further large amounts of taxpayers money are required to bail-out the financial sector.
So rather than 1929, perhaps a more useful comparison to make would be the last time we saw economic turbulence on this scale, during the 1970s. Just as the Great Depression ushered in the era of Keynesianism and the Bretton Woods system, so the 1970s ended it and ushered in the era of neo-liberalism. There are a number of similarities between the ‘70s and now: stagflation, a spike in oil prices, imperial overreach on the part of the US threatening the credibility of the dollar as the world’s reserve currency. With the impending economic turbulence, we could well be entering a period of similar political turbulence. A leaked memo has revealed that Home Secretary Jacqui Smith fears the downturn may produce “upward pressure on acquisitive crime”, an increase in support for “far right extremism and racism” and widen “the pool of those susceptible to radicalisation” (link). Meanwhile, Tory leader David Cameron has said that “We must not let the left use this as an excuse to wreck an important part of the British and world economy”.
State control or economic democracy
If there actually were a left of any significance, as there was in the 1930s and the 1970s, then Cameron may have reason to be fearful. However, Cameron seems wilfully ignorant of the scale of the victory his side won last time round. The shift toward financialisation and speculation and away from industry and production not only concentrates wealth at the top, it also leaves no place or role for an organised working class: workers become atomized and have no option other than to become selfish in outlook and take care of number one. In this context, organising a working class challenge to capital becomes all the more difficult. So Cameron can rest easy: his side has successfully vanquished the left and quieted the working class, at least for now. While there will be increased regulation of the economy, it will carry none of the unpleasant baggage of the past, because this time it will be solely on capital’s terms. In 1929 a weakened capitalist class had to contend with a strong working class that had a knife to capital’s throat. Compromise had to be reached if capitalism was to survive, but there is no such imperative now. As soon as the post-war settlement between capital and labour had been reached, capital (again, from Hayek onwards) looked to break it. The economic crises of the 1970s provided that opportunity, and since then capital has been systematically rolling back the gains won by the working class as part of that settlement. The current crisis offers capital the chance to reorganise, regroup and come up with a new regulatory framework, but this time without working class interference, something Keynes (who was perfectly honest about his loathing of the working class) would regard as an ideal. Cameron’s side has nothing to fear from nationalisation without economic democracy.
Old Labour sees the crisis, and New Labour’s seemingly terminal decline, as a chance to re-assert itself, to ‘take back’ the Labour party. This is a dead-end for a number of reasons. Leave aside the fact that the party is near bankrupt; that membership has halved since 1997; that “Many CLP’s [constituency Labour parties] are now husks — hollowed out shells. There may still be lots of members, but active membership has completely collapsed” ; that even liberal cheerleaders like the Guardian’s Jackie Ashley fear “the party’s destruction as a major force in British politics”, or that Old Labour couldn’t even get a candidate on the ballot paper in last years leadership contest: the New Labour initiative has ended worthwhile democracy within the party, so there is no way of ‘taking back’ the party even if the will existed. And New Labour is fully aware of the danger and has no intention of allowing the party to being taken to the left, as Ruth Kelly made clear after her resignation from the Cabinet.
But more than that, for all the talk of ‘reclaiming’ the Labour party, when has it ever truly been a labour party, led by and for the working class? As Robert Dahl has pointed out, there are two potentially contradictory schools of left wing economic thought: state control of the economy and workers’ control of the economy, and by the time Labour came to power in 1945 under Attlee (a public school educated social worker) it had come out decisively in favour of the middle class Fabian tradition of state control and against workers’ control2. Beatrice Webb, who along with her husband Sidney co-founded the Fabian Society and was one of the leading lights of the early Labour party, wrote on the second day of the 1926 General Strike that it would be “the death gasp of that pernicious doctrine of ‘workers’ control’ of public affairs”, which she considered “a proletarian distemper which had to run its course — and like other distempers, it is well to have it over and done with at the cost of a lengthy convalescence”. Of the strikers she wrote that “There will be, not only an excuse but a justification of victimisation on a considerable scale” and praised scabs as “patriotic blacklegs!” [the exclamation mark is Webb’s]. Fabianism is neither pro-working class, nor is it a winner in economic or political terms: it is a busted flush. And for what it’s worth, there is nothing particularly new about New Labour: as far back as 1959 the (CIA-backed) right wing of the party wanted to dump Clause IV and change the party’s name4, a victory it ultimately took another 35 years for the right to win under Blair and Brown.
Starting from these kind of positions, it’s small wonder the middle class left has managed to completely alienate the working class. As things stand, the only likely beneficiaries of any upsurge in radicalisation will be the far-right, not the left (as evinced by recent events in Austria and Italy). A worthwhile, pro-working class, democratically inclined left would currently be demanding that in return for being rescued with public money, finance would have to be made subject to popular, democratic control. The left is not doing this, nor has any interest in, or awareness of the possibility of, doing so. The left had its chance to sever capital’s jugular vein in the twentieth century. It didn’t take it. Until the left takes a resolutely democratic, pro-working class approach, it won’t get the chance again. Neither will it deserve to.
 See previous IWCA Cutting Edge documents ‘Friedman and Pinochet: an appreciation’, currently available at http://www.ukwatch.net/article/a_planned_economy; and part 4 of ‘Kicking away the ladder at home and abroad: immigration, globalisation and neo-liberalism’, http://www.iwca.info/?p=10129.
 Robert A. Dahl, ‘Workers’ control of industry and the British Labor Party’, American Political Science Review, vol. 41(5), October 1947. See also Dahl’s A Preface to Economic Democracy, Polity Press, 1985.
 The Diary of Beatrice Webb, vol. 4: 1924-1943 (1985), Norman and Jeanne MacKenzie (eds.) (London: Virago), p76, 77.
 Richard Fletcher (1978), ‘How CIA money took the teeth out of British socialism’ in Philip Agee and Louis Wolf (eds.), Dirty Work: the CIA in Western Europe (London: Zed Press), also available at http://www.wcml.org.uk/internat/wattw.htm. See also Hugh Wilford (2003), The CIA, the British Left and the Cold War (London: Frank Cass).