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Title: Capitalism in crisis, again! Author: Anarcho Date: October 6, 2008 Language: en Topics: capitalism, financial crisis, economics Source: Retrieved on 29th January 2021 from https://anarchism.pageabode.com/?p=156 Notes: Some comments on the continuing crisis in the stock markets, discussing how economic ideology contributed to it and how capitalism has always been based on socialising costs and risk while privatising profits.
With the crisis in the finance markets rumbling on, it is hard to make
any comments on it as it is sure to become redundant. Its roots lie in
the nature of financial capital, in its tendency to generate bubbles as
resources are poured into specific markets in an attempt to make money.
Before the housing bubble, it was dot.com. Before dot.com, it was the
Savings & Loans fiasco…
The creation of such bubbles is just as regular as the denials that a
bubble exists. Seeking profits, banks create credit and financial
institutions speculate. The margins for error decrease as capital
accumulates while rising inequality makes aggregate demand teeter on the
edge. Rising debt cannot cover the repayments, new buyers cannot enter
the market and the whole think collapses. Irrational exuberance gives
way to fear and panic, easy credit turns into expensive, hard-to-find
credit. Financial capital impacts on the real economy as industry cannot
find funding and consumers cut-back on spending. Investments no longer
pay off, firms go under (“Credit Crunch: The return of depression?”).
Then the calls for wage cutting and bailouts begin as those who did not
cause the crisis are made to pay for it. As usual.
Seeing the Tories grind their teeth and promise to re-regulate finance
markets while complaining about excessive CEO pay is amusing. While
trying to make political capital out of New Labour’s problems they face
the almost insurmountable problem that Brown followed the Tory blueprint
in terms of the City – leave well alone and let the wonder of the market
do its magic. As Bush’s Republican regime is facing the same problems,
they have decided the best course to win votes is to present a
quasi-socialist critique of finance capital! Which is to be expected, as
Bush’s regime has implemented a quasi-socialist bailout (that is,
“socialist” in the usual capitalist sense of “state aid for the rich,
market discipline for the working class”).
In America, the Republican politicians are hamstrung by their own
rhetoric and are resisting a bailout. Their perchance for less obvious
forms of state intervention for capital has become a handicap now that
the government needs to act. The Democrats are trying their best to make
the package less obviously pro-capital, with some support for “Main
Street” rather than Wall Street. Still, they are working within an
administration whose rhetoric in favour of “free markets”, lackadaisical
concern for regulation and debt to big business means that any bailout
will be tailored to the few, not the many.
The current crisis has deep roots. Some are in the inherent dynamics of
capitalism, others in the particular form current capitalism has taken
(neo-liberalism). Some flow from the ideological justifications for
neo-liberalism which allowed the notion of unregulated finance markets
to gain such influence. These are to be found in the neoclassical
analysis of the finance market.
According to the Efficient Market Hypothesis, information is
disseminated equally among all market participants, they all hold
similar interpretations of that information and all can get access to
all the credit they need at any time at the same rate. In other words,
everyone is considered to be identical in terms of what they know, what
they can get and what they do with that knowledge and cash. This results
in a theory which argues that stock markets accurately price stocks on
the basis of their unknown future earnings, i.e. that these identical
expectations by identical investors are correct. In other words,
investors are able to correctly predict the future and act in the same
way to the same information. Yet if everyone held identical opinions
then there would be no trading of shares as trading obviously implies
different opinions on how a stock will perform. Similarly, in reality
investors are credit rationed, the rate of borrowing tends to rise as
the amount borrowed increases and the borrowing rate normally exceeds
the leading rate. The developer of the theory was honest enough to state
that the “consequence of accommodating such aspects of reality are
likely to be disastrous in terms of the usefulness of the resulting
theory ... The theory is in a shambles.” (W.F Sharpe, quoted by Keen,
Debunking Economics, p. 233)
Thus the world was turned into a single person simply to provide a
theory which showed that stock markets were “efficient” (i.e. accurately
reflect unknown future earnings). In spite of these slight problems, the
theory was accepted in the mainstream as an accurate reflection of
finance markets. Why? Well, the implications of this theory are deeply
political as it suggests that finance markets will never experience
bubbles and deep slumps. That this contradicts the well-known history of
the stock market was considered unimportant. Unsurprisingly, “as time
went on, more and more data turned up which was not consistent with” the
theory. This is because the model’s world “is clearly not our world.”
The theory “cannot apply in a world in which investors differ in their
expectations, in which the future is uncertain, and in which borrowing
is rationed.” It “should never have been given any credibility — yet
instead it became an article of faith for academics in finance, and a
common belief in the commercial world of finance.” (Keen, Op. Cit., p.
246 and p. 234)
This theory is at the root of the argument that finance markets should
be deregulated and as many funds as possible invested in them. While the
theory may benefit the minority of share holders who own the bulk of
shares and help them pressurise government policy, it is hard to see how
it benefits the rest of society. Alternative, more realistic theories,
argue that finance markets show endogenous instability, result in bad
investment as well as reducing the overall level of investment as
investors will not fund investments which are not predicted to have a
sufficiently high rate of return. All of which has a large and negative
impact on the real economy. Instead, the economic profession embraced a
highly unreal economic theory which has encouraged the world to indulge
in stock market speculation as it argues that they do not have bubbles,
booms or bursts (that the 1990s stock market bubble finally burst like
many previous ones is unlikely to stop this). Perhaps this has to do the
implications for economic theory for this farcical analysis of the stock
market? As two mainstream economists put it:
“To reject the Efficient Market Hypothesis for the whole stock market
... implies broadly that production decisions based on stock prices will
lead to inefficient capital allocations. More generally, if the
application of rational expectations theory to the virtually ‘idea’
conditions provided by the stock market fails, then what confidence can
economists have in its application to other areas of economics ... ?”
(Marsh and Merton, quoted by Doug Henwood, Wall Street, p. 161)
Unfortunately for ideology, reality has this bad habit of disproving it.
This can be seen today, with the unregulated “efficient” finance markets
proving that the neo-classical dogmas which have justified and
rationalised the acts and desires of finance capital are as unrealistic
and misleading as the critics argued. Unsurprisingly, given this flawed
theoretical model the so-called “experts” (including those in
government) none of them saw the crisis coming even though the signs of
a housing bubble have existed for many, many years. And now the
“experts” who failed to see the problem are now urging us to bailout
Wall Street! But, then , that is their job – to bolster the elite.
This is not to say that bad economic theory caused this crisis. No, but
such ideological positions helped ensure that deregulation desired by
finance capital appeared both objective and economically sensible. Such
is the magic of the market, with the demand for economic theory to
justify the desires for finance being meet with an appropriate supply.
With the financial markets in a panic, the calls for bailouts have
increased. The shock of crisis is being used to push through a bailout
for the people who caused the problems in the first place, with the
state ensuring that no billionaire or banker is left behind. Yet this
comes into one of the key defences of capitalism, inequality and profits
for the few, namely that these are the result of “risk taking.” Rather
than labour being exploited, non-labour income is justified because its
owners took a risk in providing money and deserve a reward for so doing.
First, it must be noted that in the mainstream neo-classical model, risk
and uncertainty plays no role in generating profits. According to
general equilibrium theory, there is no uncertainty (the present and
future are known) and so there is no role for risk. As such, the concept
of profits being related to risk is more realistic than the standard
model. However, this is unrealistic in many other ways, particularly in
relation to modern-day corporate capitalism.
According to capitalist myth, those who take the risks should pay the
price. Yet, when push comes to shove, the socialisation of risk is
always there. This is because, it is claimed, the impact of letting the
banks fail would harm everyone. Strangely, though, during the good times
the impact of inequality was ignored. If the few benefit the many can go
hang; if the few are threatened, then the many must pay. This
“socialisation of risk” is something capitalism is built on, not some
kind of unusual event applicable in bad times. Most kinds of “risks”
within capitalism do not contribute to production and, thanks to state
aid, not that risky.
So appeals to “risk” to justify capitalism are somewhat ironic, given
the dominant organisational form within capitalism – the corporation.
These firms are based on “limited liability” which was designed
explicitly to reduce the risk faced by investors. As Joel Bakan notes,
before this “no matter how much, or how little, a person had invested in
a company, he or she was personally liable, without limit, for the
company’s debts. Investors’ homes, savings, and other personal assess
would be exposed to claims by creditors if a company failed, meaning
that a person risked finance ruin simply by owning shares in a company.
Stockholding could not becomes a truly attractive option ... until that
risk was removed, which it soon was. By the middle of the nineteenth
century, business leaders and politicians broadly advocated changing the
law to limit the liability of shareholders to the amounts they had
invested in a company. If a person bought $100 worth of shares, they
reasoned, he or she should be immune to liability for anything beyond
that, regardless of what happened to the company.” Limited liability’s
“sole purpose ... is to shield them from legal responsibility for
corporations’ actions” as well as reducing the risks of investing
(unlike for small businesses). (The Corporation, p. 11 and p. 79)
This means that stock holders (investors) in a corporation hold no
liability for the corporation’s debts and obligations. As a result of
this state granted privilege, potential losses cannot exceed the amount
which they paid for their shares. The rationale used to justify this is
the argument that without limited liability, a creditor would not likely
allow any share to be sold to a buyer of at least equivalent
creditworthiness as the seller. This means that limited liability allows
corporations to raise funds for riskier enterprises by reducing risks
and costs from the owners and shifting them onto other members of
society (i.e. an externality). It is, in effect, a state granted
privilege to trade with a limited chance of loss but with an unlimited
chance of gain.
This is an interesting double-standard. It suggests that corporations
are not, in fact, owned by shareholders at all since they take on none
of the responsibility of ownership, especially the responsibility to pay
back debts. Why should they have the privilege of getting profit during
good times when they take none of the responsibility during bad times?
Corporations are creatures of government, created with the social
privileges of limited financial liability of shareholders. Since their
debts are ultimately public, why should their profits be private?
Needless to say, this reducing of risk is not limited to within a state,
it is applied internationally as well. Big banks and corporations lend
money to developing nations but “the people who borrowed the money [i.e.
the local elite] aren’t held responsible for it. It’s the people ... who
have to pay [the debts] off ... The lenders are protected from risk.
That’s one of the main functions of the IMF, to provide risk free
insurance to people who lend and invest in risky loans. They earn high
yields because there’s a lot of risk, but they don’t have to take the
risk, because it’s socialised. It’s transferred in various ways to
Northern taxpayers through the IMP and other devices ... The whole
system is one in which the borrowers are released from the
responsibility. That’s transferred to the impoverished mass of the
population in their own countries. And the lenders are protected from
risk.” (Noam Chomsky, Propaganda and the Public Mind, p. 125)
Capitalism, ironically enough, has developed precisely by externalising
risk and placing the burden onto other parties — suppliers, creditors,
workers and, ultimately, society as a whole. “Costs and risks are
socialised,” in other words, “and the profit is privatised.” (Noam
Chomsky, Op. Cit., p. 185) To then turn round and justify corporate
profits in terms of risk seems to be hypocritical in the extreme,
particularly by appealing to examples of small business people whom
usually face the burdens caused by corporate externalising of risk! Doug
Henwood states the obvious when he writes shareholder “liabilities are
limited by definition to what they paid for the shares” and “they can
always sell their shares in a troubled firm, and if they have
diversified portfolios, they can handle an occasional wipe-out with
hardly a stumble. Employees, and often customers and suppliers, are
rarely so well-insulated.” Given that the “signals emitted by the stock
market are either irrelevant or harmful to real economic activity, and
that the stock market itself counts for little or nothing as a source of
finance” and the argument for risk as a defence of profits is extremely
weak. (Wall Street, p. 293 and p. 292)
So looking at the typical “risk” associated with capitalism, namely
putting money into the stock market and buying shares, the idea that
“risk” contributes to production is seriously flawed. As David
Schweickart points out, “[i]n the vast majority of cases, when you buy
stock, you give your money not to the company but to another private
individual. You buy your share of stock from someone who is cashing in
his share. Not a nickel of your money goes to the company itself. The
company’s profits would have been exactly the same, with or without your
stock purchase.” (After Capitalism, p. 37) In fact between 1952 and
1997, about 92% of investment was paid for by firms’ own internal funds
and so “the stock market contributes virtually nothing to the financing
of outside investment.” Even new stock offerings only accounted for 4%
of non-financial corporations capital expenditures. (Henwood, Op. Cit.,
p. 72) “In spite of the stock market’s large symbolic value, it is
notorious that it has relatively little to do with the production of
goods and services,” notes David Ellerman. “The overwhelming bulk of
stock transactions are in second-hand shares so the capital paid for
shares usually goes to other stock traders, not to productive
enterprises issuing new shares.” (The Democratic worker-owned firm, p.
199)
In other words, most investment is simply the “risk” associated with
buying a potential income stream in an uncertain world. The buyer’s
action has not contributed to producing that income stream in any way
whatsoever yet it results in a claim on the labour of others. At best,
it could be said that a previous owner of the shares at some time in the
past has “contributed” to production by providing money but this does
not justify non-labour income. Investing in shares may rearrange
existing wealth (often to the great advantage of the rearrangers) but it
does produce anything. New wealth flows from production, the use of
labour on existing wealth to create new wealth.
Ironically, the stock market (and the risk it is based on) harms this
process. The notion that dividends represent the return for “risk” may
be faulted by looking at how the markets operate in reality, rather than
in theory. Stock markets react to recent movements in the price of stock
markets, causing price movements to build upon price movements.
According to academic finance economist Bob Haugen, this results in
finance markets having endogenous instability, with such price-driven
volatility accounting for over three-quarters of all volatility in
finance markets. This leads to the market directing investments very
badly as some investment is wasted in over-valued companies and
under-valued firms cannot get finance to produce useful goods. The
market’s endogenous volatility reduces the overall level of investment
as investors will only fund projects which return a sufficiently high
level of return. This results in a serious drag on economic growth. As
such, “risk” has a large and negative impact on the real economy and it
seems ironic to reward such behaviour. Particularly as the high rate of
return is meant to compensate for the risk of investing in the stock
market, but in fact most of this risk results from the endogenous
stability of the market itself. (Steve Keen, Debunking Economics, pp.
249–50)
Rather than individual evaluations determining “risk”, these evaluations
will be dependent on the class position of the individuals involved. As
Schweickart notes, “large numbers of people simply do not have any
discretionary funds to invest. They can’t play at all ... among those
who can play, some are better situated than others. Wealth gives access
to information, expert advice, and opportunities for diversification
that the small investor often lacks.” (After Capitalism, p. 34) As such,
profits do not reflect the real cost of risk but rather the scarcity of
people with anything to risk (i.e. inequality of wealth).
Similarly, given that the capitalists (or their hired managers) have a
monopoly of decision making power within a firm, any risks made by a
company reflects that hierarchy. As such, risk and the ability to take
risks are monopolised in a few hands. If profit is the product of risk
then, ultimately, it is the product of a hierarchical company structure
and, consequently, capitalists are simply rewarding themselves because
they have power within the workplace. In other words, because managers
monopolise decision making (“risk”) they also monopolise the surplus
value produced by workers. However, the former in no way justifies this
appropriation nor does it create it.
As production is inherently collective under capitalism, so must be the
risk. As Proudhon put it, it may be argued that the capitalist “alone
runs the risk of the enterprise” but this ignores the fact that
capitalist cannot “alone work a mine or run a railroad” nor “alone carry
on a factory, sail a ship, play a tragedy, build the Pantheon.” He
asked: “Can anybody do such things as these, even if he has all the
capital necessary?” And so “association” becomes “absolutely necessary
and right” as the “work to be accomplished” is “the common and undivided
property of all those who take part therein.” If not, shareholders would
“plunder the bodies and souls of the wage-workers” and it would be “an
outrage upon human dignity and personality.” (The General Idea of the
Revolution, p. 219) As production is collective, so is the risk faced
and, consequently, risk cannot be used to justify excluding people from
controlling their own working lives or the fruit of their labour.
Needless to say, the most serious consequences of “risk” are usually
suffered by working people who can lose their jobs, health and even
lives all depending on how the risks of the wealthy turn out in an
uncertain world. As such, it is one thing to gamble your own income on a
risky decision but quite another when that decision can ruin the lives
of others. With the panics in the finance markets, now is an ideal time
for anarchists to argue that running an economy based on allowing the
few to control, gamble and profit from the labour of the many is not
only immoral, it does not work.
We need a society which is not based on bribing the rich to ensure
investment and economic development. We need, as anarchists have long
argued, an economy in which those who do the work control both it and
its product. Unless we get the message out that capitalism needs to be
ended, not propped-up, then any solution to the current panics will be
paid for by the working class and the elite will, as always, benefit
from the sacrifices of the many.
Of course, the faithful few will be complaining that the financial woes
are do to there being too much, rather than too little, state
interference. However, the awkward fact that over 30 years of financial
deregulation has produced this crisis will ensure that they will remain
on the fringes – particularly as the capitalist class need state action
now, not pious proclamations on the need for liquidation to create a
wonderful “pure” system on the ruins.
On the left, we can expect the dusting off of calls for nationalisation.
For the reformist left, the Swedish financial rescue of the early 1990s
is the preferred option rather than a Republican-style Savings and Loan
style approach. For the “revolutionary” left, the aim will be full-blown
state capitalism with, as Lenin promised, the “socialist” state
nationalising the banks and so creating nine-tenths of the socialism in
one fell swoop.
While social Keynesianism may be preferable to neo-liberalism or
Leninist “socialism”, anarchists should be stressing that this is not
our only alternatives. We need to raise the point that this is a crazy
way to run an economy, that we do not need to live this way bribing the
rich to invest. Particularly as they do not do a good job of it (“Stop
panic in the City — abolish capitalism!”). We need to raise the
necessity for anarchism as replacing capitalists with state bureaucrats
is no real change.
The great unknown in these times is working class people. If we remain
quiet then any bailout will reflect the interests of big business, no
strings attached. If we remain quiet then the costs of recovery will be
inflicted on us in the shape of rising unemployment, lower wages, higher
taxes. If we remain quiet, then neo-liberalism will shrug off this
crisis like the previous ones and continue privatising the gains while
socialising the losses and costs.
Our task as anarchists is to raise our voices and encourage direct
action. Attempts to cut wages must be resisted as we did not create this
crisis and because it will make it worse (“Would cutting wages reduce
unemployment?”). Attempts to close workplaces must be meet by
occupations. Attempts to evict families from their homes must be
stopped. We need to socialise the means of life, not have them run by a
few capitalists or state bureaucrats. To do that, we need to organise
community and workplace assemblies and build an alternative to a system
in crisis, one based on solidarity and freedom.