Capitalism’s history coincides with the history of its crises. Over the 1970-2007 period, there were at least 124 banking crises, 208 exchange rate crises and 63 sovereign debt crises! Even though most of those crises remained restricted to peripheral countries, this nonetheless remains a very alarming fact.
In the face of such figures, the idea of market self-regulation appears inadequate. To understand how capitalism manages its excesses, it seems that the alternative theory of regulation through crises does not lack for arguments. If one needs proof, one need only consider those crises we call “great” or structural crises. Since they are periods of deep transformation, their role in the historic development of capitalism is crucial. The most famous of these great crises is the Great Depression (1929-1939).
At issue are deep crises, not only quantitatively by their intensity, but also in the scope of the institutional transformations that they initiate. These crises originate in the exhaustion of a growth model that no longer succeeds in containing its own imbalances. To pick up again, the economic system needs new rules of the game, new institutions, new compromises. That is what’s at stake with the great crises: reinventing a new growth model.
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Thus, during the 1929-1945 period, capitalism had to transform itself by putting forward a plan no longer based on all-out competition, but on a permanent adequacy – centered around the big industrial company – between real salary increases, productivity gains and growth. This model that emerged at the end of the Second World War was designated by terms such as “Fordist regulation,” referring to Henry Ford, who had understood that in order to be able to sell his cars and make profits, his workers had to be well-paid.
After leading to an exceptional prosperity, known in France as the “trente glorieuses” [thirty glorious years] (1945-1973), the Fordist regime in its turn entered a crisis. That was the stagflation of the 1970’s (1973-1982), which combined weak growth and inflation in an unprecedented way. Although that great crisis differed from that of 1929, its significance remains the same: the end of an era and the advent of a new form of capitalism. Consequently, in the beginning of the 1980’s after stagflation, financialized capitalism, also called “patrimonial capitalism” or “neoliberal capitalism,” emerged.
The rupture with the preceding regime was colossal, especially in the scope of financial deregulation. We witnessed the progressive dismantling of the regulatory framework which – a significant fact – had led to the elimination of any banking crisis during the Fordist period between 1945 and 1970. Politically, it was the ascension of the neoliberal governments of Margaret Thatcher in the United Kingdom (May 1979) and Ronald Reagan in the United States (January 1981) that marked the outset of this new phase. However, from the viewpoint of economic regulation, the origins of this new capitalism were to be found in the revolutionary transformation which characterized monetary policy. Inflation had become the primary target.
To fight it, Paul Volcker, who was installed at the head of the American Federal Reserve (Fed) in 1979, proceeded to an astonishing increase in short-term interest rates, which reached 20 percent in June 1981. That policy generated a complete and definitive change in the balance of power between borrowers and lenders – in favor of the latter. From then on, holders of financial assets no longer risked seeing their profitability eroded by inflation. Their field was clear. That was the beginning of a twenty-five year period the central characteristic of which was to place market finance at the center of regulation, well beyond the mere technical question of financing. In simple terms, from then on it was the financial markets that controlled property rights, something never known before.
In the preceding capitalisms, capital ownership was exercised in the form of majority control within specific structures outside the market, as for example in the German Hausbank (“house bank”) or family control. The emblematic representative of patrimonial capitalism is the institutional investor. The institutional investor is the bearer of a new form of corporate governance, centered on “shareholder value.”
The crisis that began in August 2007 must be understood, I believe, as marking the onset of the limits to patrimonial capitalism and its entry into a great crisis. Like the preceding capitalisms, it succumbed when the very principle of its dynamism turned against it to become the source of imbalances. In this case, it was the financial question that proved decisive. Patrimonial capitalism no longer succeeds in controlling the expansion of its financial sector, the weight of which became a handicap at a certain threshold.
To see that, let’s consider the total indebtedness of the United States, adding up all sectors. Between 1952 and 1981, during the Fordist period, the growth of total debt remained moderate, from 126 percent to 168 percent of GNP. During the neoliberal phase, that same ratio exploded, to reach 349 percent in 2008! The same was true for the total of US financial assets. That aggregate remained stable throughout 1952 to 1981, at four to five times GNP, to start growing subsequently to over 10 times GNP in 2007. At the global level, one sees the same thing: total financial assets, worth 110 percent of global GNP in 1980, reached 346 percent in 2006.
Although initially financial expansion actively contributed to the formation of neoliberal growth, it appears that it has become disproportionate today. Think that this sector appropriated 40 percent of total American profits in 2007, versus 10 percent in 1980, while it represents but 5 percent of salaried employment. The disproportion and excess are extreme. The financial sector weighs down the rest of the economy through numerous channels. First, through profitability requirements. The financial globalization of property rights has given shareholders – with institutional investors acting as surrogates – unprecedented power. It has allowed the emergence of normative returns for listed companies of around 15 percent. This profitability requirement is untenable in the long term. Too few industrial activities offer such elevated profitability.
Consequently, in the absence of [sufficiently] profitable employment for it, companies have been led to return capital to shareholders in the form of dividends and stock buy-backs. We know that in the United States net issues of shares have been negative for about fifteen years. In other words, the American stock market is financing shareholders and not the opposite. Because it impedes the growth of developed countries and feeds outsourcing strategies, this required profitability leads to an important reduction in manufacturing employment in Europe and the United States.
The second consequence may be deduced immediately: strong pressure on salaries. It results from a very unequal balance of power between shareholders’ unified representation and an extreme fragmentation of union organizations. In consequence, while under the Fordist regime a significant share of productivity gains went to employees, which fed the dynamism of demand, that is no longer true under patrimonial capitalism. Real salaries stagnate, which constitutes a permanent brake on economic growth; hence households’ recourse to debt, with the effects that we know.
The third consequence is a massive rise in inequalities. In fact, an essential characteristic of the new corporate governance is to have swung senior management over to the owners’ side. That’s the entire issue of new compensation rules that aim to align management’s interest with those of the shareholders. The result has been an explosion of inequalities in developed countries. The multiplier of the average worker’s salary to reach the top managers’ salary has gone from 40 to 500 in the United States.
Even more disturbing: if one considers the 90 percent of less-rich workers and compares their average income to the average income of the richest one percent, then – although during the 1933-1973 period a certain catching up was observed – over the 1973-2006 period (33 years), one observes that in real terms, the average income of the former has shrunken slightly even as it has increased 3.2 times for the latter. Such inequalities have political effects as well as economic impacts. Ultimately, the unity of society as a whole is imperiled.
It is striking to observe to what extent the markets have shown themselves incapable of deflecting or even of simply moderating these imbalances. It’s a lesson that must be kept in mind. So, according to the theory of financial efficiency, competition should have increased consumers’ (in this case, mortgage borrowers’) well-being by supplying them with good-quality products capable of containing the risks associated with acquiring property at low cost.
It was in the name of such a result that market liberalization was justified, not to increase bankers’ bonuses. None of it happened. Similarly, attracted by the high compensation, a great many of our best-trained engineers migrated to the financial sector. Is that a satisfactory situation when we think about all the technical challenges we have to confront? The onset of the crisis corresponded to the moment when these imbalances took on such a magnitude that the cohesion of the whole found itself at risk. Then the question of a new regulation was posited.
However, the crisis does not offer any ready-made solution. Far from it: initially, the crisis does nothing but aggravate the problems, since it accentuates the tendencies peculiar to patrimonial capitalism. Let’s take the financial question, the critical role of which we’ve seen. During the last fifteen years, the banking sector has evolved towards a high degree of concentration around a small number of very big banks. This development is problematic, because it produces giants which, by virtue of their size, carry systemic risk.
In consequence, the public authorities find themselves forced de facto to come to these institutions’ assistance should difficulties arise. All economists agree that such a situation is not acceptable. It leads these actors to take excessive risks, since their profits revert to themselves, while their losses are socialized. Yet the crisis and the emergency measures taken by the public authorities have accentuated concentration in the banking sector. Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual having disappeared; the remaining banks have become even more sizable.
In other words, the banks that were already too big to fail have become even bigger! Under these circumstances, to dismantle enormous conglomerates, for example by separating investment banks from deposit banks, should be a primary objective. A bank too big to fail should also be too big to exist. But such a policy presupposes a profound change of mind. At present, that seems a very remote prospect. Overall, the G20 continues to think within a neoliberal capitalist framework. However, if this diagnosis is correct, the persistence of the crisis will necessitate a paradigm change.
The difficulties to come are of two orders: not only the maintenance of massive unemployment in developed countries, but also the development of significant monetary difficulties. Note that up until now, the crisis has been primarily of a financial and banking nature. The public authorities have succeeded in controlling it thanks to their vigorous wielding of the monetary weapon. Simply put, they’ve drowned the difficulties in liquidity with the active help of central banks.
However, today, the mass of liquidities thus produced, associated with the vertiginous growth in public debt, brings the crisis into a new stage in which the question of currency values enters the spotlight. In this matter, the sites for a possible rupture exist: for example, the dollar’s hegemony, the unity of the Euro zone, the parity of the yuan – or the weakness of the pound Sterling? Should such a rupture occur, then the cohesion of international neoliberalism would find itself called directly into question.
The forces of shock that surfaced in August 2007 have not yet finished making felt their devastating effects.
André Orléan is an economist. Born in 1950 in Paris, administrator of the Insee [French national institute of statistics and economic studies], this former polytechnicien has been director of research at CNRS [French national center for sociological research] since 1987. He has also been a member of the scientific council of the Commission des opérations de Bourse [Commission for stock exchange operations], which merged in 2003 with the Conseil des marchés financiers [Financial Markets Council] to form the Autorité des marchés financiers [Financial Markets Authority] (AMF). Since 2006, he is director of studies at the Ecole des hautes études en sciences sociales [School for advanced studies in the social sciences] (EHESS). He is on the management committee of the review, “Annales. Histoire, sciences sociales” and the author of several books, including “Le Pouvoir de la finance” [The Power of Finance] (Odile Jacob, 1999).
Translation: Truthout French Language Editor Leslie Thatcher.