Crisis: The Motor of Capitalism
by: André Orléan, Le Monde
Truthout
29 March 2010
http://www.truthout.org/the-crisis-motor-capitalism58234
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.
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.
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