FedericoFaleschini(ID10902214) ModuleConvenor:AdrianPabst Module: PO817 (Resistance and Alternatives to Capitalism and Democracy) 4April2011 Essay(wordlimit:4000;actualwords:4138)

HowWouldYouCharacterisethe CurrentCrisisofCapitalismand Democracy?

Introduction This essay aims to understand the deeply-rooted causes of the current crisis of capitalism and democracy through an historical analysis of the evolution of capitalism as a world system of accumulation. As counter-intuitive as it may appear, it is necessary to go back to the start of the modern era, in Renaissance Italy, to grasp the forces and elements which have influenced the development of capitalism and are also influencing the current path of the American hegemony. However, the current period also shows a number of peculiarities in respect to previous historical experiences: such changes require an inquiry into the recent past and present of American hegemony, which has been overwhelmingly influenced by the Neoliberal ideology. My argument is that the crisis of capitalist democracy (Pabst 2010; Posner 2010) is mainly the consequence of the terminal crisis of American hegemony in its last, Neo-liberal manifestation. The causes of such a crisis are found both in the inherent instability of contemporary global capitalism(and to the central role of finance in it), in the domestic and foreign policy of the Neo-conservatives and in the relationship between the USA and China. The Neo-Conservatives have indeed accelerated the irreversible decay of the American Hegemony by committing the ultimate sin of imperial overstretch and at the same time have favoured the collapse of the financial sector by boosting the housing bubble through the provision of cheap credit. In addition, globalization in Neo-liberal flavour has put increasingly under pressure all western mature democracies, entailing a political as well as economical crisis. The essay is organised as follows. The first part outlines Arrighi's concept of systemic cycle of accumulation (Arrighi 2010: 6) to put the crisis in the historical perspective of the history of capitalism. The second part focuses more specifically on the Neo-Liberal revolution (Robinson 2006) whose heritage has been fundamental in the last financial crisis. The third part analyses the financial crisis proper from the economic point of view but it also outlines how the intertwining between Neo-conservative policies and Neo-liberal world economy have transformed the burst of the (American) housing bubble into a global crisis. The fourth part deals with the crisis of democracy as experienced in many western mature democracies: the focus will be in particular on the problem of corporate influence over political leaders as a chief heritage of the Neo-Liberalist era. Finally, the fifth section concludes.

1. The historical evolution of capitalism and the American systemic cycle of accumulation Arrighi in his work The Long Twentieth Century (2010) has drawn the concept of systemic cycles of accumulation (hence SCA) to describe the historical evolution of capitalism from the XIV century up to present. Every SCA takes place in a long time frame (a long century) and is associated with an hegemonic power which organizes and controls the world capitalist system. The colonialist expansion continually enlarged such a system, therefore resulting in a sequence of leading capitalist States [] of increasing size, resources, and world power (ibidem: 14): Genoa, Holland, Great Britain and finally the USA. SCAs are composed by two phases: material expansion [] and financial rebirth and expansion (ibidem: 6): In the first phase, capital is invested in production (of material commodities and infrastructures) and in turn in trade. As long as there is room for profitable investments for all the capitalist States, an efficient division of labour ensues and inter-capitalist competition is low. However, over time the increasing competition for valuable investments in commodities and trade provokes a fall in the profits of the capitalist, which are thus inclined to keep a growing proportion of their income in liquid form: this crisis of accumulation corresponds to the supply side of financial expansions. The second phase begins when the slowdown in the expansion of trade and production (ibidem: 373) sets off the interstate competition for mobile capital. The hegemonic State is the most well suited to provide the capitals, since it is the first one to have completed the phase of material accumulation: the profits reaped during the first phase are thus converted into financial means and are used to sustain the phase of material accumulation in other countries. The country which is most successful in its material accumulation therefore attracts more capital than the others: therefore, the phase of financial expansion in the hegemonic State broadly corresponds to the accumulation phase in the emerging hegemonic State. The transition from the first to the second phase of course is not easy and entails a deep transformation of the hegemonic State's economy. The result, however, is a brief but glorious belle poque (e.g. the British Edwardian Era and the Roaring Nineties (Stiglitz 2003) for

the USA). The flow of capitals from the declining hegemonic centre to the rising one has been a constant feature of the evolution of the world capitalist system up to the transition from England to the USA. It is worth noting that all hegemonic capitalist States up to now have been Western states. However, this is not what is happening now, at the end of the American SCA. There are two main differences in the present historical moment. First, the rising hegemonic centre, China, is not a western State, nor it is a fully-fledged capitalist State (Arrighi 2008). Second, the flow of capitals between declining and rising capitalist centre has been reversed: during the past 30 years, Japan first and then China have been financing the soaring US debt instead of the contrary. Indeed, after having been the world's main creditor during the '50sw and the '60s, the USA turned into the world's main debtor thanks to the Monetarist [Neo-Liberal] Counterrevolution (ibidem: 156). It is to this Neo-Liberal Revolution (Robinson 2006: 13) which we now turn.

2. The Neo-liberal Revolution and the Rise of Neo-conservatism One of the causes of the different pattern of US hegemony may be found in a comparison with hegemonic Britain. The USA being a self-centered and largerly self sufficiency continental economy [are] only partially integrated into the world economic system. On the contrary Imperial Britain was structurally oriented [to be the] global clearinghouse, being at the core of the world economic system it created (Arrighi 2008: 1434). The Monetarist Counterrevolution was meant to change this tendency and attract the huge mass of capital which had been accumulated in the '70s because of the increasing worldwide competition and the passage to the regime of floating exchange rates (firms looked for liquidity to hedge against and speculate on floating exchange rates). During the '70s, the crisis of American hegemony due to the Vietnam war made the USA incapable to adjust to the new environment until the run on the dollar of '79-'80. The Neo-liberal revolution can thus be seen as a deviation from the pattern of SCAs: after having became the world's biggest lender, the Monetarist Counterrevolution enabled the USA to retain the driving seat in the world order but also posed the bases for the decline of the American hegemony. Indeed while the massive inflow of capital allowed the USA to step up the military confrontation with the USSR and enjoy the '90s belle poque after the golden era

of the '50s-'60s , on the other hand the huge fiscal debt deprived the USA of a fundamental instrument of hegemony, that is, the control over surplus capital (Arrighi 2010: 380). Such a control had been taken by East Asia, which benefited from the inflow of capital to the USA since it had a strong comparative advantage over other regions in providing the US market with cheap industrial products (Arrighi 2008: 147). The success of Carter's and Reagan's Neo-liberal revolution in attracting financial capital was staggering. The dissolution of the USSR and the difficulties of other kind of capitalism (German, Japanese, etc.) made Neo-liberalism the new orthodoxy (Gamble 2006: 25), which became to be challenged again only in the late '90s/early 2000s (Gray 2002, Stiglitz 2003). However, Neo-liberalism is a complex ideology and as such has always contained various strands, the main two being the laissez-faire one (the true believers of the '70s and '80s) and the social market one. Both strands give priority to the market within social relations, and imply an active state (Gamble 2006: 22) but the former wants the State to remove all possible obstacles to the markets, while the latter envisages a much larger role for the State as provider of public goods and legitimacy for the market (neo-liberal institutionalism (Robinson 2006: 5)). The combination of global laissez-faire and shock therapy strategy in the '90s had produced global instability and numerous wars in the periphery (in particular shock therapies in the post-Soviet countries had created a huge arm traffic which flooded with arms terrorist and paramilitary corps alike). The Russian and East Asian crisis of '97-'98 were powerful signs of the end of global laissez-faire (Gray 2002: xi-xxiii): they marked the end of the supremacy of true believers and the passage to the Post-Washington Consensus (i.e. the acceptance of the concept of market failure (Thirkell-White: 153)). In addition, a powerful challenge to Neo-liberal true believers in their US headquarters was the rise to power of the Neo-conservatives. The relation between Neo-conservatives and Neo-liberalism is ambiguous. As Haroon Akram-Lodhi (2006: 162-6) argues, Neo-con and Neo-lib share the faith in the capitalist system of property relations and believe that State expense in welfare should be curbed and taxes on capital cut. The main difference rests in the role of the State: Neo-conservatives envisage an active role for the State in upholding the social authority [i.e. dominance] of capital as a whole [over other social classes] (ibidem: 163) and in giving individuals the mean to be competitive in the market. Moreover, Neo-conservatives have also been much less supportive than Neo-liberals of the principles of free market and transparency, because

one of their core constituencies is Big Business [particularly the energy and military sector], rather than the free market (Micklethwaite and Wooldridge, quoted in Tabb 2006: 188). This part has outlined the evolution of neo-liberalism, first in its golden age of the '80s and '90s and then in its intertwining with Neo-conservatism at the turn of the century. The promotion of global laissez-faire in the '90s severely impaired global stability, even though it allowed spectacular profits in the USA. In the next section it will be shown that the choice of the Neo-conservative administration to deepen financial deregulation and the characteristics of US-China relationship lie at the core of the financial crisis.

3. The Financial Crisis: a tale of wrong regulation An important antecedent to the financial crisis of 2007-2008 can be found in the deregulation of the financial sector in the '90s (Stiglitz 2003: 140-69). A fundamental moment in such a deregulation was the repeal of the Glass-Steagall Act which sent conflict of interests out of control (ibidem: 158). The Glass-Steagall Act provided for the separation of investment and commercial banks: the rational was to reduce the chances that a conflict of interest, so that commercial banks would have provided a reliable and unbiased evaluation of the creditworthiness of business (ibidem: 159): a business which was in trouble could thus at least be expected not to have easy access to credit. Instead, after the repeal of the Act, a full service (i.e. both commercial and investment) bank was tempted to provide false informations to investors over the real situation of the business since it could continue to lend money to it, in the hope that the loan would help the business to recover. Hence the numerous corporate and financial scandals at the turn of the millennium. Another relevant feature of the global finance since the '80s has been the rise of hedge funds (Ferguson 2008: 224-30, 315-33). Hedge funds trade in derivatives (future contracts, options, swaps) in order to hedge the customer against price risk, which they take on themselves. The rise of hedge funds has run parallel to the increasing globalization and financialization of the global economy: indeed hedge funds increased from just over 600 [] managing $39 billion in assets [in 1990] to 7601 [managing] $1,9 trillion in assets [in the first quarter of 2008] (ibidem: 330)). The heritage of the '90s then was one of corporate accounting scandals and ever more interconnected global finance. At the same time the surplus under the Clinton administration

had been quickly dilapidated by the Neo-conservative administration in the mighty military efforts in the Middle East and through a return to Reagan-era Voodoo economics (Stiglitz 2003: 171, 325): the argument went that a massive cut in tax rates (for the rich) would translate into an increase in savings that in turn would increase revenues. Obviously this wasn't the case. However, interest rates continued to spiral downwards, therefore pumping an enormous amount of liquidity in the financial bubble which was not-so-slowly and not-sosilently building up. Why this happened? The answer is to be found again in the rise of China (Ferguson 2008: 333-8). The economic symbiosis between China and the USA is based on the following four processes: The vast majority of China's cheap exports are directed to the US market; China needs to buy billions of dollars (mainly through purchase of US government bonds) to prevent its currency from appreciating; The US is able to enjoy far lower rates of interest and of inflation than it would be otherwise thanks to China's cheap imports and high savings; US (and other western) corporations enjoy China's cheap labour through outsourcing. The Neo-conservative administration did not prevent the low interest and inflation rates from overheating the financial bubble. There is however another reason why the financial crisis of 2007-2008 had such a catastrophic effect on the real economy too. Enter the housing bubble. The unsound monetary policy by the Federal Reserve in the early 2000s (Posner 2011: 279) kept interest rates very low (much lower than the optimal level indicated by the Taylor rule see Taylor 2011) and this, together with the government's long-standing policy of encouraging home ownership (ibidem: 291) which dates back to the Clinton administration (Friedman 2011: 4), encouraged the formation of an housing bubble (since a house is a product [] mainly brought by debt (Posner 2011: 280)). The banking sector was therefore heavily involved into the fuelling of the housing bubble and the regulators failed to perceive such a bubble because of the constantly low interest rates (they failed to appreciate that the missing inflation in the Consumer Price Index was being substituted by rising inflation in asset houses and common stocks prices). At the same time, the deepening deregulation promoted under the Bush presidencies pushed large, complex financial institutions (LCFIs) (Acharya et al. 2011: 184) to follow ever riskier practises: in particular, the instrument of securitization was used not to spread risks

between a large number of investors but instead to concentrate the risk on the LCFIs themselves in order to greatly increase their leverage; in turn, this was made possible by the USA 2001 amendment to Basel I rules and Basel II, which underestimated the riskiness of mortgage-backed securities [the ones linked to the housing boom] by assigning them a minimal risk weight (Posner 2011: 288; see also Jabecki et al. 2011). In short, the financial crisis is the end point of 30 years of deregulation and globalization and it can be seen as the terminal crisis of US Neo-liberal hegemony. The economic analysis of the crisis thus puts the blame more on regulators (and on economic theory itself) rather than on the regulated (Posner 2011: 282-5; Friedman 2011: 42-55). We shall now address the issue of the significance of this relationship (between corporate firms and political lites) for western mature democracies.

4. Post-democracy, or how democracy has been modified by Neo-liberal revolution and globalization Neo-liberalism has a distinct preference for techno-managerial forms of rule (Robinson 2006: 18) and limited democracy (Rodan 2006: 204). Its ultimate aim is to embed market values and structures [also] within [] social and political life and to do this it needs to depoliticize an inherently political process [i.e. the regulation of markets] (ibidem: 197-8). The Washington Consensus institutions and technocrats during their heyday in the '90s strongarmed many developing countries into adopting extreme Neo-liberal policies but this strategy eventually backfired in the Asian crisis and in the rise of anti-globalisation movements at the end of the '90 (Thirkell-White 2006: 146)1. The strategy thus changed and the Post-Washington Consensus (PWC) puts a great emphasis on the concept of transparency. However, the transparency Neo-liberals call for is essentially a tool to increase the accountability of policy makers to the markets, not the contrary (Rodan 2006: 198-205). The passage to the PWC also means that the need for broad legitimacy [of the market] across society to push forward the neo-liberal agenda is now widely understood by Neo-liberals (Robinson 2006: 5). However only for some Neo-liberals legitimacy has to pass through the
1 According to Gray (2002: 234), the market fundamentalism of Neo-liberal true believers embodies the Western Enlightenment ideal of a universal civilization. He specifically argues against the imposition by the WC International Financial Institutions of the Anglo-Saxon capitalist model (down to the internal structure and organization of firms) over other national capitalist (e.g. Germany) and non-capitalist (e.g. Japan) traditions.

normal political process: the emphasis is much more on procedural rather than substantive democracy; moreover, democracy and political participation are still seen as instrumental to enhanced market functionality (Rodan 2006: 204). Crouch's (2004) conception of Post-democracy highlights the effects on mature Western democracies on the one hand of the Neo-liberal strategy of embedding the market in all social relations and on the other of the financialization and globalization of world economy. Crouch argues that these two processses weakened the power of the State via--vis the power of the corporations/firms in two ways: Neo-liberalism places all confidence in business and posits the essential wisdom of firms and the essential idiocy of governments (ibidem: 98). As noted before, the increase in negative citizenship has already weakened government's legitimacy in the eyes of the public. The additional pressure exerted by the Neo-liberal message have pushed governments to imitate private business in search for legitimacy. This has two effects: on the one hand, it justifies the massive policies of contracting out or privatizing public services (it is argued that these policies provide incentive for large firms to invest in lobbying; however anti-trust rules which are only concerned with prices fault to register the significance of political influence); on the other hand, the influence of media firms in particular becomes very strong because of the change in political communication (see Wolin 2008 for an account of the role of private media in the years of the Bush presidency). Globalization and the increasing liberalization of trade and services are said to have widely increased the power of global firms: indeed the reorganization as phantom firms (ibidem: 35; only maintaining a core staff and contracting out/outsourcing everything possible) increases their flexibility in absolute terms and especially in respect to governments. Global firms thus have greater relative bargaining power in respect to governments (especially poor countries' ones). In addition, the AngloAmerican model of firm which has been often offered as a model during the '90s (see footnote 1 above) gives large powers to senior managers, since the only criteria for good performance is shareholders' satisfaction, therefore increasing even more the power of a few individuals vis--vis the population at large. The Neo-liberal revolution has modified not only the internal organization of the State but also the very nature of political representation and citizenship. In respect to the first, there has been a Shift to the liberal model of lobbying and cause

presentation as opposed to the politics of parties [] the power that [the firms] already possess [] becomes translated into a far more extensive political power. This challenges severely the democratic balance (ibidem: 46). It is useful here to recall Smith's contention that the capitalist class is indeed more inclined to pursue [its] interests with greater lucidity, power and determination than the other social classes but unfortunately at the same time the interest of the capitalist class may easily clash with the general interest of the society (Arrighi 2008: 47). The erosion of citizenship2 is instead tied to the application of commercial principles (Crouch 2004: 85) to public services, i.e. contracting out and privatization. There two main problems: Distortion: the barriers to entrance needed to make a market viable and attractive for private interests fundamentally change the quality of the good. However this change is not reflected in economic analysis: economic indicators concentrate on easily measurable quantities, which may but may also not be the most relevan (ibidem: 859); Residualization: private actors only enter profitable niches of public sectors but the public service is by definition universal: hence the residualization of not economically viable services. In this case citizenship is eroded because access to such services resembles more of a penalty than a right (ibidem: 89). The Neo-liberal revolution thus is putting under great strain the institutions of mass democracy because the conquer of State power by the corporations is changing the very nature of political representation and citizenship, fuelling at the same time a diffuse negative attitude towards government in the public at large. The expression of this resentment is not always pacific and the breakdown of society which is currently more advanced in truly postdemocratic countries such as the USA is well represented by the explosive increase of mass incarceration and widening income differences since the '80s (see Gray 2002: 114-9 for an account of the American experience).

5. The crisis of (Neo-liberal) capitalist democracy Arrighi argued that financial expansions have damaging effects for the hegemonic State in the
2 On this topic see also Jayasuria 2006.

long run: Economically, they systematically divert purchasing power from demand-creating investment in commodities [] to hoarding and speculation; Politically, they tend to create new configurations of power which make difficult for the hegemonic State to take advantage of system-wide intensification of competition; Socially, massive wealth redistribution mobilize subordinate strata to defend their entitlements (Arrighi 2008: 162). The essay has found the first two effects to be well under way. Section III has shown how the 30-years long financial deregulation, paired with globalization, has reinforced the dynamic of boom and bust which has been typical to financial history in the last five centuries (Ferguson 2008): such a dynamic has been brought to an (abrupt) stop in 2007. The financial crisis of 2007-2008 has had a deeper effect than other crisis of this period because it was intertwined with the housing bubble, fuelled by cheap credit. The deregulation has allowed (and encouraged) the financial sector to take huge risks, much more than they could sustain. The financial crisis of 2007-2008 then instead of being a crisis of the financial system per se, is much more a crisis of regulation (or de-regulation), that is, a crisis of Neoliberal economic doctrines. In respect to the second point, Section I and III have shown the importance of the relationship between East Asia and the USA in the 10 years preceding the financial crisis. Indeed, the rise of China as a new hegemonic State is already stimulating new configurations of power in the form of the Beijing Consensus (Arrighi 2008: 379). The analysis of systemic cycles of accumulation in Section I has highlighted the anomaly of the relationship between East Asia and the USA: Neo-liberalism can therefore be seen as the tentative to divert the history of capitalist evolution from its usual path. While such a tentative has been successful in postponing for 30 years the end of the American hegemony, it has also made the conditions of the passage of hegemony very unfavourable to the USA. Thus, Neoliberalism has failed to sustain indefinitely American hegemony. Finally, the third point has no easy answer. The Neoliberal goal of embedding market structuresinallfieldsofsocialandpoliticallifeandtomakethemlegitimateintheeyesofthe publicseemssofartohavebeensuccessfulinpreventingthemobilizationofsubordinated stratainadvancedwesterndemocracies.Howevertheriseofpopulistandextremistpartiesin

most western States is an indicator of their weakness. The crisis of social democracy engenderedbytheconsequencesofglobalizationandtheNeoliberalrevolutionhaspushed westerndemocraciesintothestateofpostdemocracywhicharecurrentlyexperiencing,butit isnotclearwheretheycouldheadnow.

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