The Crisis in Context; Democratic Capitalism and Its Contradictions


The following post is inspired and premised upon the 2011 Max Weber lecture by Prof Wolfgang Streeck and the recent events in London, which I consider to be the social expression of unadulterated, indigenous anger and ennui. It is the outcome of thirty years of aggressive market neoliberalism that prioritizes economic integration as a means to achieve social cohesion. It illustrates that markets on their own cannot provide the conditions for social integration but result in psychosocial fragmentation.  The core argument of Wolfgang Streecks 2011 Max Weber lecture is that the current economic crisis is but one stage (not to be understood in any teleological or Hegelian sense of development) in the inherent conflictual evolution of a relatively recent social formation – democratic capitalism. That is, the attempt to govern the irreconcilable conflict between capitalist markets and democratic politics. This tension was temporarily suspended during the golden age of ‘welfare capitalism’ after World War 2 but reasserted itself from the 1980’s and led to sequence of events that have shaped the global crisis. It was also during this period that the UK pursued aggressive monetarist policies under the political stewardship of first Margaret Thatcher and then Tony Blair. The UKs manufacturing base that provided secure employment was dismantled and replaced by a liberal labour market with high levels of unemployment, part-time work, undeclared work and flexible contracts. During this period new cleavages emerged, identities formed and communities dismantled. David Cameron’s call for a big society is ultimately an attempt to fix the problems that his political party and successive New Labour governments instituted and constituted over thirty years.  I will now give a detailed overview, based on Wolfgang Streecks work (weaved in with my own analysis) on the political strategies and public policies pursued since 1960 to tackle and overcome the inherent contradictions of governing capitalist markets by democratic states.

The Primacy of the Political in Market Economics

The general narrative in contemporary history books is that the ‘West’ saved Europe from the perils of Communism after the war. This can be observed in a recent speech by Barack Obama on the success of the Allies in defeating Fascism. The speech never acknowledged the historical fact that in the absence of the USSR fascism would have destroyed not only Europe but the USA. Fascism was premised on the political right overthrowing democracy in order to save capitalism. Any objective political-economic examination of history would conclude that democratic societies have much more to fear from the ‘right’ overthrowing democracy to save capitalism than the ‘left’ overthrowing capitalism to save democracy. After World War II policy makers and states across Europe recognised that free markets on their own will produce a variety of price fluctuations that no democratic government can control. These price fluctuations (think of the sudden spike in the price of bread in North Africa,  the inflationary pressure of wage growth that led to Labour being voted out of office and Thatcher elected in 1979 or the oil price shocks across Europe in the 1970’s that ushered in the era of monetarism) lead to radical insecurity and produce unforseen political outcomes that often change the course of history. Thus, after World War Two it was recognised that capitalism (or more precisely, capitalist freedom) had to be subject to political control in the interest of social stability. This led to what we now call ‘social democracy’, a form of economic demand management in the interest of full employment and protection from market insecurity. It was free market capitalism had to be restrained in the interest of political stability not the democratic participation of the electorate in political decision-making. Inevitably, this shift toward ‘democratic capitalism’ led economic intellectuals such F Hayek into political exile. Hayek had argued for a capitalist-technocratic government in Europe (much like what we are witnessing today). Mass democracy, it was argued, would only lead to an increase in taxation and government expenditure. These would create economic distortions  in ‘free capitalist markets’ and lead to sub-optimal outcomes. This is the philosophy that underpins contemporary economics as a ‘science’ and has governed European public policies since the mid 1980’s.

Wolfgang Streeck argues that democratic capitalism is a political economy ruled by two conflicting institutionalised principles on how to allocate resources; one is based on marginal productivity in the ‘free play of markets’, the other is premised on social need or entitlement governed by collective choices of democratic politics. Governments in contemporary societies are under pressure to manage both of these demands. They must satisfy the claims for democratic protection and distribution (political) and market freedoms for productive and profitable gain (economic). It is the type of management governing this tension between democracy and capitalism that explains the contemporary evolution of Western society. Political institutions are constructed around these competing principles. Since 1990, however, most have been constructed to ensue the efficient workings of competitive labour, product and finance markets. Politics was reduced to regulating for market competition. No longer could the state, in the interest of society, become an industrial-economic actor in its own right. The emergent regulatory state, however, did not result in less of a role for the state-in-markets but a radical  transformation of its role. The purpose was to ensure market efficiency by private organisations ruled by the interest of corporate shareholder value. Thus, the language of de-regulation, privatisation and liberalisation misconstrue the actual role of the state in constituting a market economy. The liberal utopia of free markets requires construction and active re-constitution by those with the political mandate to rule. In this regard, the ‘science’ of economics, taught in all of our universities, is predicated on the assumption of a technocratic not democratic politics. That is, it reduces democratic politics to the functional coordination of market competition. Anything that deviates from this ‘efficiency-theoretical’ coordination of markets is a distortion. Any argument to subject markets (which is often a catch word for 23 year old graduates employed by large finance companies to speculate and bet against price fluctuations, as though it were a computer game) to democratic control is heresy. It is considered an attack on market freedoms, institutionally and constitutionally enshrined in Irish and European law.

In reality, what this means is that standard economics defends a social order that is historically specific (not timeless as they would assume) and serves the interests of those with market power; this used to be industrialists but today it is the holders of financial assets. It is those with market power who should dictate democratic politics in the interests of a ‘theoretic-efficient’ allocation of resources, governed by ‘natural laws’ of economics. Power is invisible because economics is an objective science. Public policies are correct if they increase business and market confidence and wrong if they do not. Furthermore, this play of actors is not negotiable. Politics cannot negotiate with markets but must accept their preferences as fixed and determinate. In any other situation this would be called a dictatorship. This is all the more ironic when one considers, as I will later in this essay, that it is sovereign states that saved the markets from self-imposed catastrophe and who have now turned back on their saviour. In this regard, according to the natural laws of the market, good economic policy in is one that is depoliticised and technocratic. It is apolitical and entirely within the interest of those with market power.

The Demand for Price Control and Democratic Citizenship

After the war, democratic capitalism remained in relative peace for around 25 years. This post-war epoch or ‘les trente glorieuses‘ began to unravel in the late 1960s when economic growth slowed down (the reconstruction of Europe was almost complete) but inflation continued apace. For Streeck, this slow down in economic growth diminished the resources available to governments to appease the democratic ‘peace formula’ between capital and labour. Citizens inevitably demanded a continuation of an increasing standard of living, fuelled by rising expectations and a new advertising/consumer culture, captured by ‘Hollywood’. The organised capitalism that had become central to European political economies, particularly Germany, was predicated on an expanding welfare state (that included collective public goods such as health and education), free collective bargaining amongst workers and the political guarantee of full employment through Keynesian economic policies. Political economists tend to argue that it was the conflict between the latter two (collective bargaining/strong trade unions and politically guaranteed full employment by the state) that came into conflict. Government policy increased the bargaining power of trade unions over employers than otherwise would have been the case in a ‘free labour market’ (i.e. a hypothetical labour market without organised collective bargaining and trade unions).

This compromise was manageable for governments during a period of strong economic growth, similar to the way social partnership was manageable during a period of increasing distributional resources in Irelands political economy. But, in the absence of economic growth European governments were faced with the problem of how to get trade unions to moderate wage demands whilst simultaneously maintaining full employment? Government could have allowed unemployment to rise and thus tackle inflation through monetary policies. The increase in unemployment (similar to today) would have ensured wage moderation by trade unions as there would be a huge pool of unemployed labour ready to work for less money, if employers so demanded. But, very few governments were willing to risk (electorally) high levels of unemployment. The exception to the rule here was the UK. Neither the TUC or the British government were willing to enter a national incomes policy to manage these pressures of wage inflation (a strategy that was captured by the no compromise approach by Arthur Scargill and influenced the Irish trade strategy to opt for ‘partnership’ with the state). When Thatcher was elected in 1979 she adopted a non-accomodating monetary stance. She controlled inflation through an increase in interest rates and rapid de-industrialisation that inevitably increased unemployment. In the context of high unemployment and dismantling of industry she aggressively liberalised the labour market. But, most European countries opted for a more accommodating monetary stance. They ensured full employment at the expense of growing inflation by increasing government expenditure. This required  increased borrowing from  money markets and led to a debt crisis in the state.

The attempt to control inflation through debt accumulation and devaluation failed. Public debt increased, wage settlements outstripped productivity and  employers passed the cost on in the form of higher prices that made it difficult for consumers to satisfy a Hollywood lifestyle. The vicious inflationary-wage chase spiral benefitted no-one and neither did currency devaluation. Governments in the end opted for monetary stability over full employment as  a strategy to manage capitalist democratic tensions. The politics of inflation is a real problem that most classical economists know very little about. If you ask an economist to explain inflation they will simply say – wages that are too high. But, when you unpack the problem further it is far more complex. It is about the distribution of who should pay for increasing growth. Hence, it is political economists who are best placed to explain inflation and the political control it requires. But, when is the last time you heard a government talk about the need to bring down the price of housing, rent or petrol? Never, because it is an interference in the market. When Irish house prices increase by almost 400 percent over a 15 year period no one called stop. They simply argued, increase the supply, build more until the price equilibrium comes into balance. On the other hand, it is perfectly legitimate to talk about controlling the price of labour (wages) in the interest of competitiveness.

The impact of house price inflation on the Irish economy has been catastrophic and completely under analysed.  It led to the collapse of our banking system and subsequently the solvency of the state, produced a landscape scarred with empty ghosts estates, a population in negative equity and consumers living on a suburban belt that contain as much life as a clogged up traffic jam on the M50.  The politics of inflation is too important to be left in the hands of economists. It is a sociological phenomenon.

Casting aside the Political Orthodoxy of Democratic Capitalism

The end of wage-price inflation in the 1980s simply displaced the distributional conflict implicit in democratic capitalism from the labour market to the political arena. The US and UK pursued an aggressive neoliberal policy of dismantling trade unionism because of the structure of their political executives in the state. Inflation was brought under control but unemployment continued to rise. Increased unemployment led to an expansion in public debt because of rising expenditure on social assistance. Even Thatcher knew that expecting the unemployed to fend for themselves without state assistance was not democratically possible. The outcome would be looting and rioting on the street. Public debt became the problem in European economies not inflation. European governments gradually emulated the non-accomodating monetary policy of Thatcher.

Thus, fighting inflation became more important than maintaining employment and Europe began to experience an unemployment crisis which led to a public debt crisis that in turn led to fiscal consolidation. James O’Connor aptly called this a ‘fiscal crisis of the state’ in contemporary capitalism – a concept and theory built upon by Wolfgang Streeck. Monetary stabilisation tackled inflation but not the problem of generating economic growth. The decrease in tax revenues and increase in unemployment led to public borrowing and a growing crisis in the fiscal capacity of the state to deliver its democratic commitments in the welfare state (social security, pensions etc).

All of this led to the second crisis of democratic capitalism after the war; public deficit spending .This, according to the economists in government departments crowded out private sector investment – leading to higher interest rates and slow growth. In the US, domestic savings were minimal (wages were not growing and a direct result of a dismantling of trade unions and wage setting institutions, leading to a crisis of internal demand) and therefore the government began to sell its bonds to international investors. Over time, the public debt burden led to a new political response; economic revitalisation through financial de-regulation and fiscal consolidation. Both of which were central to Bill Clintons presidency after 1992. Rather than the state take on debt, privatise it.

Economic Revitalisation through Privatised Keynesianism

The aggressive pursuit of fiscal consolidation (to tackle the debt problem that attempted to solve the inflation problem) led to a politics of austerity for much of the early 1990’s. Bill Clinton, rather than cut the debt-GDP ratio through growth or investment in education pledged to ‘end welfare as we know it’. For classical economists, the policy stops here i.e. cut but don’t invest. But, the state has to tackle the inevitable distributuonal conflict that a reduction in public expenditure entails. Fiscal consolidation and rising levels of income inequality  was counter-balanced by aggressive financial de-regulation that made cheap money available for everyone. Financial liberalisation compensated for social policy being cut in a period of fiscal consolidation and public austerity. Increasing the money supply was how the state solved the distributional problem. Colin Crouch calls this ‘privatised keynesianism’ as it is a more empirically accurate description of what occurred than ‘neoliberalism’ . Public debt by the state was replaced by private debt by individuals. In addition, tax cuts were implemented for the rich enabling them to re-cycle their money into complex financial products, producing an elite financial sector playing monopoly with the US economy. But, on the other hand, given the absence of the US state to use domestic savings (real purchasing power of the average worker in America has remained stagnant for 30 years) to purchase their bonds to fund their military adventures, they had to rely on a export boom in China.

Increased credit led to an increase in mortgage transations and ratcheted up house prices; much like what occured in Ireland and the UK.  House price inflation was considered a good thing as it provided leverage for households to borrow more money. The US, UK and Irish liberal market economies were held up as examples by the OECD for European elites to learn from. They managed to secure full employment, low inflation and econonomic growth without accumulating debt!  All of this, as we now know was built on a house of cards. It was premised on the circulation of cheap money made possible by the aggressive de-regulation of wholse sale money and finance markets and increased reliance on transaction taxes that dried up when the property boom burst. For a period, privatised keynesianism (where people thought they could get rich by selling houses to one another) solved the internal tension between capitalist markets and democratic politics. In turn , this speculative craze constituted a whole new sociology of identity premised on an aggressive consumerism. Credit was used to draw down from future and fictional resources for a lifestyle of televised and marketed social constructs. Cultural critics were now aesthetic snobs.

The Socialisation of Private into Public Debt

With the inevitable collapse of privatised Keynesianism democratic capitalism has now entered its latest ‘stage’. Governments socialised the debt of the private finance industry because they were unwilling to impose on society another ‘great depression’. Despite governments saving the global money factories from their own excess the politics quickly changed to the latter demanding from governments a new round of fiscal consolidation. They are concerned that they may not get their money back and demand fiscal austerity (i.e cuts in pensions, education, health and social security) and monetary stability. Wolfgang Streeck has aptly described this new distributional conflict as a ‘tug of war between global financial markets and sovereign national states’. The underlying configuration of power interests is still not entirely visible. Given that investors control the rise and rate of interest payment on debt they can pick off states and speculate against others. The extent of public debt accumulated by taxpayers via the state (to pay for the biggest welfare recipient today – the banking sector) means that even modest increases in the interest rate will result in a significant reallocation of taxpayers money toward servicing the debt and possibly result in fiscal disaster (which is exactly what happened in Ireland). On the other hand, the US is taking on more debt to try generate conomic growth and revitalisation. Obama has taken on more debt than all of the previous presidents before him combined. But, if the US political system desired they could effectively inflate it all away through printing more money which would bring us back to the first crisis of capitalism after the post-war settlement; inflation. I sense this might well happen.

Capitalist economies have become more and more precarious as each crisis in democratic capitalism unfolds. States are increasingly losing their capaicty to mediate between democratic social rights and capital accumulation. International markets can, in effect, impose obligations on governments to sacrifice the general taxpayer and societal interest to the specific interest of financial investors. The markets now dictate sovereign and democratic states like no other period in the course of human history. As Streeck argues when examining Greece – “where democracy is effectively suspended street riots and popular insurrection could well be the last political expression for those devoid of any market power”. This is not to say that what is happening in the UK is the precise outcome of the tug of war between sovereign states and international money factories. The riots in London are a psycho-cultural expression of a deep social cleavage in a fragmented ‘lifeworld’ that has been colonised by a logic of market competition as a means of social integration. In the same way the UK authorities would sooner construct a shopping center than invest in education to regenerate an urban community the ‘rioters’ would rather loot Footlocker than participate in the regeneration of a local co-operative. Meaning is constituted through the logic of market greed not aesthetic, social or ethical norms. Investors constitute their power through the acquisition and holding of money, the rioters (at least for a couple of days) got their power from the collective realisation that they could kick in a shop window and take what they want. The latter are presented as social delinquents while those who are motivated by the same greed and power in legal finance markets are entrepreneurs and wealth creators.


One response to “The Crisis in Context; Democratic Capitalism and Its Contradictions

  1. Top notch stuff that I’ll be rereading. They declared class war a while ago and celebrated it – the response is beginning to take form.

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