So Much for the Self-Regulating Market -
By MATT VIDAL -
Last week the Federal Reserve ratcheted up its ongoing efforts to halt
the burgeoning financial crisis. The Fed first engineered an injection
of money into failing investment bank Bear Stearns, an 86-year-old
Wall Street giant, and soon after facilitated a buyout of Bear by JP
Morgan Chase.
The Fed's lending of money directly to an investment bank, an
unprecedented move, follows on the heels of the US government having
passed a $170 billion stimulus package last month. Once again, the
state comes to the rescue of the so-called free market.
The market economy is celebrated as much for its supposed self-
regulatory nature as for its theoretical associations with efficiency,
innovation and freedom. But once one removes the ideological blinders
of free market theory, the history of actual markets consistently
demonstrates that far from being self-regulating, the crisis-prone
capitalist market economy is, in all successful cases, deeply
dependent on active and extensive state intervention.
One may look at the role of the state in establi****ng sustainable
labor markets (via The Factory Acts) and securing international trade
in 19th century England; in creating a stable international monetary
system in the early 20th century, including the creation of the US
Federal Reserve, the IMF and the World Bank; or in actively developing
the highly successful ex****t economies of the East Asian Tigers and
China in the late 20th century. But the current crisis provides a case
study in the fragility and utter dependence of the "free" market on
the state.
The trouble for Bear, the first Wall Street bank to fail, began last
summer when two of its hedge funds specializing in the subprime
mortgage market collapsed. The highly-leveraged Bear, holding 30 times
more debt than equity, was ultimately done in by an old-fa****oned run
on the bank.
To date, in addition to countless consumers who got duped into shady
mortgages, the subprime mortgage debacle has taken out the titans
Countrywide and Bear Stearns, the hedge fund Carlyle Capital, and
other smaller mortgage companies.
The current crisis, however, is more than just dubious mortgage
lending, bad bets, and a loss of market confidence. Behind the
mortgage crisis is a lax regulatory environment and the development of
a shadow banking system -- complex financial instruments created by
the investment community and traded privately outside the existing
regulatory structure.
More broadly, the bubbles currently being deflated in the property and
credit markets stem ultimately from speculation, fueled to a
significant extent by the loose monetary policy of the Fed since the
late 1990s. The current liquidity crunch began as the bubbles finally
began to burst, a situation worsened by the fact that key players are
overleveraged banks.
Crisis is inherent to the capitalist market economy
The foundation underlying all these macroeconomic troubles is the real
economy -- the production of goods and services. The troubles in the
real economy, as opposed to those in the paper economy of the
financial sector, are the same they have been since Marx first
articulated a historically-based theory of the capitalist economy
(while other economists continued to theorize the virtues of pristine
free markets); namely, the contradiction of socialized production and
private appropriation, and the tendencies generated by the anarchy of
the market.
The anarchy of markets, populated by profit-seeking individuals and
businesses in cut-throat competition, quickly generates strong
pressures for regulatory agencies such as central banks (e.g., The
Fed). Central banks and other regulatory agencies can only attempt to
mitigate market swings and to stave off the worst effects of the
tendencies of market anarchy, that is, to prevent episodes like the
Great Depression that are the natural outcome of unregulated markets:
speculation leading to bubbles and then to bank runs.
At an even more fundamental level are the problems resulting from the
contradiction between socialized production and private appropriation.
Although the productivity of American businesses is a function of the
coordinated labor power of the workers, the output is privately
appropriated by the owners and their organizations.
Private appropriation has generated extreme levels of income
inequality; labor's share in US productivity gains has been declining
for 30 years, and remuneration is again as completely out of sync with
levels of effort and skill as it was in the early 20th century.
The concentration of wealth in the hands of a small percentage of the
population, which generates serious problems for the purchasing power
of regular workers, was arguably a fundamental cause of the economic
imbalances leading up the stock market crash of 1929.
More generally, the problem of matching supply and demand,
specifically, ensuring a high level of demand to meet the capacity for
supply, is an enduring one for capitalist economies. It was
tem****arily dealt with by Keynesian demand management policies in the
decades from WWII through the early 1970s. Since then, the
institutional fix to problem of matching supply and demand has been an
economy run on debt spending, including the trade deficit,
overleveraged banks, and consumers spending on credit financed by a
combination of the property and housing bubbles.
These contradictions and problems in the real economy are intimately
related to the current crisis. According to Stephen S. Roach of Morgan
Stanley Asia, "Over the past six years, income-short consumers made up
for the weak increases in their paychecks by extracting equity from
the housing bubble through cut-rate borrowing that was subsidized by
the credit bubble."
The politics behind the economics
Although crises are inherent to capitalism, the current crisis, with
its roots partly in the shadow banking system, is a natural outgrowth
of neoliberal policies. Classical liberalism, the political doctrine
of individual freedom and limited government, was the reigning
political order until the unregulated market imploded in the US in the
late 1920s, setting off a sustained worldwide depression.
From these ruins emerged both the New Deal and the Keynesian
consensus, leading to broad agreement that the state has a fundamental
role to play in the economy: establi****ng a safety net and actively
managing the macroeconomy.
But as cor****ate profit rates were squeezed and international
competition intensified in the early 1970s, the conditions were ripe
for the free marketeers to stage a political comeback.
Thus was born neoliberalism, the post-Keynesian political project of
reasserting -- as official state policy -- the doctrine that free
trade and deregulation are the best ways to ensure economic
efficiency, economic growth, and individual freedom.
Far from being a free and self-regulating market, today's neoliberal
economy is one highly organized by the state and a variety of
institutions, nearly all of which are explicitly structured in the
interests of investors, against those of working families. So-called
deregulation is more accurately called neoliberal regulation.
The same system generating the current financial crisis, as well as
the manufacturing crisis in which 3.7 million jobs have been lost in
the last seven years, is not any old free market. Rather it is
neoliberal capitalism, which has, for its 30 year run, also generated
rising inequality and labor market instability throughout the same
period.
A saner policy environment would begin by rejecting the dogma of self-
regulating markets, so that regulatory institutions may be fortified
and public investment dramatically increased. The state should invest
in badly-needed infrastructure and could develop an ex****t oriented
industrial policy to help rebalance the debt-driven economy.
Ultimately, to deal with the ongoing problems in the economy --
crisis, underfunded infrastructure and schools, inequality, poverty,
etc. -- we need to reject the entire ideology of the free market.
Freedom is more than a choice between dozens of kinds of TVs.
Efficiency is im****tant, but shrewd state investment and intervention
can increase efficiencies, and there is an immense ground for
potentially-satisfactory tradeoffs between the extremes of American-
style hyper-capitalism and Soviet-style planned economy.
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Matt Vidal is a Postdoctoral Fellow at the UCLA Institute for Research
on Labor and Employment. He can be reached at mvidal@[EMAIL PROTECTED]
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