Notes on neoliberalism and financialisation

Neoliberalism:

Springer et al 2016. Define neoliberalism as the “new political, economic and social arrangements within society that emphasise market relations, a re-tasking of the role of the state and individual responsibility.” They go on to argue that neoliberalism extends the competitive markets into all areas of life including the economy, politics and society.

NB: Key idea of neoliberalism in politics – death of the labour party as they rewrote clause IV which resulted in no longer seeking to nationalise key industries, this could be seen as a betrayal of socialist values and demonstrates the success of neoliberalism. This breaks away from the longest suicide note in history termed by Kaufman where greater state ownership was proposed.

A Multi-faceted Concept:

An Ideology	A hegemonic ideology since the last four decades which aims to roll back the frontiers of the state to embody classical forms of liberalism. Consider the hegemonic stability theory (Ravenhill, 2008).  It emphasis market relations, reduces the state to a “night-watchman role”(Nozick, 1974) and emphasis individual responsibility and enterprise.
Development Model	Refers to the rejection of structuralist economics in favour of the Washington Consensus which embodies neoliberal pillars such as trade liberalisation, privatisation and deregulation.
Public Policy	Involves the privatisation of public economic sectors or services, the deregulation of private corporations, fiscal austerity and shrinking of government debt
Political Project	Belief embodied by Harvey – it is a battle between capital and labour. Neoliberalism functions as a project to push labour back after the gains made post WWII and to ensure capitalist gains at the expense of labour. These events promoted governments to take steps towards redistributing income, especially in the post WWII period. The fast economic growth of that time began to reduce the importance of inherited wealth in the global economy. Ongoing cold war led capital more responsive to working class demands compounded on these factors. The viability of these factors being reintroduced are unlikely. The neoliberal project is thus to turn the “nation-state” into a “market-state” with the primary agenda of facilitating global capital accumulation unburdened from any legal regulations aimed at assuring the welfare of its citizens. In essence, neoliberalism seeks unbridled accumulation of capital through a rollback of state regulation, limits it to functions of minimal security and maintenance of the law, fiscal and monetary discipline, flexible labour markets and liberalisation of capital and trade flows. Consider Paul Singer – vulture capitalist – purchased defaulted Peruvian debt for $11.4 million and won a $58 million judgement forcing Peru to pay back the sum in full.

Key Pillars of Neoliberalism:

Emphasis of market relations:

·       The idea of this is the freedom of the markets. It focuses on the invisible hand leading to the optimal allocation of resources and refers to the “miracle of the markets” (Haywood, 2012) as the market mechanism should rule free from government intervention. A key demonstration of this was under Hurd (A senior cabinet minister under Thatcher) who claimed that interest groups were “serpents that strangled efficient governance”.

·       Under Thatcher, trade union power was increasingly diminished for example the defeat of the Miners’ strike of 1984 led to the end of collective bargaining between the state and trade unions.  This trend that has arguably continued today under the “flexicurity” approach by the European Union (Bender and Theodossiou, 2017) which has argued to increase the “security and flexibility of labour”. Key to this concept is the gig economy which is embodied through the rise of Uber, Lyft and Deliveroo leading to the demise of the “invisible handshake” between employer and employees (Okun, 2980) and implicit contract theory (Akerlof, 1982).

·       This has also led to an increase in Vulture Capitalism embodied by the likes of Singer who focuses on sovereign debt as a key source of profit. This profits capital at the expense of the state. This is compounded by other speculations in foreign exchange markets – this contradicts Keynes original belief in letting “above all else let[ting] finance be[ing] primarily national”.

·       However, it must be noted that Smith, in writing about the invisible hand, wrote from a ontological liberty viewpoint only – making it clear that this theory would be ideal type only. In his lesser known work A Theory of Moral Sentiments Smith paid excessive attention to the likelihood of the “natural price” of goods and services being corrupted by human greed and even wrote about the need for institutions to reward selfless behaviour through “self-command” and penalise selfish behaviour. This deontological perspective needs to be understood to understand how the invisible hand is ideal type only and simply focusing on this crowds out the excessive attention Smith paid to in a deontological perspective. 

Individual responsibility:

·       Rooted in the ideas of Smiles (1859) who articulates the beliefs of self-help for individuals and that poverty was caused by irresponsible habits.

·       The neoliberal understanding of inequality is therefore not a structural issue but instead reflects the different levels of cognitive ability in terms of resource endowments. “no such thing as society – just individuals and their families”.

Re-tasking of the role of the state:

·       A fundamental distinction must be made between positive liberty and negative liberty which was done by Berlin (1958). Positive liberty is essentially freedom to – i.e. being free to attain an education financed by the state. Bildung, a concept advocated by Hegel, focused on the positive sense of liberty. In order to achieve self-cultivation a number of well-formed institutions, such as the state, must be embedded within society. Negative liberty is freedom from constraint, in other words being free from regulations.

·       Neoliberalism under Thatcher and Reagan believed that the state was being too powerful and that the invisible hand of the state was being replaced by the dead hand of the state. They thus argued that the frontiers of the state should be rolled back. They believed the strong state enabled a dependency culture which took away the incentives of working hard and led to the rich effectively subsiding the poor.

·       Therefore, schemes such as the right to buy in England focused on negative liberty at the expense of positive liberty. In selling council houses they freed individuals from depending on the state at the expense of being free to depend on the state as such schemes led to the availability of council homes decreasing. For example there was 6.5 million units available in 1979 which has since decreased to 2 million units in 2017 according to ministry of housing, communities and local government.

Financialisation

“Above all let finance be primarily national” - Keynes

·       Financialisation refers to a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production – Krippner

·       Hudson – “a lapse back into the pre-industrial usury and rent economy of European feudalism”.

·       This builds on the notion of neoliberalism extending the competitive areas of markets into all aspects of life, there has been an exponential growth of finance compared with the decline of manufacturing. This concept is key in understanding how the nation-state becomes instead a market state.

·       Contrary to the key tenets of neoliberal finance and economics, rent-seeking is not the exclusive realm of corrupt politicians left to their own devices, the markets are equally, if not more, adept at extracting rent from society (Buchanan et al 1980)

·       Debt and crisis – indebtedness becomes a source of profit. In the long run this redistributes assets from the poor to the rich via the mechanism of privatisation. This is key in the notion of microfinance schemes.

·       Capital-labour relation transcended to creditor-debtor relationship, debt becomes a primary tool for control of societies and a highly efficient mechanism of control and capture.

·       Consider Rodrik and the political trilemma – under neoliberalism we are forced to don what Friedman calls the golden straightjacket where a state has deep economic integration and a strong nation state but not democratic politics, the state is powerful in extending neoliberalism into all walks of life. This differs to the Bretton Woods Compromise as there was a powerful nation state but democratic politics – consider the nature of embedded liberalism.

·       Massive increase of speculation in 1973 15 billion was traded daily which was grown to 5.1 trillion as of 2016.

·       Casino Capitalism: Currency changes can halve the value of a farmers crop before he harvests it…what goes on in the casino of big financial centres have sudden, unpredictable and avoidable consequences for individual lives.

·       The strong financial wave that set in after 1980 has been marked by its speculative and predatory style.

·       Vulture capitalists – Paul Singer. In 1996, Elliott Management Corporation bought defaulted Peruvian debt for $11.4 million. Elliott won a 58 million judgment and Peru had to repay the sum in full under the pari passu rule.

o   The Argentinian debt restricting in which Argentina had to pay US $82 billion in sovereign bonds almost put it back into recession.

§  The fact that the US courts sided with vulture capitalists who heldout for greater returns demonstrates the impact of Financialisation in the world.

·       THIS IS KEY IN CAPITAL VS LABOUR

Case Study: 1997 Asian Financial Crisis

Clear cut example of casino capitalism: ·       Thailand had very high short term interest rates, which resulted in an economic bubble being fuelled by hot money. In order for this bubble to be maintained more and more hot money was required. ·       Japanese banks, which held about half of Thai debt began to lose confidence in Thailand to defend its exchange rate, which was fixed at the time. This resulted in them withdrawing their funds. ·       This triggered the electronic herd, what Friedman calls the financial centres of the world, and caused mass capital flight which resulted in liquidity drying up across the region. ·       This then triggered a speculative attack on the Thai economy and resulting in it having to devalue its currency. This caused a financial crisis across Asia. ·       Thailand’s economy shrunk by 24% and Indonesia’s economy shrunk by 56%. ·       Consequently, most economies called on the IMF for a SAP. The IMF recommended contractionary monetary and fiscal policy, resulting in weak companies to become insolvent. Finance one, Thailands largest financial company closed down. The IMF also put conditionality for the assistance for liberalisation of markets and removing all capital controls. This was essentially fast tracked capitalism.  o   Rodrik argues the IMF’s mantra is that of stabilise, privatise and liberalise. ·       Only Malaysia went its own way. It ignored the IMF advice and decided to “forbid the immoral gains of speculators”. It began to impose capital controls such as imposing a minimum one-year stay period for foreign portfolio funds. ·       In doing so, the capital controls granted autonomy which led to faster economic recovery and a more rapid turnaround in market confidence. In the aftermath Malaysia also had lower inflation rates and interest rates, and had no debt to the IMF. ·       This raises the issue of the fast that Financialisation has led to an increase in financial crisis, and has led to an “excessively efficient international monetary system”. ·       A way to check this would be the Tobin tax – which is a tax on all spot conversions of once currency into another and would throw sand into the overly efficient financial machine. ·       The primary function of this is to reduce the inherent instability of the international finance system by providing a disincentive against speculators and could potentially generate extra funds for development.

Neoliberalism and Financialisation.

The idea of neoliberalism being a political project is a argument taken by Harvey. For Harvey, there is an ongoing battle between labour and capital within the political, economic and social realm. Neoliberalism seeks to enlarge the gains of capital at the expense of labour within these realms. In order to understand this line of argument a brief history must be described.

Post 1945 there was a reconstruction of the Global Economic Order. This involved the formulation of the Bretton Woods System from which emerged key liberal institutions such as the IMF and the World Bank. The role of these institutions were very different from what they are today and primarily was a source of finance with untied aid. Within this system existed what Ruggie termed “embedded liberalism” where there was an explicit priority to domestic policy autonomy and that countries had the right to control all capital movements. The impossible trinity took on what Rodrik terms as the Bretton Woods Compromise which was a cross between democratic politics and a powerful nation state. It should be noted that this stage bought about the most growth in global history. The domestic politics therefore revolved around liberty in a positive sense – focusing on states role in education, social security, pensions, care of elderly etc. This went against capital in the political project to the gains of labour. This era is known as the golden age of capitalism. The key concepts within this period focusing around legitimating wealth and narrowing the inequality inherent within capitalist societies. Therefore, the role of government was to actively promote citizen welfare achieved by government action in market to prevent externalities and ensuring merit and demerit goods are consumed and produced at the correct levels. Thus, the promotion of citizen welfare and positive liberty become embedded within the societal, political and economic realms also known through what Marx calls “the superstructure”. Thus, the welfare state, trade unions and collective bargaining, inequality within limits via the impact of redistributive policies to ensure a safety net were prominent features of this period.

However, this golden era of capitalism did not last as a neoliberal turn came into play. This was attributed to the Triffen dilemma, as when the dollar was the central reserve currency international liquidity would only expand if the US provided the world with more dollars by running a BOP deficit, but the larger the deficit the lower the confidence in the dollar convertibly into gold. This culminated in the 1970s crisis in which Nixon suspended the convertibility of the $ into gold. This was the start of what was an opportunity for capital to gain at the expense of labour via the shock doctrine as argued by Klein. Key was the fact that it was no longer in the US’s interests as if all holders of the dollars converted the value into gold this would mean the US would be unable to meet the demand. Moreover, the dollars fixed value in gold was undermining the US international competitiveness and therefore the US had a vested interest in ending this convertibility. It should also be noted that private speculators were increasingly targeting the US dollar especially after the sterling was devalued in 1967. Marxists would term the crisis of profitability – capital was finding it more difficult to turn a profit  and therefore required a shake-up. This culminated in a change in the impossible trinity through the administration of Thatcher and Reagan from powerful nation state and democratic politics to deep economic integration and a powerful nation state. This extends the original definition provided by Springer et al (2016) of neoliberalism extending market principles into all areas of life.

These administrations stitched together what Friedman terms “the golden straightjacket” (1999) which is the defining political-economic garment of the globalisation era. It can be donned by entrenching the golden rules of free market capitalism and when donned is rewarded by investment capital from the electronic herd. The electronic herd is what Friedman calls the financial centres who park capital into states that offer commitment to pro-financial policies. However, donning this straightjacket comes with a heavy cost – feasible and viable politics tend to shrink as the golden jacket “squeezes” the availability of policies available and can fundamentally change the superstructure of a economy. This was made clear by Thatcher, the success of neoliberalism fundamentally altered the politico-economic climate of Great Britain and led to the Labour party throwing off what Kaufman termed “the longest suicide note in history” and led to Clause IV being rewritten and symbolised the end of polarised politics. In its place, consensus politics emerged which reduced the traditional spectrum of politics into what Haywood (2012) terms “horseshoe politics” as political polarisation decreases and is instead ameliorated. This commitment to free market principles was underlined by the fall of labour unions, decreasing state intervention, transfers of social wealth through public debt slowing and tax decreases to the rich and corporations. For example, Thatcher had decreased income tax rates. Whilst on a surface view this was beneficial to all it should be noted she had systematically increased VAT rates. A key distinction must be made between income tax, a progressive tax rate that taxes higher earners, and VAT, a regressive tax rate that takes a flat percentage from all. Thus, the lower income earners are the key losers of this policy as the VAT takes a greater proportion of their income than the rich, whilst the amount of income redistribution has decreased sharply as a result of these policies. All these factors that emerged from the shock doctrine of the 1970s was an opportunity for capital to entrench itself through a series of new opportunities. Harvey would thus argue this would mean neoliberalism emerged as a part of that shock doctrine – which allowed capital to push back against labour to benefit capital from labour’s expense.

Another example of a redistribution of wealth and poverty that emerged out of the Thatcher administration came from the Right to Buy. This offers a solid example of what Harvey terms accumulation by dispossession. This is the process of privatisation transferring public assets from the state to private companies, in selling this as stock this is what Harvey terms accumulation by dispossession. Low income earners reliant on social housing now had the opportunity for them to move from rental to ownership at a relatively low cost. This allowed them to gain control over their home and increase their wealth considerably, as well as their stake in society. This resulted in the breakdown of the working class as they now considered themselves to be more conservative in nature and led to the growth of “Middle England”. However, housing speculation took place following the transfers and low-income populations were forced out to the periphery. This culminated in the new homeowners being borrowers who paid portions of their yearly income as interest on long-term mortgages, effectively transferring a portion of their wealth to the owners of banks with licenses to create debt money from fractional reserves. Hudson argues that the FIRE sector (Finance, Insurance and Real Estate) profits off the industrial economy by sucking up their wealth as opposed to working together. This is done by  a parasitical relationship where the FIRE sector leeches off the industrial economy. For example, the debt that arose out of the right to buy scheme has outstripped potential profits from the “real sphere” economy which in turn raises disastrous results for both the government and the people of the borrowing state as they the money goes to payments to usurers and rentier from turnover, leaving them unable to purchase goods and services. This in turn leads to debt deflation of the economy. This is again key in understanding how neoliberalism has entrenched capital at the expense of labour.

Perhaps most importantly, the Glass Steagall Act which separated the activities of investment and commercial banks was repealed by the Gramm-Leach-Bliley Act. This enabled the creation of giant financial supermarkets that could own investment banks, commercial banks and insurance firms. This had previously been banned since the Great Depression. However, the GLBA led to deregulation which had allowed this to take place. This then enabled excessive risk bearing by banks, such the Lehman Brothers which were then considered “too big to fail” (Summer, 2008), to give mortgages to households which held excessively high risk. Naturally, this led to the formation of an economic bubble and when this subprime bubble burst it culminated in the great financial crisis. This perfectly supplements Hudson’s ideas of “killing the host” in which neoliberalism has enable the FIRE sector to essentially severely damage its host (the state) and individuals within society in an attempt to extract as much wealth as possible from individuals who would be deemed to be too high risk to be bought into the circuits of capital. However, the GMLBA enabled lower deregulation which allowed banks to take on excessive risk culminating in the bubble that unleashed the 2008 financial crisis. This acted as a catalyst for the financial crisis of 2008 and opened the floodgates for Financialisation to take place.

Neoliberalism has enabled the FIRE sector’s opportunities to grow considerable (Hudson, 2015). A key demonstration of this is the growth of vulture funds that characterised after 1980 which was marked by its speculative and predatory style. For example, consider the Elliot Management Corporation specialises in “distressed securities” and has coincidentally been termed a vulture fund numerous times by the Guardian. For example, in 1996 the Elliott Management Corporation bought defaulted Peruvian debt for $11.4 million and then went onto win a $58 million judgement and Peru was ordered to repay the sum in full under the pari passu rule from US courts. This holds drastic consequences as it not only demonstrates the relevance of Harvey’s accumulation by dispossession but also shows how the FIRE sector can essentially leech off a state to extort large amounts of capitals from other states.

This therefore demonstrates it to hold true to Springer et al 2016 original definition of neoliberalism functioning as an extension of the liberal logic of the market into all aspects of society and not just the economy.