People's Democracy

The System in an Impasse

Prabhat Patnaik

THE downgrading of the credit-rating of the United States government by Standard and Poor is revealing as much of the ascendancy of finance capital in contemporary capitalism, as of the impasse in which capitalism is caught. At first sight the entire episode appears comical beyond belief. Here is a mere credit-rating agency, whose incompetence is legendary, since it had given “investment-grade” ratings to billions of dollars of sub-prime securities and had been responsible for inflating the housing bubble and hence for the depth of the crisis that followed, which even in its latest assessment of the US financial situation had made an accounting error of $ 2 trillion, having the temerity to tell the world’s mightiest capitalist State that it is not credit-worthy! And Standard and Poor’s downgrade was not because the US had defaulted on its public debt, nor because there was any danger of its doing so in the foreseeable future, nor even because it had a particularly high public debt-GDP ratio compared to other capitalist countries. The downgrade was because Standard and Poor was not satisfied with US government policy! In the words of Standard and Poor, “the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s medium-term debt dynamics.”

The uninitiated may be pardoned for asking at this point: “Who, pray, are you that a sovereign government’s policy should be tailored to your satisfaction”? But the initiated know that S&P can talk like this because it is employed by international finance capital as its watchdog. Whether it is competent or incompetent, and no matter how much of a midget it may be relative to the might of the US State, it has the ear of international finance capital. So, its opinion of whether the US is doing the right thing counts for much. Some authors have cited the earlier example of Japan, in whose case a downgrade by S&P did not have any effect on the marketability of its bonds, to argue that even in the case of the US the markets will pay little heed to S&P; but this expectation has been already belied by the world-wide turmoil that the downgrade of the US government debt has caused. Besides, S&P is not disappearing overnight. Even if the US rides out its current downgrade, further repetitions of such downgrading are bound sooner or later to make a difference. The real point is that international finance capital now has become far more powerful than any nation-State, even the US nation-State. The fate that usually befell banana republics and other such third world countries, and has of late befallen southern Europe, now confronts even the United States.

BOWING TO CAPRICES

OF FINANCE

We have now reached the acme of centralisation of capital. Finance capital is not only globalised but moves synchronously, which is what justifies the term “international finance capital” used to denote an agency. The fact that with the emergence of international, or global, finance capital, nation-States had to bow before its caprices was well-known. But an exception was always made in the case of the US, whose State was the nearest approximation to a “World State”, with remarkable hegemony over the entire capitalist world and with a currency that was almost “as good as gold”. Global finance capital looked up to this surrogate “World State” for protection and succour. And it obtained these in good measure. The US State in other words acted at the behest of global finance capital, not because, like lesser capitalist States, it was constrained to do so for “retaining the confidence” of finance; that confidence was taken for granted by everybody. It acted at the behest of finance capital for political reasons, because its State was closely enmeshed with finance capital, because its political system was such that all its presidential candidates needed Wall Street funding, because within its political parties office went to whoever was a better fund-raiser, ie, had better corporate-financial backing, and so on. Hence if banana republics worried over investors’ confidence, the US was what investors looked up to for support. But the acme of centralisation has now made even the US vulnerable to investors’ confidence. Finance capital has now moved beyond all nation-States, including the US, and hence beyond any possible political control.

The world today represents a complete inversion of what John Maynard Keynes had visualised. To overcome the anarchy of the system, caused, in particular, by the dominance of speculation in asset markets, which made the livelihoods of millions of people dependent upon the caprices of a bunch of speculators, Keynes had suggested political intervention for taming finance. Finance, he had warned, must never be allowed to become international; and within each nation, the nation-State must intervene to negate the consequences of its caprices. A string of nation-States, controlling cross-border movements of finance, was to provide the antidote to the depredations of finance, each within its own boundaries. The Bretton Woods arrangement had sought to enshrine this vision.

What we have today is just the opposite of this. Far from each nation-State controlling its finance and preventing its finance’s escape from such control by going “global” (ie, supra- or inter- national) through restrictions on the cross-border movements of finance, we actually have the precise opposite: finance has gone global, and hence has not only escaped control by the nation-State but has started controlling the nation-State itself. And this phenomenon has now developed to a point where even the mightiest nation-State is not exempt from worrying over “investors’ confidence”, ie, not immune to being pushed around by the caprices of finance.

Politics in short cannot intervene in this system to the dislike of finance. The scope for any planned intervention against the system’s self-driven immanence is completely nullified. If this scope does not exist even in the United States, then clearly it does not exist at all. The intrusion of a rationality that exists outside of the system into the functioning of the system, which can occur only through political intervention and which Keynes saw as the only means of saving the system (he saw the State as the instrument through which social rationality could be made to intrude into the functioning of the system to overcome the anarchy that underlay its inhumanity), is no longer intrinsically possible. We have the ultimate triumph of finance; and with it a closing of all chinks for the intrusion of social rationality into the functioning of the system.

And yet, paradoxically, this complete inversion of the Keynesian vision in the contemporary capitalist world has gone un-remarked even among American “Keynesians”, which only underscores the hegemony of the weltanschauung of finance in American intellectual life, and the fact that much of American Keynesianism is what can at best be called “contingent Keynesianism”. The argument typically has been the following: in the short-run, because the US is in a recession, any curbs on its fiscal deficit can only worsen the recession; but in the medium term there has to be fiscal adjustment to ensure that the deficit is brought down. Put differently, the suggestion is that the State cannot indefinitely run a deficit; it has to make sure that ultimately the State budget is balanced (or at the most has only a small deficit). But it cannot afford this eventually desirable state of affairs in the short-run because the economy is in the midst of a recession. Whether it is Roubini or Stiglitz or Krugman, they all subscribe to this updated version of the doctrine of “sound finance” as an ultimately desirable objective.

Keynes had rejected this doctrine in toto. This is because this doctrine is based on a false analogy between the household and the State: since the household cannot go on borrowing for ever, the State too cannot go on borrowing forever. The difference between the State and the household however is that the State has sovereign powers of taxation, including the power to tax the very creditors to whom debt is owed, as long as finance is not globalised and the sovereignty of the State is not thereby compromised.

UN-TENABILITY OF

‘SOUND FINANCE’

To argue in favour of “sound finance” therefore is to accept the fact of the reduced sovereignty of the State, and hence to accept the universe where finance has hegemony, a universe that Keynes had wanted to overturn. American Keynesians, by accepting the universe of hegemony of finance, accept intellectually, perforce, the doctrine of “sound finance” that corresponds to the hegemony of finance. Their Keynesianism does not go far enough to demand an overturning of the hegemony of finance.

Keynes of course was no revolutionary; on the contrary he wanted a reform of the capitalist system to prevent a revolutionary overthrow of it. But he saw the necessity for controlling finance, and thought it could be achieved merely through the strength of ideas, which was naïve. But to argue, as contingent Keynesianism does, for a short-run deficit for stimulating a recession-hit economy while accepting the doctrine of “sound finance”, and hence implicitly the hegemony of finance, is to adopt an intellectually untenable position.

The un-tenability of this position is being daily demonstrated in practice, whether in the agreement reached between Obama and the Republicans over the debt-ceiling, or in the downgrading of the US public debt. The purpose of all these measures is to restrict the deficit, without hurting the interests of finance or the rich, by taxing them. In short, practical life daily demonstrates that as long as the hegemony of finance continues, any hopes of using fiscal means for overcoming the recessionary crisis will be necessarily belied.  

The problem for finance however is that this ultimate triumph of finance is simultaneously also a complete impasse for the system. The fact that the recession is going to worsen not only in the US but all over the capitalist world, because of the cut in the fiscal deficit in the US enforced by finance capital, is by now accepted by most observers. It is also clear that under the impact of “austerity”, popular anger, sometimes leading to militant protests, as in Greece, and sometimes to acts of hooliganism and a collapse of the social fabric, as in Britain, is manifesting itself all over the capitalist world. The system has no internal mechanism for the restoration of social peace, as it gets progressively engulfed in social strife. Since political intervention for altering the modus operandi of the system has become impossible, there is a real danger that the system will attempt to bring about social peace by suppressing the people, ie, by resorting to some form of fascism.