From Crisis to Crisis: Theory and History of Capitalist Crises

Part I: Can Capitalism Survive?
Part II: Details Proliferate, Structure Abides
Part III: Is the Euro Today’s Gold Standard?
Part IV: The Manic Masters of the Universe
Part V: Can ‘Embedded Liberalism’ Work?

There are many economists today who, like Joseph Stiglitz and Dani Rodrik, promote some kind of return to what John Ruggie – building on the work of Karl Polanyi – called the ‘embedded liberalism’ of the Keynesian compound that shaped the global economy from the end of WWII until 1973. Under this regime of fixed but adjustable exchange rates and the dollar-gold standard, the West experienced nothing short of the ‘Golden Age of Capitalism’ — or what Samuel Brittan referred to as ‘capitalism with a human face’ — witnessing rapid growth rates, mass industrialization and ‘full’ employment as the hallmark characteristics of the market-based economy.

But while a return to this highly successful model sounds intuitively appealing compared to the financialized form of scorched-earth warfare that is currently being waged against working people everywhere, the proponents of embedded liberalism might be overlooking a number of major political and economic impediments to realizing their vision.

First of all, re-embedding liberalism would require something so ‘radical’ that no mainstream economist dares discussing it today: the widespread reinstituting of capital controls and some type of global commodity standard. During the ‘glorious’ 30 years of the Keynesian welfare state, finance capital was effectively domesticated: the only way to export capital was by illegally stuffing a bunch of gold or dollar bills in an old sports bag in the back of your trunk.

Capital controls (or simply: non-convertible currencies) forced lenders to invest nationally rather than internationally, lowering interest rates on government debt and allowing governments to spend extensively on programs of infra-structural development and social uplift. Also, the lack of a credible ‘exit threat’ by capital allowed labor unions to demand ever higher wages. The combination of domestic investment and increasing wages fed into inflation and led to real interest rates for most developed countries being negative for most of this period, meaning private capital was not just lending but paying the government.

Now fast-forward to the transnational capital markets of today and the vast political power wielded by the financial sector. Given the immense opposition that the large banks have already (successfully) thrown up in the face of even the slightest bout of regulation of the free public money that was quite literally thrown at them by our governments, does anyone seriously think the financial sector is just going to roll over and accept the reinstitution of capital controls and an effectively renationalization of capital? These measures, while effectively ‘moderate’, are so radically impossible from a political perspective that we might as well settle for a much more radical alternative altogether.

This brings us to the second problem, which is that embedded liberalism can hardly be conceived of as a panacea to solve the acute crisis of capital accumulation. The Keynesian compound was meant to solve one impediment to accumulation — the lack of aggregate demand — by tight-roping finance capital and creating an environment in which domestic investment and rising wages could stimulate growth. But this situation, while clearly beneficial to the lower and middle classes, ultimately proved unsustainable as well: it produced stagflation and the fiscal crisis of the state. The Neo-Keynesians therefore seem to ignore the fact that neoliberalism was actually a ‘logical’ answer to the crisis of embedded liberalism.

As is always the case, this particular solution to the capitalist crisis of the 1970s then ran into its own inevitable problems: free capital flows greatly increased the vulnerability of the global financial system and simultaneously led to a major reconfiguration of class power in favor of transnational capital. The transfer of industrial production to emerging markets and the reduced bargaining power of labor unions led to wage stagnation, which in turn fed into a dependency on cheap credit to keep the consumption engine running. That, in the end, became the all-familiar and ultimately unsustainable credit/debt bubble of the 2000s — the one that eventually brought down the banks, who then managed to shift the cost of adjustment onto the general public through the taxpayer-funded bailout and stimulus packages.

The conclusion, therefore, is that ’embedded liberalism’ has itself to blame for the rise of neoliberalism. To put it differently, the current capitalist crisis is a direct result of the choices that were made 30 years ago to overcome the last crisis caused by Keynesian economics. For this reason, we might do well to return to the first article in this series, and ask whether capitalism can ever truly solve its own crises at all — or are we just going around in circles, like a wounded dog chasing its own tail, in a never-ending cycle of near-permanent crisis merely interspersed with brief periods of illusory calm? You decide.