5. The Long Boom and the Longer Downturn
It is time to put our conceptual material to work on the history of actually existing capitalism. Our focus is the period from the late 1960s to the present, from the collapse of the political economic structures that supported the post–WWII capitalist world to our present age of neoliberal hegemony and financial crisis. Before we get there, however, it is important to briefly consider the relationship between this period and the booming postwar economy of 1945 to the mid-1960s from which it emerged, since the present cannot be understood without some knowledge of the past that produced it.
The Long Boom and Bretton Woods
The quarter-century or so following World War II is often called capitalism’s “golden age” or the Long Boom—an era during which the capitalist global North (western and northern Europe, North America, and—confusingly—Australia and New Zealand) experienced unprecedented economic growth, low unemployment, increased average living standards, decreasing income and wealth inequality, and a vast expansion of what we now call the welfare state. The following fifteen years or so, however, roughly 1967–82, saw the whole thing seemingly go to pot. Many thought that capitalism itself was in its death throes. These years inaugurated a process we might call the Long Downturn, a trajectory which, depending upon one’s data and interpretation, continues today.
The major (and interrelated) dimensions of this reversal are well-documented, though sometimes controversial. They are usually associated with, among other things, the breakdown of the international political economic regime formally established among capitalist nations at the end of World War II. The agreements that consolidated this regime—known as Bretton Woods, after the New Hampshire resort at which they were signed in 1944—organized postwar international monetary standards, and established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the “World Bank” for short).37 These “multilateral institutions” continue to wield enormous power in the international sphere, but they were founded for somewhat different purposes than those to which they are currently put.
Bretton Woods (to which Keynes contributed significantly, although the final arrangements differed from his proposals in important ways) had three main formal aims: to promote and fund postwar European reconstruction, in Germany and France especially; to secure the political stability of debtor nations (the UK in particular, whose finances the war had left in tatters, deeply indebted to American finance and the US state); and to stabilize the international monetary regime, which was (correctly) understood to be crucial to the first two goals. Forty-four nations, including the most powerful states in the world and led by the US (which emerged from the war the clear capitalist hegemon), signed the agreements. According to their architects, the institutions would work as follows:
The IMF, using funds contributed by all nations, would provide low-interest loan coverage to debtor states to prevent default during reconstruction and reconversion (the shift from a war-economy to a “peace-time” economy). The World Bank would provide loans or grants for the reconstruction of European (and, eventually, Japanese) economies, a flow of funds greatly enhanced by the US’s Marshall Plan, which rebuilt German industry remarkably rapidly in the 1940s and 1950s (the US wanted German demand for its intermediate and consumer goods, so reconstruction was essential). To make all this possible, the international monetary regime was stabilized via a system of “fixed” exchange rates between all major currencies, so all capitalist nation-states had the value of their moneys “pegged” to a specific rate against the US dollar (unsurprisingly, China and the Soviet Union were not signatories). The foundation of the system lay the US dollar’s anchor to a gold standard. In other words, its value was pegged to gold, which made the US responsible for the stability of the regime as a whole. Every US dollar was to be backed by—exchangeable for—gold: 1 troy ounce for every 35 US dollars, to be precise.
As discussed in Chapter 3, a “gold standard” is an international currency regime that reigned on and off (mostly on) in Europe and North America from the early nineteenth century to the early 1930s. It is supposed to guarantee the stability of currency values by forcing all participating nations to hold gold reserves equal to the value of all circulating domestic currency. There have occasionally been “bimetallic” standards as well, based on gold and silver, but the principle is the same. The main point of these “convertible” monetary standards is to prevent states from simply creating money when they needed it (to fight wars or fund colonialism) by limiting their money supplies to the value of their reserves, thus restraining inflation.38
The gold standard served capitalist purposes for a century or so, but by the early twentieth century, it imposed significant constraints on national and international economies. Most notably, it meant that a nation’s economic growth was limited by its gold reserves. If a domestic economy is increasingly productive, then unless the currency increases in value (so that it can purchase more), the new productivity cannot be absorbed by the economy. As a consequence, much of the nineteenth century involved a dog-eat-dog or beggar-thy-neighbour international regime, in which the major capitalist states fought over and hoarded a limited supply of gold, because it was essential to expanding domestic prosperity. (You can imagine why the California gold rush of the 1850s was such a big deal for US national development.) In addition, especially at the end of the pre–Bretton Woods, “direct” gold standard era, when every currency was pegged to gold, states were frequently forced to devalue their moneys, i.e., reduce the amount of gold backing each currency unit, to create money to pay for things like World War I (which led most to temporarily abandon convertibility). Most of the capitalist world dropped the gold standard at the beginning of the Depression to fund recovery efforts, and stayed off until Bretton Woods instituted the “indirect” gold standard (indirect because currencies were pegged to the US dollar, which was in turn pegged to gold) that allowed most nations to relax the relentless pursuit of gold.
The Bretton Woods monetary scheme was a system in which all capitalist moneys could in theory move securely in the international realm because their values, and the stability of the economies in which they were based, were guaranteed by an institutional backstop in the form of the IMF, the World Bank, and the general context of American economic power. No need for frantic currency trading, no fears of massive devaluation or overvaluation, and no way for speculators to manipulate or exacerbate exchange rate fluctuations. This is the political economic regime within which the “welfare state” emerged. Capitalist governments across the global North created massive institutional networks aimed at popular “welfare,” and paid for them with so-called Keynesian deficit financing.39 The expanding social function of the state was certainly not entirely attributable to the Bretton Woods framework, but its stabilizing of state and super-state institutions was part of what helped the welfare state make sense.
Although it is unfortunately beyond our ken to follow up the Long Boom in detail, from a growth, social security, income equality, and wage-rate perspective, it was more successful than any previous international or national mode of economic organization—capitalist or noncapitalist. Of course, not everyone enjoyed the fruits of this “success.” It entailed—indeed, it depended upon—a vastly unequal distribution of political economic power and the further geographical concentration of wealth in the global North. Still, from the perspective of accumulation pure-and-simple, little in human history can compare. Its successes were all the more exceptional when set against the backdrop of the most recent “peace-time” economy in the memory of many: the Great Depression. It is crucial to keep this relative achievement in mind when confronted with liberal and “progressive” nostalgia for the postwar welfare state. In Europe and North America, unions in particular seem stuck in a rueful political paralysis imposed by the weight of the postwar experience in the lives of an older generation of workers.
The Busted Boom and its Origins
The Long Downturn is closely associated with the collapse of the Bretton Woods regime, since many of the dynamics it was designed to suppress or eliminate in the mid-1940s raised their ugly heads two decades later. By the late 1960s, the fixed-exchange-rate regime was falling apart. Food and commodity prices rose, driving inflation and inviting speculation. Oil prices skyrocketed (rising 400 percent), and the advanced capitalist world experienced a severe decline in productivity growth (the increase in output per unit of labour). This slower rate of growth ignited distributional conflict between labour and capital, and between different fractions of capital. This fanned the inflationary flames higher, as different social groups and classes fought to retain their piece of the income pie, exacerbating political instability.
How all this came about is the subject of some of the most heated historiographical battles in recent memory, and not only among historians. How the story gets told suggests who is to blame, what we can do about current troubles, and whether or not the "golden age" is in fact recoverable. Many on both the left and the right argue that the sources of the Long Boom’s exhaustion lay not in some new, unanticipated dynamics, but in the era’s very “successes,” that its achievements sowed the seeds of its own decline. The following points are standard evidence for this argument:
One of more notable features of this explanation is its rather “orthodox” flavor. Anticapitalists often reject it for that very reason, especially, it seems, because it more or less blames the end of the Boom on workers. In fact, much of modern economics is premised on the ill workers do when they get too much power. Orthodox theories of inflation, for example, cloak themselves in “monetarist” supply theories, but almost always blame inflation in the real world on labour’s excessive demands. They may call for monetary restraint, but the main “political” reason they do so is to limit wage demands. Capitalist common sense says that excessive money supply increases the price level via “wage-push” inflation.
This underlines the fact that how we explain the crisis of the 1960s and 1970s is not merely “academic.” On the contrary, it is enormously important today, both politically and economically, because we are constantly struggling over what lessons the past teaches. Different interpretations of the past lead to different conclusions regarding what can be done at present. But we must not reject orthodox explanations just because they are orthodox. In fact, capitalist reason provides some very helpful tools for understanding capitalism. There are aspects of contemporary economic life that appear to be very well diagnosed by conventional tools. Rather than rejecting orthodoxy because of its ideological predisposition to posit capital as the engine of historical progress, even in periods before capitalism itself existed, and to see workers and noncapitalists as “backward” forces, hindering progress, we need to see it for what it is: a set of ways of understanding the world that is a product of the very world it is trying to explain. Capitalist reason is embedded in and emerges from a particular, ideologically saturated world. Recognizing the embeddedness of “reason” in its time is about as close to truth as we are ever going to get with respect to actually existing human communities. We have to resist the desire to dismiss it out of hand, and search instead for the truth in it, truth of which that reason might not itself be aware.
The historiographical battle over the end of the Long Boom is a useful example of this. Labour activism and workers’ growing expectations did play a significant role in pushing capitalist political economies to the point of collapse. The employed and unemployed did demand more, women and non-European or nonwhite workers did enter the labour force in enormous numbers and expected (but rarely received) reasonable compensation, and unions and other civil rights organizations did obtain, however temporarily, some power to trouble capital’s hegemony and its rate of wealth accumulation. One need not be a right-wing monetary economist to expect capitalism to be in trouble in such a situation. The point is not who is to blame—a question of interest only to those wanting to “save” postwar capitalism—but rather what happened, why, and what lessons can be learned.
Surely one of the main lessons is that demands from workers and others outside the halls of power can, over time, really do a number on the system. Of course, an organization like the United Auto Workers, for example, which certainly played a part in these struggles, was and is by no means anticapitalist. It has never been interested in upsetting capitalism or its key institutions. If the UAW had its way, the Long Boom would have been Longer, ideally Eternal. But that does not mean we cannot learn from the UAW’s experience.
Let’s try to put some meat on these polemical bones by returning to history itself. It is worth remembering that rapid postwar growth and urbanization across the global North led to a massive decline in agricultural employment, both absolutely and as a percentage of the labour force, and a corresponding increase in industrial and service employment. What drove these changes was the rapid accumulation of capital over the period (i.e., “growth”). Increased capital stock—objects of capitalist investment like factories and technology—usually brings with it employment growth.41 This process was concentrated in urban regions, so the growth was urban-biased and led to an increasingly urban population and economy across the board.
Low unemployment and urban concentration was a boon for labour organizations that, in turn, demanded and obtained regulatory adjustments like higher unemployment benefits, reductions in hours, and job protection legislation. This further increased the power and size of organized labour. The extent of these effects varied (less extensive in the US, quite a bit more extensive in Scandinavia, for example), but in almost all cases organized labour became more bold, and the level of industrial conflict grew. (Wage statistics show that strikes and conflict worked: wages and benefits increased. This pattern no longer holds.)
These rapid and substantial wage increases (especially compared to earlier periods in capitalism), had two important, if predictable, effects. First, they squeezed capitalist profits. This problem was intensified by accelerated inter-capitalist competition between US firms and those Japanese and German businesses benefiting from postwar reindustrialization, which prevented capitalists from raising prices to pass increased labour costs on to consumers. Second, it helped generate inflation, by increasing the costs of production and expanding demand for existing consumer goods (better-paid workers buy more things, and are willing to pay more for them).
In other words—and I don’t think it is possible to exaggerate the importance of this for understanding the development of the neoliberal, financialized capitalism we live with today—the crisis that ended the good ol’ days of the Long Boom was a distributional struggle. Orthodoxy almost never says this explicitly, but it is right there in its account of the history of capitalism. This struggle had two fronts: (1) a struggle between labour and capital over the distribution of income—an increasingly empowered labour-force wanted more of it; (2) a struggle between nationally based capitalists over the distribution and control of productive power and international market share. One might also add: (3) conflict between highly developed rich countries and resource-rich but less powerful countries. Keeping the latter in mind would help us rethink the standard explanation of some important political economic developments. For example, the massive OPEC oil price increases of the early 1970s, which most Europeans and North Americans are taught was merely random and baseless Arab nastiness, makes much more sense through this lens.
States played a key role in these developments, mostly by attempting to manage or contain the distributional conflict. On the first front (domestic class struggle), states faced the choice of either inflating or deflating their way out. They could either (a) let money supplies and government spending increase so workers really did feel like their wages were going up, and businesses felt like their profits were maintained; or they could (b) clamp down on inflation by reducing government spending, raising interest rates, suppressing wages and benefits, and tightening up the supply of money and credit in circulation.
At least at first (in the US under Nixon and Ford, for example), capitalist states generally chose to inflate their way out of the crisis, hopefully subduing distributional conflict by keeping profits and wages high while maintaining investment and consumer demand. If both groups wanted a bigger piece of the pie, and dividing it was a zero sum game, then the state figured it would just increase the size of the money-pie and try to keep everyone happy. The choice to inflate—which merely postponed the crisis—is not at all surprising. By the early 1960s, most capitalist states were already on a path of growing government employment and spending, a response both to popular pressures (for pensions, protections, health care, etc.), and to increased state revenues, which made previously unaffordable social services possible. Moreover, although things have obviously changed, it used to be that states providing effective social services could expect public support, so it was smart politics too. This is the welfare state as we remember it.
As for the struggle between different national capitals, most states’ main goal by the late 1960s and early 1970s was to survive the exchange-rate chaos created by the breakdown of Bretton Woods. The breakdown was largely attributable to the decay of macroeconomic conditions in the US: its attempts to manage its own domestic distributional struggle in the manner just described, to pay for Vietnam, and to cover for a loss of international competitiveness, which led to surging imports and falling exports. The American response to this situation had an enormous impact on the whole capitalist world because of its role as the linchpin of the Bretton Woods system. Since all currencies in the system were fixed to the value of the US dollar at a specified rate (with the interesting exception, for much of the time, of the Canadian dollar), and the US dollar was in turn valued at a fixed amount of gold, when the US devalued its currency, it not only reduced the amount of gold the dollar was worth—which let it increase the money supply—it also exported inflation around the world.
This sounds more complicated than it is. Under Bretton Woods, the value of every other internationally significant currency was measured relative to the US dollar. So, when the US devalued the dollar, it unilaterally devalued every other Bretton Woods currency. This not only passed the costs of Vietnam and US domestic turmoil on to the rest of the world, it put the whole international system of economic management at risk. By 1971, there was no way the US could devalue any further and pretend to be the bedrock of the international monetary system, and it dropped the gold standard completely, initiating on its own terms the “floating” exchange rate system we have today. These developments challenged the hegemony of the US dollar and American power, and, for a time, severely limited the capacity of firms in the most influential capitalist states to assert their dominance over firms and states outside the global core. The situation was made worse by the oil crisis of 1973–74, which exacerbated inflation and the profit squeeze, and reduced real wages (since it substantially increased most workers’ cost of living). The result was reduced investment and consumer demand.
So the Long Downturn that followed the long boom was at least partly a product of that boom’s successes, just as most orthodox accounts suggest—if for different reasons (they usually blame it all on state spending and uppity workers). The eventual response to the crisis, in the 1970s and early 1980s, took a little while to configure. But when it came, at least in North America, the UK, and parts of western Europe (Scandinavia was an interesting exception), it brought the reassertion of capitalist discipline. It put capital back on top of the political economic hierarchy—it had never really been usurped, but it had been forced to cater to the rabble—by choosing domestic conflict management option (b) above: clamp down by reducing government spending, raising interest rates, suppressing wages and benefits, and tightening up the supply of money and credit in circulation. This hurt capital in the short term, and support among business people for this radical economic restructuring was by no means unanimous, but in the long term it was one of the most brilliant moves it ever made. This turn to inflation control marks the consolidation of the neoliberal capitalist state in the industrialized world.
The principal objective was to reverse course on the distributional conflict strategy: to give up on the conciliatory attempt to inflate our way out of crisis, and force markets to swallow a bitter pill and deflate. In other words, the state, with the particularly vocal support of bankers, decided to kill inflation, no matter what the social cost. If you remember (Chapter 3), modern monetary policy is oriented toward inflation control using so-called interest-rate operating procedures (increase interest rates, subdue inflation; lower interest rates, allow a little price increase). This obsession with inflation has stood as macroeconomic common sense since the beginning of the downturn we are discussing. (It is, however, presently being questioned by a whole host of players, from Joseph Stiglitz to the IMF he attacked so vigorously after his time at the World Bank, although this change of heart seems to be a matter more of expedience than repentance.)42
What we know today as “neoliberal” policy was established at this time, and not just in monetary policy, but across the whole realm of capitalist economic management. It was the moment when business, and finance capital in particular, started to reassert control of an economic system that had throughout the post–WWII era been increasingly influenced, if never dominated, by labour. In doing so, it not only retook the political economic reins, but got in a few retaliatory kicks as “payback” to working people.
Counter-Revolution and Emerging Neoliberalism
Following the analysis of political economist Andrew Glyn, we can describe the components of this strategy as “austerity, privatization, and deregulation” (although “reregulation” would be better; more on this below). Glyn says these involved a “counter-revolution” in macroeconomic policy (fiscal austerity, restrictive monetary policy), the retreat of government from many arenas of economic life via deregulation and privatization, and the “freeing” of labour market dynamics, in particular by repealing or not enforcing worker protections and union-friendly legislation.43
This counter-revolution, and in particular the attack on inflation, was no straightforward boon for capital. It could not be; when economic activity tanks because of high interest rates and low demand, most businesses are not happy. Moreover, capital is not some homogeneous monolith; there are different, often conflicting, fractions of capital and competing international and domestic capitals. What is good for one fraction or region is not necessarily good for all. Inflation is a case in point. In its mild variety, it helps some businesses, especially those indebted to banks and other financiers or relying on exports—in the first case, because the dollars with which the loan is repaid are cheaper; in the second, because inflation reduces the value of your currency relative to other moneys, so your goods become cheaper for foreign buyers. But by the mid-’70s, inflation had reached a level that could not be called “mild,” and it was making unemployment worse. It is fair to say that pretty much nobody was happy.
This situation—high or rising inflation and unemployment, so-called “stagflation”—seemed to contradict the fundamental tenets of “Keynesian” economic theory. Capitalist governments across the global North, Scandinavian left-social democrats and US right-conservatives alike, faced a difficult dilemma. This was especially true with regard to growing unemployment, to which even conservatives are sensitive given its influence on election outcomes. If states chose to try to stimulate spending with loose money and fiscal programs, inflation would almost certainly accelerate. If they chose to clamp down on state spending, drive up interest rates, and choke off inflation, the effects on unemployment were sure to be terrible. In the end, as I mentioned, many of the most powerful nations struggled from the late ’60s to the late ’70s, arriving at option two after experimenting with option one.
One of the more common paths this transition took—in Canada, the US, and the UK among others—had three basic steps:
The best-known example of step 3 is the so-called “Volcker coup” of 1979–82. Paul Volcker was appointed chairman of the Federal Reserve (or the “Fed,” the US central bank) at the end of Jimmy Carter’s single presidential term, and remained through most of Reagan’s term of office.44 The Volcker coup is best described as the use of US monetary authority to squash inflation no matter how many jobs, how many social services, or how much human welfare it cost. In a period of only a few months, Volcker pushed US short-term rates up from about 5 percent to about 15 percent (and that was just the federal funds rate—the rate at which banks borrow reserves from each other—retail rates, the ones you and I have access to, were far higher). The rapid rise in rates slowed the economy to a crawl, and borrowing, investing, and spending dropped off a cliff. Inflation fell from 13 percent in 1980 to 3 percent three years later.45
The objective, as I said, was to choke off inflationary pressure, to protect the domestic value of the US dollar, whose purchasing power was diluted by inflation. In turn, this would buoy its value on foreign exchange markets, which had fallen significantly in rapid inflation, reducing American economic power, and making the US dollar a much less useful tool of geopolitical influence. With the dollar plummeting, for example, why would OPEC countries want to keep it as the currency used to buy oil? Dollar devaluation reduced oil revenues. So it was important to kill inflation and save the dollar for both domestic and internationally strategic reasons.
But why did the dollar’s value relative to other currencies fall in the first place? It fell because when a country experiences inflation, the purchasing power of its currency declines, and basically becomes a losing bet: you buy it on the international currency exchanges today, when it can buy x, y and z, but when you sell it tomorrow, it can only buy x and y. In a mode of production in which value is the form wealth takes, it does not make sense to hold your wealth in a money that is diminishing in value. Consequently, when inflation is a problem for a country, other countries and financial institutions don’t want to hold their currency, so they try to sell it. When they offer it for sale, they find almost everyone else is trying to sell it too, creating an oversupply on the market, which only further reduces the value.
In recent history, the US dollar has been less subject to these vicissitudes than almost every other currency because of its centrality to the world economy. Even since it gave up its place at the hub of the Bretton Woods system, it remains the currency with which nations buy oil, and the form in which many, if not most, countries hold their foreign reserves (the liquid assets the state sets aside, almost like a savings account, to cover international expenses, purchase foreign exchange for imports, etc.). However, this starring role causes a lot of trouble when the US dollar loses value, or threatens to lose value. A declining US dollar affects many other nations; certainly every advanced capitalist economy, and no small proportion of developing countries as well. Some of them are hurt even worse than the US. As noted earlier, Nixon’s attempt to inflate his way out of crisis was not only directed at domestic problems. He was also effectively trying to export inflation, and reduce the real value of the US foreign debt (since the dollars in which the US owed its debts would be worth less than those originally borrowed).
These dynamics highlight an essential driver of the financialized global economy, a driver that is sometimes obscured by everyday “common sense.” Common sense tells us, for good reasons, to think of interest rates as a cost. Most of us, after all, are consumers in some way or another, and many of us are debtors too: credit cards, payday loans, car or student loans, mortgages. So when we see “Interest Rates Rising” in the headlines, we think, “Oh, that’s bad.” For us, it means the things we need or want to purchase, especially big-ticket items like houses and cars and educations, will cost more.
But a significant part of the global economy—arguably the most important part—is coordinated by people who understand things in a completely different way. If you are a lender, or a bond trader on international money markets, when you see “Interest Rates Rising” on the front pages, you think, “Excellent.” For you, interest rates are not a cost, but a return that makes you money. If interest rates rise in a nation, that makes its currency more, not less, attractive to many international players. Not only can that country’s currency buy more on international markets, but its bonds offer a higher return. So in many cases, the interests of finance are diametrically opposed to those of (some) businesses and almost all household consumers. What you and I experience as cost is their return. And, for good or ill, the international economy (especially the money and capital markets), operate according to their preferences, not ours. Whenever we are talking about global capital, there is a significant portion for whom interest rates are profit, not cost. There are exceptions, but for finance capital, it is fair to say higher is better (to a point, of course; you don’t want capitalism to collapse because no one can get credit in a major economy—this was partly what Keynes feared).
To return to our story, a rising dollar and US high interest rates in the wake of the Volcker coup had substantial but unequal effects on different groups in the US. Not only did high interest rates make borrowing very expensive, which basically stopped manufacturing growth dead, but export-oriented manufacturers were put in a tough spot by high currency values, since it made their goods more expensive for foreign purchasers.
A Brief But Crucial Aside on Bond Markets
This trade impact is one manifestation of a crucial problem in international capitalist political economy, one very important from a social justice perspective. When an economically influential nation like the US changes its interest rates, especially when it makes its currency and bonds more attractive to finance capital and foreign investors, it affects virtually every other nation in the world. Like the US, at any one moment in time, most nations owe money to international creditors, or want to raise money, say, to pay for domestic infrastructure. The principal arena of this international credit and debt activity is the notorious, much-discussed-but-rarely-explained “bond markets.”
Because bond markets are so important to modern capitalist governance, it is worth pausing to explain how they work. Here’s how: if the government of a nation—Brazil, for instance—wants to pay for infrastructure, service some debt, or undertake other major expenditures, the principal means to obtain the necessary funds is the international bond market. To raise the money, Brazil must issue bonds, which are also called “debt,” in the form of repayment contracts of predetermined length. Bonds have a face value, known as “par” (say $100,000 for this example, but they can have smaller denominations), and a predetermined “maturity” or term, at the end of which they are “redeemed.” Most states issue both “government bonds" (denominated in their own currency) and “sovereign bonds" (denominated in a foreign currency, usually a widely trusted “reserve” currency, like the US dollar), for a wide range of maturities, from one month to thirty years. In other words, states sell bits and pieces of their debt (i.e., the claim to a certain amount of repayment from that state), which purchasers then hold, and for which they are repaid once the debt contract is up. Most states, especially in the developing world, tend to auction five- and ten-year-term debt, but in this brief explanation we will use one-year bonds, since the idea is the same and we don’t have to work out compound interest.
In this example, each bond represents a claim on the Brazilian government for $100,000 in one year’s time. Since bond dealers are not going to purchase bonds for “par,” to be repaid the same amount they loaned with no interest on top, most bonds with maturities of more than a year have a “coupon rate.” The coupon is the annual interest rate the issuer promises bond-holders, who will also get the “par” value when the bond is redeemed at maturity. In addition, when the Brazilian state auctions or “floats” bonds (usually with the help of, and often heavily backed by, an investment bank like Goldman Sachs or JP Morgan), not only must it offer a guaranteed annual return in the form of the coupon, but, because it is an auction, the issuer cannot command a particular price for the bond. If you are the US, whose bonds are in high demand (especially when considered a “safe haven” in crises), you might be able to sell your debt at a “premium,” i.e., for more than par. But if you are Brazil, you will most likely have to sell your debt at a “discount,” less than par. Participants in bond markets—big financial institutions and some foreign states—examine sovereign credit history and rating (Brazil is a BBB, a rating determined by the same credit agencies that did such a good job leading up to the subprime crisis) and a host of other factors, and then decide whether or not to bid, and if so, at what price. Once sold, purchasers can either keep bonds until maturity and redeem them, or sell them to another bond trader in the meantime. Whoever is holding them will receive the coupon payments (usually semi-annual), and will bring them back to the Brazilian state to redeem at maturity, to receive the face value.
The tricky, if unsurprising, part is that for Brazil, bond traders will demand a sizeable incentive as an encouragement to lend (i.e., buy bonds). They worry about Brazil’s capacity to redeem them in a year, or that its currency will tank and either devalue the bond or force the state to issue new bonds with a higher coupon, or that social unrest or a collapse of the governing coalition might bring a new government that tells global finance capital to shove their bonds where the sun don’t shine. So traders focus not only on the coupon, but on what is known as the bond’s “yield,” or the profit they can anticipate if they were to hold the bond to maturity (a function of both the coupon and its sale price).46 The higher the coupon, and the greater the discount, the larger the yield. The larger the yield demanded by bond traders, especially relative to other nations’ bond issues, the larger the risk “the market” deems the purchaser to be taking. From a percentage perspective, the difference is the same as an interest rate, if an “implicit” one.
Let’s follow through on the Brazil example to see what this means in practice. For the purposes of convenience, and because we are using a one-year bond as an example, we will assume a “zero-coupon” bond, meaning that all the investment risk is calculated into the difference between par value ($100,000) and the discount Brazil must offer to attract investors. As I write (Spring 2012), Brazil’s $100,000 bond issue with a zero percent coupon and one-year term will fetch less than $89,000. In comparison, if Canada auctioned a $100,000 bond with a one-year term and no coupon, bids might come in at about $98,500.
To see how this works like an interest rate, let’s use these same numbers: Brazil auctions its $100,000 bond for $11,000 less than face value, Canada can sell its for $1,500 less. From a bond trader’s perspective, it looks like this: “If this investment works out, we will earn $11,000 profit from a $89,000 one-year investment in Brazilian bonds, and $1,500 profit from a $98,500 one-year investment in Canadian bonds.” Which is to day that the potential annual return from investing in Brazilian bonds is $11,000 ÷ $89,000, or approximately 12.4 percent. The return on Canadian bonds is $1,500 ÷ $98,500, or about 1.5 percent. These percentages (“yields”) are just like an interest rate charged on a loan by a bank; the bond purchaser is like the bank, and the bond issuer the borrower.47
Bond yields are extraordinarily influential in modern capitalism. If a country must offer higher yields to sell its debt, all else being equal, it is costing them more to borrow money. They are for all intents and purposes “subprime” nation-states. As the not-at-all fanciful Brazil/Canada comparison shows, this can make a big difference, and at the volume of money that can change hands at a sovereign bond auction it is enormous. Brazil might well sell $500,000,000 debt in a year, but a half-billion-dollar, one-year bond issue will raise $54,500,000 less than a Canadian bond issue of the same amount and duration. If that were not burdensome enough, bond yields also have a massive impact on domestic interest rates. Domestic banks will lend to local enterprises only at rates competitive with what they can earn by investing their money elsewhere. If they are confident they can get 12 percent return on their money buying bonds, they are going to need a lot of convincing to lend to a local firm for less.
The same dynamic operates at the international level. If a wealthy nation widely trusted by international finance (i.e., “credit-worthy”) were to offer high yields, then yields offered by a nation like Brazil will look less attractive. With no fear of revolutions or regime changes, every big player in the bond market is going flock to the wealthy nation’s auction unless others can match the yield, if not beat it by an attractive margin. So, if the US, for example, is offering great rates to global financiers, then no one is going to buy Brazilian or any other bonds unless they offer even higher returns, since they are not considered as credit-worthy as the US. Moreover, most vulnerable developing world countries are excessively indebted to the IMF, the US, and others, debts that are frequently short-term and denominated in US dollars (which rising interest rates make more expensive and which exports thus have less power to earn). Short-term debt, combined with domestic structural problems that cannot be solved in the short term, means a developing nation cannot meet its obligations to international lenders and bond-holders. It is thus forced to renegotiate the terms of the outstanding debts at different (punitive) interest rates.
In the context of the current financial crisis, the US is not offering high yields on its bonds. On the contrary, they are lower than at perhaps any previous moment in history. As I write, the US can almost borrow money on the international capital markets for free. The yield on a one-year Treasury security, for example, is 0.19 percent. If inflation is higher than that, the US state enjoys a negative real interest rate—international financial capital is effectively saying it is willing to pay for the right to lend to it. But back during the crisis that led to the Volcker coup (to return to our story), US interest rates skyrocketed, and other nations had to follow suit, just to prevent international finance from dropping their currencies and bonds in favor of those of the US—and in the process killing non-US exchange rates and economies. So, with the Volcker coup, the rest of the world had to raise their rates to comparable levels, meaning the Fed’s vicious recessionary monetary policy rapidly diffused across the globe.
One of the better-known results of this process was the Latin American debt crisis. In the early 1980s, many Latin American countries (and others too) who had borrowed enthusiastically throughout the 1970s were forced to renegotiate the terms of international loans. They found themselves in a market demanding exorbitant interest rates, up to 20 percent (compared to 6 or 7 percent in the mid-1970s).48 They could never agree to these loans and expect to actually meet their payment obligations, and many defaulted. The whole continent went into a decade-long tailspin.
From Liberalism to Neoliberalism
What I have discussed thus far in this chapter is a set of processes frequently grouped together under the umbrella concept “neoliberalism.” Neoliberalism is a term currently used only by its critics; its champions, including the leaders of most capitalist countries, do not proclaim themselves “neoliberals.” If you hear the word today it is almost certainly used derisively. Indeed, for a while, “neoliberalism” was used everywhere in radical or progressive circles to describe the ills of the modern political economic order. However, although there are some good reasons for describing that order as “neoliberal,” only occasionally did anyone bother to say what neoliberalism was, or why it named anything more than a remarkably successful form of capitalism.
At first, I was unconvinced of the need for the term, but I was so relentlessly dressed down for my skepticism by people I respect that I eventually decided to take it more seriously. I am glad I did—because I was wrong. Neoliberalism may indeed be remarkably successful capitalism(s), but it is not adequately understood on these grounds alone. My error was first exposed when I looked at how “neoliberalism” helped explain the work of the IMF.
The IMF is one of the most important frontline units in the diffusion of neoliberalism beyond the wealthy world. It has been a key player in many of neoliberalism’s most notable disasters, including the institutionally imposed starvation, poverty, and indebtedness due to the global North’s so-called “management” of the Latin American debt crisis. Much of this devastation is associated with the IMF’s role in the “structural adjustment” of developing world national economies. Although the IMF was not originally designed to do this work, by the 1980s one of its principal objectives was to remove what it identified as “structural” obstacles preventing client states’ “integration” into the global economy, especially via trade, but also via financial flows. The means to this end are now known as “poverty-reduction strategies” (formerly “structural adjustment plans”)—contractual conditions the IMF imposes on its borrowers, including changes in governance borrowers must undertake to receive an IMF loan. Until the Eurozone crisis (see Chapter 7), these borrowers were mostly developing countries.
Why, in the IMF’s view, is international economic integration good for everyone? The IMF’s policy programs are designed with particular theories in mind. On the economic side, we have the classical political economy discussed in Chapter 2—the ideas of Adam Smith and the neoclassical economists and policy makers who consider themselves his modern disciples. The political theory side is underwritten by a doctrine that goes hand in hand with classical political economy: classical liberalism.
“Classical liberalism” gets its name because (a) it is “classical” in that it came before the modern age; and (b) it is “liberal” because it believes, for reasons that Smith and others laid out, that society should not be “constrained” by the state or any other force, because the individual freedom to seek out opportunities for profit and utility is the necessary corollary of the idea that the pursuit of self-interest is the golden road to collective wealth. The IMF may not describe itself as “Smithian” or “Ricardian,” but its approach adheres pretty closely to Smith’s and Ricardo’s views (at least as they are understood by modern neoclassical economists). And their views, as you will remember, suggest that anything that prevents specialization, trade, and innovation—anything that prevents enterprise from pursuing profit—is a bad idea.
So, to return to my initial resistance to the term “neoliberalism,” how different is the new variety from classical liberalism? Clearly, it uses new technical tools and institutions (like credit default swaps and the World Trade Organization), and it dominates economic knowledge production across the globe in a way the original liberalism never did. But is it really any different from what was going on in the UK and the US in the 1920s? Or Britain in the 1850s, for that matter? To answer this question, let’s return to the IMF. Its constituent policy prescriptions have three main objectives, which, in the case of the IMF’s loans, become “conditions” that must be met to receive funds:
As this outline of the neoliberal policy package shows, neoliberalism is not merely a way to specify the modern variety of classical orthodoxy, but a description of at least two powerful and intertwined contemporary economic dynamics: globalization and financialization. Neoliberalism can be understood as the historical conjuncture, and political legitimization (via both coercion and consent) of these two processes. Globalization is the integration of the international economy via trade. The original version of liberalism certainly involved globalization, but without the kind of financialization we have today with neoliberalism—or at least, back then, finance played a different and subordinate role as investor in productive enterprise.
However simplified, this definition of neoliberalism is helpful since it allows us to identify some of its novel historical and geographic dynamics. It enables us to understand the differences between what is sometimes called the “first era of globalization”—British free trade imperialism in the nineteenth century—and what we call globalization today (by which we mean something more specifically neoliberal). In the first era of globalization, the era of classical liberalism, the term meant international economic integration via trade and production networks, especially trade in goods and primary commodities. Indeed, as measured by international trade, the first era of globalization was as integrated as the present.49
In our present era of neoliberal globalization, the term means international economic integration via trade and financial channels. In contrast to the first era of globalization, today the movement of goods and services, and the flows of often untethered capital, are equal but often independent partners. Obviously, they are not always working together for the same purposes, nor do they always cooperate (think about the possible differences of opinion between finance and industry on interest or exchange rates mentioned in Chapter 3). My point is that “neoliberal” globalization is driven as much by finance as by trade, whereas nineteenth-century “liberal” globalization was dominated to an extraordinary extent by traders. The former was the logical form a capitalist internationalism that emerged in a mercantilist geographical and political matrix would take. It also explains free trade imperialism’s dependence on colonialism, the geographical infrastructure mercantilism produced. Wall Street’s “relative autonomy” from “Main Street” today would have been impossible in the nineteenth century, when finance was the handmaiden of a Main Street economy that enriched itself via mercantilist methods.
The simultaneous explosions of financialization and globalization in the last thirty or so years have been interdependent. There are times when they help each other and times when they hinder each other, but they both depend on similar policy environments. It is difficult these days to integrate internationally via trade and escape the reach of global finance. Technological change has also played a big part. Much of global trade would be impossible without recent improvements in transportation, refrigeration, etc. And, technology has also been a key factor in the capacity of finance to shape globalization, especially increases in the speed and volume of information transfer across space and among market participants. In addition, the technical and analytical changes made possible by computerization (especially complex modeling and “financial innovation”) have facilitated the “securitization” of income flows virtually anywhere on the globe, at almost any point in the future.50 This has surely helped financialization to accelerate, and even take the lead in, neoliberal globalization.51
What David Harvey calls “space-time compression” may be the best way to understand the neoliberal era, and how it differs from the classical era. He uses the concept to describe how the dynamics of capitalist development effectively blur the distinction between space and time (at least from an “economic” perspective), while at the same time they work to shrink or compress this new space-time. The idea was first developed in depth by Marx, in his notebooks now published as the Grundrisse. The gist is that capitalism tends to evolve in a way that makes problems posed by space (lengths of supply chains, geographical barriers like oceans, the physical structure of urban space) increasingly indistinguishable from problems posed by time (the time it takes to realize return on investment, or the slowdown in economic activity at night). Over time, technological change has meant that spatial problems that used to seem insuperable are increasingly understood in terms of their temporal features. It is easier to get commodities to and from major centres on the other side of the world than it is to nearer but more remote locations. As long as communication and transportation are cost-effective and reliable, there is no spatial limit to the length of a supply chain or other contractual relation. Similarly, spatial strategies can overcome formerly insuperable time constraints. If financial markets have to shut in New York because people have to sleep, then an integrated set of global financial centres, in which it always daytime somewhere, can eliminate traditional dead time when no money could be made. Everything gets sooner and closer. One could see nineteenth-century “liberal” globalization in this light, but it was more accurately an attempt to deal as profitably as possible with given “natural” obstacles to capital accumulation.
Indeed, a defining quality of that earlier, liberal globalization—both states and enterprises—was long-term commitment to economic projects. Insofar as profit was based mostly on commodity production and trade, and on the quite slow (by modern standards) movement of goods, long-term commitment was absolutely necessary, both in political (colonization) and economic (commodity extraction and manufacture) dimensions. In the accelerated time-space compression of neoliberalism, long-term commitment has not vanished; it lives on in the expansion and increasing complexity of supply chains, for example. However, the volume and pace of economic flows have risen exponentially due to finance, which has taken special advantage of the profitability possible in the increasingly short “instant,” the unit of neoliberal time.
Defining Neoliberalism
Given the above, let’s suggest a definition. Neoliberalism is the ongoing effort, in an inevitably uneven global political economy, to construct a regulatory regime in which the market is the principal means of governance and the movement of capital and goods is determined as much as possible by firms’ short-term returns. Because that global political economy is dynamic, neoliberalism is always incomplete, and is itself uneven.52
Neoliberalism—as a policy program, political project, or historical variation of capitalism—can never be “finished.” As soon as anyone thinks all the loose ends have been tied up, the very dynamism of capitalism (and the social world as a whole) changes the terrain and more neoliberalization work has to be done. The vigilance this situation requires makes neoliberalism far more flexible and agile than is often assumed. Its policies and regulations necessitate a nimbleness that is well-suited to a regulatory regime in which the movement of capital and goods is determined as much possible by almost instantaneous changes in short-term profitability. This remarkable regulatory regime can make it possible to earn or lose hundreds of millions of dollars in the few minutes following an earthquake in Honduras or a brief shift in exchange rates.
This is a crucial aspect of neoliberal political economy that we find echoed in the rise of finance (see Chapter 6). Neoliberalism is not just about getting rid of rules, or “deregulation.” Removing tariffs, capital controls, currency pegs, restrictions on foreign ownership, and so forth are all essential elements of neoliberal regulatory programs, abolishing rules that limit firms’ opportunity to maximize short-term returns. But states and firms and international institutions need not only to eliminate rules, they must also create new ones, imposing, extending, or deepening regulatory or legal structures where they were previously underdeveloped or nonexistent. For example, countries the world over have established intellectual property rights regimes for everything from medicinal plants to corporate logos, often where no such legal frameworks existed before. That is not deregulation by any stretch of the imagination. Jamie Peck and Adam Tickell were among the first to point out these complexities in “actually existing neoliberalism,” which they label “roll-back” (deregulation) and “roll-out” (reregulation). Neoliberalism has always involved both.
As for the use of the market as a means of governance, one of the best examples can be found in the IMF’s standard structural adjustment policy package. By force-feeding nation-states its neoliberal medicine, the IMF produces a situation in which the market—foreign exchange markets, global commodity markets, and/or equity (stock) and bond markets—becomes the principal means though which the behaviour of nation-states, firms, and individuals is governed. When the package is accepted (however forcibly) by a borrower-state, it is effectively accepting that markets have the ultimate power over its behaviour—judge, jury, and executioner. Insofar as market-mandated conduct is precisely the goal of neoliberal policy regimes, who better to govern it than the market itself? “Bonds not bombs,” we might say—if it were ever that simple.
37 Bretton Woods also established the General Agreement on Tariffs and Trade (GATT) to monitor and arbitrate international trade disputes. GATT had no binding power, and in the 1990s, it was replaced by the World Trade Organization (WTO), a world free-trade police force, with fully enforceable powers.
38 “Convertible” monetary systems get their name from the fact that, at least in principle, all money is at any time “convertible” into its value in the precious metal standard. In theory, this rules out the problem of excessive increases in the money supply (see Chapter 3).
39 Although the term “Keynesian” has come to describe the deficit-financed welfare function of the state, as discussed in Chapter 2, it is in some ways quite far from what Keynes’ theory suggests and the policies he endorsed. While he recognized the temporary need for state debts, he was no fan of permanent welfare mechanisms. Indeed, the massive infrastructure of the modern welfare state would have almost certainly alarmed him.
40 Margaret Jacobson and Filippo Occhino, “Labor’s Declining Share of Income and Rising Inequality,” Federal Reserve Bank of Cleveland Economic Commentary, 25 September 2012, http://www.clevelandfed.org/research/commentary/2012/2012-13.cfm
41 Whether our present slump is an “exception” to this rule, or a new rule altogether, remains to be seen.
42 Joseph Stiglitz, Globalization and Its Discontents (New York: W. W. Norton, 2003); Jonathan Ostry, et al., “Capital Inflows: The Role of Controls,” IMF Staff Position 1004 (2010).
43 Andrew Glyn, Capitalism Unleashed (Oxford: Oxford University Press, 2006).
44 Alan Greenspan, whom is commonly blamed (only partly justifiably) for the subprime crisis, succeeded him in 1987, and directed the Fed until 2006.
45 As an aside, Volcker has been in the news again recently, in his role as special economic advisor to President Obama. He has been especially visible with regard to new banking regulations he proposed and presented to the US Congress, which would limit banks’ ability to play the gambling game with their clients' money—regulations, interestingly, he would likely have opposed when he was Fed chair.
46 If the bond were purchased at par, then yield will be equal to the coupon rate, and if the bond were purchased at a premium, yield will be less than the coupon rate. But if the bond was purchased at a discount, then yield will be greater than the coupon rate. In other words, if Brazil sells a $100,000 dollar bond for $89,000 dollars, then when the bond is redeemed, the purchaser profits not only from the coupon payments, but also from the $11,000 deal on the original purchase (because they bought a bond for $89,000 that they redeem for $100,000).
The coupon rate and the difference between par and the bond’s sale price indicate how large a return investors must be promised to give them incentive to purchase the bonds. This is also affected by a country’s inflation rate, which is almost never zero (in Brazil or elsewhere), and can be quite a bit higher in Brazil. This is one reason Brazilian government bond yields are so high. Inflation eats into bond dealers’ profits by reducing the real value of the money in which the bonds are redeemed. This is part of the explanation for finance capital’s and modern capitalist states’ shared obsession with controlling inflation.
47 A more complex variation on this process is exactly how interest rates are set in the capitalist states of the global North: via what would, in any other situation, be considered market manipulation, the state buys and sells its own bonds in an effort to control interest rates.
48 These are nominal interest rates. The change in real rates (nominal rates minus inflation) was even greater, and perhaps more meaningful: in 1975, real international interest rates sat at -2.9 percent. In 1981, they hit 8.1 percent, an increase of 11 percent. Sources: Economic Commission for Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean (Santiago: ECLAC, various years); IMF, International Financial Statistics (Washington DC: IMF, 1987), 113.
49 Increased international trade does not necessarily mean “liberalized trade” in the contemporary sense. While the first era of globalization saw a massive increase in international trade (in exports as a proportion of economic activity, for example), this does not mean that trade was “free” and went wherever it chose. This was the height of British colonialism and, in reality, very few countries and colonies participated in, or benefited from, the explosion in global trade.
50 Securitization is the process through which rights to regular flows of future income—from consumers' credit card payments, students’ loan payments, homeowners’ mortgage payments, pensioners’ life insurance payments, and more—are decomposed and reconstructed so as to be transferable on financial markets (see Chapter 6 for detailed explanation).
51 There is an important chicken-or-egg problem here. To what extent is technical change in any particular instance a cause or an effect of economic change? Many technical advances are initially developed for military applications, but that does not make the question any easier to answer, since the role of militarism in modern capitalism (driver? effect? both?) is not clear either.
52 The neoconservative pundit Thomas Friedman may have made millions telling us otherwise in The World is Flat: A Brief History of the Twenty-First Century (New York: Farrar, Straus and Giroux, 2005), but the world is definitely not flat.