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1 Introduction
Introduction
In the immediate aftermath of the 2008 financial crisis, the viability of globalised financial capitalism was called into question. The fear and uncertainty associated with the crisis shook confidence in the conventional wisdom of neoliberalism and there was a momentary return to “Keynesian” thinking and policies. But as soon as it appeared that these emergency stimuli – accompanied by the rescue of banks deemed “too big to fail” – had stabilised the situation, there was a sharp reversal in policy as concerns about the resulting high levels of fiscal deficits and public debt trumped concerns about the nature of the system that had produced the crisis; and austerity replaced stimulus, first in the Eurozone and then more broadly.
More than a decade later, despite widespread unemployment, growing social unrest, increasing poverty and an ever-expanding gap between the wealthy and the rest, remarkably little has changed. The litany of high-profile systematic misbehaviour on the part of financial actors and institutions – and the much criticised culture of the international financial sector – has failed to produce an effective response. Even the International Monetary Fund (IMF) – arguably the strongest proponent and promoter of neoliberalism – is questioning its ability to deliver on its promises.1 All of this raises the question: Why has so little changed?
In his book, The Affluent Society, John Kenneth Galbraith emphasised the inherent conservatism of the ideas used to interpret economic and social life; and he identified the dominant set of such ideas as “conventional wisdom”, the essence of which is acceptability. Thus, those who re-iterate the conventional wisdom are reassuring and afforded respect.2 Galbraith (1999) went on to argue that the conventional wisdom gives way not so much to new ideas as to the “massive onslaught of circumstances with which it cannot contend” (p. 17). This makes space for alternative ideas to challenge the dominant orthodoxy. However, the alternative ideas that come to form the replacement conventional wisdom are not evolved in a vacuum; they are incubated by critics of the existing conventional wisdom, whose ideas gather increasing traction as the “massive onslaught of circumstances” builds up.
The purpose of this book is to address the question of why – in the years since the 2008 financial crisis – we have not (perhaps yet) seen a shift in the conventional wisdom.
The book’s main focus is the United Kingdom (UK); but the UK is an integral part of the system of globalised financial capitalism, so the analysis will be located in this broader international context, in which Britain holds a unique position. It is one of the first countries to develop an industrial base and a centre for international finance; it is also one of the first to globalise, de-industrialise and re-financialise. Peculiarities of the British state also make it interesting. It is legally constrained in some ways through a flexible version of the rule of law; but relatively unfettered in others, as a result of having no codified constitution. These characteristics have remained relatively constant despite both globalisation and membership of the European Union (EU). The British state also has a long history of being intertwined with finance, from its early support for merchant trading companies and establishment of the Bank of England in 1694. It is also a fiscally stable and effective state that, contrary to popular opinion, has never been truly “laissez-faire”, even during the nineteenth century. All of this suggests that the UK has the capacity to change and develop, despite the fact that the consequences of the 2008 financial crisis continue to plague the economy and financial reforms remain elusive. Exploring the reasons for this is a core component of our study.
This chapter lays out the conceptual and empirical puzzle regarding change in the dominant ideology of neoliberalism; and it develops the notion of the “insecurity cycle” as an analytical approach for explaining why, when and how change in the conventional wisdom – and the policies that accompany it – comes about. The evolution of this dynamic and non-equilibrium cycle is influenced by economic ideas; but vested interests and institutions are inextricably involved in the process, with the relative position of the key socio-economic actors – and the quality of their respective governing institutions, inter-relations and relationship with the state – having an important influence on both the evolution of the system and their location within it. The chapter concludes by drawing together the key analytical themes that will be explored in the sections and chapters to follow.
The “insecurity cycle”
During the century since the implementation of David Lloyd George and Winston Churchill’s controversial “Liberal” social reforms, there has been an ongoing struggle between capital and the promotion of the “self-regulating” market, on the one hand, and, on the other, a functional welfare state which takes the view that the economy should serve society – rather than the other way round. This was very much Karl Polanyi’s (1944) understanding of the relationship between economy and society, which forms the basis for beginning to discern what might be termed the “insecurity cycle”. Other significant ideas informing its nature and dynamics can be found in Michal Kalecki’s (1943) assessment of “political aspects” of the cycle and the role of institutions and powerful interest groups in driving or inhibiting policy maintenance and change; in John Maynard Keynes’s (1936) analysis in which cycles are driven by fundamental uncertainty – with the tendency of market capitalism to generate involuntary unemployment and excessive inequality – and an important role for the state in stabilising them; and in Hyman Minsky’s (2008 [1986]) insight about the inherent instability of the free market economy – particularly with respect to finance – with financialisation being a long-term trend within capitalism.
The dynamic nature of such a cycle arises from two opposing tendencies within democratic capitalism – market liberalisation and social protectionism. Wolfgang Streeck (2016) describes democratic capitalism as
a political economy ruled by two conflicting principles, or regimes, of resource allocation: one operating according to marginal productivity or what is revealed as merit by a “free play of market forces”, and the other based on social entitlement, as certified by the collective choices of democratic politics.
(p. 75)
He goes on to observe that whilst “governments are theoretically required to honour both principles simultaneously … substantively the two almost never align” (ibid.). Moreover, because democratic politics is organised at – and confined to – the level of the nation state, there are limits on the ability of the democratic state to effectively intervene in the protection of society from the consequences of global market forces, particularly with respect to finance. Thus, central to our thesis is the idea that a capitalist economy must have an effective state or political realm, particularly in relation to finance; but that, at the same time, certain aspects of capitalism, including the nature of the international financial order, limit the capacity of nation states to protect society from the destabilising effects of the market.
In the British case, given that powerful vested interests and other institutions tend to mitigate in favour of free market capitalism – as does the narrowing of the political options available to the electorate – the cycle has historically been skewed towards market liberalisation. Movement away from this position has typically only ever been preceded by an extended period of high levels of uncertainty – and not a little fear – in some or all quarters, with free market capitalism giving ground only to preserve its assets and influence, ready to push back as soon as the appearance of stability returns.
To illustrate the cycle and the forces and factors within it, as well as to identify the tipping points likely to either drive or inhibit change, we will examine periods in British political and socio-economic development during the past century, when some of the most radical changes in the conventional wisdom – and the policies informed by it – took place. Building on the insights of Polanyi, Kalecki, Minsky and Keynes, discussed below, we will examine the circumstances that created the environment within which different ideas gained traction and ultimately reconstituted the dominant orthodoxy. As Keynes (1924a) observed, to make sense of contemporary economic developments, it is important to “contemplate the particular in terms of the general … [and to] study the present in the light of the past for the purposes of the future” (p. 322). Thus, we will consider the question of paradigm change in the light of both history and current developments.
The study begins by tracing developments of the nineteenth century – during which a divergence in Britain’s economy and society was first identified – in order to locate the twentieth-century shifts in insecurity cycle in context. We then turn to the Liberal social reform era that preceded the First World War – and the attempts to restore the pre-war liberal economic order that followed it. However, the experience of the Second World War – which seemed to justify not only “Keynesian” ideas about the role of the state in managing the economy but also its responsibility for social welfare provision – produced a post-war “consensus” that witnessed the retreat of laissez-faire and the advance of “Keynesianism”. The “stagflationary” 1960s and 1970s reversed this process, with the questioning of Keynesianism and the promotion of pre-Keynesian “neoliberal” ideas. We are currently in what might – or might not – be a third Galbraithian episode, with neoliberalism being challenged by the money market frenzy that followed the 2007 credit crunch and the resulting crisis which paralysed the financial system, triggering the deepest recession since the 1930s. As yet, it is unclear what the new conventional wisdom might be as theorists and policy makers thrash around looking for alternatives – or, indeed, whether a replacement paradigm will emerge.
Conceptualising the insecurity cycle
Since the late nineteenth century, the British state has alternatively used its power to create and maintain the “self-regulating” market and to protect individuals and groups within society from its adverse effects. In this context, John Ruggie (1982) suggests that “states and markets are complementary institutions” (p. 383); but he warns that “markets that societies do not recognize as legitimate cannot last” (Abdelal and Ruggie 2009, 152). Streeck (2016) argues that the legitimacy of post-war democracy was based on the premise that states have the capacity to intervene in markets and correct their outcomes in the interest of citizens (p. 52).
The nineteenth-century liberal economic order was informed by the idea that an economy is a collection of (national and international) markets, with its own principles and logic, that is somehow separate from the social and political relations of the society in which it is situated. In this context, the free movement of goods, services and capital is assumed to deliver both economic efficiency and distributional justice. Polanyi (1944), however, contended that such “dis-embedded” markets – particularly in finance – are unsustainable as a consequence of their perpetual conflict with democratic forces in society.
Polanyi’s historical research revealed that economic activity originally evolved to serve human needs – and that until the rise of nineteenth-century liberal capitalism, where they had existed at all, markets were subject to various social, religious and political controls to ensure that they did. However, during the nineteenth century – justified and reinforced by the conventional wisdom of the English Classical political economists, notably by the work of David Ricardo and Thomas Malthus – industrialisation and the rise of the laissez-faire market economy produced a radical shift, which Polanyi described as the “dis-embedding” of the economy from society.
From Polanyi’s reading of history, this could be traced to a key event of 1834, the Poor Law Amendment Act, which sought to abolish (and in practice severely restricted) outdoor relief. This forced the unemployed poor, who were unable to access any other form of financial relief, either to enter the workhouses (which were becoming progressively more oppressive) or to obtain work at whatever wage was on offer. In Polanyi’s analysis, this created a free market for labour. From this point onward, until the 1870s, after which various labour market protections, including rights for trade unions, were enacted, free market ideology enjoyed almost unchallenged ascendancy in Great Britain – and its influence rapidly expanded abroad. In mainstream economics and finance, it remained dominant until the 1930s.
Polanyi recognised that the market is embedded in a complex social, political and institutional context which ultimately defines and shapes it. Interested in the role of institutions in the organisation and functioning of the socio-economic system, he viewed the market as embedded in institutions – including legal institutions and the rule of law, civil society institutions, financial institutions and industrial relations institutions – all of which play an important role in its effective functioning by helping to support the trust, shared understanding and enforcement of contracts upon which market transactions depend. In Polanyi’s view, the market forms part of the broader economic system, which itself is part of society; as such, instead of being an end in itself, the market economy serves as a means to more fundamental socio-economic objectives.
However, he identified a tension between what he considered to be the two organising principles of modern market society: “economic liberalism” and “social interventionism” (Polanyi 1944 [2001], p. 239), each with their own objectives and policies as well as support from the groups within society whose interests they are seen to serve. The aim of economic liberalism is to establish or restore the self-regulation of the system by eliminating interventionist policies that obstruct the freedom of markets for land, labour and capital. Through laissez-faire and free trade, social relationships are embedded within the economic system and subjected to unregulated market forces with support from the propertied classes, finance and industry. By contrast, the aim of social interventionism is to embed the economy within social relationships, thereby safeguarding human beings and nature through market regulation, with support from those adversely affected by the destabilising consequences of economic liberalisation and the self-regulating market – notably the working classes.
Polanyi argued that there is a conflict between the interest of capital in freeing itself from the constraints of society – and society’s interest in protecting itself from the social dislocation of the market (particularly that of finance). This generates a “double-movement” of counter-reactions by both capital and society, mediated by politics and the legal process. Without compensating social intervention, Polanyi contended that the pressure on vulnerable individuals and groups within society, arising from attempts at market self-regulation, would generate resistance in the form of labour, civic, social and political movements. If these become widespread – and discontent with the damaging effects of the self-regulating market intensifies – social order becomes more difficult to maintain; and in an effort to safeguard the existing system, political leaders may attempt to deflect dissatisfaction by scapegoating. However, at some point, the state is likely to be put in the position of having to decide whether to intervene on behalf of those affected or to risk social breakdown. In turn, the impairment of market forces associated with protective regulatory measures could set into motion a counter-movement on the part of capital to attempt to protect its own interests by freeing itself from social and political constraints. In response, the state would have to decide the degree to which laissez-faire should be restored and social protections and market regulations relaxed.
Thus, for Polanyi, market forces are created and sustained through political decisions; and “re-embedding” the economy in society re-establishes social control over economic processes by means of democratic representative institutions. In his view, “socialism … [is] the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society” (Polanyi 1944 [2001], p. 242).
Polanyi thus brings the role of government and politics to the centre of the analysis of market economies, as a consequence of the pivotal role played by the state and legislative processes in creating and maintaining socio-economic systems, by simultaneously promoting and regulating the market economy. In this context, because economies reflect the principles and values of the societies in which they are located – and the relative balance of power among the groups within – the question of whose interests they are designed and maintained to serve (special interests or the general interests of society as a whole) comes to the fore. Polanyi also highlights th...
