Business as Usual

The Roots of the Global Financial Meltdown

Craig Calhoun, Georgi Derluguian, Craig Calhoun, Georgi Derluguian

• Publisher: NYU Press
• Year: 2011
• Print ISBN:
  9780814772782
• eBook ISBN:
  9780814772799
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Situates the current crisis in the historical trajectory of the capitalist world-system, showing how the crisis was made possible not only by neoliberal financial reforms but by a massive turn away from manufacturing things of value towards seeking profit from financial exchange and credit. Much more basic than the result of a few financial traders cheating the system, this is a potential historical turning point. In original essays, the contributors establish why the system was ripe for crisis of the past, and yet why this meltdown was different. The volume concludes by asking whether as deep as the crisis is, it may contain seeds of a new global economy, what role the US will play, and whether China or other countries will rise to global leadership.

Contributors include: Giovanni Arrighi, Gopal Balakrishnan, Manuel Castells, Daniel Chirot, Fernando Coronil, Nancy Fraser, James K. Galbraith, David Harvey, Caglar Keyder, Beverly J. Silver, and Immanuel Wallerstein.

The three volumes can purchased individually or as a set.

Business as Usual is the first part of a trilogy comprised of the first three books in the Possible Future series.

Volume 1: Business as Usual
Volume 2: The Deepening Crisis
Volume 3: Aftermath

The three volumes are linked by a common introduction and can be purchased individually or as a set.

CHAPTER 1

The End of the Long Twentieth Century

Beverly J. Silver and Giovanni Arrighi

Writing almost twenty years ago—shortly after the collapse of the Soviet Union—the British historian Eric Hobsbawm pointed to a widespread sense of confusion about where the world was headed: he wrote that it was as if we were “surrounded by a global fog.” The citizens of the world at the end of the twentieth century “knew for certain that an era of history had ended. They knew very little else.”¹ In the two decades since this was written, the shape of the “new era” has continued to take form, but the “global fog” has not dissipated.

Understandings about the direction of global change have shifted wildly. In the late 1990s—with the long economic boom in the United States and no serious challengers to US global military power—it became common to hear predictions of an impending “Second American Century.” Such predictions reached a high point in the aftermath of the 1997 East Asian financial crisis. But then the tables turned, first, with the bursting of the New Economy stock-market bubble in the United States in 2000–2001, followed by the debacle in Iraq and the failure of the Bush administration’s Project for a New American Century. With the 2008 US-centered financial meltdown and the continued rapid growth of China, talk of a Second American Century faded. Instead, speculation about an impending Chinese Century took off. At the same time, speculation about the demise of US global dominance reached levels not seen since the 1970s, when the US defeat in Vietnam, oil shocks, and economic stagflation produced a sense of deep crisis.

How can we make sense of these wildly shifting perceptions about what era of world history we have entered? In this chapter, we argue that a comparison with past periods that are broadly analogous with the present can help both in explaining the shifting perceptions and in dissipating the global fog that still surrounds us.² But to what period should we compare the present? It has become relatively common to point to similarities between the beginning and the end of the twentieth century. In both periods, finance capital rose to a dominant position in the global economy relative to capital invested in production. In both periods, moreover, the financialization of economic activities proved destabilizing, culminating in major crises, notably in 1929 and 2008.

These two periods of financialization are indeed analogous. But the rise of finance to a dominant role in world capitalism was not unique to the late nineteenth and the late twentieth centuries. As the French historian Fernand Braudel has pointed out, the financialization of capital has been a recurrent feature of historical capitalism from its earliest beginnings. Writing in the 1970s (that is, before the takeoff of the latest phase of financialization), Braudel identified three periods of systemwide financial expansion: in the mid-sixteenth century (centered in the Italian city-states), in the mid-eighteenth century (centered in Holland), and in the late nineteenth century (centered in the United Kingdom).³ In this chapter, we take these three earlier instances of financial expansion as the appropriate historical comparisons for understanding the current (fourth) period of systemwide financial expansion.

Like today, each of these past periods of financialization was preceded by a long period of material expansion of the global economy—that is, a period in which capital flowed predominantly into trade and production rather than financial intermediation and speculation. Genoa, Holland, Britain, and the United States successively rose to global preeminence by taking the lead in a major material expansion of the global economy (as was the case, for example, during the US-led “golden age” of Fordism-Keynesianism in the 1950s and 1960s). At a certain point, these material expansions reached their limits (for reasons to be discussed later), and when this happened, the dominant power of the epoch led a systemwide shift away from investment in trade and production and toward financial speculation and intermediation.

A phase of material expansion followed by a phase of financial expansion constitutes what we have called a long century, or a systemic cycle of accumulation (SCA). We can identify four (partially overlapping) long centuries, or SCAs: (1) a Genoese-Iberian cycle, stretching from the fifteenth through the early seventeenth centuries; (2) a Dutch cycle, stretching from the late sixteenth through the late eighteenth centuries; (3) a British cycle, stretching from the mid-eighteenth through the early twentieth centuries; and (4) a US cycle, stretching from the late nineteenth century to the present. Each cycle is named after (and defined by) the particular complex of governmental and business agencies that led the world capitalist system toward the material and financial expansions that jointly constitute the long century.

In all three cases discussed by Braudel, financial expansions led to a dramatic resurgence of power and prosperity for the leading capitalist country of the time (e.g., a second golden age for the Dutch; the Victorian belle époque for Britain). Yet in each case, the resurgence of world power and prosperity was short-lived. For Braudel, the successive shifts by Genoese, Dutch, and British capitalists away from trade and industry and into finance were each a sign that the material expansion had reached “maturity”; it was “a sign of autumn.” Financialization turned out to be a prelude to a terminal crisis of world hegemony and to the rise of a new geographical center of world economic and military power.

Is this pattern repeating itself today? Are we experiencing the “autumn” of US world hegemony? In this chapter, we argue that the 2008 financial meltdown is one of the latest indicators that this is indeed the case. Like the Genoese, Dutch, and British before it, US capital shifted increasingly into finance and away from trade and production as the major world-scale material expansion founded on Fordism-Keynesianism reached its limits in the 1980s. By shifting to a focus on finance, the United States succeeded in attracting capital from all over the world, financing both a major boom in the stock market and a dramatic expansion of the US military. The Soviet Union collapsed under the strain, while the United States experienced its own belle époque in the Reagan-Clinton years. By the late 1990s, the crisis of the 1970s seemed a distant memory, and forecasts of a Second American Century became common.

Seen from the perspective of this chapter, however, those who forecast an impending Second American Century were mistaking the “autumn” of US world hegemony for a “new spring.” Put differently, we are witnessing the end of the long twentieth century—a long century that has stretched from the late nineteenth-century financial expansion through the current financial expansion, a long century that is coextensive with the initial rise, full flowering, and demise of the US-centered era of capitalist world history. The chapter also addresses the question as to whether the “autumn” of US world economic and military power is likely to be seen (in retrospect) as the “spring” of a new world economic and military power, as has been the case during the three previous financial expansions.

In the remainder of this chapter, we compare the present with previous periods of financialization, and we compare the long twentieth century with previous long centuries. We do this in three main steps. In the following section, we identify similarities among the three previous periods of financialization, pointing to patterns of recurrence across time. In the next section, we focus on patterns of evolution. For long centuries should not be understood as primarily recurrent (cyclical) phenomena; rather, the financial expansions that mark the beginning and end of each long century have been periods of fundamental reorganization of the world system. We show how these successive reorganizations have produced an evolutionary pattern in which the dominant governmental-business complex increased over time in size, power, and complexity—including social complexity.

The pattern of recurrence and evolution summarized in the following two sections helps us narrow down the possible alternative futures open to us at this time. But as we argue in the last section of the chapter, there are good reasons to think that we cannot simply project into the future from past patterns of recurrence and evolution. The last part of the chapter identifies significant anomalies that can be expected to make future outcomes deviate from past patterns and concludes with a discussion of “possible futures.”

Recurrence

A repeated theme in the second and third volumes of Fernand Braudel’s trilogy Civilization and Capitalism—which takes us on a sweeping tour from the fifteenth through the eighteenth centuries—is that the periodic resurgence of finance has been a characteristic of historical capitalism from its earliest beginnings. “Finance capital,” Braudel wrote, “was no newborn child of the 1900s.” Instead he points to at least two earlier waves of financial expansion—periods in which “finance capital was . . . in a position to take over and dominate, for a while at least, all the activities of the business world.” The first wave of financialization began around 1560, when the leading groups of the Genoese business diaspora gradually withdrew from commerce to specialize in finance; the second began around 1740, when the Dutch began to withdraw from commerce to become “the bankers of Europe.”⁴

Seen from this perspective, the financial expansions that began in the late nineteenth and the late twentieth centuries are the third and fourth waves of a recurrent world-systemic process. During and after the Great Depression of 1873–96, when it became clear that the “fantastic voyage of the industrial revolution” had created an overabundance of money capital that could not all be profitably reinvested in industrial activities, the British increasingly withdrew from industry to specialize in finance. At the time Braudel was writing his trilogy, the fourth (that is, the current) wave of financialization had not yet taken off; but we can recognize today a repeat of the same phenomenon: that is, when, in the final decades of the twentieth century, it became clear that the golden age of Fordism-Keynesianism had created an overabundance of money capital that could not all be profitably reinvested in industrial activities, US capital switched to specialize in finance rather than industrial production. By the mid-1990s, the share of total US corporate profits on a world scale accounted for by finance, insurance, and real estate (FIRE) had surpassed the share of profits accounted for by manufacturing.⁵

It is helpful to reformulate Braudel’s insights about the periodic resurgence of finance capital in light of Marx’s general formula of capital, which is often understood as depicting the logic of investment decisions by individual capitalists.⁶ Capitalists put their money capital into commodities for use in production (e.g., machinery, labor) with the expectation of obtaining a greater mass of money capital at some future point in time. They do not participate in production as an end in itself. If capitalists do not expect that their money capital will increase by investing in production, or if this expectation systematically goes unfulfilled, then they will tend to move out of production and revert to more flexible (liquid) forms of investment.

But Marx’s formulation can also be understood as depicting a systemic logic. There are phases in which the dominant tendency among capitalists is to invest the mass of their money capital in production and trade, thus leading to phases of overall material expansion. But the very success of any material expansion eventually leads to an overaccumulation of capital that drives down the rate of return in the activities that had previously fueled the material expansion. The attendant squeeze on profits results in a switch: the dominant tendency among capitalists becomes to hold an increasingly large portion of their capital in liquid form, creating the “supply conditions” for financial expansions for the system as a whole. Financial expansions are thus symptomatic of a situation in which investment in the expansion of trade and production no longer serves the purpose of increasing the cash flow to the capitalist stratum as effectively as pure financial deals can.

As already noted, past financial expansions temporarily restored the power and fortunes of the leading capitalist state of the epoch (most recently seen in the Reagan-Clinton belle époque). How has this happened? In very broad terms, the slowdown in the material expansion associated with the initial takeoff of the financial expansion puts a squeeze on the fiscal positions of states, which in turn begin to compete more intensely for the mobile capital piling up in financial markets, fueling the financial expansion on the “demand side” of the equation. The world hegemonic power at any given time (Dutch, British, US), thanks to its continuing centrality in networks of high finance, is best positioned to turn the intensifying competition for mobile capital to its advantage and to gain privileged access to the overabundant liquidity that accumulates in world financial markets. This was clear in the 1980s and 1990s, when the United States succeeded in attracting mobile capital from around the world, fueling a long boom in the United States and provoking severe debt crises elsewhere in the world. The first major debt crisis was centered in Latin America in the early 1980s, producing what the United Nations dubbed “the lost development decade.” Debt crises in eastern Europe and East Asia followed.

In the past, a new systemwide material expansion took off only if and when there was a hegemonic power capable of creating the needed global institutional preconditions (financial, geopolitical, and social). When this was the case—as it was in the 1950s and 1960s, when the US-sponsored global institutions provided a certain degree of security and predictability—capitalists routinely plowed profits back into the further expansion of trade and production. However, such global institutional conditions are not created quickly or easily. In the past, declining powers lost their ability to maintain the necessary global institutional conditions before rising powers had the capacity or inclination to take over the role of leader. Thus, periods of transition from one long century to the next historically have been periods of widespread warfare and economic crises. This was clearly the case in the first half of the twentieth century—with the transition from British to US hegemony. We can see signs of a similar dilemma facing the world today.

Interestingly enough, Marx, in his discussion of primitive accumulation, took note of a historical pattern whereby expansions of the financial system recurrently played a key role in the transfer of surplus capital from declining to rising geographical centers of capitalist trade and production. Marx observed a sequence that started with Venice, which “in her decadence” lent large sums of money to Holland; then Holland lent out “enormous amounts of capital, especially to its great rival England” when the former “ceased to be the nation preponderant in commerce and industry”; and finally, England was doing the same vis-à-vis the United States in Marx’s own day.⁷ Thus, expansions of the credit system played a crucial role in restarting capital accumulation in a new geographical center again and again over the lifetime of historical capitalism—or to put it in our terminology, financial expansions have played a crucial role in launching each new systemic cycle of accumulation.⁸

Put differently, financial expansions historically have been periods of hegemonic transition, in the course of which a new leadership emerged interstitially and over time reorganized the system, setting the stage for a new material expansion on a world scale. Financial expansions have not only been the “autumn” of the existing hegemon; they have also marked the “spring” of a new major phase of capitalist development under a new leadership—that is, the start of a new long century with a different geographical center. But because this process has been neither simple nor smooth, financial expansions have culminated in fairly long periods of widespread systemic chaos.

Evolution

In the previous section, we focused on the similarities among long centuries. If we were to draw conclusions based on patterns of recurrence alone, then we would conclude that we are now in the “late autumn” of US world hegemony and the “early spring” of a new long century with a different (perhaps East Asian) geographical center. We might well be worried that we are entering (or have entered) a more or less long period of systemic chaos, with attendant widespread human suffering. However, precisely because the global system has evolved over time, we are limited in what we can conclude about the present and near future by focusing solely on patterns of recurrence. In this section, we focus on the pattern of evolution.

Figure 1.1 sums up a historical pattern of evolution that can be seen by focusing on the changing characteristics of “the containers of power” that have housed the headquarters of the leading capitalist agencies (i.e., the dominant governmental-business complex) of the four successive long centuries: the Republic of Genoa, the Dutch Republic, the United Kingdom, and the United States.⁹ One key aspect of the evolutionary pattern shown in figure 1.1 is a trend toward an increase in the size, power, and complexity of the dominant governmental-business complex from one long century to the next.

At the time of the Genoese-centered material expansion, the Republic of Genoa was a city-state. It was small in size, simple in organization, deeply divided socially, rather defenseless militarily, and by most criteria a weak state in comparison with all the great powers of the time. Genoa’s wealth made it a tempting target for conquest, but because it lacked any significant military power, the Genoese had to depend for their protection on the Iberian monarchs from whom they “bought protection.” The Dutch Republic, in contrast, was a larger and far more...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Series Acknowledgments
• SERIES INTRODUCTION From the Current Crisis to Possible Futures
• Introduction
• CHAPTER 1 The End of the Long Twentieth Century
• CHAPTER 2 Dynamics of (Unresolved) Global Crisis
• CHAPTER 3 The Enigma of Capital and the Crisis This Time
• CHAPTER 4 A Turning Point or Business as Usual?
• CHAPTER 5 Marketization, Social Protection, Emancipation: Toward a Neo-Polanyian Conception of Capitalist Crisis
• CHAPTER 6 Crisis, Underconsumption, and Social Policy
• CHAPTER 7 The Crisis of Global Capitalism: Toward a New Economic Culture?
• CHAPTER 8 The Convolution of Capitalism
• CHAPTER 9 The Future in Question: History and Utopia in Latin America (1989–2010)
• Notes
• About the Contributors
• Index