Stable instabilities

It would seem that capitalism’s days are numbered when the Frankfurter Allgemeine Zeitung starts reflecting on the tendency of “debt crises” to augur revolution. Such musings – which are either optimistic or apocalyptic, depending on one’s disposition – can be guaranteed to find broad agreement. Capitalism, currently one of the most popular terms in new titles on sociology and economics, is these days is up for conceptual grabs. The belief that “it’s the capitalism, stupid”, though it fails to bear up to close scrutiny, is widespread. So much so that doubts concerning it are almost anathema. You wouldn’t seriously want to dispute that our current plight is the consequence of unfettered finance capitalism, would you?! Moral indignation, however, is a poor counsellor if one wants to understand the situation in which capitalism finds itself today. My thesis is that we are currently pinning something on capitalism that it didn’t cause and which it doesn’t stand for. Blaming capitalism isn’t just a mistake, however: it’s also a form of witchcraft employed by many of those involved to conceal their own, not entirely noble interests.

Capitalism, and above all financial capitalism, so it’s claimed, breeds instability and catastrophes that benefit the banks but harm the great majority of the population. The latter suffer even more when the states that sought to protect the individual from the “markets” themselves become victims of unrestrained speculation. It’s therefore necessary to win back autonomy from the markets in order to generate politically the very stability which the markets couldn’t create. This conviction needs to be examined. That capitalism breeds instability that in turn requires political rectification is by no means self-evident. Nor is this supposed insight old: it appeared during and above all after the Great Depression of 1929. Only then did arguments attributing the lasting imbalances (unemployment) in capitalist economies solely to the internal dynamics of economic development start receiving broad endorsement. This, at any rate, was the message of John Maynard Keynes. His conclusion that the state must actively pursue fiscal and monetary policy in order to remove these imbalances and instabilities was entirely plausible and enjoyed almost unanimous agreement in the post-war period: when in doubt, the state was to create the stability that economic processes alone cannot always produce, let alone automatically. West Germany’s Stability Law of 1967 – which is still in force – duly obliged the state to intervene in order to realise four central points: monetary stability, appropriate growth, a balanced trade budget and full employment. Even contemporaries sensed that this wouldn’t be easy, hence their term the “magic quadrangle”.

The Keynesian argumentation did not go uncontested. Milton Friedman and Anna J. Schwartz raised doubts about the central assumptions of Keynesianism in the late 1950s. They saw the severity of the Great Depression as a product of a mistaken monetary policy. Imbalances, they argued, are the consequence of faulty regulation and a monetary policy that is either overtly restrictive or overtly liberal. When monetary policy is correct, free (financial) markets function flawlessly. This message found an audience during the 1970s and early 1980s at a time when the USA was facing economic woes. It inspired Ronald Reagan’s economic and fiscal policy, the essence of what today is called “neoliberalism”. Reagan’s policies didn’t come out of the blue; indeed, it was only possible to implement them because previous, Keynesian-inspired policies had so clearly failed. At the beginning of the 1980s, all this still provoked fierce debate. In Germany, a great deal of hot air was prompted by a free-market manifesto authored by the finance minister Otto Graf Lambsdorff, which heralded the end of the social democratic-liberal coalition government under Helmut Schmidt.

The idea that markets function flawlessly given the requisite deregulation and a suitable monetary policy was criticised by several economists known as neo-Keynesians. In the 1980s, Hyman Minsky, a pupil of Schumpeter, argued that the close interaction of economic and fiscal development creates inherent fluctuation in protagonists’ expectations of the future. The cycles of boom and bust to which this leads are the product not of external errors but of the internal logic of the process itself. Not only is this plausible, it also charmingly compatible with real economic developments. Nevertheless, Minsky’s position remained a minority view; only now, following the eruption of the 2007/8 financial crisis, has it received what appears to be delayed confirmation. Indeed, the financial crisis has inspired something akin to “relief” among some American economists, since it seems to have reshuffled the cards in the competition of theories. All in all, Minsky was pessimistic regarding government’s ability to regulate financial markets. This pessimism was certainly not uncontested. Paul Davidson, very much a sympathetic reader of Minsky, correctly observed that it isn’t a question of “instability” at all. He argued (albeit before the financial crisis) that financial markets are basically astonishingly stable.

“We are all Keynesians now”

Critical inquiry into what “instability” does and does not mean is indeed very necessary. The constant talk of “instability” in the current public debate belies that fact that it’s entirely unclear what is actually being meant and, above all, how one should conceive “stability”. If “instability” means the continuous structural change of economies and finances, then it’s a necessary attribute of every developing economy. Every innovation means the destruction of old structures. If “instability” refers to the fluctuations of economic development, then it denotes a decidedly stable element of cyclical growth, in which case it would be better not to talk of “instability”. If, on the contrary, “instability” means a tendency towards collapse, a constant state of existential threat, then it is an apocalyptic expectation that is empirically implausible – one would otherwise have to imagine capitalism as a sort of tightrope walker hovering above an abyss. Even assuming that were the case, one would need to explain the fact that capitalism has so far succeeded in “flirting with disaster” where socialism has failed.

Currently, the threat of apocalypse is at best a rhetorical figure for interested parties who expect support in order to minimise potential losses: investment schemes are now demanding that the European Central Bank prints money! Nevertheless, no one seriously wants to claim, perhaps with the exception of bankers and the politicians close to them, that without public support the financial world will fall apart or even be ruined irrevocably. This is all the more true for the rest of the economy. There are historical examples of what happens when there is no state support during a crisis: as a rule, the protagonists help one another in other ways, even if some go under. In any case, they don’t sit by idly or rush headlong towards destruction like lemmings. Sometimes it takes a full-blown crisis to create the incentive for painful change, even if the change is by its nature expensive. Current cant about the general failure of the banks bizarrely represents the latter as helpless. Nothing could be further from the truth! After 1873, numerous banks and traders in New York went bankrupt within the space of a few days. However, those that remained supported one another. A new cycle could begin.

Finally, there is a third understanding of the term, one that seems to be particularly important: “instability” as a counterweight to the “natural equilibrium” of the so-called neoliberal economy. As such it is both a theoretical model and a normative statement on economic reality. This has consequences insofar as “equilibrium” is understood as the normal state of the economy and “instability” an avoidable disturbance. This “normativity” acquires a special spin when “instability” or “equilibrium” are mentioned in the same breath as capitalism. After all, no concrete situation is ever balanced and can therefore always be described as “instable” and requiring of correction.

Many welcome this definition, Keynesians as much as neoliberals, even if their cures differ. It allows capitalism to appear as the great agent of imbalance, the source of instability, with the public argument typically being over whether the imbalances emanate from capitalism’s structure or are “just” the result of the unfettered activity its protagonists. Even here, however, talk of “instability” and “capitalism” remains entirely abstract. Despite all the rhetoric of crisis, the current economic system is extremely stable. Certainly, for the past few years we have been in the deepest crisis since the Second World War. However in Germany at least, hardly anyone has felt the effects directly. The manufacture and supply of goods continues to run smoothly and unemployment has fallen significantly; the currency value remains stable and the euro is broadly accepted. The German economy recovered quickly after the cyclical collapse of 2008/9. At the moment, growth seems to be slowing, but the prospects are by no means bleak. Other European countries are less fortunate. However there is no evidence that capitalism per se has created “doomsday scenarios” in their cases. This is not to deny the fact that social inequality has risen in recent years; it is simply that inequality is not the consequence of any particular “instability” within capitalism. Yet many intuitively refuse to accept these simple facts.

The reason for this is that some symptoms of the crisis are indeed anything but harmless, above all state debt. But these symptoms are not primarily an economic phenomenon: “capitalism”, if one can describe it as a collective actor, wants only to produce and sell. At heart, it is indifferent to questions of social equality: it works in Sweden in the same way as in Spain or Korea. No, the current instability is not necessarily a consequence of the “instability” of capitalism, but the result, among other things, of political efforts to tame this “instability”. Not only have economic, fiscal and monetary policies run up enormous debts, they have undertaken to alleviate the symptoms of the crisis in the financial sector. The crisis was not allowed to fulfil its function. Instead, the cycle was interrupted due to a fear of “systematic” risks; the long overdue bankruptcy of a host of large financial institutions was prevented. Instead of intervening consistently by nationalising the institutions, so as to end certain business practices (which in the past had been promoted), the states “merely” saved the institutions and changed little else – with incalculable repercussions for the now thoroughly debt-ridden states.

The political failures of Left and Right

How could it come to this? This brings us back to the supposedly certain knowledge about “instability” and “capitalism”. To start off with: capitalism is not responsible for high levels of indebtedness and rising interest rates. When it comes to state debt, capitalism has thus far worked smoothly, without a trace of instability. In expectation of particularly good returns, loans are made not only to companies but also to states and public bodies (in return for appropriate risk premiums). If economic prospects worsen, the performance of certain states decreases or the lenders need their money themselves, then there are simply no more loans or loans on other terms, i.e. higher interest rates. This is as correct as it is straightforward – and is only a problem when a state lets its debts get out of hand. This leads to the straightforward conclusion that high interest rates are a consequence of high indebtedness and not their cause. Only when interests rates are high can something like the debt-interest rate spiral develop that currently seems to be gripping Greece. However, Greek interest rates had been at a historical low for more than a decade. One could argue that the banks drove Greece into “debt bondage”. But in that case, why didn’t this game work in the Netherlands, for example? Why were Slovakia and Estonia able to free themselves from the debt trap?

However one twists it, indebtedness is a result of political behaviour that does not want to accept responsibility and instead denounces the “markets”. The real question (and this is relevant not only to the Greek case but also to the US, for example) is: what is behind this enormous indebtedness? A full answer would require reconstructing the history of state activity since 1945. However a number of salient points emerge whose connection to the common perception of “instability” and “capitalism” is not entirely coincidental. After the war, the belief prevailed in the western democracies that the lessons of the interwar period had been learned. The Great Depression was perceived not as the result of a political failure to deal with a chain of unfortunate circumstances closely tied to the consequences of the First World War, but rather as a kind of omen: if the state doesn’t intervene, capitalism will drag us into the abyss! The economic catastrophe in the USA and the political disaster of the Nazi dictatorship seemed to confirm this observation. State policy after the Second World War therefore came to be judged according to how far it succeeded in transforming capitalism into a welfare society and in eliminating economic imbalances.

Given the political move towards mass democracy after the First World War, it was scarcely possible to imagine anything else. After all, the case of interwar Britain had shown that orienting economic and fiscal policy exclusively towards currency stability to the neglect of domestic economic and social interests, as had been the case before 1914, could at worst lead to civil war and at best to social and political unrest. Greece is facing a very similar problem today, with its economic and fiscal policy caught between the Scylla of the euro crisis and the Charybdis of domestic unrest. In any case, after 1945/49 it became clear that, when in doubt, the state should correct the supposed “instability” of “capitalism” through intervention while at the same time ensuring social security and economic prosperity. This worked only as long as the state didn’t actually need to intervene, in other words during the boom years of the 1950s and 1960s. Since the return of the normal cycle of crisis in the 1970s, the state has been largely unable to cope. Between 1960 and 1980, the state share of the gross domestic product in the FRG rose from about 30 per cent to 50 per cent, causing state indebtedness to explode. However to no avail: in 1982, chancellor Helmut Schmidt had to pack his bags, his struggle against the “markets” having failed. Helmut Kohl dreamed, like Schmidt, of economic equilibrium and social prosperity, but altered the tactics. Instead of intervening directly, his government, influenced by Margaret Thatcher and Ronald Reagan, attempted to create the right incentives by deregulating numerous markets; the goal, however, remained unchanged. The crisis of 2007/8 was final proof that this didn’t work either: instead of reducing state debt, de-regulation had only exacerbated social inequality.

The return of beneficent authoritarianism

In the current crisis, the struggle against the “markets” and the “instability of capitalism” has been and will be ratcheted up again; indeed, it looks as if the western governments will continue their campaign against the “markets” to the last drop of their liquidity! A more relaxed image of capitalism and another concept of stability would provide relief. More than anything, it would free us from the expensive fantasy of “equilibrium”. The “armchair revolutionary” Gustav Schmoller already knew that assumptions plausible in theoretical models rarely led to prudent economic policy. The real economy has nothing to do with equilibrium: it is constant change, its dynamism emanating from opportunities and risks. If today’s banks go under, there will be others. In historical terms, less than one in ten companies survive to see their tenth birthdays. One cannot “save” them all – and it is economically nonsensical to want to obstruct or disable economic changes and crises. It is enough that the state helps tackle the social consequences of economic structural transformation. Anything else is impossible.

“Equilibrium” and “stability” are, by any estimation, expensive illusions. Capitalism itself, by its nature stably instable, is in rude health. What does seem to have come to an end, or at least the end of its liquidity, is a mode of politics that seeks to correct the markets and generate general stability and prosperity. So closely has it linked its legitimacy to this doctrine that it now claims that its own end means the end of politics as such. The warning that “if the euro fails, Europe fails too” is treacherous insofar as it makes the existence of a peaceful continent dependent upon the workings of a technical monetary system – as if there weren’t plenty of other reasons for unity in Europe, indeed as if the maintenance of the Brussels bureaucracy is the fundamental lesson of the twentieth century.

At any rate, a mode of politics that ties its own existence to a particular currency is in factual terms far closer to its end than a capitalism that, so far at least, ensures that the supermarkets are full. Particularly since the political problem isn’t only that politics has little to offer other than supposed economic stability. It is also that, in the course of defending this approach, many are clearly willing to abandon good faith, break treaties and neglect to keep the public informed (or only give out information when it’s too late). I don’t want to talk about lies; the prime minister of Luxembourg, Jean-Claude Juncker, has already done that. However, the extent to which public debate and trust in existing agreements has been undermined is exceptional, and this isn’t even to mention the de facto replacement of the rule of law with rule by decree in the sphere of fiscal and monetary policy. The authoritarian state is making a comeback, it seems, for the supposedly good reason that it alone can protect people from the “markets”. That can get dangerous.

This article is a translation of Werner Plumpe’s lecture given at the Römerberg Discussions, Frankfurt am Main, Dezember 2011