The global financial crisis, neoclassical economics, and the neoliberal years of capitalism

The global financial crisis will probably represent a turning point in the history of capitalism and of economic thought. It was a crisis not only of neoliberalism but also of neoclassical economics - of the general equilibrium model, of neoclassical macroeconomics and of neoclassical financial theory. On the other hand, the political coalition behind the neoliberal years and the deregulation and financialization that it promoted - a coalition of capitalist rentiers and professional financists - will probably lose ground to a new arrangement of the previous Fordist coalition. The banking crisis that began in 2007 and became a global crisis in 2008 is also a social crisis since the International Labor Organization estimated that unemployment had reached around 20 million to 50 million by the end of 2009, whereas, according to the Food and Agriculture Organization, as the incomes of the poor are falling due to the crisis but the international prices of food commodities remain high, the number of undernourished people in the world increased by 11 percent in 2009, and, for the first time, exceeded one billion. The questions that this major crisis raises are many. Why did it happen? Why did the theories, organizations, and institutions that emerged from previous crises fail to prevent this one? Was it inevitable given the unstable nature of capitalism, or was it a consequence of perverse ideological developments since the 1980s? Given that capitalism is essentially an unstable economic system, we are tempted to respond to this last question in the affirmative, but we would be wrong to do so. In this essay, I will, first, summarize the major change to world financial markets that occurred after the end of the Bretton Woods system in 1971, and associate it with financialization and with the hegemony of a reactionary ideology, namely, neoliberalism. Financialization will be understood here as a distorted financial arrangement based on the creation of artificial financial wealth, that is, financial wealth disconnected from real wealth or from the production of goods and services. Neoliberalism, in its turn, should not be understood merely as radical economic liberalism but also as an ideology that is hostile to the poor, to workers and to the welfare state. Second, I will argue that these perverse developments, and the deregulation of the financial system combined with the refusal to regulate subsequent financial innovations, were the historical new facts that caused the crisis. Capitalism may be intrinsically unstable, but a crisis as deep and as damaging as the present global crisis was unnecessary: it could have been avoided if a more capable democratic state had been able to resist the deregulation of financial markets. Third, I will shortly discuss the ethical problem involved in the process of financialization, namely, the fraud that was one of its dominant aspects. Fourth, I will discuss the two immediate causes of the hegemony of neoliberalism: the victory of the West over the Soviet Union in 1989, and the fact that neoclassical macroeconomics and neoclassical financial theory became "mainstream" and provided neoliberal ideology with a "scientific" foundation. Yet these causes are not sufficient to explain the hegemony of neoliberalism. Thus, fifth, I will discuss the political coalition of capitalist rentiers and financists who mostly benefited from the neoliberal hegemony and from financialization.1 Sixth, I will ask what will follow the crisis. Despite the quick and firm response of governments worldwide to the crisis using Keynesian economics, in the rich countries, where leverage was greater, its consequences will for years be harmful, especially for the poor. Yet I end on an optimist note: since capitalism is always changing, and progress or development is part of the capitalist dynamic, it will probably change in the right direction. Not only are investment and technical progress intrinsic to the system, but, more important, democratic politics - the use of the state as an instrument of collective action by popularly elected governments - is always checking or correcting capitalism. In this historical process, the demands of the poor for better standards of living, for more freedom, for more equality and for more environmental protection are in constant and dialectical conflict with the interests of the establishment; this is the fundamental cause of social progress. On some occasions, as in the last thirty years, conservative politics turns reactionary and society slips back, but even in these periods some sectors progress,download.