The financial crisis has spooked capitalism’s ideologues. Anatole Kalatsky, a widely-read hardline free marketeer, has written of the need to consider the “wholesale nationalisation” of the banking system. Calls for tougher restrictions on the City are everywhere.
Capitalism needs rules to function effectively – written and unwritten. For over 20 years, the ruling class has used a set of rules known as “neoliberalism” that provided a neat set of policies for government – cut taxes, deregulate and privatise, and break trade unions.
But these particular rules have not always been in place. After the Second World War governments adopted a different set of rules, named after the economist John Maynard Keynes.
“Keynesianism” stressed the need for governments to intervene in the economy to prevent capitalism tearing itself apart.
Both rules are about making sure capitalism runs smoothly and that profits are squeezed as efficiently as possible from workers.
For 30 years after the war, capitalism boomed. But when the boom collapsed in the early 1970s, Keynesian remedies appeared not to work.
With unemployment rising, Western governments followed the rules and attempted to prop up the economy by slashing interest rates and boosting their spending.
Instead of staving off the recession, these remedies appeared only to produce increasing inflation. Keynesianism had failed. Western governments cast about desperately for different solutions.
A group of previously marginalised free market economists took the opportunity to push themselves to centre-stage. Led intellectually by the Austrian economist, Friedrich von Hayek, these “New Liberals” mounted an ideological attack on Keynesianism.
They believed a return to the old moral certainties of the free market was needed to restart capitalism. The welfare state had encouraged idleness. Excessive union power crippled entrepreneurs. And progressive taxes discouraged hard work and investment.
A sprouting of new right wing think-tanks, such as the Adam Smith Institute, pushed the same message. To restore growth and profitability, the ruling class had to show its teeth. This aggressive ruling class offensive became known as neoliberalism.
Two governments, Margaret Thatcher’s in Britain and Ronald Reagan’s in the US, led the charge.
The trade unions were first softened up, then battered into submission, culminating in Britain with the Miners’ Strike of 1984-5. Taxes on the rich were slashed. And the regulations governing how banks and financial institutions could gamble their money were torn up.
The left around the world was pushed onto the defensive. Social democrats, like those in Britain’s Labour Party, who had once defended Keynesianism as almost an article of faith, instead adopted neoliberalism.
Governments such as Tony Blair’s from 1997 stuck rigidly to the neoliberal rules, expanding privatisation and loosening regulations. The City of London was allowed to run wild.
The results of this bonfire of regulations are now abundantly clear. Given free reign, banks borrowed mountainous sums of cash and devised new and ever more freakishly complex means to gamble with it.
Some of the credit the banks created found its way to consumers.
With real wages close to stagnating in Britain, consumer borrowing has propped up the economy. One estimate is that the average household now spends more of its income on debt payments than ever before – close to 20 percent.
Banks found ways to package up and sell on their debts to each other that hid the risks of default. This process went so far that, when the credit crunch started to bite last summer, they had no idea how much some of their more complex investments were worth.
And because the banks were all borrowing money from one another, the ties between them became more and more intricate. A collapse in one bank threatened every other bank.
Given this danger, the US government has torn up its old rule book. It has nationalised some of the biggest financial institutions on earth.
It has promised to pump what could be around $700 billion into the financial system to keep it afloat, with US workers footing most of the bill. And in Britain, Gordon Brown’s government had to rewrite its competition rules to push through the HBOS-Lloyds TSB merger.
The ideological consequences of this are immense. At present the ruling class is forced into pragmatic crisis management.
But they are bickering among themselves about the best way forward, with no clear sense of direction.
When the ruling class squabbles, it creates a space for new ideas in the rest of society.
Everyone can now see that free markets are not sacrosanct. The possibilities for socialists to intervene are huge. We must fight to defend jobs and homes. But we must also win the battle of ideas – not just to rewrite capitalism’s rules, but to overthrow the whole system.