There is now an entire cottage industry writing about the capitalist crisis. When I first projected something ominous, something far worse than an ordinary downturn on the MLToday website in April of 2007, I noted that many radical commentators had made a career of projecting capitalism's collapse. Like religious zealot's predicting the end of the world, some were bound to eventually get it right. But few did.
At that time, I used the headlines in the tabloid, The Weekly World News, a National Enquirer spin-off, as a rhetorical and facetious foil. The now defunct scandal sheet foretold a coming depression in the summer of 2007. It proposed all kinds of outlandish strategies to survive the catastrophe. I noted at the time that the writers seemed to have a deeper understanding of the world economy than the experts pandering their wares in the media. I'm happy to say that I stood shoulder to shoulder with the editors of this august publication, though I sought a Marxist explanation to support my position. On the other hand, I've seldom shared an opinion with the editors of the New York Times.
Reflecting on this article, I think its fair to say that few found my argument compelling, probably even the writers of The Weekly World News who made careers out of reporting unlikely events. Nonetheless, the fact that I playfully put my projection side-by-side with a super market tabloid shows how uncommon and unconventional such a view was in the Spring of 2007. While I'm not pretending that I was the first or only writer to predict the crash, most - including the doom-and-gloom forecasters of the left - did not foresee an economic event of such catastrophic impact. I would like to believe that this is a tribute to the power of Marxism.
One person who, while not predicting the collapse, has anticipated a profound disruption of the financial sector for over a decade is the billionaire investor, George Soros. Soros is a strange bird. He has been a willing and able accomplice to American imperialism, spending millions of his vast fortune in support of the many so-called "color" counterrevolutions in Eastern Europe. Through his Soros Foundation, he supports "democratic" change - change that curiously coincides with his own vision of free market capitalism and seeks to sway those who's idea of democracy deviates from his own. Nonetheless, when it comes to understanding capitalism, his success in mastering the vicissitudes of the global economy is unmatched. In other words, he knows how to make money.
Soros's unique skills separate him from the many academic economists who have much to say about modern capitalism, but have put nothing on the table. While celebrated and award winning economists like Stiglitz, Reich, and Krugman have argued forcefully for a capitalism with a human face, Soros has raised deeper questions about the way capitalism functions. Even the most liberal of trained economist, like Paul Krugman, are confined in their thinking by the dogmas of classical and neo-classical economics. Soros, concerned mainly with making money, knows no such restrictions. Moreover, he is willing to step beyond the bounds of conventional thinking. He is a maverick, but a maverick with wide experience in the inner workings of contemporary capitalism.
Soros develops his views in a recent book with the ponderous title of The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means and in a recent article in The New York Review of Books entitled The Crisis and What to Do About It (12-04-08). In the later essay, he makes several points that separate his views from the orthodoxy, even the newly awakened orthodoxy of neo-Keynesian regulation.
1. He writes: With the financial system in cardiac arrest, resuscitating it took precedence over considerations of moral hazard - i.e., the danger that coming to the rescue of of a financial institution in difficulties would reward and encourage reckless behavior in the future - and the authorities injected ever larger quantities of money... Unfortunately the authorities are always lagging behind events... Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact on global economic activity is yet to be felt. A deep recession is now inevitable and the possibility of a depression cannot be ruled out. (NYRB, p. 63)
This is an unusually frank and accurate statement of what has been done to solve the crisis and where events stand. What is unsaid, but suggested, is that force feeding public funds into proven irresponsible financial institutions only encourages irresponsible behavior - outrageous executive bonuses, predatory mergers, and the pawning of toxicity onto the public. Soros recognizes that nothing done so far changes the behavior patterns of financial players, it only cleans the mess after they've made it. And he rightly sees more of a mess ahead.
2. Credit - whether extended to consumers or speculators or banks - has been growing at a much faster rate than GDP ever since the end of World War II. But the rate of growth accelerated and took on the characteristics of a bubble when it was reinforced by a misconception that became dominant in 1980 when Ronald Reagan became President and Margaret Thatcher was prime minister in the United Kingdom.
The misconception is derived from the prevailing theory of financial markets, which... holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. (NYRB, p. 64)
Soros is correct to see that credit has grown as has the role of financials and the risk undertaken by them. He is correct to see that the ideological pillars of the accelerated growth were laid during the rise of ultra-right politics, though it is misleading to suggest that Reagan and Thatcher were the architects. But he fails to see that the material conditions for this leap in credit were created by the demise of the Soviet Union and the ensuing era of so-called"globalization".
To his credit, he is bold enough to challenge the myth of the market. While he supports limited market regulation, his rejection of market infallibility opens the door to a far reaching challenge to markets. Markets, like mathematics, cannot be usually, or more often than not, accurate. If they are not always optimizing, then they are always necessarily subject to human scrutiny, adjustment, or trumping. Let's call that Zoltan's law. The appeal of a market based economy - "free markets", as their high priests like to call them - is that they make optimal decisions in allocating resources, labor, and products. If they cannot optimize, as Soros concedes, then they must be corrected by human intervention. But if they can only achieve optimal results with the help of a higher power - human intellect - then they have lost their mythical power to determine economic life. Not only is economic planning possible, but necessary.
Even if markets could always optimize, they face the contradiction between optimizing profit and optimizing social well-being, a contradiction that would seem more and more apparent with every passing day. Zealots for markets have argued that one of the benefits of markets is that they optimize the common good by maximizing profits. With living standards and social mobility for most people frozen at or deteriorating to levels of nearly forty years ago, this seems hardly a compelling argument.
3. Soros offers an eccentric theory called "reflexivity" which he attempts to graft onto conventional market theory to explain market aberrations like the current financial debacle. He hopes to rescue markets as an otherwise optimizing mechanism by isolating and explaining deviant market behavior in terms of a certain psychologically grounded "self-reinforcement". In essence, he is simply saying that markets fail when market players deceive themselves. And self-deception encourages even greater self-deception - it reinforces itself. Bubbles result.
What he does not say is that the underlying motive for self-deception is the unfettered lust for profits - the sooner the better and regardless of other costs. Soros correctly notes that the financial sector grew to occupy 25% of market capitalization. What he fails again to note is that, at the same time, the financial "industry" accounted for nearly 40% of all profits! The easy profits, acquired through what he calls "financial engineering", sucked away resources from more productive, socially useful needs. It placed an enormous amount of wealth in fewer and fewer hands. And the pool of accumulated wealth cried out for even more arcane and risky methods to maintain and grow profit rates. This is the logic of markets and the logic of capitalism, only to be countered by a severe economic crash.
4. At the end of the day, Soros is in the same position as those who clung, at all intellectual costs, to the Newtonian world view when faced with the telling predictions of Einsteinian physics. He stretches for an ad hoc explanation to save the dogma of markets: human excesses distort markets and human correctives must be employed to fix those excesses. But this just exposes the deeper truth that "markets" are merely a short-hand term for economic exchange between people, a social relation. These exchanges are shaped and determined by a host of political, juridical, cultural and power relations. There is no magical "correctness" to the allocations determined by markets. As the sum total of a society's conventions, these "markets" - social relations - reflect the interests of the social forces that dominate that society; in our case, capitalism.
For the society of the future - socialism - economic exchange will be determined, not with the social conventions of capitalism, but by mechanisms that place the optimization of the common good first. They will not be determined by a rigid theology of markets, but by the best rational mechanisms for ensuring both societal goals and efficiency. Only a medieval scholastic (or a neo-classical economist!) would not see a greater role for democratic, scientific planning. Neither the rigid dogma of market-fetishism nor the anarchy of markets will have a place in this world.