As the integrated world economy reels from recessionary symptoms of slowing
growth, credit crunch, financial ruin, demand contraction, inflation and
unemployment, the buzzword that has made a stunning comeback is "regulation".
Questions about the extent to which the state must regulate and intervene in an
economy have occupied the intellectual annals of public policy and social
science for centuries. They are now taking center stage as the unprecedented
prosperity of what economist Joseph Stiglitz termed the "Roaring Nineties"
recedes into memory like some fading Gilded Age.
At the heart of the debate on what went wrong in the global economy and how it
can be fixed lie core disputes over diagnosis
and cure. Adherents of neo-liberalism, whose prescriptions of laissez faire and
limited government were ascendant in the 1990s, are contending that the current
slump is natural in hindsight because "we never had it so good" as in the past
two decades. They are also the most optimistic that the world economy, led by
the industrialized countries that compose the Organization for Economic
Cooperation and Development, will stage a quick rebound from the current
sluggishness since the "fundamentals" of free market economics are still
intact.
According to libertarians, we are currently experiencing a typical
boom-and-bust cycle of capitalism, where downturns are only to be expected
after a major bout of record productivity, profitability and growth. To them,
markets will eventually adjust themselves to the present slippage and commence
on a new round of enrichment propelled by technological innovations and freeing
up of restrictions on goods and capital. By conceptualizing shrinkages as part
and parcel of the game of capitalism's "creative destruction", they see no
reason to examine the way the world economy was managed or mismanaged in the
era of globalization.
The other side of the fence, led by critics of neo-liberalism, blames
unregulated markets and excessive speculation for the economic mess that is
impacting the rich and especially the poor in both the global North and South.
To this school, the retreat of the state into a shell since the onslaught of
Margaret Thatcher and Ronald Reagan's neo-liberal dogmas left open a vast
hunting ground for greedy financial heists, fictions and bubbles by capitalists
who mastered the art of "making a fast buck" at the expense of lay persons.
Followers of this line of thought point to the extraordinary fraud and
speculation of the era of "corporate globalization" as the root causes of the
present maladies. The virtual procession of blue chip banks, investment
companies and industrial firms into a cul-de-sac of insolvency in recent years
reveals, to this school the delusions of market fundamentalists that free
competition can actually exist and that it would be enough to secure overall
human welfare. The less regulated the economic sphere, it appears to them, the
more the likelihood of the weak and the uninitiated falling prey to slick and
unscrupulous financial manipulators.
As the sorry sight of foreclosures and disappearance of hard-earned savings of
ordinary American and European homeowners and depositors unfolds, the weight of
the evidence favors the anti-neo-liberal camp's theory of culpability for the
crisis.
The subprime mortgage disaster, which has dragged the entire Western financial
system down with it and spun nightmares of trillion-dollar meltdowns, is a case
of unregulated profligacy by adventurous capitalists. The absence of state
licensing and oversight of the housing finance sector enabled bolder and more
complex "derivatives" to be spun out of thin air, infecting whole economies and
their foreign partners.
With no Leviathan watching and correcting the accumulating imperfections, the
markets entered the badlands of profiteering by bending the basic rules of
accountancy, transparency and corporate social responsibility.
At the peak of neo-liberal hegemony, developing countries around the world were
being offered "bailout packages" by the International Monetary Fund (IMF)to
solve macroeconomic crises. Ironically now, it is not international financial
institutions but the states of Western countries that are doing the
fire-fighting and bailing out their own prized corporations such as Freddie
Mac, Fannie Mae and Northern Rock from sinking.
Powerful states, epitomized by the phrase "Washington Consensus", had been
pushing to downsize the regulatory power of states in the Global South by means
of the IMF and the World Bank. It is quite a reversal of roles now for them to
be forced to take on a more interventionist role in their own economies after
facing flak from their publics for allowing speculators free rein to plunder.
If the first decade of the 21st century were to be generalized in terms of
trends, it might well be remembered as the time when the bastions of
neo-liberalism ate humble pie and intervened in their economies to prevent the
social costs of robber baron capitalism from exploding.
In his 1944 magnum opus, The Great Transformation, political economist
Karl Polanyi argued that the history of the modern industrialized world is to
be viewed with the heuristic device of a "double movement". On one hand, market
capitalism advances ruthlessly in its drive for accumulation and dispossession
of the weak without being burdened by the state's handcuffs. And on the other
hand, pressures build to regulate and tame the speculative beast from harming
society and "social interests".
In the post-World War II era, this battle of opposites polarized the world
between the Western and Eastern blocks and produced extreme reactions to
uncontrolled capitalism like dirigisme. In the post-Cold War era, however, it
is very unlikely that economies ridden by the global recession will opt for
maximal statist solutions to ride out of the dumps. Instead, what we will
witness is the return of the Leviathan as a regulator that is still within the
boundaries of liberal capitalism, though not blind to violations of fair play
by big businesses. This will involve a reworking of the relationships among
states and capitalists in the overall interest of preserving the "system" at
the national and global levels.
A corollary to the reinvention of the state's regulatory power over the economy
is the growing clout of its national security dimensions in the political
sphere. As many countries battle internal insurgencies and external threats in
the context of a US-led "war on terror", the accretion of military and policing
powers of governments over the past decade has been tremendous. States have
more legal and extra-legal means of coercion today than they did 10 years ago
and notions of "national security state" and "political economies of defense"
enjoy wider following.
Philosopher Georg Hegel's characterization of the state as the "march of God on
Earth" may have applied to a different era, but it carries a ring of
familiarity as governments open their purses to save collapsing companies and
shield citizens from spiraling costs of living. As the rescuer of last resort
and the protector of social stability, there is no alternative to the
centralized institution of the state. Deeper state interventions in the economy
and in society are, for good and worse, here to stay and the repercussions of
this shift away from neo-liberalism will be felt for whole generations.
Sreeram Chaulia is a researcher on international affairs at the Maxwell
School of Citizenship in Syracuse, New York.
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