Wolfgang Streeck – The Crises of Democratic Capitalism.
Addressing the conceptualisation of the 2008 Financial Crisis, Wolfgang Streeck challenges mainstream economics opinion of crisis being a deviation from a ‘fundamental condition of stability’. Taking a sociologist stance, Streeck maintains that there is a core tension in society between economics and politics and that the rule is disequilibrium, not the exception. He describes the two principles of allocation in a democratic capitalist society. One is subservient to democracy, resources allocated based on a social right to benefits, the other is capitalist, arguing that the market determines allocation based on member’s marginal productivity. His article posted in the New Left Review leaves little room for doubt, the two principles hold an unavoidable contradiction and cannot coexist. This commentary will provide a summary of Streeck’s arguments concluding that the historical analysis proves true. Yet his approach holds too strong a faith in the bipartite nature of democratic capitalism, and negates the role of innovation and the learning of financial institutions in his prediction of democratic capitalism’s demise.
Streeck’s analysis of the implosion of neoliberal economics comes in chronological form, beginning in the post war period. His core thesis is that the twenty years of uninterrupted growth provided an economic norm that was unsustainable, raising political expectations that governments could not maintain. When growth slowed in the 1960’s, the following decades were consumed by consistent tectonic tension between democratic capitalism culminating in the 2008 crisis. The first settlement was an ‘accommodating monetary policy, expanding welfare state, trade unions, and full employment guarantees’ in the 1970’s. Unable to maintain this spend, governments brought forward future resources, to satisfy current consumption. The resulting inflation proved unsustainable, forcing conflict to move to the ‘electoral arena’ as Thatcher and Reagan initiated a neo liberal precedent of undermining political support via trade union attacks and reduced taxation. Economic disorder was again exacerbated as growth stagnated and public debt increased from a combination of low tax yields, and expenditure increases in welfare payouts. Governments were forced to exploit low IR and low inflation to borrow to accommodate demands.
Streeck then details the process of fiscal consolidation and deregulation of financial markets. Societal pressures were counter balanced by ‘unprecedented opportunities for people and firms to indebt themselves’. A wave of financial services and deregulation had multiple beneficiaries for both the rich and the poor. Individual debt replaced public debt and financial liberalisation sustained a growth economy that Europe modeled itself on post 2001. The crash in 2008 was systemic and an all-encompassing, Streeck highlights how the government’s socialized bad loans forced a massive increase in public indebtedness to liquidate the financial sector.
Streeck’s analysis rests on the core assumption that capitalism and democracy are two separate entities with competing agendas. However, he neglects consideration of the wholly integrated nature of the two. In many cases policy maker’s interests align with that of the capitalists, pursuance of social optimums ignored. This was most evident prior to the financial crisis, with individuals operating as both government officials and big bank advisors. Larry Summers for example, was in the payroll of the Clinton and Obama administration, as well as Goldman Sachs and multiple other financial institutions. Birthed from a conflict of interest their advocating for reduced leverage restrictions and deregulation was pivotal in the advent of the crisis. It was not tension between two agendas that caused the crises, it was greed, and ability to be greedy. Thus, the dual alignment of political apparatus’ doesn’t indicate a crisis of democratic capitalism, rather it strengthens the need for greater transparency to make governments and the finance industry more accountable, and to limit both the greed of the state and the ability of private individuals to abuse the mechanisms.
Looking forward, Streeck articulates that political management of democratic capitalism is declining. Other authors expressed this rhetoric focusing specifically on the role of international governance, claiming the structure of international cooperation on economic issues ‘is stalled, flawed, or non existent (Frieden, Pettis, Rodrk and Zedillo). Hence, it is not the fault of capitalism but the contradictory priorities of ‘democractic’ governments, failing to co-operate to mitigate systemic risk. However, Streeck correctly identifies issues with greater degrees of international organisation. He references the principle agent problem, as citizens view their governments not as their agents but agents of international organisations like the IMF and the EU, casting further mistrust in political authority. Streeck’s article has proven to salient and preemptive in multiple respects. The Brexit referendum’s discourse was driven by a nationalistic sentiment, citizens expressing fear of outsider influence. Whilst identifying that the next crises would not lie in a sub-prime market, Streeck also raised issues with the growth of internet currencies. Crypto currency now dominating financial narrative, Streeck was wrong only in his timings. The 10-year bull market whilst overestimating Streeck’s guess at collapse in 2013, strengthens his argument that the next crash will be of huge and systemic proportions, a result of the globalisation of the world economy and integration of both social and financial systems.
The article paints a bleak outlook for economic futures, published before the positive results of the financial crisis could be observed. Did we not recover from 2008, and recover well? The IMF, learning from its failed response to the Asian financial crisis, responded with an expansionary fiscal policy directive that was quick and appropriate. ‘Global economic governance responded quickly and robustly to the crisis with a remarkable degree of ‘institutional resiliency and flexibility’ (Drezner). Global growth, trade flows, and FDI all rebounded and lead to a stronger level of banking standard. Thus, tensions were not as severe as the article suggests with political mechanisms acting quickly to protect citizens interests (deposit insurance and bail outs). Capitalism is arguably thriving under democracy, creating methods and access to financial credit and markets for many who could not previously benefit.
Starting in the post war period, Streeck ignores the importance of free markets in fostering democracy, but correctly identifies the conflict between political and market objectives. His study is profound in it’s ability to explain the Crises and the role of human error but is too damning of capitalisms ability to innovate and readjust.