Not only will historians look back at the crash of 2008 and recall an extraordinary turnaround in economic fortunes, but the more astute observers will realise that the seeds of downfall were sown in the very symbols of success. Already talk of the new economy has been replaced by talk of the ‘bubble economy’, the bursting of which has led to repossessions, debt deflation, overproduction and widespread job losses. The first signs of decline may have been evident in the housing market, but the deeper and wider weaknesses in the economy are becoming ever more obvious. Historians will surely recall that the housing market was not the first bubble to burst during the era of new capitalism. In the mid-1990s speculative investment in the dot.com industries came to grief as dot.com became dot.bom.
The bursting of the dot.com bubble presaged several investment bubbles in mobile communications and fibre optics. The rapid expansion of fibre optics in the 1990s was based on the incredible assumption that internet usage would double every 100 days, or some 1,000 per cent per year. As it turned out, the growth rate was only around 40%, a rate completely unable to sustain the frantic investment in telecoms during the second half of the 1990s. In the United States, it has been estimated that some 39 million miles of cable were laid – enough to circle the globe 1,566 times – but only 3% of capacity was being used by the middle of 2001. The resulting telecoms crash led to the loss of three million American jobs in the early years of this decade. It is reasonable to assume that the history of the new economy will link a series of such telecom bubbles – dot.com, fibre optics and 3G – to the surge in lending in the sub-prime housing markets that produced the toxic assets which spread like a virus through the global financial sector. These bubbles were all products of deregulation, they all were global to a greater or lesser extent, and all led to overproduction and debt overhang.
If we are to have any chance of charting our way out of the current crisis, it is necessary to explain the rise of a more irrational form of capitalism. Arguably we have to root these developments in the rise of neoliberalism, the era of capitalist development that can be traced back to the rise of Regan and Thatcher. Neoliberalism has three features that not only help explain the fragility of the bubble economy, but also reveal the nature of wealth accumulation in this period. These include deregulation, financialisation and changes in corporate governance.
Rising housing markets fuelled asset accumulation and borrowing on an unprecedented scale
In the middle of the last century, the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world’s major industrial nations. Its collapse in 1973, with the abandonment of exchange rate controls and the acceptance of floating rates, was the first sign of the new monetary and financial order. Limits on capital movements were lifted in 1974 in the United States and in 1979 in the UK. Subsequent deregulation of telecommunications, airlines and finance also greatly reduced restrictions on corporate freedoms. Finally, corporate taxes were slashed and the top rate of taxation reduced from 70% to 28%.
Financialisation involved the rebalancing of wealth between financial and non-financial corporations, such that the relative net worth of financial to non-financial corporations grew from 12 to 23% in the two decades before 1999. Moreover, production industries began to extend their operations into financial services as mergers diversified activities across sectors, blurring the boundaries between finance and production. It has been suggested that neoliberalism ‘has meant the financialisation of everything’.
There were two key changes in corporate governance over the past 25 years. Firstly, a ‘second managerial revolution’ emerged in the early 1980s that was marked by the rise of a new breed of management gurus. This new managerialism, disdainful of economic planning, virtually celebrated the irrationality of the market, suggesting ways of ‘thriving on chaos’ during the ‘disorganisation of the nanosecond nineties’. Secondly, there have been critical adjustments in the remuneration of executives whose wealth has grown spectacularly during the last 20 years. Executive income, based on bonuses and share options, came to be tied, not to corporate profitability, but to rising share values whose link with economic realities grew increasingly tenuous. Thus the chief executives’ share of equity in US corporations grew from 2% in 1992 to 12% by the end of the decade. The result has been described as ‘one of the most spectacular acts of appropriation in the history of capitalism’.
These developments must be factored into the radical policy rethink that is currently under way. As the fire-fighters of global capitalism struggle to stem the tide of further economic decline, it is hard to overstate the depth of the policy dilemmas. Government measures are under consideration that would have been unimaginable this time last year. When the former chairman of the US Federal Reserve is referred to as ‘Comrade Greenspan’ for his support of nationalisation, and when the Financial Times runs a headline (23 February) ‘In Praise of Rigidity’, arguing that the inflexibility in the labour market was a key defence against debt deflation, it becomes clear that the intellectual edifice that has supported the growth models of the past three decades has utterly collapsed. This crisis calls on to the stage those who have challenged the economic orthodoxies that have underpinned neoliberal capitalism. If we are to restore rationality to the management of the economy, nothing short of a full-scale policy reversal will suffice.