Nonetheless, I think capitalism is not likely to collapse. It may lose some of its grip on the course of social change. It may organize less of social, economic, and political life. But the image of collapse is misleading. To say the Roman Empire collapsed is meaningful, but it is worth noting that it took over 200 years, not just a single crisis. To say feudalism collapsed and in the process gave birth to modern capitalism—the schema offered in The Communist Manifesto—is less realistic. First, feudalism was not “systemic” in quite the sense modern capitalism is. But second, there was no moment of the collapse of feudal relations or related institutions. The long decline in feudal relations came in an era of state-building and war, of agricultural innovation and growing global commerce, of religious revitalization and Reformation—and it lasted at least 300 years. It was not simply a collapse. The Catholic Church was deeply transformed during the era when feudalism declined, and never played the same role afterward, but it survived. Many monarchies disappeared, though not all; some managed transformations enough to remain—and sometimes remain significant—in an era that could hardly be called feudal.
The end of the capitalist era, if and when it comes, is likely to be comparably rough, uneven, and hard to discern in midprocess. There will be institutions that survive it, including quite possibly many business corporations, which needn’t stop trading, manufacturing, or speculating just because capitalism stops being the driving force of the age. The effort to buy cheap and sell dear long predated capitalism and likely will last long after.
CAPITALISM IN GENERAL AND FINANCE-DOMINATED CAPITALISM IN PARTICULAR
Capitalism creates a variety of problems for itself, for human society, and for nature. But for the most part these problems don’t drive capitalism into potentially fatal tailspins. Extreme financialization does produce such vulnerability.
Finance is of course a basic part of capitalism, providing it with dynamism, capacity for rapid expansion, and tools for managing costs over time. It has been crucial to technological revolutions. More generally, it is central to the basic, definitive ability to move capital from one investment to another based on anticipated greater profits.
As its name suggests, capitalism is centrally a way of organizing economic activity through the fluid deployment of wealth—capital—by means of investments in different kinds of profit-making enterprises. Capital is invested or investable wealth. Finance—including straightforward debt but also a range of tradable securities—is an important part of this, crucial to the liquidity and mobility of capital as well as to expansion and spreading costs over time. Entrepreneurial dynamism depends on financial backing. But lopsided financialization can be distorting in a variety of ways. It has brought dramatic increases in domestic income inequality in all the major capitalist economies; it has channeled funds away from investment in productive enterprises. It fueled a long “megabubble” in asset prices, including the more specific bubble in mortgage-backed housing prices that helped precipitate the 2008–2009 crisis. It encouraged speculation.
During the years before the 2008–2009 market crisis, trading in equities and debt overtook employment-generating and profit-sharing industries in the old core of the capitalist world-system. Where financial instruments accounted for only a quarter of invested assets in the 1970s, by 2008 financialization had brought the total to 75%. Globally, financial assets accounted for some four times the value of all equities and ten times total global GDP.
This was a global phenomenon, shaped by a range of factors largely dating from the 1970s and accelerating toward the end of the 20th century. Because of its unpopularity, the United States financed the last years of the Vietnam War largely on credit. Seeking to manage economic difficulties in the 1970s, the United States and other core capitalist countries brought the Bretton Woods monetary system to an end, replacing the stabilization of backing by precious metals with floating, infinitely tradable fiat currencies. After the 1973 Arab-Israeli war OPEC oil producers restricted supply, vastly multiplying their returns from a world deeply dependent on petroleum, and then channeled much of the money into sovereign wealth funds. But financialization was at its most extreme in the world’s long-standing core capitalist economies (and weaker economies yoked to them, for example by membership in the European Union or asymmetrical commodity trade). And while it was led by big capital it also drew in ordinary citizens who saw their incomes stagnate but continued high levels of spending by relying on credit. A better balance between productive industrial enterprise and finance is in fact one of the advantages of today’s higher-growth economies like China or India as they move from semiperiphery to core in global capitalism.
The recent financial crisis reveals the main internal vulnerability of capitalism. This is systemic risk—that is, risks embedded in the complex web of internal connections that make up the modern financial system. It is important to be clear about this and about the nature of the crisis. This was not a “classic” capitalist crisis of overproduction and underconsumption. While it had a wide range of impacts in the “real” economy of manufacturing and consumption, it was first and foremost a financial crisis. Its impact was multiplied by the enormous growth in global finance during the decades preceding, and especially the extent to which financial assets came to dominate, especially in advanced Western economies. It was this that made overleveraging, excessive risk-taking, poor or absent regulation, and the heavy use and abuse of a range of new financial technologies so dangerous and ultimately so damaging. Not only did financialization increase the scale of financial assets, thus increasing the impact of a financial crisis. In addition, and more basically, it increased the interconnection of capitalist institutions joined not only in more or less transparent market transactions but also in a host of complicated and often opaque financial relationships. This was particularly true of the financial industry. When major banks were described in 2008–2009 as “too big to fail” it might have been more accurate to say: “too connected to fail.” But financialization did not only affect firms in the financial sector; it became a basic part of all large-scale global capitalism. Car companies became auto-finance companies. Mining companies were tied centrally to exchange-rate arbitrage.
Financialization enhances the dynamism of capitalism. It facilitates the “creative destruction” of existing structures of capital (e.g., specific modes of industrial production) and spurs the development of new technologies, products, production processes, and sites of production. When extreme, though, it drives investments toward ever more short-term profits and undercuts long-term and deeper growth. It also produces speculative bubbles and busts. It increases market pressure on firms bringing less than median returns to capital, driving disinvestment from still-profitable older businesses and thus driving down wages and reducing the tendency of industrial capitalism to share profits through rising wages. It intensifies inequality.
Financialization leads to returns on invested wealth that far outstrip returns on employment. It rewards traders more than material producers (and despite celebrated exceptions, far more than most entrepreneurs). It makes all other sorts of businesses pay more for financial services. The 2010 bonus pool for securities industry employees in New York City alone was $20.8 billion; the top twenty-five hedge fund managers earned $22.7 billion. And this was after the market meltdown revealed the damage financialization was doing to the larger economy.