rethinking capitalism newsletter no. 2

T H E B R U C E I N I T I A T I V E

Rethinking Capitalism Newsletter Issue No. 2, 2011 http://rethinkingcapitalism.ucsc.edu/ 1

RETHINKING CAPITALISM

The Market SpectacleKarin Knorr Cetina

“The Market Spectacle”

Karin Knorr Cetina

“The Politics of Milton Friedman’s Economics”

Michael MacDonald and Darel Paul Interview with Peter Dimock

“The Meaning of Financial Liberalization”

Prabhat Patnaik

“Betting on 2008”

Lynn Stout

“Using Software (Art) to See the World”

Warren Sack

“Rethinking Money and Finance Capital” Richard Walker

“Impressions of Rethinking Capitalism”Kim Stanley Robinson

“Finance, Politics, and the Fiscal Crisis of the State”

Darel Paul

“Proprietary Trading and the Volcker Rule: How Will WeWrite the History of Financial Reform?”

Robert Wosnitzer

What is the content of the play being staged on the trader’s screen? What type of spectacle does it offer? What is the logic of its composition? The assemblage on screen consists mostly of numbers, figures and text. Yet these abstract items have the visual intensity and energy of a hit

Broadway play. What show is being produced? Is there a story arc or plot? Can we identify a genre, a mode of narration? The first point to note is that the numbers, figures and text on screen represent acts—for example, deals that result in the prices displayed. The reconfigurations of the production process create a special world, but action has not been deleted from this world. The picture is still an action picture, and an enhanced and escalated one at that: we see not only multiple streams of fast financial action, but also the rest of the world’s compacted doings. The actions are truncated however: the picture lacks most of the actors that perform the acts. What we find on screen is action in a detached form—detached from the

Newsletter Issue No. 2, 2011

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players, though historical lists of some of the financial acting cast are provided after deals have been completed.1 Bare action beckons, it wants something back: financial screens are interactive, entries are placed there for participants to respond. This is perhaps most obvious when we look at EBS, the electronic broker system displaying currency prices and quantities. The price is constrained by the last deal made and all other offers on hand, but it also represents an offer to deal, waiting for someone to respond to the offer. When the text on screen presents the words of a politician, the result of an election, a plane crash, a terrorist attack, or some other contextual matter, the actions presented invite interpretations and the use of the information in subsequent transactions. The financial “movie” being watched on the screen is dynamic, a stream of action gushing forward. On the one hand, it is an assemblage of symbols or information bits that scroll down the screen. Yet in their own way, the symbols “apresent” (bring near) in a condensed and crystallized form a global world continually rushing forward through many types of activity: things are bought and sold, inventories are being built, price and deal requests are made, research is conducted, votes take place, military interventions are carried out, riots and revolutions happen—the lines of text indicate a dynamic flow of activities in different locations, in itemized fashion. Traders observe on screen a Theatrum Mundi, a spectacle of the world on the electronic stage assembled for their observation. It is a spectacle of the globe acting out its various dramas. Viewing it, we must assume, contributes to the sense of captivation that the market on screen arouses. The spectacle is of course limited, or let us say, exclusive. First, it narrows the world down to what is relevant to financial markets, plus some distractions—traders sometimes watch soccer matches or movies on one of their screens. “Narrow” still means a net cast wide: one can get a better overview of what happens in the world at large from financial screens than from any other medium I am aware of. It is often unclear before markets have reacted how they will react, and to what. Therefore anything having the potential to influence events, or to contextualize price movements for traders can be found on screen. Second, the financial markets which are at the center of things are themselves highly exclusive; highest tier trading in currency markets, for example, or trading of massive volume accounting for most of the 3.8 Trillion Dollar daily turnover in these markets (BIS 2007), occurs in a few cities, those Saskia Sassen has termed quintessentially global (1991): London, New York, Tokyo, Zurich, Frankfurt, Singapore, and some others. Bejing, a highly visible

metropolis on the world political stage, and a seat of government, is not part of the set. Third, the spectacle develops in very small scenes and vignettes—composed of a few lines of text, a short sequence of numbers, the shape of a curve, a brief video stream, headline news. It evolves in the nano-time scale and nano-space of text messages, rather than within the standard episodes of everyday interaction, or even the more reductive ones found in daily newspapers or on TV.

This third feature raises the question of what narrative genre the screen text represents. Is it in a “low mimetic” mode, a term which Phil Smith suggested for the modern, pragmatic, disenchanted, scientized, matter-of-fact discourse (2005, 23ff.)? Scholars from Weber onward have thought this to be an increasingly prominent organizing cultural frame. Low mimetic genres are not obviously driven by plots, have weak character polarization, and portray events that do not seem to have a lot of drama in them. Or does the screen text take the form of tragedy, a genre that Aristotle wrote of as evoking powerful sentiments of moral empathy, pity, and terror? Tragedy excels in presenting downward movements and the futility of human striving. Might the screen text of currency markets possibly emulate the genre of romance, which, as Smith explains following Frye (1976), need not be about love? Romance is a fundamentally optimistic genre that presents and upward movement of the protagonist and perhaps a conversion to good by the forces of evil. If the genre is romance we would have an emphasis on the transformative power of the human agent and “themes of ascent” that lead to a better world (2005, 25-26). Or is the spectacle perhaps organized as an apocalyptic narrative, the last genre on Smith’s list? This dramatic form legitimizes extreme measures, allows cultural constraints on violence to be removed, exhibits the strongest character polarization, and invokes the highest and lowest of human motivations. Apocalyptic tales tell us of absolute evil with no possibility for an upward conversion of the bad, with the consequence that evil must be destroyed. The morality play of financial markets is not centered on human characters and their traditional forms of conflict, though sometimes an apocalyptic human villain, Bernie Madoff for example, turns up and briefly dominates the stage.2 Nor is it centered on human conflict; the genres outlined would seem to apply only if we transpose the narratives to non-human and institutional settings. When cultural constraints on action are being thrown out the window in financial plays, it is not usually constraints on physical violence that are overcome, but rather legal, political and bureaucratic constraints on things like the use of tax and debt for the bailout of banks, as in the world financial crisis of 2008-09. Similarly, a romantic upward movement could be a rising bull market—rather than, for example, a political





leader blessed with luck, guile, and a good voter turnout machine. When we allow for such transpositions of quintessentially human dramas into dramas involving objects and their relations to us, then the genres listed above are all found on financial screens. These same genres appear to perform similar functions when they are used to plot crises that lead to a war, or are used to frame other topics that have interested the literature (Frye 1976; Smith 2005, 27ff; Geertz 1973; Alexander 2004). Genres provide conventionalized paths to understanding current affairs, for making sense of them, and for legitimizing subsequent actions. They allow for comprehension, and, as stories being told and retold, for transferring the understandings gained to others. Financial screens do not usually display just one particular narrative, and lay it out in an integrated fashion. Rather, what we find on them are multiple developing stories cast in terms of single acts and bits of information that are seen as belonging to, or adding onto, these stories. The stories are referenced but may not be coherently recounted in this medium. They are generally known and may be expounded in detail elsewhere—for example in financial newsletters and economic journals, magazines and papers. Periodically released indicators of consumer confidence or unemployment, for example, were, like many other indicators in 2009, placed in the context of the ongoing narrative of the then virulent global financial and credit crisis. Whether something counts as a major or minor crisis tends to be contested in public discourse, and the respective “genre wars” (Smith 2005, 28) can be witnessed on screen. Information provider firms (and participants) post more than one view on matters of interest; conflict between these views contributes to the spectacle of financial reality. There is usually more than one evolving narrative glossed and referenced on screen, and these do not normally all correspond to the same genre. In fact, the extremity of the apocalyptic slant given the crisis story of 2008/9 owed partly to the paucity of other narratives in a different mode around—all the world was in crisis. There is one genre characteristic of the financial screenplay that I want to add to the above genres. I call this the open composition genre, a term I borrow from painting, where it means that the lines, shapes and colors in a picture look as if they can be extended out of the edges of a painting.3 The pattern they display is open and seems to overflow the frame rather than to be formally contained by it.

The electronic screens of financial markets are open composition in the following ways. First, content continuously scrolls down the screen, seemingly flowing in and out of it, with new content continuously arriving and only slightly older content disappearing. In other words, the financial text seems to be unbound and to only temporarily float into view in traders’ computer windows. The world is truly larger, or so this suggests, but it can be made to stream through electronic windows, and as it floats by we can inspect it briefly. Second, the world is dissolved into the nano-bits of information (or “schemes”): it is painted as if in snapshots with broken brushstrokes. It is part of a larger reality but captured as if by chance, as a photographer might capture things in a transient moment. This world is not without internal structure. Complementary windows, opening separately, structure flux into distinctive streams, and within many window s, grids and matrix designs map and arrange incoming text and figures into cells and columns. Nonetheless, the character of the whole remains liquid and overflowing. Financial markets not only have a “heated” feel, they appear “molten.” The result of open composition is a vivid picture of the financial world, but in short strokes, and not smoothly blended. What this “technique” of reality staging brings to the fore is action in an embryonic state—by this I mean action in the world that is not yet storied, not yet framed, at times even not yet categorized. The actors behind these doings surely have their reasons for their acts and will have anchored them in plans and views. But financial screens rarely include and explain intention and strategies in any way. When they do, it is because the stream of behavior being reported is slow, and the actors are politicians or other outsiders. Traders and other participants’ activities are not only too fast for any full accounting, this group has no interest in disclosing motives, trading views, or insider knowledge. The spectacle of the market on screen, then, includes developing narratives, generally presented in different genre modes and itemized in terms of contributing numbers, activities and commentary. But it also includes streams of embryonic action and these are of particular interest to participants: action in embryonic form foreshadows new developments and points to emerging opportunities and new promises. It is an early indication of what is brewing in a market and in the world—an indication of incipient trends that have not yet become recognized, of trend reversals, of changes in pattern. Participants think in trends and “differentials”—differences between a previous and subsequent occurrence—and embryonic actions are only single steps and even half steps. This makes them all the more relevant to extrapolation and difference-completion: they offer themselves to inferences about the





future. Embryonic actions are open material for anyone to take up. Since they are not yet storied and categorized, embryonic actions allow anyone connected to financial screens to develop their own early stance on what is going on, and then to act on their view before others hear about the material, or spread the word about it. Embryonic action displays are not common, I think, in other areas. Why, for instance, would anyone want to know that it has rained in California now for a day or two? Yet an electricity trader might be quite interested in this seemingly gratuitous bit of information—it could indicate an embryonic trend of declining demand for electricity—if more rain came down and less electricity was needed for irrigation. The ambiguously dramaturgical spectacle of the synthetic market appearing on traders’ screens is just one aspect of the “engagement machinery” of contemporary markets that I am interested in analyzing. The financial component is never separate from that machinery but always deeply embedded within it.

1 The firms involved in EBS deals are named and the volume of the transaction is disclosed after deals have been completed.

2 Bernie Madoff was the chairman of the investment firm Bernard L. Madoff Investment Securities LLC and a former chairman of the NASDAQ. He was arrested on December 11, 2008 and is thought to have defrauded investors by approximately US$50 Billions in a Ponzi scheme that may be the largest investor fraud ever committed by a person. See http://en.wikipedia.org/wiki/Bernard_Madoff for a good overview of the case (accessed March 1, 2009). 3 For a schematic illustration of different types of composition see: http://library.thinkquest.org/20868/ang/moe/kmpz.htm (accessed March 2, 2009). Open composition painting has been famously used in impressionist paintings—and indeed, there is an analogy between this painting school and the picture created on financial screens. Both can be understood to use the same techniques of representation. See Denvir (1990) for details.

Editor’s Note: Karin Knorr Cetina has generously allowed Rethinking Capitalism Newsletter to excerpt this article from Chapter 5 of her forthcoming book, Maverick Markets: The Virtual Societies of Financial Markets, to be published in 2012. The title of the chapter is “The Market as an Object of Attachment.”

PD: Michael and Darel, I have just read your forthcoming article on the politics of Milton Friedman’s economics.1 I was struck by how your understanding of both his ideas and his influence produces quite a disturbing perspective on our present moment. As I read your article, the present moment is one in which the dominant neo-liberal ideological climate shaping American politics is the result of a strongly held set of ideas about the relation between the autonomy of markets and freedom that the work of their chief theorist actually contradicts. You show that Friedman’s impact, while he understood himself to be devoted to markets, was, as you put it, “to institutionalize the supremacy of finance.” Your article suggests that the frame most Americans have for understanding the relation between their economy and their polity is both wrong and disabling. That frame is almost absurdly self-destructive, you imply, in that it obstructs recognition of the actual logic by which financial capitalism is determining so much in our lives. Is this true? If it is, what role can scholarship and institutions like the Bruce Initiative play in creating another framework for understanding the relation between markets, states, and democratic freedoms that is responsive to the growth of extreme inequality and worsening economic conditions experienced by most of the world’s people in the present moment?

MM: One of the things that Friedman is doing in A Monetary History that is the source of much of his power is that he is making an argument that’s a harbinger of a powerful movement.2 It’s centered on the University of Chicago Economics Department and becomes very influential in the academy, but also, by the 1970s, has established connections throughout the political economy. It makes strong arguments for laissez faire and market capitalism—finance itself is very rarely named. Friedman doesn’t see himself as representing finance, but what’s clear from his work on the history of money and banking crisis (this is especially clear in his analysis of the Depression) is that what capitalism finally is for Friedman is finance.

The Politics of Milton Friedman’s Economics

Michael MacDonald and Darel Paul Interview with Peter Dimock



http://en.wikipedia.org/wiki/Bernard_Madoff

http://en.wikipedia.org/wiki/Bernard_Madoff

http://library.thinkquest.org/20868/ang/moe/kmpz.htm






Friedman’s argument rests on a double movement. On the one hand, he argues for emancipating the market from the state—but what’s being emancipated isn’t productive capital so much as finance. On the other hand, while finance is being emancipated from the state, it never severs its dependence on the state. You can see this in the savings and loan crisis of the late 1980s and early 1990s. The crisis was caused in substantial measure by the de-regulation of finance that the state ends up having to clean up. Friedman and other libertarians don’t argue for deregulation in order to liberate finance, but finance becomes the primary beneficiary over time. At the same time, it gets the benefits of deregulation; finance is never divorced from the state. Instead, finance becomes more the master and the state its servant, as becomes clear every time finance creates a crisis—the S&L crisis, the Mexican peso crisis, the collapse of Long Term Capital Management, the popping of the tech bubble, and certainly the financial crisis of 2007 through now. At each critical moment, the state steps in to save finance from itself.

DP: Friedman doesn’t understand what he is doing, but he invariably insinuates finance as the general interest of the economy and society. Because finance is the general interest, the whole language of “bailing out” banks becomes inapplicable. The state isn’t bailing out banks or helping a special interest; it is doing what it must do to establish and maintain the institutional requirements of capitalism. Here is where the differences between Friedman’s conception of productive capital and financial capital surfaces. When failing productive firms turn to the state for assistance, Friedman prescribes market discipline. When finance comes to the state, he doesn’t understand it as such. He can’t even see it. Money is the purest form of capital and finance the embodiment of a capitalist ideal. The ideology demands that capitalism cannot require the state, even though his whole analysis of the Depression demonstrates otherwise. What Friedman sees instead—and this is why the argument in A Monetary History is so deceptive to Friedman himself—is the failure of the state. He must pin the crisis on the state. That then allows him to call upon the state to clean up its own mess. This is different from the problem of mass unemployment that he sees as not the state’s fault and thus not its responsibility.

MM: This is where the deep politics of Friedman emerges. Of course, the banking crisis is different, more urgent, than unemployment or excess capacity or insufficient demand, and of course it requires state intervention—though the intervention is concealed—in spite of Friedman’s

libertarianism and the state’s incorrigible incompetence. He doesn’t see himself as saying the state should have intervened to save finance in 1931, even though he is saying precisely that. He instead sees himself as saying that the state is responsible for cleaning up the mess it created, even though a close reading of his book discloses otherwise—that the state didn’t create the crisis, financial markets did. Most importantly, by blaming the state, Friedman gets to have his cake and eat it too; he gets to demand state intervention in financial markets without ever admitting it as such. In fact, he would see an “intervening” state as simply conducting good, technical economic policy, not as “intervening” in markets at all.

DP: Through libertarianism, Friedman prepared the ground for what has become a three-pronged attack on the state that constitutes the contemporary crisis of the neo-liberal order. First, finance attacks the state—invokes libertarianism, complains incessantly about regulation and intervention—all the while depending on the same state for its very lifeblood: money and well-functioning financial markets. Second, the professional class that grows out of the post-World War II Keynesian state—dependent on it for its income (directly through employment or indirectly through state spending in science, education, health, social services, etc.), status, and social self-reproduction—attacks the exercise of state power in regulating culture and demands an ever-widening private sphere of personal identity and behavior where professional expertise becomes meaningless in the face of “authenticity.” Third, the petty bourgeoisie, managers and the upper “white collar” ranks of the working class (whom Michael and I think of as a small-r “republican” class) attack the basic contours of the New Deal and seek to starve the state of revenue even as they insist on their slice of the spending pie: Social Security, Medicare, public education, suburban infrastructure—the things that make their middle-class lives possible.

MM: Each of these classes attacks the power and authority of the state. What’s remarkable about these attacks—and here Friedman is the pioneer of a politics of self-destruction—is that each depends on the state for a substantial portion of its power, prosperity, and perhaps even its existence. Each depends radically on the state’s power and authority to maintain and reproduce their class interests, but blinded by different moments in neo-liberal ideology, they deny to themselves their dependence on the state whose power they constantly try to curb. Now, it would be one thing if these classes contented themselves with attacking the state’s support of other classes





while trying to hoard its largess for themselves. Usually, classes attack their rivals. Now, classes are attacking what they need to reproduce themselves. Different class interests have different locales, different strengths, in the state, an insight which goes back at least to Nicos Poulantzas. What situates the current crisis of neo-liberalism and what makes it truly unusual is not only that these actors and interests that derive from and are created through state power are attacking the integrity of the state, but that each is attacking the state in its own domain. What’s striking about this historic moment, in other words, is not that these three classes are attacking where the others live. It’s that they’re attacking where they themselves live because, intoxicated by libertarian ideology in one form or another, all have mystified their own dependence on state power. The state gets reproduced as a matter of daily practice and routine, but ideologically it is affronted from all sides. Things are fine, therefore, as long as they’re fine. But if the state encounters real crisis, how will it be able to meet it when it has become paralyzed by systematic ideological de-legitimation?

PD: One further question then. By what process, if any, do you see scholars—or anyone else—creating an interpretive framework concerning the current financial crisis through which the American state can be re-legitimated as a representative political mechanism through which finance can be made accountable to a general democratic interest?

MM: There was a moment back in late 2008 and early 2009 when finance was utterly dependent on the state for its survival. From the collapse of Lehman Brothers to the nominal end of the recession, finance was truly in existential crisis. It was supremely vulnerable both politically and economically. Yet rather than dictate terms to finance when the advantage had swung to the state, the Democratic Congress instead gave finance everything it needed to not only survive but even to grow bigger and more powerful than before the crisis. When Nancy Pelosi quite literally had Hank Paulson before her on his knees, she failed not only to question the system that brought us all to that moment. She failed even to negotiate reforms that might fend off a recurrence. When the Democratic leadership had its one shot to do something big, something transformative, it backed TARP, a virtually no-strings-attached bailout of the biggest financial institutions in the country. Afterwards it stood faithfully by Tim Geithner and supported Ben Bernanke’s reappointment.

DP: It’s important to remember that Congressional Democrats, far more so than Congressional Republicans,

backed the bank bailout of 2008-09. TARP didn’t get majority Republican support in the House, after all, and all the Democratic leaders—including Chris Dodd, Barney Frank, Tim Geithner and Barak Obama—strongly opposed the Paul-Grayson bill to audit the Fed. The policy leadership of the Democratic Party is no longer the party of the New Deal coalition—it’s the party of finance capital. Rubin, Summers, Geithner—what more evidence could you want? Finance is too strong ideologically, politically and economically to be defeated or significantly curbed without a crisis. It shouldn’t surprise that Democrats squandered their opportunity in 2008-09. Few movements in the Democratic Party are both serious and influential when discussing the economy—the exception is labor. Otherwise, the top levels of the Democratic Party are generally indifferent to economic matters or align openly or tacitly with finance. Whatever one thinks of the politics of new social movements, they are remarkably ill equipped to respond to the power of finance. Finance is both decentralized and dispersed; it’s redefining money, capital, political and social boundaries by the minute. Yet liberals seem more concerned with the demographic composition of financial elites than about their power.

1 Michael MacDonald and Darel E. Paul, “Killing the Goose that Lays the Golden Egg: The Politics of Milton Friedman’s Economics,” forthcoming in Politics & Society, Vol. 39, No. 3, September 2011, or Vol. 39, No. 4, December 2011.s2 Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867 – 1960 (Princeton University Press, 1971 [1963]).





The Meaning of Financial Liberalization

Prabhat Patnaik

The term “financial liberalization” is used to cover a whole set of measures including the autonomy of the Central Bank from government, i.e., the complete freedom of finance to move into and out of the economy and this implies: the full convertibility of the currency. The also include the abandonment of all “priority sector” lending targets; an end to government-imposed differential interest rate schemes; a freeing of interest rates; the complete freedom of banks to pursue profits unhindered by government directives; the removal of restrictions on the ownership of banks, which means de-nationalization, full freedom for foreign ownership, and an end to “voting caps”; and so on. These measures are not necessarily presented as a package, and not always presented in their maximal form. Nonetheless, no matter what the exact sequence, form, and strategy through which financial liberalization is sought, the objective ultimately is to realize the above set of measures. Since financial liberalization is seen as consisting of these measures, the debate about it gets fragmented into a debate about the desirability of each of these measures: whether central bank autonomy is desirable or not; whether the government should have exclusive equity ownership in banks or only a majority ownership, or not even that; whether priority sector lending targets serve the purpose they are meant to; whether control over interest rates has not understated the scarcity value of “capital” (a particularly silly debate this, based on a Hayekian assumption of full employment); and so on. Because of this fragmentation of issues, the process of financial liberalization is never seen in its totality. The question therefore arises: What is financial liberalization in its totality? The essence of financial liberalization, seen in its totality, is to ensure the control of finance capital over the State. This may appear paradoxical at first sight. As the term “liberalization” appended to “financial” suggests, the

basic aim of the process is to liberate finance from the shackles of the State, i.e., to ensure not the control of finance over the State but the negation of the control of the State over finance. But the remarkable aspect of financial liberalization consists precisely in this: What appears at first sight as the liberation of finance from the shackles of the State is nothing else but the acquisition by finance of control over the State. An analogy might be to a wrestling bout in which each of two wrestlers has a grip on the other, and the liberation of one from the grip of the other clearly simultaneously marks the ascendancy of the one so liberated over the other. In a similar fashion, it may be argued that the liberation of finance from the State, and therefore from the possible control of other classes exerted through the State, marks simultaneously the acquisition of hegemony by finance over the State. The dialectics of class struggle in this case can thus be seen only as an instance of the dialectics of any struggle, of which the wrestling bout is just one obvious example. This perception, though not wrong, is inadequate. Financial liberalization does not just mean an inversion, that is, the ascendancy of finance arising from the very fact of the social grip over it—exercised through the State—being loosened. Since we live in a world where the State remains a nation-State while finance is globalized (i.e., is international in character), financial liberalization is not just liberalization. It is simultaneously a process of globalization of finance, i.e., the conversion of “national finance capital” into an integral element of international finance capital, and hence the acquisition on its part of enormous strength vis-à-vis the nation-State. To go back to the wrestling analogy, it is as if the loosening of grip over one wrestler makes the one so released multiply several times in size, and hence necessarily acquire ascendancy. It is within this specific global context that financial liberalization marks the acquisition by finance capital of control over the State. Each of the measures mentioned above as constituting financial liberalization has the effect of strengthening the hegemony of finance over the State. Central Bank autonomy removes a host of policies—including monetary policy, exchange rate policy, and credit policy—from the purview of the democratically elected government and entrusts them to a group of financiers, or bureaucrats allied to them, who exercise control over the autonomous Central Bank. This restricts the domain of intervention of the State. In addition, since the target with regard to State borrowing from the Central Bank is fixed, an autonomous Central Bank simply pushes and then delivers the State to the mercy of the financial market to meet its borrowing requirement above this limit. Hence the State can





spend only as much as finance capital allows it to. Since being creditworthy in the eyes of finance capital becomes a matter of paramount importance, the State pursues only such policies as finance capital would like it to. A fully convertible currency, and freedom for financial flows into and out of the country, has exactly the same effect. Since the pursuit of policies that finance capital dislikes would give rise to a financial outflow with potentially disastrous consequences for the economy, the State becomes obliged to follow only those policies that keep up the “confidence” of finance in the economy. The state is obliged to pursue only those policies that are to the liking of finance capital. Likewise, the freeing of finance capital from all social obligations like priority sector lending targets and differential interest rates allows it to pursue its own profit-seeking ways over a global terrain. This has the effect of subjugating the State to the thralldom of internationalized finance capital. In short, financial liberalization is the process through which a fundamental change is enforced on the capitalist State. From being an entity apparently standing above society and intervening for the “social good” (which means keeping in check to an extent the proclivities of big capital), the State becomes dominated by financial interests (with which big corporate interests are enmeshed). We have not the “rolling back” of the State as neo-liberal theorists suggest, but State intervention in the exclusive interests of finance capital. This change has profound implications. I shall mention only three. The first relates to the attenuation of democracy: As long as the economy is characterized by financial liberalization and hence the hegemony over the State by finance capital, any change of government effected through popular democratic intervention makes little difference to policy. Any assertion of democracy necessarily requires therefore a negation of the hegemony of finance capital over the State, and hence a reassertion of social control over finance effected through the State. (This in turn presupposes a change in the nature of the State itself.) Second, capitalism requires some external prop to make it come out of crises. In the absence of such props, the crises get inordinately prolonged, imposing such heavy burdens on the working people that the social stability of the system gets jeopardized. Historically, colonialism played this role of providing an external prop to the system. The fact that this prop had got more or less exhausted by the late 1920s was a major reason behind the Great Depression of the thirties. In the post-war period, State intervention in demand management provided such an external prop.

Such intervention can only happen, however, if the State has some autonomy—if it is not part of the “spontaneity” of the system, but represents an “external element” to such spontaneity. If the State loses this autonomy, then it loses the capacity to intervene in situations of crisis. This necessarily prolongs crises, and, with no clear end in sight, not only imposes heavy burdens on the working people but also undermines the system’s social stability and legitimacy. Financial liberalization sets the stage for social upheavals. Third, the State’s inability to truncate crises is part of a wider phenomenon, namely, its inability to rid the system of its obvious ills. John Maynard Keynes was aware of these ills and wanted a reform of the system to eliminate them. He was a Liberal but advocated State intervention because he saw liberal capitalism as undermining the Liberal values he cherished and that required a humane economic system. He saw the State as an embodiment of “social rationality” intervening in a capitalist system to make it function in a manner different from what its own spontaneity dictated. Underlying his reform agenda, and indeed any Liberal reform agenda, is the presumption that the State stands outside the “spontaneity” of the system, so that it can intervene in a “rational” manner. But if the State is under the hegemony of finance capital, and hence lacks the autonomy to intervene in any manner that does not meet with the approval of finance capital, then that puts paid to all agendas of Liberal reform of capitalism.

If we persist in defining capitalism merely as an economic concept, we overlook the important ways in which enforceability and the law greatly contributed to the 2008 economic crisis. In what follows, I argue that capitalism is fundamentally a legal concept. In the end, capitalism relates to a description of a system of laws—at a minimum, private property and enforced contractual exchange. A free market without the rule of law is essentially Hobbes’ world, a land of great hostility and violence where the strong and the fast take whatever they want from the weak and the slow. As a legal system, the kind of capitalism we’ve had for the last 15 years is one that Adam Smith not only wouldn’t have

Betting on 2008

Lynn Stout





recognized, but one he would have never named as capitalist. This is another way saying that my working hypothesis is that the primary cause of the 2008 crisis was not a change in markets or the emergence of a specific financial innovation, as has been argued by others. Instead, it was an unnoticed but still revolutionary change in the law regarding the enforceability of specific contracts, contracts that in fact do not produce any value on their own but instead simply move money from one set of hands to another. The law I’m talking about is essentially the law of gambling that dates back at least to the Babylonian era—we have a good 3,000 years to think back on. What the Romans did with gambling was not too dissimilar with what we’ve done with it, in other countries in other times. The reason why I’m talking about gambling laws is because that is what derivatives amount to. Derivatives are bets. I do not mean this to be taken as a metaphor or a figure of speech. Derivates are literally bets. They are agreements between two parties, that depending on what happens in the future, one party will pay the other party a sum of money. And they require no asset evaluation to make them happen. So just as you can bet on the outcome of a horse in a horserace without owning a horse, you can use derivatives to bet on the fates of various forms of market phenomena. You can bet on credit ratings and inflation rates without having to own a deposit of money that brings an interest or a bond whose credit is being rated or an asset whose value would change with inflation rates. Derivatives are merely bets, nothing more and nothing less. It’s true that some derivatives can be arranged in quite complicated ways. And maybe it’s because of their complexity that some people talk about derivatives as “innovations.” But, in these terms, the trifecta would count as an innovation. It’s not my understanding that the Romans used the trifecta betting systems when they were betting on chariot races. Whatever the case may be, this doesn’t change the reality that derivatives are bets just as Babylonian bottom contracts, as they were called, were bets based on the success and failure of trading caravans. To say that derivatives are bets brings with it looks of unease, especially for those who count on derivatives for income. The word “bet” comes with many negative connotations, and no one likes to be told that what they do for a living, and what they do to justify their existence, is equivalent to gambling. But it’s important to remember that you don’t have to use bets for gambling; they have other very valuable uses. You can use bets, as an example, to offset a risk to which you are already exposed. One way of thinking about this is to say that I live in California and I’m worried about wildfires. Because of this worry I might make a bet

with an insurance company that my house will burn down. We call that insurance. Insurance is fundamentally a wagering market, and in an ideal world if all bets were used for insurance, you would not only get less risk throughout the system, but even a more equal distribution of wealth. The problem arises from the fact that bets can be used for things other than hedging. They can be used for something that goes roughly by the name “speculation,” which means trying to make a profit by predicting future events with more accuracy than others around you. Just as I may try to profit by predicting the outcome of a horse race, I might try to profit from predicting where interest rates are going or what the rating on a particular corporation’s bonds is going to be. When bets are used for speculative purposes, they can cause economic problems. This is why it’s important to go back to Adam Smith to clarify the role of the state with respect to gaming contracts. One of the interesting linguistic difficulties at work when you speak about the strengths and weaknesses of capitalism is that it is easy to assume that anything you do that makes money must be “productive” in nature. But Adam Smith knew better. He knew in The Wealth of Nations, as an example, how there are some ways of making money and some ways of spending money that are more productive than others. And this is where the law comes in. Laws have typically made a distinction between ways of making money that are productive and that are then subsidized by the state through enforcement, ways of making money that are destructive and that are penalized by the law, and ways of making money that are neither productive nor destructive where the law and the courts, and the United States up until 2000, doesn’t get involved. Enforceability in these instances simply drops out of the equation. To get a better grasp of what I’m talking about, I’ll pose a hypothetical. In this hypothetical we’ll pretend that I have a gun and that I put it to my colleague’s head. I say to my colleague: “Bob, either you pay me 1,000 dollars, or I kill you.“ After hearing the terms of the arrangement, Bob writes me a check for 1,000 dollars. Well, obviously there is a problem, and the problem is that I’m forcing Bob to become involved in a “voluntary transaction” by telling him that if he doesn’t enter into a contract with me, he can safely assume that his life will be over. The result of this kind of agreement or contract becoming enforceable (and, with that, being subsidized by the state) is that it fosters incentives for people to invest in learning how to extort others rather than becoming engaged in mutually beneficial contracts. The social and economic consequence is that this shrinks the pie for everyone else, mainly because it encourages people to





invest time and money in hurting other people, deterring all other possible future arrangements in the process. This is a very different scenario than the one in which, say, I am a skilled artist, and Bob sees my art, and says he would like to pay me $1,000 for a painting I did. This is a contract that Adam Smith and the law would both approve of. Whereas making money by threatening to kill people is penalized by the law, the law subsidizes most voluntary exchanges that are deemed productive, exchanges in which one party is producing something that is valued by the other person and money is used as way to transfer goods from one party to the other. Distinct from these two scenarios, however, is a third possibility, a middle area wherein you get money from someone by doing something that doesn’t create value but, at the same time, is not destructive, but, rather, means taking money from one person and putting it into the pocket of another. This would be an instance in which Bob and I said that we wanted to make an arrangement based on my prediction that I thought interest rates were going to stay stable as opposed to his view that interest rates were going to go up. We would bet on interest rates with what’s called an interest rate swap. At the time of the bet, each of us holds a different view of what is going to happen in the future with respect to interest rates, but it’s an inescapable logic that we can’t both be right: interest rates will either stay stable, go up, or go down. This is a mistaken contract. And, at the end of the day, all it does is transfer wealth. It is a gambling contract; it doesn’t produce anything. The law has known about these kinds of contracts for thousands of years. It has treated them neither as destructive (therefore deserving of penalization) nor as productive (requiring being subsidized). Instead, the law has treated them simply as something that the law had no interest in enforcing. Gaming contracts were traditionally unenforceable. This was true for Roman games of dice, except perhaps for the two weeks of Saturnalia in which, I believe, they were legally enforceable, but the rest of the time they were not. Whatever gambling’s moral standing, historically it has produced economic problems: it shrank the pie by several different methods. If you read 19th-century contract cases, you’ll see that there’s nothing new under the sun. The judges discussing difference contracts, as they were known in the 19th century, could have been discussing derivatives markets today. So, for example, one of the problems enforcing gambling contracts or difference contracts is that it “discourages the disposition to engage in steady labor.” In other words, we take valuable human capital, and we waste it by having

people spend their time trying to pick each other’s pockets. You have heard this criticism, I’m sure, of the rise of Wall Street and the financialization of the economy in the form of the lament that some of our best mathematical and scientific minds were drawn into what was essentially a zero sum game and squandered. Another argument against gambling contracts or difference contracts is the recognition that gambling, far from reducing risk, the way hedging does, instead increases it. Increasing risk is the very nature of gambling. When you sit down to a poker table with a hundred bucks in your wallet, you have a certainty of one hundred dollars. The minute you enter the game, however, you have a probability—you may have ten bucks when you leave, you may have a thousand, you may have four hundred. No one really knows until the game is over. What you’ve done is taken the certainty of a hundred dollars and transferred into a probability, which is another way of saying that you have created risk where there was none before. If you look at the history of derivatives, you would be perfectly aware that a change in a the legal rules that made derivatives used for speculation legally enforceable—and thereby, in effect, subsidizing them—was going to create a much larger derivatives market. And a much larger derivatives market posed the problem of adding risk to the economic system instead of decreasing it. And that’s exactly what we did in the United States in the early 1980s, the mid 1980s, and the 1990s to 2000. You might wonder what happened to the common law against difference contracts? We codified it into what was called the Grain Futures Act of 1926, which eventually became the Commodities Exchange Act of 1936. The interesting thing about commodities law is that it many ways has nothing to do with commodities. No real pork bellies or red wheat No. 2 ever changes hands. Commodities law is really gambling law or derivatives law. So we codified it, and then we started getting rid of it through the wave of deregulation that came into favor in the 1980s and 1990s. It started with the Commodities Futures Trading Commission creating an exemption for what’s called over-the-counter derivatives trading. The fact that trading in derivatives contracts was not an enforceable contract didn’t stop people from gambling, as you might imagine. Instead, it motivated people to create private gambling clubs during the Roman Empire. In the 19th century, we called these “gambling clubs” the commodities exchanges, and they are still in existence today in the form of the Chicago Port Trade and the Chicago Mercantile. The neat thing about the private gambling club is that the only





people who were allowed in were those who could pay off their bets. The bets were guaranteed by the gambling club, which had a very keen interest in making sure that gamblers didn’t get in over their heads. So we had this wonderful system where people gambled as much as they wanted on the commodities exchanges that didn’t cause any problems for the rest of us or the rest of the economy because gambling was not subsidized with public money. It is the case that you could enter a difference contract off of an exchange and thus have it legally enforced, but to do this you had to prove that at least one of the parties was truly hedging, that you had an insurable interest or an indemnity interest. So what really happened is the gambling law became divided into two parts: commodities law and insurance law. Somehow this system worked so well that, as far as I can tell, the vast majority of people literally forgot about it, until the 1980s. At that point, someone on Wall Street thought to start making interest swaps, essentially bets on interest rates. Whoever came up with this didn’t realize at first that these were in reality illegal off-exchange futures under the Commodities Exchange Act or Unenforceable Difference Contracts under Common Law. Whoever came up with the idea thought they were enforceable, and a large market emerged. By the time a couple of smart lawyers pointed out that maybe these things weren’t enforceable, the industry had enough political power that it was able to go to the CFDC and get an exemption from both the Commodities Exchange Act and the Common Law that said, for the first time in business history in the Western world, that bets on interest rates—that were formally outside of the watchful gaze of an exchange—were legally enforceable. Well, what would a 19th-century judge predict would happen? He would predict an enormous increase in the size of the market. It is just as if we legalized murder for hire. We would see an increase in murder. And this is exactly what has happened. Interest rate derivatives went from something that was measured in the mere trillions in notational value to something like 67 trillion by the late 1990s. To make matters worse, the creation of this market added risk to the system. We saw with the collapse of Orange County, Barings Bank, the losses to Procter and Gamble, and eventually the near collapse of Long-Term Capital Management. Congress, being what it is (and there is equal opportunity for blame on both sides of the political aisle), thought that this little experiment had gone so well that they should legalize and make enforceable not only contract swaps but all other financial phenomena as well. So in 2000 we get the Commodities Futures Modernization Act. What

the CFMA did was to say that all speculative financial trading is legal and legally enforceable. We see the same pattern: the derivatives market leaps from 67 trillion to 600 trillion dollars. To put that in human terms, that is about one hundred thousand dollars in derivatives contracts for every human being on the planet—man, woman, and child. And it appears that the creation of this enormous market eventually did exactly what the legalization of interest rate swaps did: it added risk to the system. As a result we saw the collapse of Enron in 2001. By the way, Enron didn’t collapse because of fraud. The fraud was a result of executives wanting to cover up the fact that they were insolvent on bad energy derivatives bets. Then we get Bear Stearns, Lehman Brothers, and especially AIG in 2008. Legalization, in this narrative, was the proximate cause of 2008. Now that’s not to say that we don’t have other problems. But I think there’s a very good story to be told that the primary trigger for 2008 was this change in the rules of road from an Adam Smith form of capitalism, where the state only rewards productive exchange, to a new financialized form of capitalism where the state subsidizes essentially zero sum exchange and puts the force of law behind the contracts. If that is the correct story, then certainly what is needed is a change in the laws that will prevent a recurrence of this sort of speculation leading to increased risk leading to widespread institutional failures. Of course we will have to wait to see what is in store for us. But capitalism has not reformed itself and has not returned to Adam Smith’s version of it.

The first version of this essay was composed for a panel at the 2010 College Art Association (CAA) conference, the main professional conference for artists and art historians who work in academia. The panel was called "The Culture of Dispersion” and was organized by the artist Patrick Lichty, best known, perhaps, as a member of The Yes Men. On their website, The Yes Men describe their project like this: “Identity Correction: Impersonating big-time criminals in

Using Software (Art) to See the World

Warren Sack





order to publicly humiliate them. Our targets are leaders and big corporations who put profits ahead of everything else” (http://theyesmen.org/). They have made some very good films about their work (see http://theyesmenfixtheworld.com/). In the abstract for the call for participation on the CAA panel, Patrick wrote, “The art world at the end of the first decade of the Third Millennium has been said ‘to be everywhere, all at once.’ Short of the social components analyzed by Bourriaud in his text, Relational Aesthetics, there have been few “-isms” in the last twenty years. Have communications revolutions and unstable economics created a cultural landscape of utter flatness and fractured attention spans? Has culture become a truly flat, rhizomatic playing field with no central dialogues, has it become cellular, or has the culture of non-direction created an era of indistinctness, where the cultural impact of a YouTube video may rival that of a Murakami?” After thinking about it for a while, I decided my answer to these questions is “yes”; or, as Murakami would have it, culture has not just become flat, it has become “Superflat.” I suppose I could end here, but then I would have been too brief to be convincing, especially for those who do not know the work of the French curator, Nicolas Bourriaud, or the Japanese artist Takashi Murakami who started an art movement called “Superflat,” influenced by manga and anime. So, I will elaborate. The frame set by Patrick for the CAA panel invited us to consider larger political and economic forces at work, operating at the level of artistic image production. In this essay I

would like to offer some reflections on this issue in relation to recent and contemporary economic experience with some comments about the critical reception of some of my own Internet-based art works, the work of some emerging artists, and a recent brilliant book analyzing several information visualization works by the art critic and theorist, Rita Raley. (Raley is also a professor at UC - Santa Barbara). This essay germinated after Sawad Brooks and I received a double-edged review in The New York Times some eight years ago. There Matt Mirapaul wrote the following in his review of an exhibition curated by Steve Dietz: “The best work in ‘Translocations,’ an online exhibition of nine new Internet-based artworks presented by the Walker Art Center in Minneapolis, succeeds aesthetically because it is destined to fail electronically. ‘Translation Map,’ one of the works, allows viewers to write and send e-mail to any of 250 countries. There is just one small problem: The Internet is considered a global village that inspires free-flowing conversations, but few of these messages will ever be received.” Sawad and I built the “Translation Map” (http://translationmap.walkerart.org/) as a Wiki-style environment where strangers could gather and collectively translate messages and then route them around the world to hundreds of public, online destinations. We built the code so it did, in fact, work as advertised. But, it didn’t get a lot of use, hence Mirapaul’s charge that it did not work. At first, I was puzzled by this binary claim that it succeeded aesthetically because it failed functionally. Eventually, I remembered that this is Immanuel

Kant’s aesthetic philosophy; namely, that beautiful art is defined by its lack of purpose and its distance from utility. In other words, Mirapaul is just being old school when he complements the beauty of “Translation Map” by saying that it succeeds aesthetically and fails functionally. It is pretty, if I can say so myself. The interface includes 450 satellite photos that I stitched together and then animated with Java. It’s not so striking today, in a world with Google Maps, but eight years ago, The New York Times included a big image of “Translation Map” in its print edition. I’ve received the inverse of Mirapaul’s critique for other work that I’ve done that obviously does work. “Conversation Map” generates an interactive, graphical summary of hundreds or thousands of emails posted to an online discussion. Generally speaking, critics and curators find “Conversation Map” to be scary, ugly, or both. I’ve never had anyone tell me it’s beautiful and, on reflection, I think I know why: because it’s obvious that it works. By aesthetic convention, what works cannot be beautiful. Julian Stallabrass, in his book, Internet Art: The Online Clash of Culture and Commerce, relates a similar story about artist Paul Garrin’s work, “Name.Space.” Garrin created an alternative to the naming protocols of the Internet. Right now, if you want to get a specific domain name for your website, you go to the ICANN corporation, or one of its subcontractors, check to see that the name is not yet purchased, and buy it for some amount of time if it’s available. ICANN then pairs your IP address (which is a number) with the name you have chosen, adds it to the



http://theyesmen.org/




http://theyesmenfixtheworld.com




http://translationmap.walkerart.org





13

Rethinking Capitalism

list of current addresses, and thereby gives the Internet a means to route visitors to your site. Garrin set up an alternative to this. One could choose any name one wanted, regardless of whether or not someone else had chosen that name. One did not need to pay ICANN or anyone else for the choice of a name. And the software he wrote allowed network addressing to route traffic even when various names where duplicated at different sites. Garrin did this in the mid-1990s, and so we might understand the work today as one of the first pieces of software art. In 1997 Pit Schultz interviewed Garrin on Nettime (http://www.nettime.org/), a mailing list for artists and art critics working with computers and networks, and posed the question: “Is ‘Name.Space’ an art project?” Here’s how Stallabrass relates the rest: “In a revealing exchange, Pit Schultz put it to Garrin that it certainly was, saying that it was ‘maybe the best net.art project I know of’ but only under the crucial condition that it did not work [an idea that should be familiar by now]. Garrin did not directly reply to the art question but asserted that the system does work. Indeed, in going on to explain why ‘Name.Space’ has had few long-term participants, Garrin describes not only the political immaturity of hackers who might otherwise have been drawn to it, but the suspicion of theorists towards a functioning alternative: ‘The problem is that “Name.Space” is about real action which requires the responsibility to act on one’s propositions and suffer the consequences or reap the benefits. Certainly not as safe as plain old ASCII. It becomes another dilemma for them whether to think or to act, or how to reconcile thoughts into action’” (pp. 103-104). The basic problem here is that anything that looks like work is difficult for cultural institutions to accept as art. Software art is especially difficult because one needs to read the code to understand its function. Reading code is far afield from most people’s idea of visual pleasure and, furthermore, that act is likely to reveal how it works, thus throwing us altogether out of the Kantian beautiful. The issue is somewhat paradoxical. Consider the fact that we call specific pieces of art “works.” Or, that we

use the French word for work, to describe the output of an artist’s career, the artist’s oeuvre. Moreover, it is not in any way radical to consider the artist as a worker. The opinion of the painter Henri Matisse was this: “Il faut travailler chaque jour à heures fixes. Il faut travailler comme un ouvrier. Aucune personne ayant fait quelque chose qui vaille la peine n'a agi autrement. J'ai travaillé toute ma vie la journée entière.” One might translate this into English in the following way: “One must labor every day during fixed hours. One must labor as a worker. No person who has done something worthwhile has acted otherwise. I have labored all my life the whole day.”2

I don’t leave the quote in French to be a smarty-pants. Rather, I want to point out that there are two words for “work” in French, and Matisse uses both of them in his definition of the work of the artist. In English, we have “work” and “labor.” In French, the analogous terms are “travailler” and “ouvrer.” In her book, The Human Condition, philosopher Hannah Arendt points out that this double term exists in multiple languages, including English, French, German, Greek, and Latin (footnote, p. 80). Arendt hinges one of the main arguments of her book around this repeated difference, a difference that John Locke states in his Second Treatise of Civil Government where he writes about “the labour of our body and the work of our hands” (section 26). Arendt points out that in ancient Greece labor was shunned and work was esteemed. Labor included those efforts made by slaves and domestic animals to produce and reproduce life and the necessities of life. Work was the production of free men in public—for public, rather than private, purposes. Labor was considered an act of privation that took place in private. Work was an act of honor and renown that took place in full social view. Arendt’s distinction describes the circumstances in which some forms of effort, production, and reproduction are unseemly or hidden and other forms of work are highlighted, highly valued, and given center stage. We should add that class and gender strictly regulate the differences between labor and work, private and public.

http://www.nettime.org

http://www.nettime.org



There’s a silly chapter titled “Miss Stein Instructs” in Ernest Hemingway’s novel, A Moveable Feast. Gertrude Stein comes to visit Hemingway in his small Paris apartment and comments on a number of his writings: “[S]he said that she liked them except one called ‘Up in Michigan.’ ‘It’s good,’ she said. ‘That’s not the question at all. But it is inaccrochable.’ That means it is like a picture that a painter paints and then he cannot hang it when he has a show and nobody will buy it because they cannot hang it either. ‘But what if it is not dirty but it is only that you are trying to use words that people actually use? That are the only words that can make the story come true and that you must use them? You have to use them.’ ‘But you don’t get the point at all,’ she said. ‘You mustn’t write anything that is inaccrochable. There is no point in it. It’s wrong and it’s silly’” (p. 19). Miss Stein did, of course, leave her term in French in order to be a smarty pants. This, I believe, is the problem with most software art. The problem is not that it works, but, more embarrassingly, the work that it does is classically labor--the kind of work that one should keep out of sight. It is, therefore, for the most part, in the context of art, inaccrochable. So, what makes some digital art crochable and other kinds of software art inaccrochable? What makes “Translation Map” beautiful and “Conversation Map” ugly or scary? Cultural theorist Rita Raley’s brilliant analysis of several information visualization works can provide us with the bulk of the answer. The primary subject of Rita’s analysis, the artwork that you can see reproduced on the cover of her book, Tactical Media, is “Black Shoals” developed by artists Lise Autogena and Joshua Portway and artificial life designer, Cefn Hoile. The piece was sponsored by Reuters, the Copenhagen Stock Exchange, the London Arts Council, the Arts Council of England, the Danish Art Council, and a number of other funders. It was shown at the Tate and then again at Nikolaj, the Copenhagen Contemporary Art Center. It is named after Myron Scholes and Nobel prize-winning economist, Robert Merton’s formula for pricing derivatives in financial markets. It takes Reuters data feeds from NASDAQ, the FTSE 100, and the CAC 40 indices and renders them as a complex and adaptive astronomic system. The system shows 4000 “stars” each keyed to one of the top publicly traded companies on the London Stock Exchange. The stars produce light and energy in relation to trading activity: “Starbursts are generated whenever trades for an individual company are received from the market,

leading to cascades of illumination when live news events trigger trading activity in the various clusters.” In addition the display incorporates a set of artificial life creatures that use the energy emitted by the stars to survive and grow. Cefn Hoile is the designer of this aspect of the project and states, “The ecosystem in which they are embedded implements a decentralized evolutionary algorithm, applying competitive selective pressure to the population through conservation of energy. It also couples them to a larger complex system. The opportunities in their world derive from real time stock market information.” (p. 114). I met Joshua Portway, one of the artists, an amazing visual artist and programmer, at about the time this work was being developed. It struck me at the time and years afterwards as a quirky set of mixed metaphors: a mixture of the visual look of a planetarium with an artificial life algorithm to depict financial data? Why? Raley explains why. First, she describes the piece itself and then she contextualizes it within the larger world of mathematical modeling of financial markets. She quotes a well-regarded economist, Andrew Lo, who states, “One of the most promising directions is to view financial markets from a biological perspective and, specifically, within an evolutionary framework in which markets, instruments, institutions, and investors interact and evolve dynamically according to the ‘law’ of economic selection.” In other words, Autogena and Portway are not quirky in their choice of an organic, biological model of the financial markets. Rather, they are mainstream. They are recapitulating mathematically and visually the preferred metaphors of the industry itself. Next, Raley contextualizes this work within a larger body of information visualization systems built by artists. She gives extensive attention to John Klima’s “ecosystm,” commissioned by Zurich Capital Markets and shown at the Whitney Museum. Klima’s work also models market and market dynamics as simulated biology, artificial life, and evolutionary algorithms. The look here is also “organic.” How do these visual and technical details go together? Raley invokes Marx’s critique of capitalist’s belief that capital itself can produce and reproduce more capital, on its own. Marx claims that capital needs labor, specifically productive labor, in order to reproduce. From this perspective, it becomes clear why capital markets would like to image themselves as biological systems, organic entities of capital that can produce and reproduce in cycles of growth. It is, in short, the ideal cover story for what might otherwise be revealed as impotence.





Finally, Raley puts the whole thing together by bringing to bear the incisive writings of communications theorist Tiziana Terranova on digital labor. Financial markets deploy evolutionary discourse and privilege an organic, biological understanding of financial markets because their self-worth requires them to hide the fact that capital cannot reproduce itself. These organic models of markets allow the model builders to hide what actually does the work of production and reproduction. They hide the labor for the same reasons the ancient Greeks did: it is inaccrochable for the rich. If we think about it for a while, it’s easy to come up with a number of other prominent data visualization projects and artists who prefer to work with organic, biological metaphors and visuals. John Maeda and his former students, Ben Frye, Casey Reas, Golan Levin, all come to mind quickly because I went to school with them at the MIT Media Lab. We can certainly expand this roster to a much longer list with a little effort. This is certainly a well-worn path in the history of the avant-garde. Art historian Peter Burger explains things like this: “Artists who produce an organic work (…we refer to them as ‘classicists’…) treat their material as something living. They respect its significance as something that has grown from concrete life situations. For avant-gardists, on the other hand, material is just that, material. Their activity initially consists in nothing other than in killing the ‘life’ of the material, that is, tearing it out of its functional context that gives it meaning. Whereas the classicist recognizes and respects in the material the carrier of a meaning, the avant-gardists see only the empty sign, to which only they can impart significance. The classicist correspondingly treats the material as a whole, whereas the avant-gardist tears it out of the life totality, isolates it, and turns it into a fragment” (p. 68). Burger’s aim is to explain certain artistic practices of the early twentieth century, and so a canonical practice, for him, of avant-garde art, is montage in, for instance, John Heartfield’s, “Adolph—The Superman—Who Swallows Gold and Spouts Junk” (1932). It is tempting to align the avant-garde artistic techniques with a progressive politics and conversely to label organicist classicists “reactionaries.” But, then, one should probably have seen, for example, the set of superb montage works of Kurt Kranz that the MOMA recently exhibited in its recent show on the Bauhaus. Kranz was a student at the Bauhaus from 1930-1933 who later became a Nazi. No such clean alignment of artistic techniques and politics can be made. (“Bauhaus 1919-1933: Workshops for Modernity” was an exhibition on view at The Museum of Modern Art,

New York from November 8, 2009 through January 25, 2010). Nevertheless it is still possible to acknowledge the political and economic forces at work that operate at the level of artistic image production. For example, the need for capital to portray itself as capable of self-reproduction encourages the production of portraits that render it biological and organic. This can have the effect of making other images seem ugly—even inaccrochable. The old battle between organic aesthetics and montage continues. In 2005, the New York Times columnist, Tom Friedman, published a book titled The World Is Flat: A Brief History of the Twenty-first Century. Friedman flew all over the world to chat with rich business executives as they played golf and otherwise lived the pampered luxury of their everyday lives. Friedman’s conclusions are astounding. Apparently cheap, ubiquitous telecommunications have finally obliterated all impediments to international competition, and now rugged, adaptable entrepreneurs will be empowered. On his own website for the book Friedman includes a review from Publishers Weekly that concludes, “Add in Friedman's winning first-person interjections and masterful use of strategic wonksterisms, and this book should end up on the front seats of quite a few Lexuses and SUVs of all stripes.” Maybe the world is flat—even “Superflat”—for some people. The culture of dispersion may indeed be providing a flat playing field, if not a level one. But the competition continues to rage between capital and labor, each embedded in forms of technological mediation. The work of software art is to make the game visible my showing what many do not want to see—and to construct alternatives to the status quo.

Simply describing the bubble and meltdown or denouncing the bankers and subprime mortgages won’t do. We need to understand what money and finance do, what part they play in the capitalist system. Sadly, left theorizing about money has always been thin. Money has been too repulsive, too ethereal, or too far from the point of production to grab our

Rethinking Money and Finance Captial

Richard Walker





attention. A failure to think fundamentally and deeply about money has made us who are on the left ill prepared to explain what happened in 2008 or anticipate what comes next. We need a theory that can account for the somewhat independent movement of financial affairs from the underlying industrial economy. To create that theory we need to go back and rethink our view of money itself, and to use our analysis to rethink Marxist theory—not necessarily on the centrality of economic crisis but on the basic dynamic of capital accumulation and capitalist development in a way that gives money a real role. Below I lay out five propositions about money and capitalism that I believe will contribute to the development of such a needed theory, one that will accord analytical importance to the relative autonomy of money and finance. I will argue that money’s crucial relative autonomy from the so-called “real economy” under capitalism gives it a special and under-appreciated role in the dynamics of accumulation. Such a perspective allows us to see a deep and absolute thirst for money-making rearing its head regularly above the sea of “capital in general” during the history of capitalism. Most recently, it allows us to ask whether the relative autonomy of money and finance have produced an irreversible shift in capitalist finance that we only vaguely comprehend, yet dismiss at out peril.

1. Money Matters

Money is, above all, the starting point and the end goal of capitalist accumulation. It is the purest form of power over things and others, much sought after and yet feared in the hands of others. It is the fluid coursing through the veins of commerce and market exchange. It is the substance of corporate revenues and the measure of profits. It is the stuff of taxation and the lifeblood of governments. Nevertheless, in conventional economic theory, money doesn't matter. It is consigned to a purely nominal role, useful for market transactions and measuring prices, but having no real effects on its own (Ingham 2004, Ch. 1, Smithin 2003). To the neoclassical economists money is no more than a "veil" over the workings of the "real economy.” Pull back the curtain and you'll see only the little wizard of the market operating the modern world economy. In the conventional view, money is tightly harnessed to the real economy, with very little room for independent movement. Money serves commodity exchange, acting as a means of exchange and measure of values (prices). It cannot outgrow the exchanges it serves and the value that it measures. Both neoclassical theory and Marxist economics normally operate on a hard money theory that goes back to

the origins of the gold standard in post-revolutionary Britain around 1700. In this "quantity theory" of money, the amount of currency times the rate of turnover should equal the amount needed for circulation to proceed smoothly. If money does outgrow the real rate of expansion of trade, it will trigger inflation and crisis of confidence in the value of money, and will ultimately be brought back to earth (Ingham 2004, pp. 19-23). If this were true, however, it would be hard to explain the intense attention of central bankers and monetary authorities to the flux of money and their careful attempts to manage money in service of overall economic performance. During the brief reign of "monetarism" in the 1980s, we learned that there is no automatic relation between quantity of money and economic growth and price levels (Ingham 2004, pp. 28-30). There is a long line of dissenters to the conventional view of money, going back at least to the English Revolution (Ingham 2004, Ch. 2). John Maynard Keynes (1930) is the most important of the modern dissenters, and his followers include Hyman Minsky (1986), whose reputation shot up in the wake of the recent financial crisis. For these theorists, money arises outside of the commodity exchange system, and has a life of its own. Indeed, on this score Keynesianism outshines the vast majority of Marxian economics, in which money is taken as a reflection of the economic base of production and circulation of commodities. The latest in the long line of dissenters is Geoff Ingham, whose brilliant monograph, The Nature of Money, was the immediate incitement for developing the argument I make in this paper. I believe a revised Marxian theory of money needs to recognize both sides of the case. Money is not reducible to the so-called real economy,1 and yet it is indispensable to the latter's operations and even arises out of the flux of commerce and production. Above all, there has to be a renewed attention to the gap between money and commodities, between finance and exchange, and between the financial sector and industry. We know now that gap will make an enormous difference in the end. Money and finance work what once may have been a tiny gap into a world of difference—like water seeping into a crack and freezing to break open the hardest stone.

2. Money is Virtual but Real

Money is real and has real effects. Why, then, is it so elusive? Because money exists in two modalities: tangible and virtual. Tangible money takes the form of currency: coins, greenbacks, checks, credit cards. But most money is virtual in that it is simply numbers in account books or computer files. Bills and coins issued by governments—hard





currency—amount to less than 1% of all money in circulation. We think of money in bank accounts as a representation of hard cash, but the reality is quite the reverse. The dominant form of money is virtual: abstract “money of account” (Keynes 1930).2 That is, money is a system of counting, measuring and comparing values of things like stocks of goods, flows of trade, taxes and debts. This was true long before the rise of capitalism and the modern market economy. Money of account grew up from large-scale practices of merchant trading and borrowing, assessing the wealth of kings and priests, levying taxes and paying soldiers. All these activities required an abstract system of accounting. Indeed, money of account exists as far back as early Mesopotamia and is closely tied to the origin of number systems and mathematics (Ingham 2004, pp. 95-99). Currency (or tangible money), on the other hand, was issued only episodically and pragmatically before modern times, and was not always present at the moment of settling accounts that had to be done in abstract, agreed-upon units. Indeed, currencies came to reflect those units of account rather than generating them. Before the modern era, most gold and silver were used as ornament and treasure, symbols of accumulated wealth of kings and emperors. Until the advent of regularized commodity exchange, their value had little to do with markets (Schoenberger 2008, 2010). Money of account is an abstraction from the everyday expression of prices, currency or wealth. But it is what Marx called "a real abstraction" created in the process of social life.3 To put it another way, abstract money of account is like abstract weights and measures, another abstraction developed in the course of trade. Both have to be formally established by merchants, kings, and industrialists, and they have to be enforced, usually by means of the power of the state. Both ancient empires and modern states have had to back up systems of monetary account and put them into effect by minting tangible currency (coins). States have also been the greatest users of money (to collect taxes and to pay soldiers), keepers of accounts (storing grain or accumulating precious metals), and borrowers from merchants and bankers (to finance wars), and they have thus had a clear interest in counting debts, measuring assets, and assuring the values of payments. If money depends on state sovereigns, it possesses, itself, a kind of sovereignty, as Ingham (2004, p. 12) puts it. Money gives its possessor general economic power over things and people. Possession of money gives rich people and states a new kind of power over others not reducible to the power of property, arms, or prestige. But this power of

money remains limited in pre-modern societies. It only steps forward in a distinctive way in modern, capitalist economies.

3. Money is Created by Credit

Where does money come from? Bourgeois economists from the time of Adam Smith have seen money arising from the natural tendency to truck, barter, and trade, using one thing or another as a means to facilitate exchange (conch shells are a favorite example in these just-so stories) (Ingham 2004). Marx, too, speaks of gold and silver arising as just another pair of commodities with their own values, which then get adapted to use as money because of their practical qualities (Marx 1967a, p. 90). Neither of these are adequate “origin stories.” Money has its own sources of creation. Money arises outside commodity circulation and is not rigidly bound to the quantity of goods and payments in the market. Money is born in the realm of credit and debt: it is a promise to pay, guaranteed either by merchants, bankers, or the state (Ingham 2004, pp. 12, 56-57, 69-80). Government currency, whether ancient or modern, is a promise to pay for goods and services, backed by the wealth and taxing power of the state. But the vast majority of money originates not from the state but from the financial system itself, especially commercial banks. Every time banks issue loans, whether in the form of checking account balances or credit card advances, they are creating new money. These acts of lending are normally linked to real economic activity, as the borrowers use the new money in hand to make consumer purchases (like a new car or home) or to make business purchases, like new stock or equipment. Credit relations became more regular with birth of the modern era, especially in the relations among European merchants. In Europe, for the first time, private money overtook state money in quantity and quality. This was largely abstract money of account to keep track of debts, payments, and stocks, even when no currency changed hands. The invention of modern bookkeeping and banking in Renaissance Italy grew out of such transactions. A key step in expanding the money supply came with the generalization of borrowing and lending using merchant IOUs (or bills of exchange). A subsequent step was the "depersonalization of debt" by free exchange of these bills. This first took place in Antwerp, followed by Amsterdam and London, in the 16th and 17th centuries (Ingham 2004, pp. 108, 112-20).4 Government debt in the form of bonds (like U.S. Treasury Bills) is another kind of credit, or promise to pay, which is monetized as it circulates through banks and exchanges. Government borrows by selling bonds to wealthy





individuals, trust funds, private banks, or even the central bank (e.g., the Federal Reserve), whereupon the state can turn around and spend by printing new currency or writing checks. The modern state manipulates the amount of private credit-money in circulation by having the central bank buy or sell bonds, by reserve requirements for commercial banks, and by having the central bank provide credit to the banks to expand their reserves. The power to create money is a critical one, and the history of money is fraught with class struggles. Today the credit system is so extended that it's quite hard to pin down where money begins and ends. Indeed, even the monetary authorities have trouble measuring the quantity of money in existence today! They have a system of categories, M1, M2, M3...M10 and beyond, each less tangible and more virtual than the last, and still no one is sure what the exact measures are. The amount can never be precisely known because of the power of credit to breed money and the gap between money and the real economy. This elasticity of money, and the open-ended potential of money creation, takes on particular importance when joined to capital. Still, money is not infinite in its abstraction; eventually it must be tied back to value creation (Harvey 1982). But what is value?

4. Value Breeds Money

Money took on a dramatically new form and function with the coming of the modern capitalist economy. Early modern Europe saw gold and silver monies start to flow through the arteries of commerce in unprecedented quantities. Indeed, as Erica Schoenberger (2010) has shown, this is the first time in history that gold becomes primarily money in circulation rather than stocks of wealth attesting to the social value of kings and nobles. The ancient fetish of gold did not disappear immediately, however. Most notably, it remained at the forefront of Spain's plunder of the Americas (a murderous appropriation justified by mercantilist economic theory). As Marx puts it, "Modern society...greets gold as its holy grail, as the glittering incarnation of the very principle of its own life" (1967a, p. 133). But this fetish could not sustain a real economy for long, as the Spanish discovered to their regret in the long 17th century (Hobsbawm 1954). That gold only became fecund in the hands of Dutch merchants and their modern economy of credit, commerce and capital, and the Netherlands left Spain in the dust.In its new role as key actor in the play of commerce, money assumed its modern role as means of exchange, measure of value, and store of value. But what is this thing called

"value" that money is supposed to be the measure and store of? As Marx argued, with the spread of markets as regulators of economic life, a new kind of abstraction arises in the world: commodity value. At first, this value largely represented abstract labor time, as recognized by most 18th-century classical political economists (who opposed the Physiocrats’ doctrine of land as the ultimate source of value). Only later, with the growth of modern industry and machine production, did labor time become submerged by “the transformation problem" due to the unequal capital/labor ratios across sectors.5 As value becomes the chief moving force behind exchange and commodity circulation, it drives the expanding use of money. As Marx says early in Capital, "Circulation sweats money from every pore" (1967a, p. 113). And that money represents value. As production expands, the swirl of commodities expands, and so does the quantity of value in circulation and hence the amount of money. But this means a collision of two modalities of money: credit-money created by mercantile commerce and value-money created in the process of commodity production and exchange. A crucial transformation takes place through this collision: the new abstraction of commodity value comes to inhabit the skin of the older abstraction of money of account. Ingham fails to reckon with this historic transformation because he refuses to entertain an objective theory of value (2004, p. 62). For him money is chiefly guided by credit relations and by states, not the production and circulation of commodities. On the other hand, Marx's followers have erred in thinking that the commodity value system and the money system are equivalent. There is no such equivalence. On this point Ingham is correct. Money of account comes into alignment with money as value, to be sure, but it is never simply reducible to the sum of (labor) value produced.6 Rather, money is like a flexible, virtual glove fitted to the invisible hand of value production and circulation. Yet there is more to the link between money and value than elasticity. The rapid expansion of value with modern economic growth gives new life, new currency, and new force to money, conferring an even broader power over things and people and states. And that power is extended further by the way money comes to ride the elephant of capital—even as money is an essential aspect of the origins and expansion of that capital.

5. Money Breeds Capital

It takes more than a theory of markets and value to grasp the workings of capitalism. Capital is the vital yeast in the brew, as Marx has shown. I have always thought that





people read too quickly over the opening chapters of Capital to get to the secret of surplus value and the nitty-gritty of the labor process. In fact, Chapter 3 (“Money, or the Circulation of Commodities”) and Chapter 4 (“The General Formula for Capital”) of Volume I are vital to Marx's whole project. These are the bridge between the opening chapter showing that commodity value is based on socially necessary labor time and Chapters 6 and 7 showing that surplus value is based on surplus labor time. In these bridging chapters Marx demonstrates that generalized commodity circulation must necessarily give rise to the use of money as capital. This is what we need to understand. Looking back, as commerce became generalized in Europe and the Americas, so did capital, but with a lag. The merchants of Italy who financed the Iberian conquests of the 16th century, with the help of the barely-modern Spanish and Portuguese crowns, were still shadowy players compared to the Dutch and English merchant capitalists who drove the sugar and slave trade of the West Indies by the 17th century, aided by the modern Netherlands and British states that they had shaped from within (Arrighi 1994, Moore 2007). And, of course, by the 18th century, full-blown capital gave birth to the agrarian and industrial revolutions in Britain, spreading quickly across Europe and to North America (Marx 1967a, Pollard 1981). How are we to understand this trajectory theoretically with respect to the roles of money and finance? Marx's argument is that generalized market exchange requires money as means of exchange and measure of value, as in the formula C-M-C. But market exchange also

“bleeds” new money that serves as a store of value and the stalking horse of capital.7 C-M-C soon becomes inverted to M-C-M', as merchants see that money thrown into circulation can yield more money, that is, make a profit (Marx 1967a, pp. 147-50). Soon this becomes the preferred pathway along which money moves. It moves no longer as a passive facilitator of exchange but as an active investment in circulation (merchant capital) and, ultimately, in commodity production (industrial capital). The secret of profit making, or the ability of M to turn into M', is revealed by Marx to rest on the secret of surplus value: labor's ability to produce more value than it costs to reproduce workers. Everyone leaps on the concept of the production of surplus value as the key to the life of capital, but Marx does more than this in the early chapters of Capital. He reveals the secret of capital accumulation— the driver of modern economic growth. The secret to that lies in the nature of money. Money, which is pure value, pure accounting, is experienced as potentially infinite. Thus, capital accumulation, too, can be understood—and conceptually and psychologically internalized—as infinite, even if the number of commodities, "the wealth of nations," is registered as finite. A boundless lust for unlimited monetary wealth therefore becomes the primary—even primal—motivation of the capitalist even before the spur of competition. Marx's key discussion of the miser versus the capitalist reveals that the world of the moneyed is turned upside down once the possibility of unlimited riches through investment, rather than hoarding, is revealed (Marx 1967a, pp. 130-33, 151-53). The accumulation of capital opens up a new gap between the

abstract and conceptually infinite world of money and the finite material foundations of commodity production. Capital climbs onto the economic bandstand and everything is soon dancing to the tune of M-C-M'. Capital becomes the reigning power over economic life. This brilliant insight illuminates all of Capital: capital begets more capital, more wage-labor, and more surplus value, ad infinitum. The failure of money theorists to see this power of capital to multiply itself and money exponentially has had profound consequences. Alas, in Marxist theory it is industrial capital that gets all the attention. The role of money fades into the background. Money virtually disappears in the second half of Volume I of Capital. When Marx goes on to discuss capital circulation in Volume II, the distinctive character of money is hardly mentioned (Marx 1967b). Money only comes back when he discusses the partition of total surplus value in Volume III. This is insufficient. We need to be in a position to give the following question a convincing and more than theoretical urgency: Has finance capital now forced open the gap between money and the circulation of commodities so far—filling the space with its own institutions, activities, investments, and profiteering—that we are now in a new era of capitalism that is taking the United States and prospects for a economic system that promotes democracy downhill?__________Note: A longer version of this paper can be found on the Rethinking Capitalism website under Recent Articles”: http://rethinkingcapitalism.ucsc.edu/.

1 I will continue to use the standard term the “real economy” as a convenience, even though I am



http://rethinkingcapitalism.ucsc.edu/






arguing that money and the gap are also real.2 Marx also refers to the dual nature of money of account versus hard cash, and the potential contradiction between the two (1967a, p. 138). 3 That is, money is an abstract relation, not just an abstraction arrived at through thought. To grasp this requires an ontology in which the world has depth and not everything is immediately accessible to observation (Sayer 1987).4 Harvey (1982) draws on scattered observations by Marx, particularly in volume III of Capital, to arrive at a similar history of credit as Ingham.5 I leave quarrels about the labor theory of value aside here. All that matters is that value is an objective quantity that measures the real costs of production in some manner and not a subjective evaluation as in neoclassical economic theory.6 But Minsky (1986) surely goes too far in calling money a “force of production.” Money is a force, to be sure, but production of value is something else again7 "This final product of the circulation of commodities is the first form in which capital appears" (Marx 1967a, p. 146).

The Bibliography below is provided in the hope that it will prove useful to others working on money and value and the future of finance capitalism.

Bibliography

Akerlof, George and Robert Shiller. 2009. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton, NJ: Princeton University Press.Arrighi, Giovanni. 1994. The Long Twentieth Century: Money,

Power and the Origins of Our Times. London: Verso.Bernstein, Peter. 1996. Against the Gods: The Remarkable Story of

Risk. New York: John Wiley & Sons.Brenner, Robert. 2002. The Boom and The Bubble: The US in the

World Economy. London: Verso.Brenner, Robert. 2004. "New boom or new bubble? The trajectory of

the U.S. economy." New Left Review 25: 57-99.Brenner, Robert. 2006. The Economics of Global Turbulence: The

Advanced Capitalist Economies from Long Boom to Long Downturn, 1945-2005. London: Verso.

Brenner, Robert. 2009. "What's Good for Goldman Sachs is Good for America: The Origins of the Current Crisis." Center for Social Theory and Comparative History, UCLA, April 18.

Bryan, Dick and Michael Rafferty. 2006. Capitalism with Derivatives: A Political Economy of Financial Derivatives, Capital and Class. New York: Palgrave Macmillan.

Foster, John Bellamy and Fred Magdoff. 2009. The Great Financial Crisis: Causes and Consequences. New York: Monthly Review Press.

Fox, Justine. 2009. School for Scoundrels: The Myth of the Rational Market – A History of Risk, Reward and Delusion on Wall Street. New York: Harper Business.

Frank, Thomas. 2000. One Market Under God: Extreme Capitalism, Market Populism and the End of Economic Democracy. New York: Random House.

Fraser, Steve. Every Man a Speculator: A History of Wall Street in American Life. New York: HarperCollins.

Freeman, Alan. 1995. Marx without equilibrium. Capital and Class. 56: 49-89.

Galbraith, John Kenneth. 1988. The Great Crash, 1929. (With a new Introduction) Boston: Houghton Mifflin.

Galbraith, John Kenneth. 1967. The New Industrial State. Boston: Houghton Mifflin.

Harvey, David. 1982. The Limits to Capital. Oxford: Basil Blackwell.

Harvey, David. 2005. A Brief History of Neo-Liberalism. New York: Oxford University Press.

Harvey, David. 2010. The Enigma of Capital and the Crises of Capitalism. London: Profile Books.

Henwood, Doug. 1997. Wall Street. London: Verso.Hilferding, Rudolf. 1981. Finance Capital. London: Routledge and

Kegan Paul. [Vienna, 1910]Ho, Karen. 2009. Liquidated: An Ethnography of Wall Street.

Durham, N.C.: Duke University Press.Hobsbawm, Eric. 1954. “The General Crisis of the European

Economy in the 17th Century.” Part I: Past and Present, 5, 33-53. Part II: Past and Present, 6, 44-65

Ingham, Geoffrey. 2004. The Nature of Money. Cambridge, UK: Polity Press.

Johnson, Simon and James Kwak. 2010. 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York: Random House.

Keynes, John Maynard. 1930. A Treatise on Money. London: Macmillan.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money. London: Macmillan.

Kindleberger, Charles. 2000. Manias, Panics and Crashes: A History of Financial Crises. New York: Wiley.

Lewis, Michael. 2010. The Big Short: Inside the Doomsday Machine. New York: WW Norton.

Martin, Randy. 2002. The Financialization of Daily Life. Philadelphia: Temple University Press.

Marx, Karl. 1967a. Capital: Volume I. New York: International Publishers. [1863].Marx, Karl. 1967b. Capital: Volume II. New York: International

Publishers. [1893]Marx, Karl. 1967c. Capital: Volume III. New York: International

Publishers. [1885]McNally, David. 1988. Political Economy and the Rise of

Capitalism. Berkeley: University of California Press.Minsky, Hyman. 1986. Stabilizing an Unstable Economy. New

Haven: Yale University Press.Moore, Jason. 2003. “Nature and the Transition from Feudalism to

Capitalism.” Review: A Journal of the Fernand Braudel Center 26 (2): 97-172.

Moore, Jason. 2007. “Silver, Ecology, and the Origins of the Modern World, 1450-1640.” In: Hornborg, Alf, J.R. McNeill and Joan Martinez-Allier, Eds. 2007. Rethinking Environmental History: World-System History and Global Environmental Change. Lanham, MD: Alta Mira Press. Pp. xxx.

Phillips, Kevin. 2009. Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. New York: Penguin Group.

Pollard, Sidney. 1981. Peaceful Conquest: The Industrialization of Europe, 1760-1970. New York: Oxford University Press.

Reinhardt, Carmen and Kenneth Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.

Roemer, John. 1982. “New Directions in the Marxian Theory of Exploitation and Class.” Politics and Society. 11 (3): 253-287.

Roubini, Nouriel and Stephen Mihm. 2010. Crisis Economics: A Crash Course in the Future of Finance. New York: Penguin Press.

Sayer, Derek. 1987. The Violence of Abstraction: The Analytic Foundations of Historical Materialism. Oxford: Basil Blackwell.





Impressions of Rethinking Capitalism

Kim Stanley Robinson

The conference invited speakers from many different disciplines to discuss the recent financial crash and its aftermath. The speakers were entertaining and accessible, sharing with the audience their most recent findings and often in the process giving a succinct abstract of their last several years of work. The result constituted a kind of extremely rapid education, given in twenty-minute increments, with each presentation explicating some aspect of our economic moment, and fitting in with the rest like bricks in a wall: as the weekend went on, the conference as a whole seemed to be making a case. From the economic historians we learned that financial bubbles are a regular and perhaps inevitable feature of capitalism. From the anthropologists we learned how finance traders behave, and from the sociologists we were shown how modern finance operates as a world system, and how its structure has changed with the advent of computers and the invention of new derivatives to trade. Science studies provided its characteristic mix of history and theory to deconstruct any idea we might have had that accounting is a simple or straightforward thing; not only are the books cooked, as the saying has it, but they are indeed books, written by interested to parties to express certain things and could be written differently. Legal

experts described how some kinds of accounting get encoded into law, and how laws shape behaviors. Political scientists connected all this theory and analysis to particular situations in American, global, and personal politics. The conference discussed economics by speaking to it from the sciences and humanities surrounding it, which I thought made the implicit point that economics, as currently practiced, is a discipline so narrowly conceived that it can’t do its job right. So this group of speakers, academic, technical, and research-oriented, was also political, and inevitably so. Together they made a progressive analysis and critique of capitalism that would be contradicted by the analysis of a right-wing think tank. It’s in this sense that I feel there was a case being made, by a diverse but mutually comprehensible and ultimately coherent group of thinkers. The coherence was not an accident but rather the result of the conference’s organization. I presume this is the work of Robert Meister who should be given credit for being something like the curator of an event, an educational spectacle with a conceptual impact beyond that of the usual conference The nature of the weekend as a kind of theater made up of improvised performances was made obvious when the first morning’s speakers in their enthusiasm went over the allotted time. Eventually Michael MacDonald had to grasp the nettle and save lunch by replacing his presentation with a brief but inspired talk that reminded us of the stakes involved in the matters being discussed. Later Randy Martin danced his talk on dance as political expression, and after that the talks were not only close to on time, but had an extra charge as theater. A lot of lively discussion also took place during the catered meals in the conference hall, and between talks. I was lucky to sit next to Robert Wosnitzer and thus was able to ask him a lot of questions that gave me context for what I was seeing. In breaks I talked to Dick Bryan about derivatives and other things, and to Janet Singer about math education methods. I could see in these intervals that similar conversations were going on all over the room. The students in the audience were similarly absorbed and engaged. Coming to all this as a science fiction writer, I was struck by how much futurity there is in capitalism. Speculation, hedging, insurance, investment, futures, mortgage, credit, debt, etc.—all these concepts contain stories about how the future is supposed to unfold. But to me stories set in the future are always science fiction, by definition. So when we were told future earnings cannot

Schoenberger, Erica. 2008. “The Origins of the Market Economy: State Power, Territorial Control, and Modes of War Fighting.” Comparative Studies in Society and History. 50 (3): 663–691.

Schoenberger, Erica. 2010. “Value in Nature: The Case of Gold.” Unpublished manuscript, Johns Hopkins University, DOGEE.

Shiller, Robert. 2005. Irrational Exuberance. Princeton, NJ: Princeton University Press. Second edition.

Smith, Adam. 1776. The Wealth of Nations. New York: Modern Library Edition, 1937.

Smithin, John. Ed. 2003. What is Money? London: Routledge.Stiglitz, Joseph. 2010. Freefall: America, Free Markets, and the

Sinking of the World Economy. New York: Norton.Studenski, Paul. 1963. A Financial History of the United States.

New York: McGraw-Hill [1952].Sweezy, Paul and Harry Magdoff. 1987. Stagnation and the

Financial Explosion. New York: Monthly Review Press.Whalen, Christopher. 2010. Inflated: How Money and Debt Built

the American Dream Nj: Wiley.





be estimated unless one knows present value, while present value cannot be determined until future earnings are known: to me it was a time travel paradox. Newly invented financial derivatives entering a computer-augmented market and becoming an emergent life form? That sounded like the singularity, or even Frankenstein. Maybe this was just my own particular lens, but on the other hand, maybe in any field with a high element of futurity, science fiction stories will unconsciously shape the way we narrate those fields. UC - Santa Cruz’s Hayden White showed how this process works when historians write history; their underlying narrative structures turn out to come from epic and dramatic literature. In attempting to write the future’s history before it arrives—to own it—capitalism may make the same kind of borrowing from literature. So, in a new way, it seems to me yet again that we are all living in a science fiction novel that we write together. Out in the world, this Santa Cruz conference, part of a larger rethinking of capitalism, joins an ideological “war of the economists,” in which different paradigms, explanations, and prescriptions compete to construct the capitalisms and post-capitalisms to come. Any changes will occur against powerful resistance, and will necessarily be based on the description of the situation that is the most persuasive to the most people—both to people in power and to everyone else, as co-creators of hegemony. In this slightly destabilized moment, and with environmental ruin the inevitable result of our current economics, one has to hope that the clearest analysis wins, and then try to make that analysis. The task is then also to describe ways in which the economy could be improved. Sometimes it seems to me that the human sciences have made a mistake in trying to prove that they are truly scientific by being objective in the manner of physics—confining themselves to describing the world as it is, without getting into any questions of how things should be or what we should do, which, from the perspective of physics, would be nonscientific. To me a better model for the human sciences is medicine, the first human science, where the point is never just diagnosis, but diagnosis and treatment. The other human sciences should follow medicine’s example and routinely include suggested treatments along with their diagnoses, as if the human sciences were public health agencies. An example of how this could work in economics was given at the conference by Shyam Sunder in his talk on valuation and measurement, in which he described how a more broadly-conceived accounting balance sheet for the performance of corporations would make the accounting less tilted toward shareholders and more comprehensive, more humanly useful. It would be good to see speculative,

prescriptive treatments like this in studies of all parts of the economy. The mere existence of alternative possibilities described in detail is a positive force in the struggle to move into a better system. There was a suggestion that next year’s conference focus on the idea of “futures.” Naturally I think this is a good idea. No matter what its focus is, if it’s like this year’s meeting, it will be truly interesting.

We can all agree, I trust, on a basic, stylized progression of economic and political events over the past decade in the United States. In the mid-2000s, the country entered yet another financial boom—henceforth seen as a bubble—which was itself intimately tied to the real estate sector and the invention of increasingly complex and exotic financial products which became the vehicles of financial collapse. Boom first began turning to bust in the summer of 2007 when Bear Stearns shut down two of its real estate hedge funds and the “credit crunch” first reared its head. By mid-2008, Bear Stearns itself had collapsed and US mortgage giants, Fannie Mae and Freddie Mac, effectively had been nationalized by the United States government. In September it all began to unravel as the country found itself in the midst of its greatest financial crisis since the Great Depression. American capitalism itself was only saved by the quick interventions of the federal government that in due course came to face its own financial challenges. By 2010, many state and local governments, lacking the federal government’s exorbitant privilege of externally unconstrained borrowing, began experiencing full-blown fiscal crises that provided unequalled opportunities for state-level Republican parties to marshal political attacks on state spending in general and public employees in particular. In the teeth of the country’s most sluggish economic recovery since the 1930s, this has been inevitably followed by fiscal retrenchment and a new political enthusiasm for austerity. This is, I hope, an uncontroversial description of recent American history. A common interpretation generating an understanding of these events is, however, less widely shared. The popular interpretation from the left is a familiar one. A very old story is rehashed, one of

Finance, Politics, and the Fiscal Crisis of the State

Darel Paul





capital organizing itself for an attack on the working class, supported in misguided fashion by a popular downscale political right which fails to appreciate its true interests.1 This understanding of recent American political-economic history is both inaccurate and dangerous to the effective political agency of those members and friends of the working class who embrace it. Instead I propose a very different story, one which appreciates the dramatic changes in the country’s political economy since the 1970s and which may provide the foundation for a new and more effective transformational political project. The signal feature of the American economy today is its deep and thorough financialization, itself refracted through the country’s politics. Consider first that government finances have become increasingly correlated with the successes and failures of the financial sector. From the end of World War Two through the 1970s, federal expenditures and federal receipts moved together fairly closely. The Reagan tax cuts of the 1980s brought on the country’s first major bout of deficit spending, itself enabled by a burgeoning transnational financial sector, and particularly since the 1990s, the ups and downs of finance itself have determined the state’s fiscal health. The two most recent booms in federal receipts—the late 1990s and the mid-2000s—were both accomplished thanks to expanding financial bubbles. Dramatic collapses in receipts in the early 2000s and the late 2000s/early 2010s were likewise due to popping financial bubbles. Prior to the financialization of the American economy, falls in real federal receipts were associated with temporary dips in manufacturing. They were always fairly short—on the order of four to nine quarters—which dramatically limited their social and political impact even when exceptionally deep as in 1948-50, 1953-55, or 1974-76. This was mirrored in the character of the country’s periods of unemployment that were likewise brief if sometimes dramatic. Under conditions of financialization, however, the decline of government revenues in times of recession—like declines in employment—has been of a completely different character. The 2001-02 decline in federal receipts was the fourth deepest in relative terms in American post-WW2 history, and at sixteen quarters duration, the longest up to that time. Today we are in the midst of the worst of both worlds. The 2007-09 decline was at -15.3%, the steepest since the Great Depression, and as of mid-2011 constitutes the longest lasting decline as well. One should not therefore be surprised that the country’s current and third straight “jobless recovery” has been both the deepest collapse in employment since the 1930s and the longest in duration.

Figure 1: US real federal government expenditures and receipts, 1947-2010, by quarter, in billions of constant seasonally-adjusted 2005 dollars

Source: Federal Reserve Economic Data, Federal Reserve Bank of St. Louis. http://research.stlouisfed.org/fred2/ Of course, the recovery that supposedly began in June 2009 is far from touching all parts of the economy. Currently the United States faces its worst employment market since the Great Depression. Since the crisis, the relative decline in the number of jobs was -6.3% at its nadir in the overall economy and -7.6% in the private sector, the worst relative employment crash in post-



http://research.stlouisfed.org/fred2/

http://research.stlouisfed.org/fred2/



WW2 US history. To make matters worse, the decline is set to be the longest in post-WW2 history as well; as of June 2011 the jobs shortfall stands at forty-one months and counting, and, because of its tremendous depth, is sure to last longer than the forty-six month slog under George W. Bush. Believe it or not, the US has fewer jobs today than the country did back at the beginning of the last jobs recession in 2001, making for a truly lost decade in American employment. Even though food stamps have replaced soup kitchens and private charity has largely ceded ground to a multitude of state-backed income support programs, comparisons of today with the 1930s are certainly warranted. Back in the 1930s, however, a strong political backlash against finance occurred. The banking sector was widely blamed for the onset of the Great Depression—note Franklin Roosevelt’s condemnation of the “money changers” in his 1933 inaugural address—and the innovative work of John Maynard Keynes lent theoretical support. By Roosevelt’s inauguration, finance had largely self-immolated and thus the political task of caging what remained was relatively easy. Even in contemporary Europe, popular political revolt against the rule of finance has claimed governments from Ireland to Portugal to Spain. Yet nothing like this has yet happened in twenty-first century America. Why not? In part the answer is that the crisis of finance has become the fiscal crisis of the state, a shift itself made possible by a mode of class politics very different from that born out of the New Deal and World War Two. Over the past twenty years, state government revenues have become increasingly dependent on the success of finance, and the 2008-09 financial crisis combined with the ensuing recession dramatically weakened government budgets. More importantly, this is an unfolding catastrophe that appears to have no end in sight. According to the Center on Budget and Policy Priorities, FY2012 (July 2011-June 2012) is “shaping up as one of the states’ most difficult budget years on record” with 44 of the 50 states projecting shortfalls and a majority of those 44 with projected shortfalls greater than 10% of their overall budgets.2 While budget gaps in FY2010 and FY2011 were notably worse in terms of states’ own revenues, federal stimulus spending cushioned the blow. Federal supplements are now over, and states must face their futures without the massive borrowing power of Washington. The Republican Party has embraced a familiar political response to this fiscal impasse: dramatically cut government spending. The Democratic Party has advanced a different policy that on the surface appears to reflect a New Deal commitment to progressive taxation: “soak the rich.”

However, this approach masks an important shift in the political interests represented by the Democratic Party since the demise of Keynesian policies. While high marginal rates on top earners were certainly characteristic of the country’s New Deal tax regime, they were matched by a political commitment to a broad tax base, itself made possible by relatively high levels of income equality. Bill Clinton and Barak Obama, however, have each campaigned on a “middle-class tax cut”—not a wider tax base but a narrower one. In fact, tax cuts for middle-income Americans have served largely as Democratic Party compensations for the ever growing income inequality created by neoliberalism, and “soak the rich” has become the Democrats’ primary fiscal strategy. Who exactly are the “rich”? If one looks at the 2009 stimulus package, tax cuts were extended to married couples making up to $150,000 per year or individuals making up to $75,000, which represents, in both cases, slightly over twice the national median. If one looks instead to the 2010 health care legislation, only families making over $250,000 would be subject to new taxes, for example; that is, only those married couple households making around three-and-one-half times the national median.3 These are tax policies that look to generate revenue from at most the top 10% of earners and oftentimes even fewer persons. It should be no wonder then that this combination of growing income inequality and “soak the rich” tax policies produced in 2009 a situation in which 47-51% of individuals and households paid no federal income taxes at all.4

Figure 3: Individual income tax rates by state, as of 1 February 2010

State Top marginal tax bracket

Top marginal tax rate

Top-‐to-‐median

marginal tax rate gap

California $1,000,000 10.55% 1.0%

Maryland $1,000,000 6.25% 1.5%

New Jersey $500,000 8.97% 3.445%

New York $500,000 8.97% 2.12%

Connecticut $500,000 6.5% 1.5%

Rhode Island $373,650 9.9% 2.9%

Vermont $373,650 8.95% 1.95%





Oregon $250,000 11.0% 2.0%

Wisconsin $224,210 7.75% 1.25%

Ohio $201,800 5.925% 1.816%

Hawaii $200,000 11.0% 2.75%

Sources: “State Individual Income Tax Rates, 2000-2011,” Tax Foundation, 3 March 2011. http://www.taxfoundation.org/taxdata/show/228.html#state_individualincome_rates-2000-2011-20110302 ; “Median household income by state: 1984-2009”. US Census Bureau, Current Population Survey, Annual Social and Economic Supplements. http://www.census.gov/hhes/www/income/data/historical/household/H08_2009.xls

Many of the most liberal states have followed this national Democratic Party strategy. The states which best exemplify a “soak the rich” approach are a group of mainly Pacific coast and Northeastern states which combine high marginal income tax rates for the highest brackets, high income levels in the highest tax bracket, and large gaps between rates paid by the top taxpayers and those paid by the state’s median income household. It is probably little surprise that many of these same states are highly dependent on individual income taxes to fund their budgets. In 2007, five states relied on such taxes for 38% or more of their general own-source revenues, and all five were among the top six states most dependent on the top 1% of earners for their general own-source revenues.

Figure 4: State dependence on a “soak the rich” tax strategy

(2007 data)

State

Percentage of state general own-‐source revenue from individual income taxes

(rank)

Percentage of state general own-‐source revenue from individual income taxes on top 1% of personal income earners

(rank)California 38.3% (4) 17.2% (1)

New York 41.6% (2) 17.1% (2)

Connecticut 38.2% (5) 15.3% (3)

New Jersey 30.3% (15) 12.4% (4)

Massachusetts 38.8% (3) 11.3% (5)

Oregon 46.0% (1) 9.7% (6)

Sources: State and Local Finance Data Query System, Tax Policy Center, Urban Institute and Brookings Institution; “Falling fortunes,” Wall Street Journal [on-line], 26 March, 2011, http://online.wsj.com/article/SB10001424052748704471904576231111730177574.html

The states which thus epitomize both a “soak the rich” revenue approach and are the most dependent on the rich for their state revenues also constitute the country’s spatial foci of finance capital: California, New York, New Jersey, and Connecticut. Here we see, in effect, the contemporary liberal model of financing government, a model premised at the very least upon the existence of the super-incomes generated by finance and perhaps even upon the expansion of those incomes. Reliance on “millionaire’s taxes” only increases the state’s reliance on the super-rich and constitutes a meager compensation for the perpetuation of super-inequality, itself born of the financialization of the American economy.5

This is far indeed from a social democratic model of government financing in which everyone is brought into the tax system and at relatively high rates. For example, in Iceland and Denmark around 54% on average of the disposable income of working-age persons is taken in taxes while the richest 10% of income earners contribute only 22% and 26% of total taxes respectively. Even in Germany, 41% of the disposable income of working-age persons goes to taxes (the US figure is under 28%) and 31% of all taxes are paid by the top 10% of earners (the US figure is 45%). Out of all OECD countries, a 2008 report on inequality noted that “taxation is most progressively distributed in the United States,” a progressivity again premised upon the existence and perpetuation of the most dramatic income inequalities in the Western world.6 A social democratic taxation policy is not a liberal (in the American sense) one by any means, which points up the fact that the Democratic Party is far from social democratic, even in aspiration. The reason for this lies in its class foundations that have long since departed from the industrial working class and settled instead upon the professional class.

It goes without saying that the republican class likewise lacks any desire for a social democratic mode of financing the state. The combination of professional class opposition to raising taxes on 95% of people and republican class opposition to raising taxes on 100% of people leads us to our current political impasse. In February 2011, Gallup



http://www.taxfoundation.org/taxdata/show/228.html








http://www.census.gov/hhes/www/income/data/historical/household/H08_2009.xls




http://online.wsj.com/article/SB10001424052748704471904576231111730177574.html






asked a representative sample of Americans, “Which strategy do you prefer to close these tremendous budget gaps that we see in the US?” Of three possible options, the least popular proved to be, “Increasing state sales, income or other taxes,” supported by only 27% of respondents. When broken down by party affiliation, a majority of self-identified Republicans back policies to both “reduce/eliminate certain state programs” and “reduce pay/benefits for state workers.” More interesting, however, are the responses of self-identified Democrats. For each of the three options, roughly one-third of Democrats favor it while two-thirds of Democrats are in opposition; that is, a majority of Democrats don’t want to decrease or eliminate state programs, don’t want to cut the salaries of state workers, and don’t want to raise taxes.7 A similar Gallup poll from March 2011 presented seven different options for balancing state budgets. “Raising state income or sales taxes” came in second to last with just 33% support, ahead only of “borrowing more money by issuing bonds.” The only two options to garner majority support were cutting state programs and firing state workers. As seen in the earlier poll, a majority of Republican partisans are behind all four strategies for cutting spending, and a majority reject all three options for increasing revenues. Among Democrats, a bare majority support three possible solutions: “reduce/eliminate certain programs” (52%), “reduce number of state workers” (51%), and “raise state business taxes” (51%). Perhaps most depressing from a social democratic viewpoint, only 36% of Democrats favor increasing sales/income taxes and nearly as many (31%) support limits on the bargaining rights of public employee unions. In light of the poll’s margin of error, these two options have equal support among self-identified partisan Democrats.8 These national polls do not indicate that a “soak the rich” approach cannot be implemented in selected states. They do suggest, however, that such an approach is the only politically viable one available to the American left, and thus that the Democratic Party remains wholly wedded to the country’s financialized status quo.

The magnitude of the economic collapse of 2008-09 combined with the nearly illegitimate status of tax increases set the stage for the 2010 small-r republican backlash. Not only did a new crop of market enthusiasts and state budget cutters take power in the US House of Representatives, but they also won gubernatorial races and state legislative majorities across the country. The traditionally “blue” and increasingly “purple” state of Wisconsin is both an example and a harbinger of this backlash. In 2010 Republicans took control of the

governorship and both houses of the state legislature for the first time since the 1995-96 session and only the second time since 1971. Governor Scott Walker proceeded quickly to try to resolve the state’s budget woes by cutting public employee salaries and attacking the bargaining rights of public employee unions. Despite a powerful counter-response from the state’s labor movement and dramatic political tactics by Democrats in the legislature, Walker’s budget passed and his example has been followed in Ohio and Indiana with Florida, Maine, and Michigan lining up behind.

Why such determined attacks on state workers’ ability to organize and bargain collectively, particularly when it promises little meaningful contribution toward budget cutting in the long-run and none in the short-run? To some degree it is a party political strategy to defund Wisconsin Democrats by eliminating important unions as a reliable source of campaign contributions.9 That being said, there is much more going on. This is a class political strategy of the republican class to discipline its professional class rival and allies. A common left interpretation of Wisconsin is a familiar one of corporate-backed attacks on the working class. It is essential to note, however, that since 2009 and for the first time in US history, a majority of the country’s unionized workers are in the public sector. While a mere 7.7% of private sector workers were in 2010 covered by unions, 40.0% of public sector workers are likewise covered.10 Significantly, a majority of these state workers are teachers, social workers and nurses, and thus “professionals” by any definition. Because of this, professionals have become the most unionized broad occupational category.11 Moreover, a 2004 study found that persons with advanced degrees—almost the definition of the professional class—were the most unionized group in the country by level of educational attainment.12 In the contemporary United States, attacks on public sector unions are attacks on the professional class.13

As the Wisconsin model of budget balancing spreads to other states, a pattern of political preconditions for attacks on state workers emerges. The biggest political pushes appear in states which present a problem in large budget deficits, a target in significant public employee unions with bargaining rights, and the political will to unite problem and target in Republican control of both the executive and legislative branches of state government. After the 2010 elections, this recipe seems to fit several states across the center of the country besides Wisconsin such as Ohio, Indiana, Michigan, and Tennessee as well as Maine and Florida.





Such aggressive attacks on state workers have been interpreted by some as political suicide. Wisconsin Democrats are likely to secure a recall election on Scott Walker in 2012 and have already gained recall elections for six Republican state senators for the summer of 2011. However, if we compare Scott Walker to his counterpart in neighboring Illinois, Pat Quinn, we see some interesting numbers. As of May 2011 Walker had an approval rating of 43% with 54% opposed, figures that have been steady since Walker’s budget was released in February.14 In light of his tremendously polarizing political actions as well as the closeness (52-47) of his win in the November 2010 governor’s race, these are far from terrible numbers. Quinn, the Democratic governor of Illinois, won an even closer gubernatorial race in November 2010 (47-46). He too faces a daunting state budget challenge.

Rather than attack public sector unions, however, Quinn marshaled through the Democratic state legislature one of the biggest tax increases in Illinois history, raising personal income tax rates from 3% to 5% and corporate tax rates from 4.8% to 7%. In turn, Quinn’s approval rating in March 2011 was a dismal 31% with 61% disapproving.15 In light of the political firestorm unleashed against Walker by the state’s public employee unions and its Democratic Party as well as Walker’s standing as the country’s most polarizing governor,16 the fact that he outpaces Quinn by 12 points says volumes about the country’s views of taxation.

In the contemporary struggle between the professional class and the republican class, professionals are politically vulnerable. They are highly dependent on the state for both direct income as state employees as well as indirect income as recipients of state spending on education, health care, social services, science and engineering, etc. The professional ethic is one of meritocracy which requires the state, as well as professional organizations with power backed by the state, as the social location for expertise to be recognized and rewarded. Republican anti-state and anti-tax politics thus sharply threaten the social power of professionals. The primary political response of the professional class has been a combination of identity politics and “soak the rich” tax policy, both of which are completely consistent with a continuation of the neoliberal status quo.

The republican class is a market-oriented social class far less dependent upon the state than are professionals. This is especially so for the petty bourgeoisie whose social position is premised upon satisfying market demand rather than upon specialized knowledge. Members of the republican class are comfortable with the role of the

market in determining social values as long as that market is “competitive,” itself an always ephemeral quality of actually existing markets. Their laissez faire ideology is premised upon the claim that states allocate values by means of power, and thus those social actors visibly dependent upon the state are fundamentally suspect and potentially illegitimate. This not only includes all manner of professionals but even finance itself that demonstrated during the crisis that it could not exist without public largess secured via special access to the state. One should recall that the Tea Party movement began in 2008-09 as a backlash against the implicit union of state and finance capital manifested through the rolling financial bailouts of Bear Stearns, Fannie Mae and Freddie Mac, and ultimately of the entire industry through the TARP. Its belief in market discipline is sincere, leading to the justified fears of not only liberals but of managerial-class Republican Party elites as well that small-r republican rabble rousers such as Rand Paul, Christine O’Donnell, or Michelle Bachman might take over the party and enact their vision.

At best, professional class fears of right-libertarians combined with its failure to generate any political strategy that departs from neoliberalism weds the mainstream American left to the status quo. At worst, it enhances professionals’ substantive interest in financialization and inequality to provide tax revenue to the state – and not coincidently, employment, income, and status to the professional class.

Because it is an objective endorsement of the status quo through minimal compensatory redress for the deep structural power of finance capital, a “soak the rich” strategy is a poor one for any American left truly interested in changing the country’s political economy. The only practical near-term path forwards is the tried-and-true method of the past: discipline finance with the shackles of the nation-state. As Keynes urged in the very depths of the Great Depression, “Above all, let finance be primarily national.”17 Every social democrat prior to the 1980s understood that there can be no viable left politics that allows finance to be economically dominant and geographically mobile. Any politics that does so is a “liberal” expression, at most, of the interests professionals and managers, not of labor. Both the irony and futility of European “socialists” serving as the faithful water carriers for international finance—and going down to crushing electoral defeat for their efforts—should not be lost upon any American

A departure from a deeply financialized economy and its correlate “soak the rich” fiscal strategy carries its






own risks and, even if successful, notable costs. The ability of Americans to consume out of all proportion to our production will come to an end, with painful lifestyle adjustments demanded from professionals and others in the top ranks of the social hierarchy. The power of the United States government wielded through the dollar would likewise be scaled back markedly. “Millionaire’s tax” brackets would descend to touch many professional class households, and the elephantine endowments of the top private colleges and universities across the country would shrivel.

Finally, a new political coalition would have to be built to support a strategy of definancialization. To be effective, such a coalition would have to embrace a populist hue and coalesce around the interests of a broadly defined “middle class”—from the established working class, lower professionals, and lower managerial class—in avoiding and/or escaping debt, their clearest negative connection to financialization.

The combination of educational debt, housing debt and medical debt upon moderate-income American households is destructive is numerous ways. Economically it depresses consumption, new production and thus economic growth. Politically it fuels individualist and libertarian modes of engagement with collective life. Socially it fuels inequality and an illusion of universal prosperity that can never be fulfilled.

In a previous issue of this newsletter, Bob Meister provided a very useful concrete expression of this new potential mode of American politics.18

To understand the role that capital markets play in the democratic politics of states like California we have to compare how much in taxes people could afford to pay if they had no debt service and how much more debt they could take on if they paid no taxes. This question is the kernel of the struggle over privatization and its relation to public values.

This is a potentially very fruitful way forward through a specific and tractable engagement with perennial issues of American politics: debt and taxes. The current reigning ideology of libertarianism (whether in its left-cultural or right-economic form) must first be countered by an alternative which is cooperative, rooted in common public values, and social democratic if it is to succeed at all.

1 One of the most popular recent expressions of this view is Thomas Frank, What’s the Matter With Kansas?: How Conservatives Won the Heart of America (New York: Metropolitan Books, 2004).

2 Elizabeth McNichol, Phil Oliff and Nicholas Johnson, “States continue to feel recession’s impact,” Center on Budget and Policy Priorities, 9 March 2011. http://www.cbpp.org/cms/?fa=view&id=7113 Carmen DeNavas-Walt, Bernadette D. Proctor and Jessica C. Smith. US Census Bureau, Current Population Reports, P60-238, Income, Poverty and Health Insurance Coverage in the United States: 2009. US Government Printing Office: Washington, DC, 2010: Tables 1 & A14 Robertson Williams, “Who pays no income tax?” TaxVox [blog], Tax Policy Center, 8 July 2009. http://taxvox.taxpolicycenter.org/2009/07/08/who-pays-no-income-tax/ ; “Information on income tax liability for tax year 2009,” Joint Committee on Taxation, United States Congress, 29 April 2011. http://taxprof.typepad.com/files/jct-analysis-2009-income-tax.pdf5 Not surprisingly, the states contemplating new “millionaire’s taxes” in early 2011 according to The Wall Street Journal are “New York, New Jersey, Maryland, Oregon and California.” See Robert Frank and Laura Saunders, “The Battle Over the Millionaire’s Tax,” The Wall Street Journal, 26 March 2011.6 Organization for Economic Cooperation and Development, Growing Unequal?: Income Distribution and Poverty in OECD Countries, OECD Publishing, 2008: 103-104, 107.7 Lydia Saad, “Scaling Back State Programs is Least of Three Fiscal Evils,” Gallup [on-line], 22 February 2011. http://www.gallup.com/poll/146276/Scaling-Back-State-Programs-Least-Three-Fiscal-Evils.aspx8 Lydia Saad, “Americans’ Message to States: Cut, Don’t Tax and Borrow,” Gallup [on-line], 9 March 2011. http://www.gallup.com/poll/146525/Americans-Message-States-Cut-Dont-Tax-Borrow.aspx9 Kevin Drum, “Defunding the Democratic Party,” Mother Jones [on-line only], 17 February 2011. http://motherjones.com/kevin-drum/2011/02/defunding-democratic-party10 Barry Hirsch and David Macpherson, Union Membership and Coverage Database. www.unionstats.com , accessed 10 June 2011.11 “Professional and Related” occupations are Standard Occupational Classification groups 15-29 per the definition of the US Census Bureau.12 Gerald Mayer, Union Membership Trends in the United States, Congressional Research Service, Report RL32553, 2004: Table A6.13 Speaking volumes on the class politics of contemporary Wisconsin politics, limitations on public union bargaining rights do not apply to three “working-class” protective services unions: local police officers, firefighters, and state troopers. This pattern did not repeat in Ohio, however, where no public employees unions were exempted.14 “Walker Would Lose to Feingold or Barrett in Recall,” Public Policy Polling, 25 May 2011. http://www.publicpolicypolling.com/pdf/PPP_Release_WI_0525930.pdf



http://www.cbpp.org/cms/?fa=view&id=711




http://taxvox.taxpolicycenter.org/2009/07/08/who-pays-no-income-tax/






http://taxprof.typepad.com/files/jct-analysis-2009-income-tax.pdf




http://www.gallup.com/poll/146276/Scaling-Back-State-Programs-Least-Three-Fiscal-Evils.aspx




http://www.gallup.com/poll/146525/Americans-Message-States-Cut-Dont-Tax-Borrow.aspx






http://motherjones.com/kevin-drum/2011/02/defunding-democratic-party






http://www.unionstats.com

http://www.unionstats.com

http://www.publicpolicypolling.com/pdf/PPP_Release_WI_0525930.pdf








15 “Tenacious Gadfly,” We Ask America, 21 March 2011. http://weaskamerica.com/2011/03/21/tenacious-gadfly/16 Craig Gilbert, “Loved by Republicans, Loathed by Democrats, Scott Walker Remains in a Political Class by Himself,” "The Wisconsin Voter” [blog], Milwaukee Journal-Sentinel, 5 June 2011. http://www.jsonline.com/blogs/news/123198683.html17 John Maynard Keynes, “National self-sufficiency,” The Yale Review, Vol. 22 No. 4 (June 1933): 755-769.18 Robert Meister [interview], “Financializing Public Universities,” Rethinking Capitalism Newsletter, Issue No. 1, 2011: 17-19. http://rethinkingcapitalism.ucsc.edu/wp-content/uploads/2011/03/Interview-with-Robert-Meister.pdf

The practice of proprietary trading (or, prop trading, for short) for financial instruments within banks has been getting a lot of attention of late. The term, along with the practice, became the object of intense public attention when former Federal Reserve Chairman Paul Volcker identified it as a central culprit when markets seized up in 2008. The so-called “Volcker Rule,” which seeks to “ban” proprietary trading for banking institutions, has been installed as part of the sweeping Dodd-Frank Financial Reform legislation.

What, then, is prop trading?Prop trading occurs when a bank mobilizes its own

capital in the purchase and/or sale of financial instruments for its own account, as opposed to arranging transactions on behalf of its clients. In recent years, many Wall Street firms and banks set up what are called “prop desks,” a collection of traders who do not interact with customers, but only use the firm’s capital to execute various trading strategies across a range of financial instruments. Essentially, these prop desks are de facto hedge funds, mirroring the practices and organizations found on many hedge fund trading desks. Like hedge funds, these desks take large risks and earn hefty profits. Its “ban,” given this definition, seeks to restore stability by outlawing speculation with money whose loss

traders do not have to experience directly as that of their clients or their own.

From the perspective a seemingly commonsense regulatory goal, this definition of proprietary trading appears, on its face, unexceptional. Clearly, prop trading amplifies risk. The drive for larger profits demands larger risk-taking, either in scale or scope, and therefore the possibility of losses becomes of paramount concern: a bank can quickly become insolvent or public funds may have to be mobilized to cover the losses when they occur at a “systemically important” institution deemed “too big to fail.” Indeed, the banks’ immediate response to Volcker’s analysis was telling. The proposal of the Volcker Rule prompted Wall Street, in a pre-emptive move, to quickly shutter many of these operations, while claiming that prop trading profits were never a large part of their revenue stream.1

The deeper truth however is that the identification of “proprietary trading” as a specific practice in urgent need of reform has created an enormous amount of anxiety everywhere within finance. This is because no one can agree what, exactly, constitutes prop trading. It has been reported that Paul Volcker himself spent months testifying before Congress, attempting to explain what “it” was. Finally, it is rumored, he had to conclude his testimony with the unsatisfying statement that he “knew it when he saw it.”

Consider also that the Dodd-Frank legislation explicitly stipulates that the term remain undefined, pending the results of a legislative call for no less than six studies from as many government agencies (the Financial Stability Oversight Council (FSOC), Government Accounting Office (GAO), Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), and the Board of Governors of the Federal Reserve System). Each agency is being called upon separately to define the practices that constitute proprietary trading. Distressingly, few of these studies will be or have been delivered on time, and it has been reported that the chief counsel for the OCC, the agency responsible for enforcing the new “ban,” sees no need for the studies or for the ban itself.

The problem, I believe, may turn out to be that, as one trader I interviewed told me, “Today, everyone is a fucking prop trader.” With the help of his colorful language, the trader may accurately be pointing to a historical process in which prop trading has now emerged as the central, organizing logic of many investment banks. The invocation of the temporal “today” implies that this was not always the

Proprietary Trading and the Volcker Rule: How Will We Write the History of Financial Reform?

Robert Wosnitzer



http://weaskamerica.com/2011/03/21/tenacious-gadfly/

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http://rethinkingcapitalism.ucsc.edu/wp-content/uploads/2011/03/Interview-with-Robert-Meister.pdf






case, but also implies that any attempt to legislate against prop trading now is doomed to fail. Prop trading is, it suggests, the culture of Wall Street—an indissoluble part of its values, practices, imaginaries, and structuring logic. The larger question my own work focuses on is: How do we write the history of the development (and reform) of proprietary trading so that its social impact and implications can be adequately and accurately assessed?

Dick Bryan, in this newsletter’s previous issue, made the compelling case for the ways that finance “goes forward,” making new claims and producing new relations in the compulsory circulation of capital that marks the global economy. The narrative that Dick provided convincingly captures the shift from mercantilist understandings of finance to the yield bearing liquid instruments of today. His analysis points to the ways that the relentless search for return has created structures of practice in which the risk-diminishing distinctions meant to be invoked by a notion of “proprietary trading” and its subsequent ban, may now have become meaningless given the fact that enormous volatilities of risk are immanent to the circulation of capital and its various instruments and methods of calculation.

In other words “finance,” and “the market,” as abstractions may be preventing accurate descriptions of themselves from within their own language when the goal is something as amorphous as “regulation.” What, after all, is a “derivative” other than a word for some commensurating device whose surface obfuscates more than it reveals? Visit the Museum of American Finance in New York, and you will encounter a lucite box in the commodity exhibit that promises to display a derivative. When I visited it recently, the box was empty. Curators have not been able to conceive of a way to “show” one. Derivatives exceed visual representation

How then are we to write a proper “history” of proprietary trading? Curiously, a Lexis-Nexis keyword search for “proprietary trading” reveals that the term first appeared in 1986, on the heels of the October stock market crash. In that usage, and foreshadowing the current debate on high-frequency trading (HFT), prop trading referred to the presence of complex computer models which triggered many of the trades that led to the downward spiral of stock prices, as Wall Street investment banks increasingly owned and operated these new “program traders.”2 The phrase largely disappeared from journalistic accounts of Wall Street practices but has now returned in post-mortem accounts of the financial crisis of 2008. So it seems that even a cursory history of the term situates it as some sort of

lurking culprit, unleashing untold and unspecified practices which disrupt the normally smooth flow of capital in financial markets.

What if it turns out that the practice of prop trading has become an imaginary space for all of the ills of finance, the space where unmanageable levels of risk are articulated and where the most egregious forms of self-dealing occur?

I strongly suspect that the problem will not turn out to be a question of how to define “proprietary trading” from within the contemporary internal descriptions of finance so as to successfully “reform” its volatility. Rather, I suspect the problem will be to write the narrative of “finance” and “the market” socially as vastly complex spaces, with different actors, logics, and calculative practices situated across multiple nodal points for which both the historical and the technical economic narratives we now have turn out to be inadequate.

1 For an overview of this development, see Michael Lewis’ Bloomberg column from November 2010 in which he interviews me on parts of my research (http://www.businessweek.com/news/2010-10-27/proprietary-trading-goes-under-cover-michael-lewis.html).2 60 Minutes, the popular television newsmagazine in the US, recently ran a feature on these “high-frequency traders” (http://www.cbsnews.com/8301-504803_162-20019067-10391709.html). It is interesting to note that these computer programmers rationalize the use of these algorithmic models by claiming that they are “providing liquidity” and keeping markets efficient. This is the identical argument used by over-the-counter credit traders when pressed on the (alleged) benefits of prop trading.



http://www.businessweek.com/news/2010-10-27/proprietary-trading-goes-under-cover-michael-lewis.html






http://www.cbsnews.com/8301-504803_162-20019067-10391709.html




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