Sasha Lilley: Liberals and leftists alike argue that the economic crisis was caused by a lack of state regulation over the banks and financial markets. Consequently, they conclude that we just need new regulation to keep the financial sector in line. Why don’t you think that’s the case?
Leo Panitch: Well, the cause of the crisis was certainly related to competition in the financial sector. But that competition was to some extent the product of state regulation. The American financial system is certainly the most regulated financial system in the world, and probably in history, if you measure it in terms of the number of pieces of legislation, the number of regulatory agencies, and the massive amounts of regulation to which finance is subject.
So, yes, there were changes that allowed for more competition in finance, although those changes were only a matter of closing the barn door after the horse had bolted. It was already the development of finance that made the old New Deal regulations impossible. The state then removed those limits and encouraged further competition in finance. So it’s just a misunderstanding of what’s really going on. There’s a sense that the state didn’t do its job in constraining markets. And there’s a confusion about what a capitalist state is. A capitalist state responds to and sponsors and facilitates markets. The notion that it’s there to restrain markets, to restrain capitalism, that if only it would do that it would remove the contradictions of competition in capitalism, is simply a cockamamie way of seeing the world. Although unfortunately it’s the way in which it’s ideologically presented to us.
Sasha Lilley: Much of this may appear counter-intuitive since the dominant narrative on the left is that over the last quarter century the state has retreated and let markets run unfettered. Could you give us some concrete examples of the ways the state actually facilitates markets?
Leo Panitch: At the most basic level, you couldn’t have contracts. You couldn’t have property without all of the things that the state does in the form of law, in order to guarantee to one side of a contract, or to one capitalist to another, that their deals can be validated. So at the most basic level the state is in there.
But more than that, states are oriented to facilitating accumulation on their own terrain. And some of them, the imperial states like the American, are oriented to facilitating capital accumulation and the spread of markets to do that around the world. They do that in a myriad of different ways. People think the New Deal regulations were brought in to constrain finance. Yet in many ways the Glass-Steagall Act that separated commercial from investment banking, for instance, was adopted in order to stabilize finance and to nurture it back to health. Through the whole of the post-war period there was a very close corporatist relationship between the banking sector and the regulators. The regulators were oriented to nurturing finance, not only back to health, but to a new stage of development. And that’s what began to happen by the 1960s.
Some of the old constraints that were put on the separation between commercial and investment banking then began to make less and less sense as finance was now very powerful and expansive and spreading around the world. And you got some removal of those. The big example was the 1975 New York Big Bang where New Deal price-ceilings on what brokers were allowed to charge for buying and selling stocks for people were broken down. They were mainly broken down because pension funds and other institutional investors were buying very large blocks of them and they wanted discounts.
Another example is the remove of Glass-Steagall, the separation of commercial and investment banking, which allowed commercial banks to be involved with derivatives and acting as brokers and selling insurance and so on. But that had already been broken down. It was never applied internationally and it had broken down domestically in the United States since the early 1980s. So it was really changing the legislation after finance had already expanded in the way it had.
Sasha Lilley: Coupled with the notion that deregulation is the cause of our current economic woes is a belief that finance is simply a parasite on the real economy. What you argue, however, is that although part of finance is obviously speculative, finance actually plays a crucial role for accumulation in general. Can you explain why?
Leo Panitch: Finance is speculative and, yes, it is very much about trying to make money by trading on money. There isn’t the kind of Marxist connection between money commodities—money in the classic sense of producing a thing, a good. I think that’s where the misconception comes from.
But no production takes place with out the provision of credit. And increasing no production takes place with out the provision of credit to consumers. And finance has been crucial to the dynamics of expanded production. Especially in terms of globalization and financing the means of integrated production right around the world.
So when people for instance speak of derivatives as simply speculation, there certainly is speculation involved, but you couldn’t have somebody, say Wal-Mart, contracting with a supplier in China to produce something that will be on Wal-Mart shelves in the United States next winter, unless both parties were able to find financial intermediaries that would allow them to hedge the difference in the exchange rate between what the dollar and the renminbi is now and what it will be next winter. Or do the same with what transportation costs will be at that time. Or do the same with what interest rates will be at that time. So these derivatives are means of buying insurance in relation to fulfilling a contract for the delivery of things that are produced.
You simply couldn’t have global production with out the role that finance plays just in this respect, and I’m not even getting into the role that finance plays in terms of venture capital, which was very important in terms of the development of information and technology revolution we just lived through; for the role it plays in terms of the role it plays in terms of facilitating investment. You could do the same for the kind of role that finance plays in terms of making indebted consumers into viable consumers. And you see that through credit cards and many, many other aspects of the role that finance plays. And that even has to do with the role that finance played in housing, which led to subprime crisis. People were taking out second mortgages in order to sustain their consumption in part. Now you can go even further to look at the role that finance plays via channeling workers savings into pension funds and the role those pension funds play in investing in stock markets, investing in derivatives, and so on, which has to be traced through how that links to production.
It’s an illusion to imagine that finance is out there in some greedy Gordon Gecko world and that is “bad capitalism,” rather than what GM does which is somehow “good capitalism” and why GM was in the tank was because of the Geckos of this world. Not at all. This is capitalism and both productive capital, in the sense of industrial corporations or retail firms like Wal-Mart, and the big banks are part of the totality and we need to understand them in terms of the way they link with one another.
Sasha Lilley: Various Marxist critics have argued that the financialization of the economy is capital’s means of addressing the underlying stagnation of the “real economy,” of industry in decline. The argument goes that the current crisis is part of a long downturn starting in the 1970s and capitalism’s ill-health has been masked by a shift into profit-making through all sorts of incomprehensible derivatives and forms of speculation. You three see things quite differently. How so?
Sam Gindin: To elaborate a little more on what Leo was saying: part of the role of finance—once you see it in terms of capitalism—is to discipline and restructure the so-called real economy. It’s been fundamental to that, imposing discipline on every factory to be more competitive or finance will go somewhere else, to reallocate capital across several sectors, venture capital, but much more generally. So finance has been fundamental to that.
The other way that finance has been absolutely crucial too, is to understanding capitalism in terms of its imperial dimension. It’s been fundamental to capitalism actually penetrating other countries, imposing certain conditions if they want the finance, putting the United States in a position where the American state is responsible for managing capitalism more generally; and for integrating the working class—in addition to them using credit in the macro sense that it keeps the economy going—the involvement of workers in the circuits of capitalism in terms of housing and pensions and their assets rising. It’s also been a socialization of workers.
Now in terms of specifically the question of decline, if you leave aside looking at specific numbers for a second and just think about what’s happened over the last quarter of a century, it actually looks like one of the most dynamic periods from a capitalist perspective—not from a worker perspective, but from a capitalist perspective. It’s a period in which you’ve penetrated China. You’ve penetrated the former Soviet Union. You’re now penetrating the enormous potential of the Indian market. You’ve seen a powerful commodification of things that used to be seen as part the Commons. Part of what government provides has been privatized as sources of accumulation. You’ve seen very radical breakthroughs in technology over this period in terms of that kind of dynamism.