The crisis of privatized Keynesianism

A guest contributor to The Current Moment, Wolfgang Streeck has published a powerful account of the current global economic crisis in the New Left Review. Streeck’s analysis is worth outlining in detail as it provides a very useful overview of current events as manifestations of a deeper set of contradictions within contemporary capitalist political economy.

Streeck’s basic idea is that we live in an age of what he calls “democratic capitalism”. Largely a product of the post-1945 compromise between capital and labour, democratic capitalism represents an unstable attempt at combining public expectations with private interests. Public expectations are mediated through democratic procedures (elections, party platforms) and are implemented through the instrument of majority rule. Private interests are focused on the maximization of returns on capital and are agnostic about political institutions. What they are concerned about, however, is minimizing the extent to which private accumulation is forced to accommodate itself with the demands of social justice.

Streeck argues that from the 1970s onwards, with the high growth rates of the post-war Golden Age a thing of the past, crises in this model of democratic capitalism have taken four different forms. The first, which prevailed in the 1970s, was inflation. With collective bargaining still strongly rooted in industrialized countries, governments were able to hold onto their political commitment to full employment only by running a lax monetary policy. As Streeck notes, inflation targets those who hold financial assets and creditors. That the reaction of governments in the 1970s was to manage the global economic downturn through inflation reflects the power of organized labour in governmental decision-making at that time.

Subsequent attempts at resolving the same conflict have reflected different patterns of power in advanced industrialized societies, the general trajectory being the decline in the power of organized labour. After having pursued inflationary policies, governments began in the 1980s to meet public expectations through borrowing. Inflation rates fell but governments accumulated high levels of debt. This goes some way to explaining one of the paradoxes of Thatcherism: the vicious attack on labour unions that never led to any marked reduction in government spending. Streeck observes that into the 1990s, this accumulation of public debt became unsustainable. As a way out, the debt burden was transferred from governments to individuals – what Colin Crouch has called “privatized Keynesianism”. As we have already noted on The Current Moment, this shift from public to private debt was made possible by a fundamental revising of the social contract of advanced industrialized countries. What had been considered an integral part of national citizenship became something to be accessed only through private borrowing.

These successive crises are well-illustrated in one of Streeck’s graphs. We see below, for the United States, a fall in inflation followed by a rising in public debt, leading in turn to a rise in private debt. For Streeck, these are different movements in the unstable co-existence of social democratic expectations and the imperatives of market society.

As an historical overview of current events, Streeck’s analysis is excellent. He identifies developments as inherently subjective: a product of changing expectations and outlooks. There is no inevitable resolution of a particular crisis: what matters is how expectations are changed over time. The liberalization of financial markets and their centrality in today’s political economy can therefore be read as a consequence rather than a cause of our present difficulties. As the social contract of advanced industrialized economies narrowed, so did financial services become central to our everyday life. With certain basic rights removed from the right of citizenship and considered instead as a privilege accorded to those daring enough to invest in themselves, so our dependence on financial services has grown exponentially.

What are the political implications of Streeck’s account? That at the heart of the present crisis is a fundamental rewriting of our social contract. Specific institutional and regulatory developments in international financial have played a role but only as consequences of this prior change. Solutions to the present crisis thus lie not in the technicalities of international capital markets but in the elaboration of a new social model based more on rights than on debt-funded privileges.