By Sreeram Chaulia
As the integrated world economy reels from recessionary
symptoms of slowing growth, credit crunch, financial ruin,
demand contraction, inflation and unemployment, the buzzword
that has made a stunning comeback is "regulation".
Questions about the extent to which the state must regulate
and intervene in an economy have occupied the intellectual
annals of public policy and social science for centuries.
They are now taking center stage as the unprecedented
prosperity of what economist Joseph Stiglitz termed the
"Roaring Nineties" recedes into memory like some fading
At the heart of the debate on what went wrong in the global
economy and how it can be fixed lie core disputes over
diagnosis and cure. Adherents of neo-liberalism, whose
prescriptions of laissez faire and limited government were
ascendant in the 1990s, are contending that the current
slump is natural in hindsight because "we never had it so
good" as in the past two decades. They are also the most
optimistic that the world economy, led by the industrialized
countries that compose the Organization for Economic
Cooperation and Development, will stage a quick rebound from
the current sluggishness since the "fundamentals" of free
market economics are still intact.
According to libertarians, we are currently experiencing
a typical boom-and-bust cycle of capitalism, where downturns
are only to be expected after a major bout of record
productivity, profitability and growth. To them, markets
will eventually adjust themselves to the present slippage
and commence on a new round of enrichment propelled by
technological innovations and freeing up of restrictions on
goods and capital. By conceptualizing shrinkages as part and
parcel of the game of capitalism's "creative destruction",
they see no reason to examine the way the world economy was
managed or mismanaged in the era of globalization.
The other side of the fence, led by critics of
neo-liberalism, blames unregulated markets and excessive
speculation for the economic mess that is impacting the rich
and especially the poor in both the global North and South.
To this school, the retreat of the state into a shell since
the onslaught of Margaret Thatcher and Ronald Reagan's
neo-liberal dogmas left open a vast hunting ground for
greedy financial heists, fictions and bubbles by capitalists
who mastered the art of "making a fast buck" at the expense
of lay persons.
Followers of this line of thought point to the extraordinary
fraud and speculation of the era of "corporate
globalization" as the root causes of the present maladies.
The virtual procession of blue chip banks, investment
companies and industrial firms into a cul-de-sac of
insolvency in recent years reveals, to this school the
delusions of market fundamentalists that free competition
can actually exist and that it would be enough to secure
overall human welfare. The less regulated the economic
sphere, it appears to them, the more the likelihood of the
weak and the uninitiated falling prey to slick and
unscrupulous financial manipulators.
As the sorry sight of foreclosures and disappearance of
hard-earned savings of ordinary American and European
homeowners and depositors unfolds, the weight of the
evidence favors the anti-neo-liberal camp's theory of
culpability for the crisis.
The subprime mortgage disaster, which has dragged the entire
Western financial system down with it and spun nightmares of
trillion-dollar meltdowns, is a case of unregulated
profligacy by adventurous capitalists. The absence of state
licensing and oversight of the housing finance sector
enabled bolder and more complex "derivatives" to be spun out
of thin air, infecting whole economies and their foreign
With no Leviathan watching and correcting the accumulating
imperfections, the markets entered the badlands of
profiteering by bending the basic rules of accountancy,
transparency and corporate social responsibility.
At the peak of neo-liberal hegemony, developing countries
around the world were being offered "bailout packages" by
the International Monetary Fund (IMF)to solve macroeconomic
crises. Ironically now, it is not international financial
institutions but the states of Western countries that are
doing the fire-fighting and bailing out their own prized
corporations such as Freddie Mac, Fannie Mae and Northern
Rock from sinking.
Powerful states, epitomized by the phrase "Washington
Consensus", had been pushing to downsize the regulatory
power of states in the Global South by means of the IMF and
the World Bank. It is quite a reversal of roles now for them
to be forced to take on a more interventionist role in their
own economies after facing flak from their publics for
allowing speculators free rein to plunder.
If the first decade of the 21st century were to be
generalized in terms of trends, it might well be remembered
as the time when the bastions of neo-liberalism ate humble
pie and intervened in their economies to prevent the social
costs of robber baron capitalism from exploding.
In his 1944 magnum opus, The Great Transformation,
political economist Karl Polanyi argued that the history of
the modern industrialized world is to be viewed with the
heuristic device of a "double movement". On one hand, market
capitalism advances ruthlessly in its drive for accumulation
and dispossession of the weak without being burdened by the
state's handcuffs. And on the other hand, pressures build to
regulate and tame the speculative beast from harming society
and "social interests".
In the post-World War II era, this battle of opposites
polarized the world between the Western and Eastern blocks
and produced extreme reactions to uncontrolled capitalism
like dirigisme. In the post-Cold War era, however, it is
very unlikely that economies ridden by the global recession
will opt for maximal statist solutions to ride out of the
dumps. Instead, what we will witness is the return of the
Leviathan as a regulator that is still within the boundaries
of liberal capitalism, though not blind to violations of
fair play by big businesses. This will involve a reworking
of the relationships among states and capitalists in the
overall interest of preserving the "system" at the national
and global levels.
A corollary to the reinvention of the state's regulatory
power over the economy is the growing clout of its national
security dimensions in the political sphere. As many
countries battle internal insurgencies and external threats
in the context of a US-led "war on terror", the accretion of
military and policing powers of governments over the past
decade has been tremendous. States have more legal and
extra-legal means of coercion today than they did 10 years
ago and notions of "national security state" and "political
economies of defense" enjoy wider following.
Philosopher Georg Hegel's characterization of the state as
the "march of God on Earth" may have applied to a different
era, but it carries a ring of familiarity as governments
open their purses to save collapsing companies and shield
citizens from spiraling costs of living. As the rescuer of
last resort and the protector of social stability, there is
no alternative to the centralized institution of the state.
Deeper state interventions in the economy and in society
are, for good and worse, here to stay and the repercussions
of this shift away from neo-liberalism will be felt for
Sreeram Chaulia is a researcher on international
affairs at the Maxwell School of Citizenship in Syracuse,
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