Introduction to Chapter 4

It is well enough that people . . . do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

―Henry Ford, the American automobile industrialist

Just as some great thinkers in the middle ages devoted themselves to alchemy, similarly in the realm of finance capital men and women devote themselves to the pursuit of the absurd, converting money into money without production. However these modern alchemists are revered as brilliant of mind, bold of spirit and are rewarded for their semi-criminal behaviour beyond dreams of avarice.

―John Weeks, Professor Emeritus of Economics

 

As pointed out in Chapter 2 of this study, many Keynesian economists envisioned an opportunity in the 2008 financial meltdown and the ensuing economic crisis: in the “crisis of neoliberal economics,” they saw an opening for a new dawn of Keynesian economics, or the coming of a “second” New Deal. More than five years later, it is abundantly clear that such expectations amounted to no more than wishful thinking, as neoliberal economics continue to be dominant in both academic and policy circles while the much-hoped-for Keynesian prescriptions are completely ignored. The question is why? Why did the dreams of a Keynesian renewal turned into disappointments? Where or why did the Keynesians go wrong in their prognosis of the “dawn of another New Deal”?

A major reason for why Keynesian economists have gone awry in their optimistic expectations is a deplorable lack of class perspective in their analysis, which is grounded in the unrealistic premise that policy-making is a simple matter of technical expertise or economic know-how, that is, a matter of choice. A second (and related) major flaw in the these economists’ perspective stems from their misconceptions about the social origin, the economic role and the political power of the state: an outlook that perceives the state power as above economic or class interests, and that it can, therefore, control the market, or capitalism, in the interests of all.

This chapter is devoted to another major flaw in the Keynesian (as well as the neoliberal) school of economic thought: a grave absence of a historical perspective. This crucially important void explains why most mainstream economists fail to see that the financial meltdown of 2008 and the subsequent economic contraction represent more than just another recessionary cycle. More importantly, they represent a structural change, a new phase in the development of capitalism, the age of “finance capital,” as the late German economist Rudolph Hilferding (1981) put it. The gradual rise of finance capital to the present state of dominance began in the late 1960s and early 1970s; after its speculative behavior had been severely restricted following the imperatives of the Great Depression and the financial needs of WW II. Financial innovations of recent years/decades are internally-driven processes and strategies that are incidental to the dynamics of the expansion of capitalism in general, and of finance capital in particular. Contrary to Keynesian critics of deregulation and other neoliberal policies, such innovations are as much the effects of neoliberal policies of deregulation as they are the causes of those policies (Toporowski 2010; Kindleberger 2000).