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It's capitalism, stupid!

In the ominously quiet moments as the world awaits the next body blow in the struggle between the ill-matched but inseparable financial and economic systems, some of those on the sidelines look for an explanation that goes beyond greed.

They’re hoping to find something that might help to avoid a re-occurrence of the catastrophic series of implosions that mark the passing of the shadowy speculative organisations populating the world of fantasy finance. Or at least, they hope to provide an early warning of the sudden collapse of demand that wrecked the profits of corporations overproducing beyond the capacity of the market and the planet.

If this all seems a bit late in the day, this is because they were caught up in the hysteria of never-ending growth promised by regulators, politicians and financiers.

The Bank of England, which sat back entranced as a series of speculative bubbles grew in size, has published a talk given last month by Andrew G Haldane, its executive director responsible for financial stability. With a job title like that you’d be forgiven for thinking he’d be well ahead of the game – but, alas, he wasn’t and he still isn’t.

In a paper entitled “Rethinking the Financial Network”, and clearly written before the global threat of a H1N1 flu pandemic gripped the media, Haldane compares the panic effect of the 2002 Severe Acute Respiratory Syndrome (SARS) outbreak in China to the collapse into bankruptcy of Lehman brothers on September 15, 2008 and its catastrophic impact on global markets.

In his analysis of the financial system, Haldane draws on the theory of complex, adaptive systems, learning, he says from ecology, epidemiology, biology and engineering. This muddle-headed, eclectic approach is not new. People, among them Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering, have been using it for years to justify and explain the operation of free (in the sense of unregulated) stock and other financial markets.

The Green New Deal from the New Economics Foundation and “Prosperity without Growth” from the Sustainability Commission, both use it to argue for intervention. Coincidentally, Lo popped up yesterday in a Financial Times interview misusing Darwin’s theory of evolution and comparing the current crisis to the impact of a meteorite on the dinosaurs.

Haldane says that the evolution of a complex network of increasingly similar financial institutions meant that “sharp discontinuities in the financial system were an accident waiting to happen. The present crisis is the materialisation of that accident.” His prescription is better information, better regulation, and restructuring “to reduce the financial network’s dimensionality and complexity”.

In attempting to borrow from other sciences, Haldane, the NEF, Lo and the others essentially acknowledge that classical economic theories, whether of the free-market or interventionist schools, are dead in the water. But in ascribing the source of the current problems to increased complexity and external accident they completely miss the point about the nature of an overarching, objective, contradictory social system known to humanity as capitalism.

Crisis is an intrinsic part of the capitalist system of social relations and manifested itself long before the appearance of the complexity that Haldane and others describe. As far back as 1848, Marx and Engels in their Communist Manifesto already observed how bourgeois society “is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells” and how the history of capitalism, then comparatively young, was one of “the revolt of modern productive forces against modern conditions of production” and how “commercial crises that by their periodical return put the existence of the entire bourgeois society on its trial, each time more threateningly”.

In other words, the problem is not at all that complex: it’s capitalism, stupid!

Gerry Gold
Economics editor
6 May 2009

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