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About the author
Yanis Varoufakis is Professor of Economic Theory at the
University of Athens, Greece, where he now lives after more
than two decades of studying and teaching in Britain and
Australia (where he held academic posts, in reverse order, at the
Universities of Sydney, Glasgow, Cambridge and East Anglia).
This is his first book aimed at the general reader. His more
stuffy books include Rational Conflict (1991), Foundations of
Economics (1998) and (with Shaun Hargreaves Heap) Game
Theory: A critical text (2004).

The Global Minotaur
America, the True Origins
of the Financial Crisis and the
Future of the World Economy

Yanis Varoufakis

©
Zed Books
London 8c New York

The Global Minotaur: America, the True Origins of the Financial Crisis and
the Future of the World Economy was first published in 2011 by
Zed Books Ltd, 7 Cynthia Street, London Ni gJF, UK and Room 400,175
Fifth Avenue, New York, NY 10010, USA
www.zedbooks.co.uk
Copyright © Yanis Varoufakis 2011
The right of Yanis Varoufakis to be identified as the author of this work
has been asserted by him in accordance with the Copyright, Designs
and Patents Act, 1988.
Typeset in Bulmer MT
by Bookcraft Ltd, Stroud, Gloucestershire
Index by Sally Phillips
Cover designed by www.alice-marwick.com
Distributed in the USA exclusively by Palgrave Macmillan, a division of
St Martin’s Press, LLC, 175 Fifth Avenue, New York, NY 10010, USA
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system or transmitted in any form or by any means,
electronic, mechanical, photocopying or otherwise, without the prior
permission of Zed Books Ltd.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging in Publication Data available
ISBN 978 1 78032 016 8 eb

Contents

LIST OF FIGURES, TABLES AND BOXES
LIST OF ABBREVIATIONS
ACKNOWLEDGEMENTS

vi
viii
X

1

Introduction

2

Laboratories of the future

26

3

The Global Plan

57

4

T he Global Minotaur

90

5

T he beast’s handmaidens

113

6

Crash

146

7

T he handmaidens strike back

169

8

T he Minotaur’s global legacy: the dimming
sun, the wounded tigers, a flighty Europa and
an anxious dragon

185

A future without the Minotaur?

221

notes

229

9

l

RECOMMENDED READING

237

SELECT BIBLIOGRAPHY

239

INDEX

242

Figures, tables and boxes

Figures
2.1 US national income
3-1 Real GDP per capita during the period of the
Global Plan
4.1 Stagnating wages, booming productivity
4-2 Index of average real US profit rates
4-3 The Global Minotaur in two diagrams
4.4 Effects of the Global Minotaur on the relative
position of the United States
5-1 Correlation between median house price inflation
and the growth in consumer spending, 2002-07
8.1 Increase in US assets owned by foreign state
institutions

43
87
104
106
111
112
129
216

Tables
3.1 Percentage change in a country’s share of world GDP
4.1 Average annual rate of change in labour unit costs

88
105

Boxes
1.1 The Cretan Minotaur
2.1 Pre-1929 crises
2.2 W hen reason defers to expectation
3.1 Surplus recycling mechanisms: capitalism’s sine
qua non
3.2 T he Global Plan’s architects
5.1 Who were the handmaidens?
5.2 Wishful thinking - how mergers and acquisitions
created fictitious value
5.3 Walmart: a corporation after the Minotaur’s heart
5.4 T he trickle-up effect
6.1 Credit default swaps (CDS)
7.1 Failure pays
8.1 Europa’s flight
8.2 America’s bankers

24
40
47
64
68

115
118
126
135
150
170
201
216

Abbreviations

AG
AGE
AIG
ATM
CDO
CDS
CEO
DC
ECB
ECSG
EFSF
EIB
EMH
ERAB
EU
FDIG
GDP
GM
GSRM

alternating current
aeronautic-computer-electronics compli
American Insurance Group
automated telling machine
collateralized debt obligation
credit default swap
chief executive officer
direct current
European Central Bank
European Coal and Steel Community
European Financial Stability Facility
European Investment Bank
Efficient Market Hypothesis
Economic Recovery Advisory Board
European Union
Federal Deposit Insurance Corporation
gross domestic product
General Motors
global surplus recycling mechanism

International Bank for Reconstruction and
Development
IGU
International Currency Union
IMF
International Monetary Fund
LTGM Long-Term Capital Management (name of a hedge
fund)
MIE
military-industrial establishment
NAFTA North American Free Trade Agreement
NATO North Atlantic Treaty Organization
OECD Organisation for Economic Co-operation and
Development
OEEG Organisation for European Economic Co-operation
OPEC Organization of the Petroleum Exporting Countries
RBGT Real Business Cycle Theory
RBS
Royal Bank of Scotland
REH
Rational Expectations Hypothesis
RMB
renminbi - Chinese currency
SME
small and medium-sized enterprise
SPV
Special Purpose Vehicle
TARP
Troubled Asset Relief Program
IBRD

Acknowledgements

T he Global Minotaur is a metaphor that crept up on me during
endless conversations with Joseph Halevi on what made the
world tick after the economic crises of the 1970s. O ur conversa­
tions were long, repetitive and animated. They took place over
two decades in Australia, in Europe, face to face, by email, in
an assortment of media and moods. Nevertheless, gradually
they led us to a coherent view of the global economic system in
which America’s deficits played a defining and, paradoxically,
hegemonic role.
T hat viewpoint first saw the light of day in 2003, in an article
published by Monthly Review, under the same title: cThe
Global Minotaur’. In it, Joseph and I put forward the working
hypothesis that the defining characteristic of the global polit­
ical economy was the reversal of the flow of trade and capital
surpluses between the United States and the rest of the world.
The hegemon, for the first time in world history, strengthened
its hegemony by wilfully enlarging its deficits, once it had lost
its surplus global position. The trick was to understand how
America did this and the tragic manner in which its success gave
rise to the financialization that both reinforced US dominance

and, simultaneously, implanted the seeds of its potential
downfall.
It was an attractive story that seemed to resonate power­
fully with many different people’s thinking about our brave
globalizing world. And when the Crash of 2008 struck, our story
began to make even more sense - at least to us. In response to
the ensuing crisis, Joseph and I enlisted Nicholas Theocarakis,
our good friend and colleague, to tell a larger story: a tale of how
the events of 2008 marked a break with the past both for global
capitalism and for the way in which, as economists, we can make
sense of it.
T he result was a recent academic book, entitled Modern
Political Economics, in which the Global Minotaur made its
presence felt on almost every page. As it was a book aimed at our
academic colleagues and students, its basic narrative was inter­
twined with elaborate discussions and inane mental excursions
that would drive sensible non-academic readers crazy. Thus,
the idea occurred to me of distilling the crux of the Global
Minotaur story in the book you are now holding.
Besides thanking Joseph and Nicholas for the shared
thoughts that have trickled into the following pages, I must
also thank: George Krimpas for spiritual encouragement,
intellectual guidance and much-needed corrections, Nicholas
Theocarakis (again) for meticulous proof-reading of an earlier
draft, Alejandro Nadal for some excellent comments and Clive
Liddiard for inspired copy-editing. Lastly, I owe a debt of
gratitude to Rob Langham, of Routledge, who suggested that
I approach Zed Books with the idea for this project, and, natu­
rally, Ken Barlow of Zed Books for embracing my idea warmly
and efficiently.

For Danaë Stratou,
my global partner

CH A PTER 1

Introduction

The 2008 moment
Nothing humanizes us like aporia - that state of intense puzzle­
ment in which we find ourselves when our certainties fall to
pieces; when suddenly we get caught in an impasse, at a loss to
explain what our eyes can see, our fingers can touch, our ears can
hear. At those rare moments, as our reason valiantly struggles to
fathom what the senses are reporting, our aporia humbles us
and readies the prepared mind for previously unbearable truths.
And when the aporia casts its net far and wide to ensnare the
whole of humanity, we know we are at a very special moment in
history. September 2008 was just such a moment.
T he world had just astonished itself in a manner not seen
since 1929. The certainties that decades of conditioning had
led us to acknowledge were, all of a sudden, gone, along with
around $40 trillion of equity globally, $14 trillion of household
wealth in the US alone, 700,000 US jobs every month, count­
less repossessed homes everywhere... The list is almost as long
as the numbers on it are unfathomable.
T he collective aporia was intensified by the response of
governments that had hitherto clung tenaciously to fiscal

conservatism as perhaps the twentieth century’s last surviving
mass ideology: they began to pour trillions of dollars, euros,
yen, etc. into a financial system that had, until a few months
before, been on a huge roll, accumulating fabulous profits
and provocatively professing to have found the pot of gold at
the end of some globalized rainbow. And when that response
proved too feeble, our presidents and prime ministers, men
and women with impeccable anti-statist, neoliberal creden­
tials, embarked upon a spree of nationalizing banks, insurance
companies and car manufacturers that put even Lenin’s post1917 exploits to shame.
Unlike previous crises, such as the dotcom crash of 2001,
the 1991 recession, Black Monday,1 the 1980s Latin American
debacle, the slide of the T hird World into a vicious debt trap, or
even the devastating early 1980s depression in Britain and parts
of the US, this crisis was not limited to a specific geography, a
certain social class or particular sectors. All the pre-2008 crises
were, in a sense, localized. Their long-term victims were hardly
ever of importance to the powers-that-be, and when (as in the
case of Black Monday, the Long-Term Capital Management
(LTCM) hedge fund fiasco of 1998 or the dotcom bubble of two
years later) it was the powerful who felt the shock, the authori­
ties had managed to come to the rescue quickly and efficiently.
In contrast, the Crash of 2008 had devastating effects both
globally and across the neoliberal heartland. Moreover, its
effects will be with us for a long, long time. In Britain, it was
probably the first crisis in living memory really to have hit the
richer regions of the south. In the United States, although the
sub-prime crisis began in less-than-prosperous corners of that
great land, it spread to every nook and cranny of the privileged
middle classes, its gated communities, its leafy suburbs, the
Ivy League universities where the well-off congregate, queuing
up for the better socio-economic roles. In Europe, the whole

continent reverberates with a crisis that refuses to go away and
which threatens European illusions that had managed to remain
unscathed for six decades. Migration flows were reversed,
as Polish and Irish workers abandoned Dublin and London
alike for Warsaw and Melbourne. Even China, which famously
escaped the recession with a healthy growth rate at a time of
global shrinkage, is in a bind over its falling consumption share of
total income and its heavy reliance on state investment projects
that are feeding into a worrying bubble - two portents that do
not bode well at a time when the rest of the world’s long-term
capacity to absorb the country’s trade surpluses is questionable.
Adding to the general aporia, the high and mighty let it be
known that they, too, were at a loss to grasp reality’s new twists.
In October 2008, Alan Greenspan, the former chairman of the
Federal Reserve (the Fed) and a man viewed as a latter-day
Merlin, confessed to ca flaw in the model that I perceived is the
critical functioning structure that defines how the world works’.2
Two months later, Larry Summers, formerly President Clinton’s
treasury secretary and at the time President-Elect Obama’s chief
economic adviser (head of the National Economic Council),
said that c[i]n this crisis, doing too little poses a greater threat
than doing too much...’ W hen the Grand Wizard confesses to
having based all his magic on a flawed model of the world’s
ways, and the doyen of presidential economic advisers proposes
that caution be thrown to the wind, the public ‘gets’ it: our ship
is sailing in treacherous, uncharted waters, its crew clueless, its
skipper terrified.
Thus we entered a state of tangible, shared aporia. Anxious
disbelief replaced intellectual indolence. The figures in authority
seemed bereft of authority. Policy was, evidently, being made on the
hoof. Almost immediately, a puzzled public trained its antennae in
every possible direction, desperately seeking explanations for the
causes and nature of what had just hit it. As if to prove that supply

needs no prompting when demand is plentiful, the presses started
rolling. One after another, the books, the articles, the long essays even the movies - churned through the pipeline, creating a flood
of possible explanations for what had gone wrong. But while a
world in shock is always pregnant with theories about its predica­
ment, the overproduction of explanations does not guarantee the
aporia* s dissolution.

Six explanations for why it happened
l.
‘Principally a failure of the collective imagination
of many bright people...to understand the risks to the
system as a whole’
T hat was the gist of a letter sent to the Queen by the British
Academy on 22 July 2009, in response to a question she had
put to a gathering of red-faced professors at the London School
of Economics: cWhy had you not seen it coming?’ In their
letter, thirty-five of Britain’s top economists answered in effect:
‘Whoops! We mistook a Great Big Bubble for a Brave New
World.’ The gist of their response was that, while they had their
finger on the pulse and their eye on the data, they had made two
related diagnostic mistakes: the error of extrapolation and the
(rather more sinister) error of falling prey to their own rhetoric.
Everyone could see that the numbers were running riot. In the
United States, the financial sector’s debt had shot up from an
already sizeable 22 per cent of national income (Gross Domestic
Product or GDP) in 1981 to 117 per cent in the summer of 2008.
In the meantime, American households saw their debt share of
national income rise from 66 per cent in 1997 to 100 per cent ten
years later. Put together, aggregate US debt in 2008 exceeded
350 per cent of GDP, when in 1980 it had stood at an already
inflated 160 per cent. As for Britain, the City of London (the

financial sector in which British society had put most of its
eggs, following the rapid deindustrialization of the early 1980s)
sported a collective debt almost two and a half times Britain’s
GDP, while, in addition, British families owed a sum greater
than one annual GDP.
So, if an accumulation of inordinate debt infused more risk
than the world could bear, how come no one saw the crash
coming? T hat was, after all, the Queen’s reasonable ques­
tion. T he British Academy’s answer grudgingly confessed to
the combined sins of smug rhetoric and linear extrapolation.
Together, these sins fed into the self-congratulatory convic­
tion that a paradigm shift had occurred, enabling the world of
finance to create unlimited, benign, riskless debt.
T he first sin, which took the form of a mathematized rhetoric,
lulled authorities and academics into a false belief that finan­
cial innovation had engineered risk out of the system; that the
new instruments allowed a new form of debt with the proper­
ties of quicksilver. Once loans were originated, they were then
sliced up into tiny pieces, blended together in packages that
contained different degrees of risk,3 and sold all over the globe.
By thus spreading financial risk, so the rhetoric went, no single
agent faced any significant danger that they would be hurt if
some debtors went bust. It was a New Age faith in the financial
sector’s powers to create ‘riskless risk’, which culminated in the
belief that the planet could now sustain debts (and bets made
on the back of these debts) that were many multiples of actual,
global income.
Vulgar empiricism shored up such mystical beliefs: back in
2001, when the so-called ‘new economy’ collapsed, destroying
much of the paper wealth made from the dotcom bubble and
the Enron-like scams, the system held together. The 2001 new
economy bubble was, in fact, worse than the sub-prime mortgage
equivalent that burst six years later. And yet the ill effects were

contained efficiently by the authorities (even though employ­
ment did not recover until 2004-05). If such a large shock could
be absorbed so readily, surely the system could sustain smaller
shocks, like the $500 billion sub-prime losses of 2007-08.
According to the British Academy’s explanation (which, it
must be said, is widely shared), the Crash of 2008 happened
because by then - and unbeknownst to the armies of hyper­
smart men and women whose job was to have known better - the
risks that had been assumed to be riskless had become anything
but. Banks like the Royal Bank of Scotland, which employed
4,000 ‘risk managers’, ended up consumed by a black hole
of ‘risk gone sour’. The world, in this reading, paid the price
for believing its own rhetoric and for assuming that the future
would be no different from the very recent past. Thinking that
it had successfully diffused risk, our financialized world created
so much that it was consumed by it.

2. Regulatory capture
Markets determine the price of lemons. And they do so with
minimal institutional input, since buyers know a good lemon
when they are sold one. The same cannot be said of bonds or,
even worse, of synthetic financial instruments. Buyers cannot
taste the ‘produce’, squeeze it to test for ripeness, or smell its
aroma. They rely on external, institutional information and
on well-defined rules that are designed and policed by dispas­
sionate, incorruptible authorities. This was the role, suppos­
edly, of the credit rating agencies and of the state’s regulatory
bodies. Undoubtedly, both types of institution were found not
just wanting but culpable.
When, for instance, a collateralized debt obligation (CDO) - a
paper asset combining a multitude of slices of many different
types of debt4 - carried a triple-A rating and offered a return

1 per cent above that of US Treasury Bills,5 the significance was
twofold: the buyer could feel confident that the purchase was
not a dud and, if the buyer was a bank, it could treat that piece
of paper as indistinguishable from (and not an iota riskier than)
the real money with which it had been bought. This pretence
helped banks to attain breathtaking profits for two reasons.
1

2

If they held on to their newly acquired GDO - and
remember, the authorities accepted that a triple-A rated
GDO was as good as dollar bills of the same face value - the
banks did not even have to include it in their capitalization
computations.6 This meant that they could use with impu­
nity their own clients’ deposits to buy the triple-A rated
GDOs without compromising their ability to make new
loans to other clients and other banks. So long as they could
charge higher interest rates than they paid, buying tripleA rated GDOs enhanced the banks’ profitability without
limiting their loan-making capacity. The GDOs were, in
effect, instruments for bending the very rules designed to
save the banking system from itself.
An alternative to keeping the GDOs in the bank vaults was
to pawn them off to a central bank (e.g. the Fed) as collateral
for loans, which the banks could then use as they wished:
to lend to clients, to other banks, or to buy even more
GDOs for themselves. The crucial detail here is that the
loans secured from the central bank by pawning the tripleA rated GDO bore the pitiful interest rates charged by the
central bank. Then, when the GDO matured, at an interest
rate of l per cent above what the central bank was charging,
the banks kept the difference.

T he combination of these two factors meant that the issuers
of GDOs had good cause:

(a) to issue as many of them as they physically could;
(b) to borrow as much money as possible to buy other issuers’
GDOs; and
(c) to keep vast quantities of such paper assets on their books.7
Alas, this was an open invitation to print one’s own money! No
wonder Warren Buffet took one look at the fabled GDOs and
described them as WMDs (weapons of mass destruction).The
incentives were incendiary: the more the financial institutions
borrowed in order to buy the triple-A rated GDOs, the more
money they made. The dream of an ATM in one’s living room
had come true, at least for the private financial institutions and
the people running them.
With these facts before us, it is not hard to come to the conclu­
sion that the Crash of 2008 was the inevitable result of granting
to poachers the role of gamekeeper. Their power was blatant
and their image as the postmodern wizards conjuring up new
wealth and new paradigms was unchallenged. The bankers paid
the credit rating agencies to extend triple-A status to the GDOs
that they issued; the regulating authorities (including the central
bank) accepted these ratings as kosher; and the up-and-coming
young men and women who had secured a badly paid job with
one of the regulating authorities soon began to plan a career
move to Lehman Brothers or Moody’s. Overseeing all of them
was a host of treasury secretaries and finance ministers who had
either already served for years at Goldman Sachs, Bear Stearns,
etc. or were hoping to join that magic circle after leaving politics.
In an environment that reverberated with the popping of
champagne corks and the revving of gleaming Porsches and
Ferraris; in a landscape where torrents of bank bonuses flooded
into already wealthy areas (further boosting the real estate boom
and creating new bubbles from Long Island and London’s
East End to the suburbs of Sydney and the high-rise blocks of

Shanghai); in that ecology of seemingly self-propagating paper
wealth, it would take a heroic - a reckless - disposition to sound
the alarm bells, to ask the awkward questions, to cast doubt on
the pretence that triple-A rated GDOs carried zero risk. Even if
some incurably romantic regulator, trader or senior banker were
to raise the alarm, she would be well and truly trumped, ending
up a tragic, crushed figure in history’s gutter.
T he Brothers Grimm had a story involving a magic pot
that embodied industrialization’s early dreams - of automated
cornucopias fulfilling all our desires, unstoppably. It was also a
bleak and cautionary tale that demonstrated how those indus­
trial dreams might turn into a nightmare. For, towards the end
of the story, the wondrous pot runs amok and ends up flooding
the village with porridge. Technology turned nasty, in much
the same way as Mary Shelley’s ingenious Dr Frankenstein had
his own creation turn viciously against him. In similar fashion,
the virtual automated telling machines (ATMs) conjured up by
Wall Street, the credit rating agencies and the regulators who
connived with them flooded the financial system with a modernday porridge, which ended up choking the whole planet. And
when, in autumn of 2008, the ATMs stopped working, a world
addicted to synthesized porridge juddered to a grinding halt.

3. Irrepressible greed
‘It’s the nature of the beast’, goes the third explanation. Humans
are greedy creatures who only feign civility. Given the slightest
chance, they will steal, plunder and bully. This dim view of our
human lot leaves no room even for a modicum of hope that intel­
ligent bullies will consent to rules banning bullying. For even
if they do, who will enforce them? To keep the bullies in awe,
some Leviathan with extraordinary power will be necessary. But
then again, who will keep tabs on the Leviathan?

Such are the workings of the neoliberal mind, yielding the
conclusion that crises may be necessary evils; that no human
design can avert economic meltdowns. For a few decades, begin­
ning with President Roosevelt’s post-1932 attempts to regulate
the banks, the Leviathan solution became widely accepted: the
state could and should play its Hobbesian role in regulating
greed and bringing it into some balance with propriety. The
Glass-Steagall Act of 1933 is possibly the most often quoted
example of that regulatory effort.8
However, the 1970s saw a steady retreat away from this regula­
tory framework and toward the re-establishment of the fatalistic
view that human nature will always find ways of defeating its
own best intentions. This ‘retreat to fatalism’ coincided with
the period when neoliberalism and financialization were rearing
their unsightly heads. This meant a new take on the old fatalism:
the Leviathan’s overwhelming power, while necessary to keep
the bullies in their place, was choking growth, constraining
innovation, putting the brakes on imaginative finance, and thus
keeping the world stuck in a low gear just when technological
innovations offered the potential to whisk us onto higher planes
of development and prosperity.
In 1987, President Reagan decided to replace Paul Volcker
(a Garter administration appointment) as chairman of the
Fed. His choice was Alan Greenspan. Some months later, the
money markets experienced their worst single day ever, the
infamous ‘Black Monday’ episode. Greenspan’s deft handling
of the consequences earned him a reputation for cleaning up
efficiently after a money market collapse.9 He was to perform
the same ‘miracle’ again and again until his retirement in 2006.10
Greenspan had been chosen by Reagan’s staunch neolib­
erals not in spite of but because of his deeply held belief that the
merits and capacities of regulation were overrated. Greenspan
truly doubted that any state institution, including the Fed, could

rein in human nature and effectively restrain greed without, at
the same time, killing off creativity, innovation and, ultimately,
growth. His belief led him to adopt a simple recipe, which
shaped the world for a good nineteen years: since nothing disci­
plines human greed like the unyielding masters of supply and
demand, let the markets function as they will, but with the state
remaining ready and willing to step in to clean up the mess when
the inevitable disaster strikes. Like a liberal parent who lets his
children get into all sorts of mischief, he expected trouble but
thought it better to remain on the sidelines, always ready to step
in, clean up after a boisterous party, or tend to the wounds and
the broken limbs.
Greenspan stuck to his recipe, and this underlying model
of the world, in each and every downturn that occurred on
his watch. During the upturns, he would sit by, doing almost
nothing, save for giving the occasional sibyllic pep talk. Then,
when some bubble burst, he would rush in aggressively, lower
interest rates precipitously, flood the markets with cash and
generally do anything it took to refloat the sinking ship. The
recipe seemed to work nicely - at least until 2008, a year and a
half into his golden retirement. T hen it stopped working.
To his credit, Greenspan confessed to having misunderstood
capitalism. If only for this mea culpa, history ought to treat
him kindly, for there are precious few examples of powerful
men willing and able to come clean - especially when the
people who used to be their minions remain in denial. Indeed,
Greenspan’s model of the world, which he himself renounced,
is still alive, well and making a comeback. Aided and abetted by
a resurgent Wall Street bent on derailing any serious post-2008
attempt to regulate its behaviour, the view that human nature
cannot be restrained without simultaneously jeopardizing our
liberty and our long-term prosperity is back. Like a criminally
negligent doctor whose patient survived by luck, the pre-2008

establishment is insisting on being absolved on the grounds
that capitalism, after all, survived. And if some of us continue
to insist on apportioning blame for the Crash of 2008, why not
censure human nature? Surely honest introspection would
reveal to each and every one of us a culpable dark side. The
only sin to which Wall Street confessed is that it projected that
dark side onto a larger canvas.

4. Cultural origins
In September 2008, Europeans looked smugly over the pond,
shaking their heads with a self-serving conviction that the
Anglo-Celts, at long last, were getting their comeuppance. After
years and years of being lectured on the superiority of the AngloGeltic model, on the advantages of flexible labour markets, on
how inane it was to think that Europe could retain a generous
social welfare net in the era of globalization, on the wonders of an
aggressively atomistic entrepreneurial culture, on the wizardry
of Wall Street and on the brilliance of the post-Big Bang City of
London, the news of the Crash, its sights and sounds as they
were beamed all over the world, filled the European heart with
an ambiguous mix of Schadenfreude and fear.
O f course, it was not too long before the crisis migrated to
Europe, metamorphosing in the process into something far
worse and more threatening than Europeans had ever antici­
pated. Nevertheless, most Europeans remain convinced of
the Crash’s Anglo-Celtic cultural roots. They blame the fasci­
nation that English-speaking people have with the notion of
home ownership at all costs. They find it hard to wrap their
minds around an economic model which generates silly house
prices by stigmatizing rent-paying non-homeowners (for being
in thrall to landlords) while celebrating pretend homeowners
(who are even more deeply indebted to bankers).

Europeans and Asians alike saw the obscene relative size of
the Anglo-Celtic financial sector, which had been growing for
decades at the expense of industry, and became convinced that
global capitalism had been taken over by lunatics. So when the
meltdown began in precisely those locations (the US, Britain,
Ireland, the housing market and Wall Street), they could not
help but feel vindicated. While the Europeans’ sense of vindica­
tion was dealt a savage blow by the ensuing euro crisis, Asians
can afford a large dose of smugness. Indeed, in much of Asia
the Crash of 2008 and its aftermath are referred to as the ‘North
Atlantic Crisis’.

5. Toxic theory
In 1997, the Nobel Prize for Economics went to Robert Merton
and Myron Scholes for developing ‘a pioneering formula for
the valuation of stock options’. ‘Their methodology’, trum­
peted the awarding committee’s press release, ‘has paved the
way for economic valuations in many areas. It has also gener­
ated new types of financial instruments and facilitated more
efficient risk management in society.’ If only the hapless Nobel
committee had known that, in a few short months, the muchlauded ‘pioneering formula’ would cause a spectacular multibillion-dollar debacle, the collapse of a major hedge fund (the
infamous LTCM, in which Merton and Scholes had invested
all their kudos) and, naturally, a bail-out by the reliably obliging
US taxpayers.
T he true cause of the LTCM failure, which was a mere test run
for the larger Crash of 2008, was simple enough: huge invest­
ments that relied on the untestable assumption that one can
estimate the probability of events that one’s own model assumes
away not just as improbable but, in fact, as untheorizable. To
adopt a logically incoherent assumption in one’s theories is bad

enough. But to gamble the fortunes of world capitalism on such
an assumption is bordering on the criminal. So how did the
economists get away with it? How did they convince the world,
and the Nobel committee, that they could estimate the prob­
ability of events (such as a string of defaults by debtors) which
their own models assumed to be inestimable?
T he answer lies more in the realm of mass psychology than in
economics itself: economists relabelled ignorance and marketed
it successfully as a form of provisional knowledge. The finan­
ciers then built new forms of debt on that relabelled ignorance
and erected pyramids on the assumption that risk had been
removed. T he more investors were convinced, the more money
everyone involved made and the better placed the economists
became to silence anyone who dared to doubt their underlying
assumptions. In this manner, toxic finance and toxic economic
theorizing became mutually reinforcing processes.
As the Mertons of the financial world were sweeping up Nobel
Prizes and accumulating fabulous profits in the same breath, their
counterparts who remained in the great economics departments
were changing the economic theory ‘paradigm’. Whereas, once
upon a time, leading economists were in the business of explana­
tion, the new trend was toward relabelling. Copying the financiers’
strategy of disguising ignorance as provisional knowledge and
uncertainty as riskless risk, the economists relabelled unexplained
joblessness (e.g. an observed rate of 5 per cent that refused to
budge) as the natural rate of unemployment. The beauty of the
new label was that, suddenly, unemployment seemed natural, and
therefore no longer in need of explanation.
It is worth, at this point, delving a little deeper into the econo­
mists’ elaborate scam: whenever they were unable to explain the
observed deviations of human behaviour from their predictions,
they (a) labelled such behaviour ‘out of equilibrium’, and then
(b) assumed that it was random and best modelled as such. So

long as the ‘deviations’ were subdued, the models worked and
the financiers profited. But when panic set in, and the run on
the financial system began, the ‘deviations’ proved anything but
random. Naturally, the models collapsed, along with the markets
that they had helped create.
Any fair-minded investigator of these episodes must, many
believe, conclude that the economic theories that dominated
the thinking of influential people (in the banking sector, the
hedge funds, the Fed, the European Central Bank (ECB) everywhere) were no more than thinly veiled forms of intel­
lectual fraud, which provided the ‘scientific’ fig leaves behind
which Wall Street tried to conceal the truth about its ‘finan­
cial innovations’. They came with impressive names, like the
Efficient Market Hypothesis (EMH), the Rational Expectations
Hypothesis (REH) and Real Business Cycle Theory (RBCT).
In truth, these were no more than impressively marketed theo­
ries whose mathematical complexity succeeded for too long in
hiding their feebleness.

Three toxic theories underpinning pre-2008
establishment thinking

EMH: No one can systematically make money by secondguessing the market. Why? Because financial markets contrive
to ensure that current prices reveal all the privately known
information that there is. Some market players overreact to new
information, others underreact. Thus, even when everyone errs,
the market gets it ‘right’. A pure Panglossian theory!
REH: No one should expect any theory of human action to
make accurate predictions in the long run if the theory presup­
poses that humans systematically misunderstand or totally
ignore it. For example, suppose a brilliant mathematician were

to develop a theory of bluffing at poker and schooled you in
its use. T he only way it would work for you is if your oppo­
nents either had no access to the theory or misunderstood it.
For if your opponents also knew the theory, each could use it
to work out when you were bluffing, thus defeating the bluff’s
purpose. In the end, you would abandon it and so would they.
REH assumes that such theories cannot predict behaviour well
because people will see through them and will eventually violate
their edicts and predictions. No doubt this sounds radically
anti-patronizing. It assumes that not much light can be shed on
society by theorists who believe they understand its ways better
than Joe Bloggs. But note the sting in the tail: for REH to hold,
it must be true that people’s errors (when they predict some
economic variable, such as inflation, wheat prices, the price of
some derivative or share) must always be random - i.e. unpat­
terned, uncorrelated, untheorizable. It only takes a moment’s
reflection to see that the espousal of REH, especially when
taken together with EMH, is tantamount to never expecting
recessions, let alone crises. Why? Because recessions are, by
definition, systematic, patterned events. However surprising
when they hit, they unfold in a patterned manner, each phase
highly correlated with what preceded it. So how does a believer
in EM H -REH respond when her eyes and ears scream to her
brain: ‘recession, crash, meltdown!’? The answer is by turning
to RBGT for a comforting explanation.

RBCT: Taking EMH and REH as its starting point, this theory
portrays capitalism as a well-functioning G aia. Left alone, it
will remain harmonious and never go into a spasm (like that
of 2008). However, it may well be ‘attacked’ by some ‘exoge­
nous’ shock (coming from a meddling government, a wayward
Fed, heinous trades unions, Arab oil producers, aliens, etc.),
to which it must respond and adapt. Like a benevolent G aia

reacting to a large meteor crashing into it, capitalism responds
efficiently to exogenous shocks. It may take a while for the
shockwaves to be absorbed, and there may be many victims in
the process, but, nonetheless, the best way of handling the crisis
is to let capitalism get on with it, without being subjected to new
shocks administered by self-interested government officials and
their fellow travellers (who pretend to be standing up for the
common good in order to further their own agendas).
To sum up, toxic derivatives were underpinned by toxic
economics, which, in turn, were no more than motivated delu­
sions in search of theoretical justification; fundamentalist tracts
that acknowledged facts only when they could be accommo­
dated to the demands of the lucrative faith. Despite their highly
impressive labels and technical appearance, economic models
were merely mathematized versions of the touching supersti­
tion that markets know best, both at times of tranquillity and in
periods of tumult.

6. Systemicfailure
What if neither human nature nor economic theory was to blame
for the Crash? What if it did not come about because bankers
were greedy (even if most are), or because they made use of
toxic theories (even though they undoubtedly did), but because
capitalism was caught in a trap of its own making? What if capi­
talism is not a ‘natural’ system but, rather, a particular system
with a propensity to systemic failure?
T he Left, with Marx its original prophet, has always warned
that, as a system, capitalism strives to turn us into automata and
our market society into a M atrix-like dystopia. But the closer it
comes to achieving its aim, the nearer it gets to its moment of
ruin, very much like the mythical Icarus. Then, after the Crash

(and unlike Icarus) it picks itself up, dusts itself down, and
embarks upon the same path all over again.
In this final explanation on my list, it is as if our capitalist
societies were designed to generate periodic crises, which get
worse and worse the more they displace human labour from the
production process and critical thinking from public debate. To
those who blame human avarice, greed and selfishness, Marx
replied that they are following a good instinct but are looking
in the wrong place; that capitalism’s secret is its penchant for
contradiction - its capacity to produce at once massive wealth
and unbearable poverty, magnificent new freedoms and the
worst forms of slavery, gleaming mechanical slaves and depraved
human labour.
Hum an will, in this reading, may be dark and mysterious;
but, in the Age of Capital, it has become more of a derivative
than a prime mover. For it is capital that usurped the role of the
primary force shaping our world, including our will. Capital’s
self-referential momentum makes a mockery of the human
will, of entrepreneur and labourer alike. Though inanimate
and mindless, capital - shorthand for machines, money, secu­
ritized derivatives and all forms of crystallized wealth - quickly
evolves as if it were in business for itself, using human actors
(bankers, bosses and workers in equal measure) as pawns in
its own game. Not unlike our subconscious, capital also instils
illusions in our minds - above all, the illusion that, in serving
it, we become worthy, exceptional, potent. We take pride in
our relationship with it (either as financiers who ‘create’
millions in a single day, or as employers on whom a multitude
of working families depend, or as labourers who enjoy privi­
leged access to gleaming machinery or to puny services denied
to illegal migrants), turning a blind eye to the tragic fact that
it is capital which, in effect, owns us all, and that it is we who
serve it.

T he German philosopher Schopenhauer castigated us
modern humans for deceiving ourselves into thinking that our
beliefs and actions are subject to our consciousness. Nietzsche
concurred, suggesting that all the things we believe in, at any
given time, reflect not truth but someone else’s power over us.
Marx dragged economics into this picture, reprimanding us all
for ignoring the reality that our thoughts have become hijacked
by capital and its drive to accumulate. Naturally, although it
follows its own steely logic, capital evolves mindlessly. No one
designed capitalism and no one can civilize it now that it is
going at full tilt.
Having simply evolved, without anyone’s consent, it
quickly liberated us from more primitive forms of social
and economic organization. It bred machines and instru­
ments (material and financial) that allowed us to take over the
planet. It empowered us to imagine a future without poverty,
where our lives are no longer at the mercy of a hostile nature.
Yet, at the same time, ju st as nature spawned Mozart and
H IV using the same indiscriminate mechanism, so too did
capital produce catastrophic forces with a tendency to bring
about discord, inequality, industrial-scale warfare, environ­
mental degradation and, of course, financial freefalls. In one
fell swoop, it generated - with neither rhyme nor reason wealth and crises, development and deprivation, progress
and backwardness.
Gould the Crash of 2008, then, be nothing more than our
periodic chance to realize how far we have allowed our w ill to
be subjugated to capital? Was it ajolt that ought to awaken us to
the reality that capital has become a ‘force we must submit to’, a
power that developed ‘a cosmopolitan, universal energy which
breaks through every limit and every bond and posits itself as
the only policy, the only universality, the only limit and the only
bond’?11

The parallax challenge
A stick half submerged in a river looks bent. As one moves
around it, the angle changes and every different location yields
a different perspective. If, in addition, the river’s flow gently
moves the stick around, both the ‘reality’ of the ‘bent’ stick and
our understanding of it are in constant flux. Physicists refer to
the phenomenon as the parallax. I enlist it here to make the
simple point that many different observations about the Crash
of 2008 may be both accurate and misleading.
This is not to deny the objective reality either of the stick
(i.e. that it is not bent at all) or of the Crash and its aftermath,
the Crisis. It is simply to note that different viewpoints can all
generate ‘true’ observations, yet fail to unveil the basic truth
about the phenomenon under study. What we need is some­
thing beyond a variety of potential explanations and perspec­
tives from which to grasp the stick’s reality. We need a theoretical
leap, like the one the physicist makes, which will allow us to
rise above the incommensurable observations before landing in
a conceptual place from which the whole thing makes perfect
sense. I call this ‘leap’ the parallax challenge.
Coming to terms with the Crash of 2008 is like coming face
to face with the parallax challenge at its most dem anding.
W ho could credibly deny that economists and risk managers
m iscalculated systemic risk big time? Is there any doubt
that Wall Street, and the financial sector at large, did grow
fat on insidious voracity, on quasi-criminal practices, and
on financial products that any decent society ought to have
banned? Were the credit rating agencies not textbook cases
of conflict of interest in action? Was greed not hailed as the
new good? Did the regulators not fail spectacularly to resist
the tem ptation to stay on the ‘right’ side of the bankers?
Were Anglo-Celtic societies not more prone than others to

neoliberalism ’s cultural trickery, acting as a beachhead from
which to spread the word to the rest of the globe that ‘scru­
ples’ meant nothing and self-interest was the only way, the
only motive? Is it not true that the Crash of 2008 affected
the developed world more acutely than it did the so-called
emerging economies? Can anyone refute the simple proposi­
tion that capitalism, as a system, has an uncanny capacity to
trip itself up?
Just as in a simple optical parallax, where all perspectives are
equally plausible depending on one’s standpoint, here, too, each
of the explanations listed above illuminates important aspects
of what happened in 2008. And yet they leave us dissatisfied,
with a nagging feeling that we are missing something important;
that, while we have glimpsed many crucial manifestations of
the Crash, its quintessence still escapes us. Why did it happen,
really ? And how could legions of keenly motivated, technically
hyper-skilled market observers miss it? If it was not greed and
profligacy, loose morals and even looser regulation that caused
the Crash and the ensuing Crisis, what was it? If the Marxists’
expectation that capitalism’s internal contradictions will always
strike back is too simple an explanation for the events leading to
2008, what is the missing link there?
My figurative answer is: the Crash of 2008 was what happened
when a beast I call the Global M inotaur was critically wounded.
While it ruled the planet, its iron fist was pitiless, its reign
callous. Nevertheless, so long as it remained in rude health, it
kept the global economy in a state of balanced disequilibrium .
It offered a degree of stability. But when it fell prey to the inevi­
table, collapsing into a comatose state in 2008, it plunged the
world into a simmering crisis. Until we find ways to live without
the beast, radical uncertainty, protracted stagnation and a revival
of heightened insecurity will be the order of the day.

The Global Minotaur: a first glimpse
T he collapse of communism in 1991 saw the conclusion of a
tragedy with classical overtones, a fatal inversion (a peripeteia,
as Aristotle would have called it) which began when the noble
intentions of revolutionary socialists were first usurped by
power-hungry zealots, before giving way to an unsustainable
industrial feudalism containing only victims and villains. By
contrast, the Crash of 2008 exuded the air of a pre-classical,
more mythological and thus cruder sequence of events. It is
for this reason that this book adopts a title alluding to a period
before tragedy was invented.
I might have called this book The Global Vacuum Cleaner, a
term that captures quite well the main feature of the second post­
war phase that began in 1971 with an audacious strategic deci­
sion by the US authorities: instead of reducing the twin deficits
that had been building up in the late 1960s (the budget deficit
of the US government and the trade deficit of the American
economy), America’s top policy makers decided to increase
both deficits liberally and intentionally. And who would pay for
the red ink? Simple: the rest of the world! How? By means of a
permanent tsunami of capital that rushed ceaselessly across the
two great oceans to finance America’s twin deficits.
T he twin deficits of the US economy thus operated for
decades like a giant vacuum cleaner, absorbing other people’s
surplus goods and capital. While that ‘arrangement’ was the
embodiment of the grossest imbalance imaginable on a plan­
etary scale, and required what Paul Volcker described vividly as
‘controlled disintegration in the world economy’, nonetheless it
did give rise to something resembling global balance: an inter­
national system of rapidly accelerating asymmetrical financial
and trade flows capable of creating a semblance of stability and
steady growth.

Powered by America’s twin deficits, the world’s leading
surplus economies (e.g. Germany, Japan and, later, China) kept
churning out goods that Americans gobbled up. Almost 70 per
cent of the profits made globally by these countries were then
transferred back to the United States, in the form of capital
flows to Wall Street. And what did Wall Street do with them?
It instantly turned these capital inflows into direct investments,
shares, new financial instruments, new and old forms of loans
and, last but not least, a ‘nice little earner’ for the bankers them­
selves. Through this prism, everything seems to make more
sense: the rise of financialization, the triumph of greed, the
retreat of regulators, the domination of the Anglo-Celtic growth
model. All these phenomena that typified the era suddenly
appear as mere by-products of the massive capital flows neces­
sary to feed the twin deficits of the United States.
Clearly, ‘the global vacuum cleaner’ would have been an accu­
rate description of this book’s theme. Its humble origins in the
world of domestic appliances might prove a marketing demerit
but should not disqualify it per se. However, at a more symbolic
level, it would have failed to connect with the dramatic, almost
mythological, aspects of the international design under which
we all laboured prior to the ill-fated 2008 - a design too unstable
to survive in perpetuity but, at the same time, one that helped
maintain global tranquillity for decades, based upon a constant
flow of tribute from the periphery to the imperial centre tribute that sustained the mutual reinforcement between the US
twin deficits and overall demand for the surplus nations’ goods
and services.
Such were the features of a global beast that roared from the
1970s until so very recently. They lend themselves, I believe,
more readily to the Minotaur metaphor than to one involving
domestic chores.

Box l.i
T he Cretan M inotaur
The Minotaur is a tragic mythological figure. Its story is packed with
greed, divine retribution, revenge and much suffering. It is also a symbol
of a particular form of political and economic equilibrium straddling
vastly different, faraway lands; a precarious geopolitical balance that
collapsed with the beast’s slaughter, thus giving rise to a new era.
According to the myth’s main variant, King Minos of Crete, the
most powerful ruler of his time, asked Poseidon for a fine bull as a sign
of divine endorsement, pledging to sacrifice it in the god’s honour.
After Poseidon obliged him, Minos recklessly decided to spare the
animal, captivated as he was by its beauty and poise. T he gods, never
allowing a good excuse for horrible retribution to go begging, chose
an interesting punishment for Minos: using Aphrodite’s special
skills, they had Minos’s wife, Queen Pasiphaë, fall in lust with the
bull. Using various props constructed by Daedalus, the legendary
engineer, she managed to impregnate herself, the result of that brief
encounter being the Minotaur: a creature half-human, half-bull
(Minotaur translates as ‘Minos’s Bull’, from the Greek taurus, ‘bull’).
W hen the Minotaur grew larger and increasingly unruly, King
Minos instructed Daedalus to build a labyrinth, an immense under­
ground maze where the Minotaur was kept. Unable to nourish itself
with normal human food, the beast had to feast on human flesh.
This proved an excellent opportunity for Minos to take revenge on
the Athenians, whose King Aegeus, a lousy loser, had had Minos’s
son killed after the young man had won all races and contests in
the Pan-Athenian Games. After a brief war with Athens, Aegeus
was forced to send seven young boys and seven unwed girls to be
devoured by the Minotaur every year (or every nine years, according
to another version). Thus, so the myth has it, a Pax Cretana was
established across the known lands and seas on the basis of regular
foreign tribute that kept the Minotaur well nourished.
Beyond myth, historians suggest that Minoan Crete was the
economic and political hegemon of the Aegean region. Weaker
city-states, like Athens, had to pay tribute to Crete regularly as a
sign of subjugation. This may well have included the shipment of
teenagers to be sacrificed by priests wearing bull masks.

Returning to the realm of myth, the eventual slaughter of the
Minotaur by Theseus, son of King Aegeus of Athens, marked the eman­
cipation of Athens from Cretan hegemony and the dawn of a new era.
Aegeus only grudgingly allowed his son to set off for Crete on
that dangerous mission. He asked Theseus to make sure that,
before sailing back to Piraeus, he replaced the original mournful
black sails of his vessel with white ones, as a signal to his waiting
father that the mission had been successful and that Theseus was
returning from Crete victorious. Alas, consumed by joy at having
slaughtered the Minotaur, Theseus forgot to raise the white sails.
O n spotting the ship’s black sails from afar, and thinking that his
son had died in the clutches of the Minotaur, Aegeus plunged to
his death in the sea below, thus giving his name to the Aegean Sea.

A quick perusal of the ancient myth (see Box l.l) confirms its
suitability as a tale of unbalanced might stabilized and sustained
by one-sided tribute; of a hegemonic power projecting its
authority across the seas, and acting as custodian of far-reaching
peace and international trade, in return for regular tribute that
keep nourishing the beast within.
In the misty world of Cretan myth, the beast was a sad, unloved,
vicious creature, and the tribute was young people, whose sacri­
fice preserved a hard-won peace. To end its reign, a brave prince,
Theseus, had to perform the ugly deed - to slay the Minotaur and
usher in a new post-Cretan era. No such heroics were necessary in
our more complicated world. The role of the beast was played by
America’s twin deficits, and the tribute took the form of incoming
goods and capital. As for our Global Minotaur’s end, it came
suddenly, with no physical agent intentionally striking out. The
potentially fatal wound was inflicted by the cowardly, spontaneous
collapse of the banking system. While the hit was just as dramatic,
ending global capitalism’s second post-war phase in no uncertain
terms, the new era is stubbornly refusing to show its face. Until it
does, we shall all remain in the state of aporia brought on by 2008.

C H A PTER 2

Laboratories of the future

Our two great leaps forward
Humanity owes its first great leap forward to a crisis. Indeed,
we have it on good authority that the farming revolution was
brought on by severe food shortages, triggered when popula­
tion size rose beyond a level that nature could sustain.1While we
tend to identify progress with gadgets and assorted machinery,
none of our proud industrial achievements can compare with
the audacity of those prehistoric hunter-gatherers to grow their
own food in the face of nature’s declining capacity to satisfy
their hunger. No innovation behind our gleaming gizmos is
equal to the impudent genius of some long-dead early human
who aspired to enslave a mammal (often mightier and larger
than herself) so as to drink its milk every morning.
Thus food crises of often famine proportions begat brilliant
interventions in nature’s ways which, about 12,000 years ago,
set us on the path to socialized agricultural production. And it
was this socialized work with soil, seeds and water that gave rise
to surpluses - i.e. to the production of quantities of food, clothes
and other materials that, over a season, exceeded the quan­
tities necessary to replace the food, the clothes and the other

materials consumed or used up during that same season. In
turn, the ensuing surpluses provided the foundation o f‘civiliza­
tion’ as we now know it and the backbone of recorded history.
Indeed, surpluses gave rise to bureaucracies and organized
religion (by affording a large minority the privilege of system­
atically shunning food production), to the written word (whose
original purpose was to assist in the book-keeping necessary for
keeping tabs on who produced what within clans and families),
to sophisticated metal tools (for ploughing the land, harnessing
the cows and, ultimately, arming the guardians of the surplus), to
biological weapons of mass destruction (as new strands of lethal
bacteria evolved in the presence of so much biomass), as well
as to differential immunity levels that made farming societies
invincible colonizers of non-farming valleys, islands and even
continents (recall the hideous encounter of native Americans
and Australian aborigines with the bacteria-infested European
settlers).
T he second great leap forward of our species brought us
industrialization. It, too, was a chaotic, unsavoury affair occa­
sioned by another crisis - this time a crisis in which nature had
no part. Its roots are deep and extend well into the fifteenth
century, if not earlier. Back then, improvements in navigation
and ship-building had made possible the establishment of the
first truly global trading networks. Spanish, Dutch, British and
Portuguese traders began to exchange British wool for Chinese
silk, silk for Japanese swords, swords for Indian spices, and
spices for much more wool than they had started with. Thus,
these goods established themselves as commodities and, eventu­
ally, as global currencies.
Unlike the aristocrats, whose wealth was appropriated from
the peasantry or looted from their defeated neighbours, the
emerging merchant class benefited from long-distance arbi­
trage: they transported commodities that were undervalued

in one market and sold them at a high price in some remote
market. Tragically, the trade in commodities was soon to be
augmented by another kind of trade - the trade in slaves,
whose heart-wrenching unpaid labour was to generate more
of these global commodities (e.g. cotton in the Americas). At
some stage landowners in Britain joined this lucrative global
trading network in the only way they could: they produced
wool, the global commodity that the British Isles could
deliver at the time. To do so, however, they expelled most
of the peasants from their ancestral lands (to make room for
sheep) and built great fences to stop them from returning the enclosures.
At a single stroke, land and labour had become com m odi­
ties: each acre of land acquired a rental price that depended
on the global price of the wool that one acre could generate
in a season. And as for labour, its price was the puny sum
the dispossessed ex-peasants could get for doing odd jobs.
T h e coalescence of the m erchants’ wealth (which was stock­
piling in the City of London, seeking ways of breeding more
money), a potential working class (the expelled ex-peasants
pleading to work for a loaf of bread), unique quantities of
coal close to the surface (in England), and some clever tech­
nological advances spurred on by the trading opportuni­
ties made possible by the ongoing globalization (the steam
engine, the mechanical loom, etc.) eventually led to the inven­
tion of a new locus of production - the factory. A frenzy of
industrialization followed.
Had history been democratic in its ways, there would have
been no farming and no industrial revolution. Both leaps into
the future were occasioned by unbearably painful crises that
made most people wish they could recoil into the past. At our
moment of Crisis, it is perhaps soothing to recall how crises act
upon history as the laboratories of the future.

Condorcet’s secret in the Age of Capital
If crisis is history’s laboratory, consent is its main driving force.
Although violence was never far below the surface, it is remark­
able how consensual the resolution of great tensions has been,
at least following the second great leap forward that culminated
in today’s market societies. Despite the organized killing sprees
(known also as wars), the famous revolutions and the violent
enslavement of whole peoples, explicit force has generally been
used only occasionally (even if to devastating effect), and by
rulers whose power was on the wane.
Indeed, the power to compel, the power to privatize a large
part of the collectively produced surplus and the authority to
set the agenda are not forms of might that can be maintained for
long on the basis of brute force. The French thinker Marquis
de Gondorcet put this point deftly at the time of another great
convulsion of history, back in 1794, as the French Revolution
was preparing to yield its place to a new despotism. Gondorcet
suggested that ‘force cannot, like opinion, endure for long
unless the tyrant extends his empire far enough afield to hide
from the people, whom he divides and rules, the secret that real
power lies not with the oppressors but with the oppressed’. The
‘mind forg’d manacles’, as William Blake called them, are as real
as the hand-forged ones.
Condorcet’s secret, as I like to call this noteworthy insight,
illuminates much of what makes societies tick. From the fertile
agricultural lands which underwrote the pharaohs’ reign to the
astonishing cities financed by surplus production in the Andes;
from the magnificent Babylonian gardens to the golden age
of Athens; from the splendour of Rome to the feudal econo­
mies that erected the great cathedrals - in all that is nowadays
described as ‘civilization’, the rulers’ command over the surplus
and its uses was based on a combination of their capacity to

make compliance seem individually inescapable (indeed, attrac­
tive), ingenious divide-and-rule tactics, moral enthusiasm for
the maintenance of the status quo (especially among the under­
privileged) and the promise of a pre-eminent role in some after­
life. Only very infrequently was it based on brute force.
All dynamic societies founded their success on two produc­
tion processes that unfolded in parallel: the m anufacturing of a
surplus and the manufacturing of consent (regarding its distri­
bution). However, the feedback between the two processes grew
to new heights in the Age of Capital. The rise of commodifica­
tion, which also led to the flourishing offinance, coincided with
a subtler, more powerful, form of consent. And here lies a deli­
cious paradox: consent grew more powerful the more economic
life was financialized. And as finance grew in importance, the
more prone our societies became to economic crises. Hence the
interesting observation that modern societies tend to produce
both more consent and more violent crises.
Why is this? Under feudalism, surplus production and its
distribution was a fairly transparent affair. After having piled up
the very corn that they had produced, the peasants would watch
the sheriff depart with the master’s share of a resource he had
had no hand in producing. Put simply, distribution happened
after the harvest was in. Who got what chunk of it depended
on visible power and customs that everyone understood quite
well. But when the market extended its reign into the fields and
the workshops, things changed drastically. A veil of obfuscation
descended upon the emerging commercial societies, resulting
in both new forms of consent and crises (i.e. misfortunes of a
purely economic variety).
What was it exactly that made the difference? Why were market
societies more prone to economic meltdowns? The main differ­
ence occurred when, some centuries before, both land and labour
stopped being mere productive inputs. They were, instead,

transformed into commodities (traded in specialist markets at
free-floating prices). At that point a great inversion occurred: distri­
bution no longer came after production. Increasingly, it preceded
it. Put simply, the labourers were paid wages in advance of the
harvest. By whom? By their ‘employers’, of course. By people who
no longer commanded labour, but instead hired it. By people who,
come the nineteenth century, came to be known as capitalists.
What is fascinating is that many of the early capitalists had not
chosen to be capitalists. Just as, during humanity’s first great leap
forward, hunter-gatherers did not choose to become farmers but
were led to agriculture by hunger, so too a large number of former
peasants or artisans had no alternative (especially after the enclo­
sures) but to rent land from landlords - and make it pay. To that
effect, they borrowed from moneylenders to pay for rent, seeds and,
of course, wages. Moneylenders turned into bankers, and a whole
panoply of financial instruments became an important part of the
business of surplus production and its distribution. Thus finance
acquired a mythical new role as a ‘pillar of industry’, a lubricant of
economic activity, and a contributor to society’s surplus production.
Unlike the landed gentry, the new capitalist employers, not
all of them rich, went to bed every night and woke up every
morning with an all-pervasive anxiety: would the crop allow
them to pay their debts to the landlord and the banker? Would
something be left over for their own families after the produce
was sold? Would the weather be kind? Would customers buy
their wares? In short, they took risks. And these risks blurred
everyone’s vision regarding the role of social power in deter­
mining the distribution of the surplus between the employer,
the landowner, the banker and the worker.
Whereas the feudal lord understood that he was extracting
part of a surplus produced by others, thanks to his political and
military might, the anxious capitalist naturally felt that his sleep­
less nights were a genuine input into the surplus, and that any

profit was his just reward for all that angst and for the manner
in which he orchestrated production. The moneylender, too,
bragged about his contribution to the miracle economy that
was taking shape on the back of the credit line he was making
available to the capitalist. At least at the outset, as Shakespeare’s
Merchant of Venice illustrates, lending money was not without
its perils. Shylock’s tragedy was emblematic of the risks that one
had to take in order to be the financier of other people’s endeav­
ours. But as the Age of Capital progressed, finance became
entrenched both in practice and in established ideology.
Meanwhile, the labourers were experiencing formal freedom
for the first time ever, even if they struggled to make sense of
their new-found liberty’s coexistence with another new freedom
- the freedom to a very private death through starvation. Those
who did find paid work (and they were by no means in the
majority) saw their labour diverted from the farms to the work­
shops and the factories. There, separated from the countryside
of their ancestors by the tall walls of the noisy, smoke-filled, grey
industrial buildings, their human effort was blended with the
mechanical labour of technological wonders such as the steam
engine and the mechanical loom. They became participants in
production processes over which they had no control and which
treated them as small cogs in a vast machine that produced an
assortment of products, many of which they would never own.
In this brilliantly challenging world, which encompasses
both nineteenth-century Manchester and twenty-first-century
Shenzhen, Condorcet’s secret appears as an impossible riddle.
T he exercise of social power retreats behind multiple veils that
no amount of rational thinking may penetrate easily. Employer
and worker, moneylender and artisan, destitute peasant and
dumbfounded local dignitary - they are all stunned by the pace
of change. Each feels like a powerless plaything of forces beyond
their control or understanding.

T he Crash of 2008 also left our world floating in a pool of
bewilderment. Its roots are to be found at the dawn of indus­
trial, market societies. O ur current aporia is a variant of the
puzzlement engendered by the simultaneous progression of
commodification, financialization, and the crises these proc­
esses inevitably occasion.

The paradox of success and redemptive crises
T he dynamic of crises was understood well before markets
began to dominate and to yield purely economic crises. Nature’s
keen observers noticed that, when prey is plentiful, the number
of predators rises, thus putting the prey population under pres­
sure. Once prey numbers begin to fall, the predators’ popula­
tion shrinks, too. But not for long. For when the decline turns
into a crisis, then the prey numbers rebound and the whole
cyclical process starts again.
Back in the fourteenth century, Ibn Khaldun (1332-1406) was
probably the first scholar carefully to project the prey-predator
dynamic onto political society. Based on his close study of the
history of the Arab states of Spain and North Africa, he told a
story of the rise and fall of regimes, in which rulers play the role
of the predator and there is something called asabiyyah in the
role of prey.2Asabiyyah is defined as a form of solidarity, group
feeling, or cohesion that emerges within small groups as a result
of the urge to cooperate in the struggle against need and danger.
Asabiyyah thus confers power and success on the groups within
which it takes root. These groups then rise to power in the
urban centres and found great city-states. But, as in the case of
predators, success is pregnant with the seeds of its destruction.
Before too long, claimed Ibn Khaldun, the rulers lose touch
with their subjects and asabiyyah begins to recede. The rituals
of power, the hubris that comes with absolute authority and the

gratification afforded by amassed riches all conspire to sap the
rulers’ vigour. Thus asabiyyah fades and, at some point, the
rulers discover that their authority and power have weakened.
Strife and anarchy follow, hope diminishes and optimism fades.
T hen some other group that has developed asabiyyah else­
where takes over and the cycle continues.
Commercial society is anything but immune to the preypredator dynamic. Joseph Schumpeter (1883-1950), the doyen
of liberal economists (though, paradoxically, he was much
influenced by Marx’s economics), warned that it is in capital­
ism’s nature periodically to generate violent crises. The reason?
Capital’s tendency to coalesce into large corporations with
significant monopoly power. Successful corporations grow
big; then they grow complacent (in ways Ibn Khaldun would
have recognized), are usurped by hungry, innovative upstarts,
and subsequently fail. While their death causes much pain, the
dinosaurs’ extinction gives rise to new, more vibrant ‘species’ of
enterprise. In this sense, crises play a crucial, redemptive role in
the story of capitalist development.
Interestingly, this dynamic storyline has its roots in Marx’s
critique of capitalism as a crisis-generating system. Richard
Goodwin (1913-96) was a Cambridge economist who summed
up Marx’s view as follows:
•
•

•

Capitalism is ruled by two parallel dynamics.
T he first dynamic determines the wage share (total wages
as a share of national income): as employment increases
above a certain threshold, say E , labour becomes scarce,
workers’ bargaining power rises, and therefore so does the
wage share.
T he second dynamic determines employment growth:
as the wage share surpasses another threshold (FT), so
employment suffers.

To see how the combination of these two dynamics produces
a regular cycle (boom to bust to boom), suppose the economy
is growing and employment is on the rise. According to the first
dynamic, once employment exceeds threshold level E , wages
rise too. But when wages rise above level FT, the second dynamic
kicks in, reducing employment. At some point, employment falls
below E and, as a result, the first dynamic operates in reverse,
causing wages to fall. The cycle has, at this point, reached its
most depressed state - wages have fallen and unemployment is
at its highest. However, with wages below FT, it is the second
dynamic’s turn to go into reverse, boosting employment once
again. Once it reaches E again wages are lifted. The economy
is in recovery mode, albeit a recovery pregnant with the next
crisis.
Note that this cycle was ‘produced’ without saying anything
about money and finance. W hen finance is added to the mix,
the cycle becomes more volatile and a new, unprecedented,
systemic risk appears on the horizon: the risk of a catastrophic
fall (as opposed to a gradual recessionary decline), followed by
a stubborn, long-lasting, depression.

Raising the stakes: crashes, crises and the
role of finance
T he paradox of success is based on the tendency of some valu­
able common good, trait or bond to fade. The inevitable crisis
thus plays a redemptive role, which brings about the revival of
the very thing whose demise it was that put the ‘system’ into a
downturn and delivered the crisis itself. From the fluctuations
in the relative size of prey and predator populations in the wild,
through political power in the Arab city-states, to the wage and
employment dynamics in our market societies, crises deliver
both retribution and redemption. Famine among predators

helps restore the prey population, political downfalls reignite
lost solidarity, unemployment leads to new employment via
a squeeze on wages, and so on and so forth. Nemesis thus
becomes the new source of hubris, and crisis is a prerequisite
for the next upturn, for a revitalization of the whole ‘ecology’
of power, wealth and domination. In this sense, periodic crises,
rather than avoidable accidents, constitute ‘natural’ plunges into
some abyss and help history along its path.
Undoubtedly, both nature and history are replete with such
cycles. But not all crises can be understood as the passing phase
of a regular cycle. Once in a while, a Crisis with a capital C strikes.
And then the cycle ends, at least in its existing form. Take, for
instance, the Easter Island civilization. Archaeologists tell us that
it experienced many cyclical crises in its history. But alas, one
big, whopping Crisis wiped it out: once Easter Islanders had
chopped down their last tree, the ecological cum economic cycle
that their activities had been subject to reached a tragic end. All
that was left were the magnificent statues as constant reminders
of the destructive and disruptive power of Crises.
So what makes a Crisis different from run-of-the-mill crises?
A radical inability to act as its own medicine is the answer. Or,
put slightly differently, the lack of anything redemptive about it.
In short, while crises are phases of some cycle, co-conspirators
in its perpetuation, a Crisis spells the end of the current cycle.
The year 1929 was just such a discontinuity. This book has been
written in the conviction that 2008 is another such disconti­
nuity. If so, the post-2008 world will not be another recapitula­
tion of the Global Minotaur’s reign, but the harbinger of a new
era, which we can only vaguely make out through the mists of
the present. But before anything can be properly discerned, we
need to bring finance into the narrative.
T he preceding discussion of the Age of Capital has already
touched on the way in which commodification of land and

labour begat financialization. Let us now see how the newly
pivotal role of finance brought about capital-G economic
Grises. T he key to this is finance’s immense capacity to inflate
risk. It is one thing to bet one’s daily wage on a horse, but quite
another to have access to financial instruments that allow one
to bet a lifetime’s wages on that same horse. Leveraging of that
sort makes possible fabulous winnings and calamitous losses.
John Maynard Keynes (1883-1946) put the same thought more
elegantly in his 1936 (Great Depression-inspired) book, known
as the General Theory :
Speculators may do no harm as bubbles on a steady stream of
enterprise. But the position is serious when enterprise becomes
a bubble on a whirlpool of speculation. W hen the capital
development of a country becomes a by-product of the activities
of a casino, the jo b is likely to be ill-done.

Prophetic words indeed.
In the 1970s, Hyman Minsky (1919-96) took Keynes’ point a
little further, blending it with the cyclical narrative coming out
of our paradox of success. Minsky’s suggestion was that periods
of financial stability and growth cause the rate of defaults on
loans to drop and, for this reason, inspire confidence in banks
that loans will be repaid. Interest rates thus fall. This encour­
ages investors to take increasing risks, in order to improve
their returns. More risks generate a bubble. W hen the bubble
bursts, there are disagreeable effects on the rest of the economy.
Interest rates rise fast, financial markets become insanely risk
averse, asset prices plunge and a state of depressed stability,
or stagnation, ensues. However, in this tale, the crisis plays its
usual redemptive role: once risk aversion has set in, only ‘good’
investment projects seek finance. This steadies the financiers’
nerves, confidence is restored and the cycle is given another
whirl.

However, once in a while the financial bubble inflates so much
that its bursting leads to the cycle’s collapse - pretty much as the
Easter Islanders’ volatile economic activity came to a crashing
halt when the last tree was felled. W hen the dust settles, the
whole economy lies in ruin, often unable to pick itself up, dust
itself down and begin rebuilding.3 A well-used metaphor is apt:
think of what happens as cars get safer: we tend to speed more.
While minor accidents make us more careful for a while, every
improvement in the car’s active (handling, brakes) and passive
(airbags) safety features increases our average speed. Though
accidents become rarer, when the big one happens our chances
of walking away are slim. This is precisely what caused, at least
in part, the Crashes of 1929 and 2008: new financial instruments
had fuelled speedy growth and had made wild investments
seem safer than ever before. Until the accident that we had to
have happened.

The Crash of 1929
On a cold January day, back in 1903, a crowd of New Yorkers
assembled at Coney Island’s Luna Park. They had come
not to enjoy the rides or munch the popcorn, but to witness
a grotesque scene: Topsy, an elephant who had not taken to
captivity gracefully, was to be electrocuted by Thomas Edison,
the great inventor. What business did such a brilliant man have
killing an elephant in public?
Edison epitomized the new entrepreneur at the heart of a
brand-new phase in the development of market societies: an
inventor who innovated in order to create monopoly power for
himself - not so much for the riches that it provided, but for its
own sake; for the sheer glory and the sheer power of it all. He
was an entrepreneur who inspired, in equal measure, incred­
ible loyalty from his overworked staff and loathing from his


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