The Will to Paralysis

The Crisis of Shareholder Capitalism

By Rene Passet

[In Munich, the Haffa brothers are on trial. A few years ago, the EM-TV founders were acclaimed as bright lights of the new economy. Today they are accused of accounting falsification and stock market fraud. Their careers symbolize the development of stock market-guided capitalism that has fallen into crisis. This crisis is trivialized by “analysts” who not long ago pushed up stock prices as the result of excesses and malformations. Interpretations that only emphasize human weaknesses and technical deficiencies are misleading. A system crisis is occurring. However the system is not at an end.]

[This article originally published in: Le Monde diplomatique, November 15, 2002 is translated from the German on the World Wide Web, http://www.taz.de/pt/2002/11/15.nf/mondeText.artikel,a0025.idx,5. Rene Passet is an emeritus professor at the University of Paris and ex-president of the advisory counsel of Attac.]

Everything actually began very well. We experienced the dawn of a new age at the beginning of the 80s. Ronald Reagan and Margaret Thatcher made their people accept the Ten Commandments of the “Washington Consensus” (1) and led them into the Promised Land. The prophets gloated. For the old Friedrich Hayek, the withdrawal of the state prevented the “way to serfdom” (2) once and for all. Free capital circulation joined with floating rates of exchange guaranteed economic stability, according to Milton Friedman. Francis Fukuyama imagined that the end of history has come. What followed was “the rule of economic calculus” and “the deregulated search for technical solutions”. (3) The age of blissfulness had begun.

A new vicious circle was set in motion. The private households invested in stocks whose stock market value was inflated just like the hope in the future of the new technologies. The released “wealth effect” should stimulate the purchasing power of private households boosting the economy so stock prices would rise again. Demand would also climb. For example, the stock market value of companies like Amazon or AOL surpassed old established corporations like Texaco or General Motors before these start-ups had made their first dollar in profits.

Sooner or later every bubble bursts. The first tear in the stock market structure appeared with the high tech stocks. The Nasdaq index dropped 62 percent between March 2000 and March 2001. Then the decline in prices also seized the traditional stocks. Within two years (March 2000 to March 2002), the SP 500 (Standard & Poors) of the top 500 US corporations in sales fell around 50 percent.

Nevertheless the real economy didn’t seem greatly impressed. Notwithstanding all stock market losses, consumer expenses and investment activity remained high. Right after the assassinations of September 11, the US economy was astonishingly reactive. To the general surprise, the gross domestic product rose around 1.4 percent in the last quarter of 2001. Unemployment fell from January 2002. Wages began to rise. The head of the US Federal Reserve Alan Greenspan still sounded optimistic on March 7, 2002, three months after the spectacular bankruptcy of the Energy corporation Enron: “The upswing has already begun.”

The economic data turned out less brilliant than originally announced. According to the information of the US Trade agency, the American gross domestic product rose only 0.3 percent in 2001, not 1.2 percent. There can be no talk of a revival for 2002. The shock wave spills over to other businesses, namely to the accounting firm Andersen working for Enron, the printer- and photocopier manufacturer Xerox, the Tyco group, the telecommunication giant WorldCom and the leading investment bank Meryl Lynch. Dirty practices like balance falsification, secret agreements, insane mergers and enormous manager salaries occurred. Top managers sold their stock options on time (4) before the drop in prices devoured the company pensions of co-workers. These managers maintained dubious connections to the government that allowed its election campaign to be financed by firms like Enron.

All rules of transparency and etiquette that should guarantee the credibility of the financial markets were obviously annulled. When US president George W. Bush and his Vice-President Richard Cheney tried to calm the public, wicked tongues said that they only condemned today what they practiced yesterday with Harken Energy corporation and Halliburton. (5)

Trust was damaged. Federal Reserve head Greenspan made a declaration that marked a turning point: “Accounting fraud and tax evasion destroy capitalism and freedom of trade and in another sense the foundations of our society.” (6) In fact the Index of Consumer Confidence fell 9.2 percent up to July 2002. One acclaimed expert said of the stock markets: “It will take years until the confidence is restored.” (7)

The boom capsized. The crisis of the real economy seized the stock market. The destruction of many stock assets had repercussions on the real economy whose slack period depressed stock prices in a fatal cycle. Growth expectations are revised downwards in the US and Europe. Dismissals occur everywhere. Stock prices skid even deeper in the abyss after every little ridge of high pressure.

To reassure the public and themselves, the governing refer to tried and tested scapegoats that don’t put the system and its inner logic in question. Scapegoat 1:: interest rates. These are at such a low level in the US after eleven reductions that the Central Bank (the Fed) has no room to maneuver any more. In Europe, on the other hand, interests are too high since the European Central Bank stubbornly holds to inflation control and ignores growth.

Scapegoat 2: the misconduct of the head of the company. “If we remove the problem with the head of the business, the other problems disappear by themselves”, Greenspan declared. (8) US President Bush spoke of a new ethic “that can strengthen the trust of investors, make employees proud of their companies and restore the confidence of the American people.” (9) Only incorrigible skeptics criticize such noble intentions.

Scapegoat 3: certain functional disturbances in the system. The financial markets are not transparent enough. The Securities and Exchange Board depends on the economic activity that it should supervise. The accounting systems are too complicated. Mammoth accounting firms are too closely connected with their clients on account of other business contracts. The powers of stock market supervision are too circumscribed.

A black sheep is separated out here; a set-screw is adjusted. Considering matters more exactly7 would be very appropriate. For example, the development raises the question whether the manifestations of corruption and tax evasion hastily classified as functional disturbances are not rather normal side effects of a system fixated on money. What seduces a business to seek “external growth” through gigantic mergers (that often fail at the end) if not the greed for profit of financial institutions and their goal of a 15 percent return on capital? Balances are falsified since refinancing businesses depends on their market value that assumes short-term profits. The great share of stock options in managers’ salaries may be the reason that so much leadership is weak and private assets are often improved through accounting fraud.

This development also shows the inner contradictions of the expansion itself that doubtlessly rests on the considerable lead of the United States in “immaterial technologies”. However the insane increased value of IT-technology stocks results in the first place from the exaggerated liberalization that puts no fetters on speculative capital movements. As long as the speculative bubble grows, businesses take credits to invest. When the bubble bursts at the end, only debts are left. These debts are everything but virtual.

It is not a good sign that businesses must buy up their own shares to support their prices. The private indebtedness that keeps consumption on a high level cannot be continued endlessly. If the indebtedness rate of private US households falls from 4 percent to 2.5 percent of annual income, the debt service in 2004 will devour 25 percent of available income. (10) In addition, there is the crisis of the US pension funds whose assets melt away owing to the stock market crisis.

The US can only increase its investments without restricting consumer expenditures on account of an annual foreign indebtedness of $400 billion. Thus the US attracts capital into the country impairing growth in other countries and also making the debtor country vulnerable.

The question may be raised whether shareholder capitalism – different than largely assumed – is appropriate to the practical necessities of technological change. Modern means of communication join the world into an interwoven super-organization marked by interdependence. The economy must take into account that the long-term problems of the biosphere (renewable resources, biodiversity, greenhouse effect among others) will be important in the future. Human values must be emphasized, not only the output of the production apparatus.

The system reacts to these challenges with a narrow-minded retreat to financial logic. For this logic, “long-term” means “in the next ten minutes” as a banker once remarked to James Tobin. (11) The economic apparatus focuses above all on the production of financial resources irrespective whether whole regions are devastated, whether the strain on the environment and nature increases and whether assets are destroyed and more and more people fall into distress.

In his successful book “The Shadows of Globalization” (12), Joseph E. Stiglitz shows how the International Monetary fund essentially creates the problems that it seeks to master by forcing a pure financial logic on the poorest countries and acting as an “arsonist fire brigade”. Wherever a crisis threatened and the real economy needed liquidity, the IMF prescribed restrictions plunging many people into misery while creditors were helped to their money. Every economic upswing needs base investments (for infrastructures, education, health care) that are only profitable in the long-term. However the IMF does not take this as seriously as the repayment of the debts that cannot be managed without budget surpluses. The necessary structural adjustment programs choke people whom they should presumably help. Argentina can tell you a thing or two about that.

This basic contradiction leads to the inability of the system in controlling the modern economy. While the great end is hardly announced in the present crisis, the crisis can hardly be regarded as a mere industrial accident. The attacks of September 11 intensify and illustrate the contradictions already at work within the system. The crisis is a crisis of the system.

Pleas, excuses and patch-up jobs cannot alter this crisis of the system. Still we don’t cherish any illusions. The main characteristic of capitalism consists in its ability to be renewed and revived through crises. The way out of “shareholder capitalism” will not fall from the sky. The way out assumes seizing control from the financial powers and changing the logic of the system.