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The End of Finance Market Capitalism: Renaissance of Socialism?

The crisis offers an historical chance to civilize an unbridled capitalism with reform policy. The future relation of market and state is the focus of attention.. Financial markets are characterized by herd behavior. Risk consciousness disappears.

Renaissance of Socialism?

By Dierk Hirschel

[This article published in: Neue Gesellschaft, Frankfurter Hefte 4/2009 is translated from the German on the World Wide Web,  http://www.frankfurter-hefte.de/Aktuelle-Ausgabe/.]

Some never learn! While German chancellor Merkel in the BILD-newspaper expressed the desire to return to our old course, "to normality after the crisis," most recognized the failed finance market capitalism could only be overcome through fundamental reforms. The state will play a stronger role in the future. The markets must be regulated socially and ecologically. In addition we need a stronger mix of forms of property and more economic democracy.

The Frankfurt and Munich glass boxes are in flames. The core meltdown threatens the German banking system. The economy is in free fall. In the fall at the latest, the crisis will strike the labor market with full force. Then it will be clear to even the last optimists: we are now living through the worst economic- and financial crisis since the Great Depression.

While the state bailout campaign is going full steam ahead, the causes of the fire are discussed. This is good. A clear analysis of the causes of the crisis is the prerequisite for effective fire prevention in the future. However more is involved. This crisis is not a pure economic crisis. It is also a crisis of the dominant ideology and policy. The crisis offers an historical chance to civilize an unbridled capitalism with reform policy. The future relation of market and state is the focus of attention.

With the crash of Wall Street & Co, the myth of the self-controlled market was demystified. Efficient markets did not survive the praxis test.

On the financial markets, there is neither perfect competition nor equal access to the same information. Market manipulation is given free rein. Financial markets are characterized by herd behavior. Macro-economic malformations arise out of wrong decisions of individual institutional investors. Moreover financial markets are pro-cyclical. In the boom, asset values rise along with potential credit creation. Risk-consciousness disappears in expectation of high profits. Inadequate institutional and personal liability promotes the risk-propensity. Thus speculation bubbles arise again and again. A new and better framework cannot limit this spectacular market failure. Repeating the excesses of the past should be prevented with stronger requirements about internal capital resources, company compensations, incentive systems, better early-warning systems, more personal liability etc. Must we all become law-and-order politicians? Does the social market economy show us a way out of the crisis? Market failure only explains a part of the current crisis. A new framework is important but cannot solve the crisis of the capitalist model of production and consumption. Profit- and assets-income have exploded worldwide in the last decades. Finance market capitalism allowed profits to climb to astronomical heights on the back of dependent employees. Capitalist production relations produce capital surpluses. But the dominant investment of surpluses as money capital is new. Global financial assets amount to $200 trillion, many times the world domestic product. This development did not fall from the sky. Politics paved the way.

The entrepreneurial freedoms of capital market actors were expanded in business law and stock taxes. Unions were weakened through political deregulation and precariousness of the labor market. High incomes and assets are managed for tax purposes. The partial privatization of the social security system and life necessities expanded the investment spectrum of the financial markets. The reverse of the increasing income- and assets concentration were stagnating mass incomes. In Germany the real incomes of employees did not rise even in the upswing. Private consumption cannot move any more. The US loosened this growth brake by organizing the consumption of the lower- and middle-income sectors on credit. In Germany, Japan and China, the response to the choked do0mestic demand was an aggressive export strategy. But the credit-financed US vacuum of the world market no longer functions in the crisis. Those who jumped on the bandwagon have to develop their future domestic markets. If they do not do this, they shrivel.

A strongly domestic oriented model of economics requires more public investments and higher wages. However local wages do not rise through idling. The development of market income is by no means without conditions. The effective power of union wage pay was weakened in the last years after the wrong ways of labor policy. Therefore a new order of the labor market is needed now. The disparity of relative strength on the labor market can be balanced with the help of a legal minimum wage, state promotion of regular employment - with simultaneous discrimination against precarious employment -, reduction of the pressure of paid labor (abolition of intensified exactions). The way would thereby be free for a more dynamic wage- and consumption-development.


The latest development has made clear once again: deregulated markets are socially blind. There is no social form of capital exploitation. What is social in capitalism was always wrestled from it in political conflicts over distribution. Unions and social democracy have made great historical gains in these conflicts. This knowledge must become part of everyday life or the common heritage of political conduct. Recalling the law-and-order foundations of the so-called social market economy leads directly in a cul-de-sac. A brief glance at the rear-view mirror of post-war history illustrates this. Ludwig Erhard wanted to set unions under the antitrust law. He regarded joint-determination as incompatible with the free market and fought against the iron-and-steel joint determination law of 1951. From Ludwig Erhard's perspective, the 1957 pension reform was the beginning of the end of the social market economy. In short, the law-and-order vision of a social market economy cannot be harmonized with a socially just and ecological reform policy.

One central political challenge of the future consists in the comprehensive welfare state regulation of modern capitalism. The welfare state of the future needs a well-balanced relation of flexibility, social security and retraining. Protection against unlawful dismissal and high non-wage labor costs ensure a minimum of income- and employment-stability. Basic security models must cover the risks of precarious paid labor. The large social security systems must be rebuilt into citizen- or employee-insurance systems.

A modern welfare state relies on prevention. Training and re-education must replace the unimaginative pressure of transfer cuts and intensified exactions. A modern welfare state is involved in a jobs policy. Social services should be developed. A publically-promoted jobs sector is the alternative to passive financing of long-term unemployment. A modern welfare state is also an investing welfare state. Profit- and assets income should be included more strongly to finance the future welfare state.

Unbridled markets are socially and ecologically blind. Capitalism undermines its own foundations of production. If climate change spreads, then a fifty of the global social product will soon be lost. Fallow capital can obviously be diverted in regenerative energy, resource efficiency, energy savings measures and efficiency technologies through an ecologically adjusted reorganization of market-conforming incentive systems. However this alone is not enough. The resistance of the promoters and profiteers of fossil capitalism is too great. Here we need an active state that leads as developer, innovator, investor and customer in the scope of an ecological industrial policy.


The current crisis sets the property question on the agenda, first of all only in the case of distressed banks.

Still the state should not appear here as a pure repair shop. The new public owner must control itself and influence corporate policy. The fairy-tale of the state as a bad businessman has had its day. The past privatization- and liberalization-balance is not convincing. A cheap countrywide and top-flight provision with public goods cannot be achieved, much less the development of wages and working conditions of the privatized areas. A functioning competition can hardly be produced with natural monopolies (energy supply, railroad). In what areas private, state, socialized or cooperative property can bring the highest economic and social efficiency must be discussed and decided anew.

But a stronger future state also requires a far-reaching democratization of society. Now is the time to join the strong tradition of economic democracy and develop this conceptually. More economic democracy means more internal and supra-internal joint determination, a democratic self-government of the economy, plural forms of ownership, a better regulation and macro-economic control.

This historic crisis is an historic chance for a social and ecological reform policy. How such a reformed society develops in the long-term and what role the profit logic will play in it is an open process in which it is rewarding to be involved.



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