Vectors of Inflation

Federal Reserve chair Jerome Powell’s recent speech at the Jackson Hole conference, delivered to an audience of central bankers from around the world, was a highly anticipated event. He arrived there a chastened man, having previously claimed that US inflation was a transitory phenomenon while implementing the lax monetary policies that many blamed for its recent surge. Could he now pull off a ‘soft landing’, bringing inflation back down from its forty-year high of 9.1% to the desired 2%, without causing a recession?  

Central bank monetary policy has various tools at its disposal for managing inflation: higher rates, quantitative tightening (i.e. selling assets to reduce liquidity in the system) and managing expectations about future monetary policy through ‘forward guidance’. Powell began raising the policy rate in March, taking it from the pandemic-era low of 0.25% to 3.25% by the time he arrived at Jackson Hole in late August, through a series of incremental rises. Yet these increases still left interest rates well below inflation, making real rates negative. Meanwhile, the debate over monetary policy heated up. Inflation hawk Larry Summers accused Powell of underestimating the problem and doing too little too late. Another hawk, Henry Kaufman, advised him to shock the markets – to ‘hit them in the face’ as Paul Volcker had done in 1980, by hiking interest rates to 20%.

By inducing a deep and prolonged recession, Volcker’s move had elicited a backlash from progressive economists, with Robert Solow likenening it to ‘burning down the house to roast the pig’. Today, the prospect of a similar hike has prompted renewed criticism of the monetarist perspective which views inflation as the result of an increase in the money supply relative to output. For inflation doves, such as former Clinton Labor Secretary Robert Reich, the current period of inflation was not caused by the fiscal and monetary stimuli of the pandemic, unprecedented though they were. Nor is it the result of a wage-price spiral – since the uptick in union activity remains relatively modest in historical terms. Doves claim that inflation is rather the outcome of factors beyond the Federal Reserve’s ken: food and fuel price rises sparked by the war in Ukraine, plus ongoing price-gouging by large corporations. Hence, it cannot be solved by raising interest rates; it requires solutions such as those set out in Jamal Bowman’s Emergency Price Stabilization Act: monitoring and regulating consumer prices, alongside measures to safeguard the supply of essential goods and services.

The hawks are certainly wrong to see inflation as a purely monetary issue. Indeed, very little of the pandemic-related stimulus, fiscal or monetary, made it into the pockets of ordinary people. When it did, it largely went towards debt repayments and had a limited impact on demand. Yet the doves are also wrong to identify war-induced food and fuel prices as a major contributor. The August 2022 inflation rate of 8.3% may have been boosted by these factors; but the core US inflation figure of 6.3% – far higher than the European average – reflected a structural malady. The real culprit here is the diminution of US productive capacity, caused by four decades of neoliberal policies – disinvestment, deregulation, outsourcing – which have rendered the economy extremely vulnerable to supply chain disruption, and prevented supply-side measures to bring prices down.

That diminution is the flip-side of the ceaseless growth in financial activity since the early 1980s. This process is usually termed ‘financialization’, although the plural ‘financializations’ would be more accurate, since each historic expansion of the financial sector has involved different structures, practices, regulatory regimes and assets. In recent decades, financialization has come to rest on asset bubbles sustained by lax monetary policy. This has created the conditions for today’s rising prices, while inhibiting the only sort of anti-inflationary policy of which the current system is capable. Yet this crucial dynamic is overlooked by economists across the political spectrum.    

Prima facie, hawks and doves pull at opposite ends of the ‘dual mandate’ that the Federal Reserve acquired in 1977, when the Humphrey-Hawkins Act added high employment levels to its original price stability mandate. Some progressive economists now point to Alan Greenspan’s tenure in the 1990s as ‘an instructive model of what a full employment economy can look like’, implying that the Federal Reserve’s current leadership can and should revert to this paradigm. Yet the full employment mandate – a last gasp of Keynesianism in an increasingly hostile political environment – was never taken seriously. Indeed, Volcker proceeded to violate it almost immediately with his historic rate hikes. Since then, the Federal Reserve has consistently curbed both employment and wages, even if this has often been obscured by the statistical inflation of employment figures (for example, counting the partially employed while ignoring declining labour force participation).

Greenspan made the dramatic decision to increase interest rates despite inflation running at a modest level. To justify this step, he cited Milton Friedman’s complaint that the Federal Reserve always raised interest rates too late, and insisted instead on getting ‘ahead of the game’, pre-empting inflation rather than responding to it. Greenspan thus extinguished the nascent manufacturing revival which, as Robert Brenner writes, held out the possibility of a ‘break beyond stagnation’. When Greenspan eventually decided to loosen monetary policy, it was not to support the expansion of production and employment, but to inflate asset bubbles, starting with the so-called ‘Greenspan put’: an injection of liquidity into the financial system in response to the stock market crash of 1987. This policy (which was continued by Greenspan’s successors, such that it became known as the ‘Federal Reserve put’) generated speculative bonanzas for the rapidly deregulating financial sector and provided generous liquidity after each inevitable crash. It was rightly criticised for creating systemic moral hazard by inducing financial institutions to increase their risk exposure.  

In the 2000s, asset bubbles grew by new orders of magnitude and loose monetary policy became a permanent policy rather than an episodic fix. Yet, because not much of this money flowed into productive investment or translated into rising demand, its inflationary effect was negligible.  Moreover, other secular trends kept inflation low: workers were too insecure to fight for wage increases, even amid relatively high employment; manufacturing supply chains extended to producers in lower-wage locations; immigration cheapened services; and income deflation in the Third World suppressed global demand and commodity prices. Dollar overvaluation was also deeply intertwined with the Federal Reserve’s bubbles. By diverting investible funds from productive to financial investment, these bubbles – the market stocks of the 1990s, housing and credit of the 2000s, the ‘everything bubble’ of the 2010s – attracted enough foreign funds to dollar denominated assets to counter the downward pressure of US current account deficits on the dollar. This, too, helped to subdue inflation.

Since Greenspan lowered interest rates to deal with the 2000 dot-com crash, they have never returned to their 1990s peak. Meanwhile, quantitative easing – effectively Federal Reserve asset purchases – has become a systemic imperative to keep both asset markets and the dollar high. With fiscal policy largely missing in action (aside from tax cuts for the rich), this monetary policy created a highly peculiar political economy. Thanks to declining industry, low investment and fiscal austerity, the consumption of a narrowing well-to-do layer, facilitated by the ‘wealth effects’ of asset bubbles, came to act as the country’s primary economic motor. As a result, anaemic growth and extreme inequality is all that contemporary US capitalism can manage.

In this context, Powell’s priority is to avoid Volckeresque rate rises on the wing of slight rate increases and the prayer of forward guidance. Why? Because hawkish rate hikes – the only effective weapon against inflation from a monetary policy perspective – would burst the asset bubbles on which the American financial sector and ultra-rich depend. Back in the late 1970s, Volcker did not have to worry about this risk; but in the early 2020s, Powell very much does. Policy interest rates of 5% triggered the collapse of the housing and credit bubbles in 2007; the current 3.25% rate has hit real estate and venture capital, while stocks have suffered the worst streak of quarterly losses since 2008. Given the fragile makeup of the US economy, rate hikes constitute a real risk; which means that the Federal Reserve has become largely impotent. No wonder it is described in the pages of the FT as ‘the least credible Fed in the markets’ estimation since the 1970s’.

The markets’ lack of confidence reflects a structural dilemma. If Powell increases rates to required levels, the US can expect a recession that will make that of the 1980s seem like a boom. But if, as I believe is more likely, he refuses to do so, the US can expect chronic inflation whose origins lie in the productive debility of the US economy, recently exacerbated by supply chain disruption, trade and technology wars with China, and self-destructive sanctions on Russia. The Federal Reserve faces a fork in the road: one where both paths will damage working-class incomes and wellbeing.

In this sense, both hawks and doves miss the elephant in the room: financializations backed by easy money. The dynamics of financialization contribute to inflation by raising the value of housing and commodities while allowing the rich to maintain their spending at inflated prices. While doves rightly emphasize the need to expand production to ease inflation, they fail to appreciate the scale of state intervention this would entail. For four long decades, neoliberal policies have entrenched the Long Downturn, reversing Janos Kornai’s old adage that socialism is a supply-constrained system while capitalism is a demand-constrained one. Making contemporary US capitalism productive again would involve not only reversing the logic of financialization; it would require a state-led programme to lift supply constraints, which is almost unthinkable within the parameters of the present system.

Read on: Wolfgang Streeck, ‘The Crises of Democratic Capitalism’, NLR 71.


Sound Money?

On 6 September Liz Truss was appointed Prime Minister of the United Kingdom, after a Conservative leadership contest notable for its near-total lack of reference to the social calamity known as the cost-of-living crisis. While the ruling party spent the summer decrying ‘woke culture’ and praising the trickle-down theory, Keir Starmer’s Labour found a new spring in its step, calling for a windfall tax on energy firms and opening up a poll lead that could point towards the steps of Downing Street. Meanwhile, a wave of strikes and protests – centred on consumer prices and real wages – has given a shot in the arm to a radical left still emerging from the post-Corbyn doldrums. Don’t Pay UK, canvassing support for the mass non-payment of energy bills in the wake of a 56% April increase and an 80% hike scheduled for October, has amassed a pledge list of almost 200,000 refuseniks.

During this period, the cap on maximum domestic energy changes by Ofgem – toothless regulator of the privatized energy system – became the object of increasing discontent. This was not the intention of Theresa May’s government when it introduced the energy cap in 2018, in an attempt to allay pressure from Jeremy Corbyn’s Labour (the proposal for a cap itself dating as far back as Ed Miliband’s leadership). Yet as wholesale natural gas prices spiked across Eurasia over 2021, then skyrocketed following Russia’s invasion of Ukraine, Ofgem continued to raise its price ceiling to unprecedented heights, bound by legislation to guarantee a 1.9% profit to retailers. This brought with it the prospect of nationwide strikes plus mass civil disobedience. So, on the second day of Truss’s tenure, the government pledged a not-quite freeze on bills (the typical bill will go up £600 rather than £1,600) for the politically significant period of two years, up until the last possible date of the next general election. This was the largest single economic intervention in Britain’s peacetime history, dwarfing the eventual cost of the Covid furlough scheme.

There is an obvious precedent for Truss’s handout. When Thatcher became PM in May 1979 she immediately accepted the recommendation of the Clegg Commission, established by Callaghan after the Winter of Discontent, for an average public-sector pay rise of 25% – approximately double the rate of inflation. This elicited a backlash from the new breed of hardline monetarists, but Thatcher recognized that securing industrial peace was more important than appeasing them. As The Economist reported at the time, she entered office with a clear intention to buy off stronger sections of organized labour while confronting and defeating weaker ones. The 1977 Ridley Plan described this as the ‘salami’ approach – ‘one thin slice at a time but by the end the lot is gone.’ In the short term, wrote Ridley, the government would have no choice but to ‘pay up’ to those unions ‘that have the nation by the jugular vein.’

It seems that today’s Tories – even (or perhaps especially) their most committed ideologues – are once again prepared to ‘pay up’ if it allows them to win a class fight. And let’s not delude ourselves: Chancellor Kwasi Kwarteng’s mini-Budget, announced this morning, shows that a class fight is underway. His so-called ‘fiscal event’ was the most dramatically regressive announcement by any government for some time – giving a £4,500 tax cut to the richest 500,000 people in the country while further tightening Britain’s miserly benefits system. This smash-and-grab raid on behalf of the very wealthiest must be set in the context of recent global upsets: the shifting international balance of power, trade wars, Covid-19, the Russian invasion of Ukraine and worsening ecological crises. With growth rendered uncertain by such turbulence, but profits still demanded, working-class and middle-class living standards are on the line. We are entering an era of zero-sum capitalism, even more cut-throat than that of the early eighties.  

In this conjuncture, the old rules of Ukanian state management – according to which the Treasury’s books should be balanced and the free market should come first – appear to have been rewritten. The Tories of the Cameron-Osborne era are gone; in their place, we have austerity-sceptic Johnson followed by deficit-sceptic Truss. The former Chancellor Rishi Sunak has seen his drab bean-counting rejected by the Tory membership, while Truss is set to embark on a £150bn-plus borrowing bonanza. Reversing the NICs rise, cutting green levies on domestic energy bills and reversing Sunak’s planned Corporation Tax hike were the priorities she enumerated during the leadership campaign, the total cost of which could easily reach £30bn. These aren’t the Tories of old: neither Thatcher’s homilies on household budgets nor their repetition by Cameron and Osborne get a look in.

With that in mind, it is worth considering the Spectator’s fascinating survey of ‘Trussonomics’, based on interviews with her three leading economist supporters, for hints as to where the Tory right are headed. In it, Truss’s backers – who prefer to be known as ‘Trusketeers’, alas – outline a programme that deviates significantly from the traditional Conservative prospectus. Julian Jessop, former chief economist at the Institute of Economic Affairs, now asserts that the austerity of the 2010s was a mistake: ‘When the facts change, I change my mind…Ten years ago, I would have been much more conventional in my thinking that you need to get the budget deficit down as quickly as possible. But it’s clear that isn’t working.’ Patrick Minford, an early supporter of Thatcher, is currently reprising that role but flipped 180 degrees as he lays into the Treasury’s obsession with book-balancing: ‘We have policies in place which are raising taxation, that damaged growth in order to satisfy short-run borrowing constraints put forward by the Treasury.’

As for the monetarism Minford once expounded, with its insistence on a strict separation between the monetary authorities and the government as well as mechanical targets for monetary growth, Gerard Lyons, tipped as a member of Truss’s as-yet-unveiled Council of Economic Advisors, says he wants to ‘re-examine’ the Bank of England’s remit ‘to make sure it is fit for purpose’. Elsewhere, Kwarteng pays lip-service to the idea of central bank independence whilst simultaneously pledging that ‘fiscal and monetary policy must be coordinated’ – the passive voice happily disguising who, exactly, should be making the coordination happen. Put all this together, and the family resemblance is not so much to Thatcherism, with its rhetorical commitments to ‘sound money’ and balanced books, but to Reagonomics, with the US deficit under President Reagan ballooning to unprecedented levels thanks to tax cuts for the rich and vast increases in military spending. (Truss has promised to increase UK military spending to 3% of GDP by 2030, at an estimated cost of £157bn.)

Of course, these solutions are presented as short-term ones: a necessary yet temporary detour from the true path of deregulation and ‘sound money’. Minford has suggested that a 7% interest rate might ultimately be more appropriate for the British economy, while Jessop has suggested relaxing restrictions on financial services, ‘gene editing’ and data protection. But all this is for somewhere down the line. For now, the Trusketeers anticipate significant state intervention and large deficits, in part to provide a political cover for their long-term plans.

Will any of this work? Most economists would say no. The FT’s Martin Wolf claims it is a ‘fantasy’ to believe corporate tax cuts and deregulation will deliver improved growth, while Jonathan Portes asserts that deficit spending will stoke inflation. But here we might pause. With inflation largely driven by external factors – Putin’s invasion, environmental collapse, supply issues linked to the pandemic – conventional economic models of why prices rise, focusing on excessive demand, are falling short. Those still using them to talk up the inflationary risks of increased government deficits are likely to be proved quite wrong. It is therefore worth attempting a level-headed assessment of Truss’s economic prospectus – identifying its strengths and weaknesses, in the terms it has set itself – beyond the standard neoclassical framework.

The most pressing challenge for the British economy is currently the soaring price of essentials goods, causing households to spend less on desirable things like pubs, restaurants and local shops and more on undesirable things like fossil fuel companies – which means that government support, of the kind promised by Truss, will be necessary to sustain demand. Contra her detractors, this is unlikely to have much meaningful inflationary effect. If the government borrows money to cut domestic energy bills, the Institute of Public Policy Research estimates that 3.9% would be taken off the ONS’s calculation for the headline rate of inflation – a win-win, making life easier for households and reducing pressure on the Bank of England to further increase interest rates.

Other things being equal – the economist’s get-out clause – Truss’s plan to massively increase government borrowing will also have some impact on growth, if only because it’s hard to borrow and spend over £150bn without making something happen. Whether this is useful in the long-term is a different question: handing £30bn more to corporations, already squatting on a £950bn hoard in their bank accounts and showing no great inclination to invest, is hardly an effective use of the tax system. Then again, if corporations don’t actually spend their unexpected windfall in Britain, it is less likely to feed into inflationary pressures here.

So, when it comes to propping up demand, limiting inflation and stimulating immediate growth, Trussonomics won’t be as abortive as orthodox economists predict. And she needs only two years, at most, to prove something like competence before facing a general election. Yet there may be other fronts on which her domestic plan could falter. For one thing, the international situation today is more uncertain than in the 1970s, and Britain’s global position is far weaker. The UK retains immense privileges as a developed economy with deep, liquid capital markets and venerable institutions. But it is also undergoing a radical shift, via Brexit, in its relations with the rest of the world at a time of acute social stress. This will inevitably unsettle the Conservative’s traditional support base in big capital and finance, while the decrease in the value of the pound, presently hitting an almost forty-year nadir against the dollar, indicates the possibility of funding problems ahead.

This is compounded by Britain’s reliance on imported energy and food supplies. In the last true currency crisis face by a Conservative government – Black Wednesday in 1992 – Britain ran a small deficit on its energy consumption, soon to disappear as gas production peaked in 2000, and was 70% self-sufficient in food. Today, it imports roughly half its natural gas, and 45% of its food. The Black Wednesday crisis erupted because the government was unable to defend the value of the pound against the deutschmark inside the Exchange Rate Mechanism, a precursor to the euro. Today, Britain is out of the EU and the pound floats freely, but the currency crisis could be even more fundamental, if we are forced to pay higher sums for basic goods in a declining currency. Even if Truss – borrowing from the playbook of Anthony Barber, Chancellor under Heath in 1970 – manages to engineer a short-lived growth spurt at the beginning of her tenure, this will prove difficult to sustain. Indeed, it may have already evaporated by the time she is forced to face Starmer at the polls.

Truss also harbours unrealistic hopes of unlocking growth through a post-EU shake-up of employment laws, threatening the removal of rights on working time and, in a familiar trope, invoking the spectre of trade union militancy. But while the recent uptick in union membership and activity is to be welcomed, strikes in Britain remain rare, with the number of annual walkouts still close to the all-time lows of the last decade. Further restrictions on union organizing will not miraculously translate into improved productivity. Nor are there many remaining costs in Britain’s perilously neoliberal labour markets that could be removed without pushing further and deeper into living standards. If Truss wants to press ahead with such reforms, she will likely have to sweeten the pill or buy off discontent with further temporary handouts – which may draw opposition from the backbenches.  

But where Trussonomics is perhaps most likely to fall apart due to domestic factors is in failing to overcome the resistance of the Treasury. Rumours that the new energy plan would involve forcing ten-year loans onto households indicate the lingering presence of Treasury Brain (harking back to the equally daft forced loan scheme which Sunak cooked up for domestic energy bills last spring). That this misstep was avoided suggests someone, somewhere in government is prepared to put political strategy over Sunak-style bean-counting. Yet the fact that this supposed ‘price freeze’ doesn’t entirely freeze prices, seemingly in deference to vestigial accountancy concerns, also evinces the zombie-like persistence of the latter.

As a result, the policy’s political efficacy has been blunted, opening up a gap which Labour could easily exploit. And this is to say nothing of the evident hypocrisy of making £40bn of liquidity support available to energy companies whilst promising only six months of support to every other business, large or small. Kwarteng’s peremptory sacking of Tom Scholar, Permanent Secretary at the Treasury, having been Second Permanent Treasury as austerity was implemented in the early 2010s, was greeted with howls of outrage from the liberal end of the media. But it reveals the new administration’s determination to press ahead with its programme against concerted opposition. The new Chancellor knows that realizing major deficits and mighty tax cuts means overriding Treasury recalcitrance.

It was always a mistake to think of austerity as a programme that swivel-eyed true-believers were determined to force upon the rest of us. This may have applied to a small number of Thatcherite diehards baying for shrunken states and flat taxes. But, by and large, austerity was promoted, designed and delivered by a cadre of ideologically adaptable Sensible People like Scholar, poring over spreadsheets at the Treasury and the Institute for Fiscal Studies. They were the ones who inflicted a miserable lost decade on the country. Now, the current crop of Tories may have few compunctions about cutting spending when the time comes; but they know better than to insist on it as a strategic priority. The class battles ahead demand a more considered approach. And should Truss’s plan fall short, as prices spiral upwards, growth disintegrates and the capital markets turn sour, there are many forces waiting to move: from the Don’t Payers to the striking workers, to those in her own party sharpening their knives for the next leadership contest.

Read on: Tom Hazeldine, ‘Transformatrix’, NLR 131.


Same As It Ever Was?

Evgeny Morozov’s ‘Critique of Techno-Feudal Reason’ in the latest NLR takes aim at the growing list of thinkers who have seen homologies between feudalism and current tendencies in the capitalist system – prolonged stagnation, upward redistribution by political means, a digital sector in which a few ‘barons’ benefit from a mass of users ‘tied’ to their algorithmic domains, and the growth of a service sector or sector of servants. Among those accused of ‘feudal-speak’ are Yanis Varoufakis, Mariana Mazzucato, Robert Kuttner, Michael Hudson and myself. Morozov dismisses feudal analogies as meme-hungry intellectual attention-seeking, a failure to understand digital capitalism, rather than insights into the possibility that it might be turning into something no longer aptly described as capitalist. Is he right?

In defining what makes capitalism capitalism, Morozov contrasts the conceptualizations of Marxists like Robert Brenner with those of world-systems theorist Immanuel Wallerstein. As he notes, Marxists generally conceive the process of surplus extraction under feudalism as ‘expropriation’, driven by extra-economic coercive or political means: lords expropriate produce from peasants over whom they exercise sovereign political and juridical power. Capitalism, by contrast, relies on ‘exploitation’ – surplus extraction by purely economic means: deprived of the means of subsistence, nominally free workers are obliged to sell their labour power for a wage in order to survive in a cash economy. For Wallerstein, by contrast, capitalism also centrally involves processes of expropriation from the periphery by the core. Morozov pinpoints this continuing role of ‘extra-economic coercion’ as the key difference between the two.

Morozov takes Wallerstein’s side, arguing that ‘dispossession and expropriation have been constitutive of accumulation throughout history’. But this dissolution of the difference between feudalism and capitalism, in favour of eternal expropriation, fails to attend to changes in the forms of exploitation. It naturalizes capitalism – in a way effectively criticized by Ellen Meiksins Wood in The Origin of Capitalism (2017) – and abandons any effort to recognize and specify systemic change. Besides, as Marx, Lenin and Luxemburg all emphasized, extra-economic coercion isn’t simply replaced by exploitation, but accompanies it; capital comes to overlay, incorporate and rely on previous social forms. Marx understood that the compulsion of labour is not unique to capitalism. Pre-capitalist economic formations also compelled labour to produce a surplus, expropriated by the master or the lord. But capitalism changes the form of this compulsion: what was a direct and personal form of domination becomes impersonal, mediated by market forces – the economic separated from the political.

In the Grundrisse, Marx posits an originary unity: in the ancient communal form, the producers are a community of proprietors, who take for granted that the earth is there for them to labour on in order to live. They reproduce themselves and their community through processes that are both productive and destructive. Increases in population mean wilderness needs to be cleared and land cultivated. The need for land propels conquest and colonization. The rise of towns, of artisanal labour and property in the instruments of labour bring about a loosening, a separation, in the community. The community starts to appear not as a naturally and spontaneously given relation to labour, but as itself a product of labour.

Capitalism presupposes that the whole has dissolved into parts. The proprietor of the land no longer works it, and those who work the land no longer own it. Craftworkers likewise stop owning the instruments of labour. The tools employ them instead. Everything that was present in the originary unity is still there, but in a different form. Under this new order, the separated conditions of production come together through the mediation of the market. Contrary to Morozov’s presumption of a continuous linear history, the Grundrisse illuminates the processes by which continuous reproduction can generate fundamental change.

Is there evidence of such a change in the elements that constitute contemporary capitalism? An examination of Uber – the ride-sharing app and the company – helps to bring the problem into focus. First, the labour relation. Are Uber’s drivers independent contractors or employees? On the one hand, the company describes its service as providing a tool for people to access ‘flexible earning opportunities’, getting extra cash by driving in their spare time. The drivers are ‘earners’, independent contractors who use the Uber app to gain access to ride-seekers. Uber connects them to the market and collects a fee for the service. On the other hand, court rulings and workers’ organizations argue that Uber drivers are employees. In February 2021, a London employment court rejected Uber’s claim that its drivers were independent contractors, observing that Uber controlled their working conditions and remuneration. Drivers have no say in negotiating their contracts. Uber controls the information they receive and monitors their passenger rates, penalizing them if they don’t conform to its standards.

For some commentators, Uber exemplifies ‘algorithmic management’, a digitally turbocharged Taylorism. For others, it is ‘a modern version of the company town’, or an ‘on-demand’ servant provider, funded by billions in venture capital. In After the Gig (2020), the economic sociologist Juliet Schor describes the new online labour platforms as recreating a servant economy. At first glance, these interpretations seem to contradict each other: are platforms like Uber manifestations of unbridled capitalism or of a new feudal servitude? For proponents of ‘employee’ status, it is better for drivers to be workers, with legally regulated conditions of employment won by decades of working-class struggle. Defenders of the ‘independent contractor’ designation – including many drivers – don’t see employee status as particularly liberating. Gig workers often say they value their freedom to set their own schedules, even if they loathe the way the platforms manipulate the apps. Likewise, from Uber’s side, the ostensible capitalist doesn’t want to invest in means of production and purchase labour power.

The Grundrisse’s account of the separation that capitalism presupposes provides a way to resolve this inverted binary of servitude and ‘freedom’. Marx describes the mass of living labour thrown onto the market as ‘free in a double sense, free from the old relations of clientship, bondage, and servitude, and secondly free of all belongings and possessions, and of every objective, material form of being, free of all property’. From this perspective, it makes sense to think of Uber drivers as ‘free’ contractors – not because of what they gain in flexibility, but because of what they lose: they are ‘freed’ from workers’ rights to guaranteed hours, paid leave, healthcare benefits and so forth.

They are also ‘freed’, in a sense, from their property. In his discussion of transport in Theories of Surplus Value, Marx notes that ‘the relation between buyer and seller of this service has nothing to do with the relation of the productive labourer to capital’. The buyer of the ride service is not employing the driver in order to accumulate capital by putting them to work. The instrument of labour, the car, ostensibly belongs to the driver – just as the pre-capitalist craftsman owned his tools.

And yet something in the driver’s relationship to their car changes: from being an item of consumption – something purchased out of their own ‘consumption fund’, wages they had received for their labour – the car becomes a means for capital accumulation by another, Uber. Instead of Uber paying for and maintaining a fleet of cars, the company puts the drivers’ cars to use, in effect getting cars to employ their owners. Because they are rated by riders, many drivers feel pressured to keep their cars extra clean and pleasant smelling. The car’s purpose now is less personal enjoyment than generation of income. It stands apart from its owner, as an independent value. The car becomes capital.

The debt many Uber drivers accrue in order to acquire a car signals this change in form. Traditional cab drivers could shift to other jobs if they were unhappy, but Uber’s drivers are often locked into vehicle financial obligations that make it much harder to leave. Debt tethers them to the platform. At the same time, the burden of car maintenance is turned into a cost of production, which drivers have to assume. Drivers have to drive in order to pay for repairs and to keep up their car payments – which means earning for Uber as well as themselves. Drivers’ double freedom – from employee status, from leisured car ownership – ushers in a double dependence: dependence on the market and on Uber, for access to it. Uber inserts itself between driver and rider: they cannot meet without it.

Uber’s insertion of itself as an intermediary between buyer and seller superficially resembles Marx’s discussion of how the intervention of merchants transforms independent spinners and weavers into dependent workers. But Uber differs from the merchant: Uber isn’t buying labour power. Riders are.   


Morozov’s critique of techno-feudalism insists that our digital overlords are not ‘lazy rentiers’. With Google as his primary example, he sees them as innovators pouring money into research and development, engaging in the production of new commodities such as search results. But the drive to maximize profits can prevent the reinvestment of surpluses in production, directing them towards destruction instead. Capitalism’s own laws can undermine capitalism and generate something worse. Thus, for example, Uber undercuts and disrupts the urban-transport sector, driving down pay and making it impossible for cab drivers to earn a living wage. Airbnb has similarly led to declines in hotel revenue and employee layoffs. DoorDash is undercutting the restaurant sector through its unlicensed, uninspected kitchens which reproduce the menus of actual restaurants for delivery. 

Platform work carries out this sort of destruction wherever it takes hold. As Alexis Madrigal writes, companies like Uber, Lyft, Grubhub, Doordash, and Instacart have ‘wired those in local industries – handymen, house cleaners, dog walkers, dry cleaners – into the tech- and capital-rich global economy. These people are now submitting to a new middleman, who they know controls the customer relationship and will eventually have to take a big cut.’ Whereas before these workers’ earnings were their own, now an intermediary extracts a fee, a rent based on control over access to the market.

The process of separation that fragmented the pre-capitalist originary unity continues as middlemen, platforms, intermediaries insert themselves into exchange relations, disrupt markets and destroy sectors. Insertion, the creation of new dependencies based on monopoly power, doesn’t come cheap. Market domination costs billions, raised through venture capital and private equity, accumulations of wealth that multiply through destructive rather than productive investment. Uber’s strategy – deploying enormous amounts of capital to incentivize drivers and subsidize riders until the company has established itself in a city and can start upping fees – is not unique. Tactics of ‘blitzscaling’ or ‘lightning growth’ are practically gospel in Silicon Valley. According to Reid Hoffman, co-founder of LinkedIn and author of Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies (2018), the process involves ‘purposefully and intentionally doing things that don’t make sense according to traditional business thinking.’

WeWork is another example of blitzscaling, this time in the office-rental sector. Armed with billions of investment capital from SoftBank’s Vision Fund, WeWork attempted to dominate markets by using hoards of cash to destroy or purchase competitors, paying out huge incentives to early renters, and so on. What makes blitzscaling appear feasible is the enormous amount of venture capital seeking outsized gains, especially the kind that can accrue from a successful IPO. Billions are funneled into a company that can destroy all potential competitors, rather than having to compete with them directly through efficiency improvements. Once competitors are eliminated, and regulations circumvented, the victor can increase the squeeze on workers and customers alike. The laws of motion here are not capital’s imperatives of market competition and profit maximization. Capital becomes a weapon of conquest and destruction.

Neoliberalism turns into neofeudalism because it effects a change in social-property relations by destroying state ‘fetters’ or constraints on markets – employee safety nets, corporate taxation, social-welfare provisions. The enormous stores of wealth that accumulate in the hands of the few exert a political and economic power that protects the holders of capital while intensifying the immiseration of almost everyone else. Wealth-holders seeking high returns rely on hedge funds, private equity, venture-capital funds and the like to sniff out high-risk, high-reward pursuits of the kind favoured by Silicon Valley – destructive platforms that insert themselves into exchange relations, rather than production. Manufacturing these days isn’t likely to generate super-profits; platforms that can make themselves indispensable to market access and extract fees in novel ways are more promising.

The increases in precarity and anxiety under neoliberalism, as well as broader patterns associated with privatization, austerity and the decline of the organized working class, have created a base of consumers grateful for price breaks and a supply of labour looking for work. Dependent on the market for access to our means of subsistence, we become dependent on the platform for access to the market. If we are to work, the platform gets its cut. If we are to consume, the platform gets its cut as well.

As it produces new social-property relations, new intermediaries and new laws of motion, the ongoing process of separation is not a ‘going back’ to historical feudalism, as Morozov would have it, but a reflexization, such that capitalist processes long directed outward – through colonialism and imperialism – turn in upon themselves. With advances in production seemingly at a dead end, capital is hoarded and wielded as weapon of destruction – its wielders new lords, the rest of us dependent, proletarianized servants and serfs. If feudalism was characterized by relations of personal dependence, then neofeudalism is characterized by abstract, algorithmic dependence on the platforms that mediate our lives.

What of the role of the state, which Morozov describes as weak to non-existent under the ‘parcellized sovereignty’ of the European feudal era, but ‘constitutive’ for Silicon Valley? Logically, of course, state involvement in the consolidation of an economic sector tells us nothing about its strength or weakness; it could just as well be the tool of special interests. But Morozov misrepresents the discussion of parcellized sovereignty in contemporary debates about feudalism and neofeudalization.

The key processes here are fragmentation and extra-economic expropriation. Just as feudal lords both exploited peasants and held juridical authority over them, so today economic actors exercise political power on the basis of the terms and conditions they set. Private commercial interests are displacing public law through confidentiality agreements, non-compete rules, compulsory arbitration and the dismantling of public-regulatory agencies, creating a fragmented form of ‘legally sanctioned private jurisprudence’. With the privatized parcellation of sovereignty, political authority and economic power blend together. Law doesn’t apply to billionaires powerful enough to evade it. Corporations like Apple, Amazon, Microsoft, Facebook and Alphabet are treated by governments like sovereign states. Immensely concentrated wealth has its own constituent power, determining the rules it will follow – or not.

The counter-revolution of neoliberalism has been a process of privatization, fragmentation and separation, in the name of a hyper-individualized freedom that resembles the ‘dot-like isolation’ of the Grundrisse’s ‘free’ worker. Today’s proletarians are caught up in a new kind of serfdom, dependent on networks and practices through which rents are extracted at every turn. When production is insufficiently profitable for accumulation, holders of capital seek returns elsewhere. In the process, they further the dynamic of separation and induce new dependencies, which require a new name. Neofeudalism speaks to that.

Read on: Evgeny Morozov, ‘Critique of Techno-Feudal Reason’, NLR 133/134.


Allies and Interests

The bonfire of so many illusions. Rishi Sunak, the UK Chancellor, star of his own soft-focus Instagram series, known as ‘Dishy Rishi’ during the country’s strange first summer of Covid, when 12 million found themselves on the government payroll and a decade of debt-reduction paranoia was suspended overnight; Sunak, former hedge funder, married to the daughter of India’s sixth richest tech billionaire, wearer of sliders (£95), brand-rep for luxury coffee mugs (£180), lover of ‘fiction’ (‘all my favourite books are fiction’), famously depicted by the BBC sporting a Superman costume; a man whose ascent from backbench MP to second highest office in the land was as rapid as it was mysteriously scandal-free – a strange state of affairs in a government where financial impropriety appears to be a condition of entry; Sunak, whose Spring Statement to address Britain’s cost-of-living crisis was delivered on Wednesday, declared that ‘this day is an achievement we can all celebrate’, even as his own statisticians warned of the greatest decline in living standards since records began; whose cunning wheeze for income tax cuts in 2024 and fuel duty cuts ‘for the first time in 16 years’ was intended to elicit fawning front pages, but proved that even the supine British media have their limits, with critical write-ups on his mini-budget in the Times, FT, Sun, Daily Express and Daily Mail.

Below: fuel prices in Britain since mid-2004. Sunak’s 5p cut is enough to wipe out about a week’s worth of price rises. This cost the government £5bn. Pause for cheers.

The average household will be down around £1,000 after the various measures in the Spring Statement have been implemented. The Office for Budget Responsibility, charged with producing the official forecasts, let it be known they expect an £830 increase in average energy bills in six months’ time – this, on top of the nearly £700 increase now due on 1 April. For those not working, Sunak refused to increase the planned lift in benefits payments and the state pension from 3.1% – matching inflation last year – meaning a dramatic real-terms cut to both. Meanwhile, a £20bn tax windfall was parked, with appalling cynicism, so that it could act as the Conservative Party election war-chest come 2023. The Resolution Foundation predicts that 1.3m people, 500,000 of them children, will be plunged into absolute poverty by then. In Sunak’s Britain, the worse off you are, the worse off you will become.

It’s not that we should expect better from the Conservative Party. It’s that their viciousness usually shows more evidence of planning. Thatcher had a consistent strategy to break the trade unions; Osborne intended to drive benefits claimants into penury. This clear-sightedness has historically reflected the party’s entanglement with the major arms of the state, big business and the media, which it has maintained alongside an extraordinary degree of political-ideological flexibility. This was always its greatest strength; a capacity to oversee national economic reinvention – twice in the last century, in the 1930s and the 1980s – far exceeding Labour, who managed the same trick precisely never. (Attlee accepted the National Government’s settlement; Blair accepted Thatcherism; Wilson, who made attempts to restructure the economy, was crushed on both occasions.)

As Lord Palmerston said of British diplomacy, ‘We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual’. The same applies to the Tories’ domestic political programme. In Britain’s semi-democracy (unelected head of state; unelected second chamber; official opposition tolerated within limits), the Conservatives have generally reconciled a close focus on their interests with an adaptable approach to their allies. Johnson performed this trick in 2019, moving with extraordinary speed to ditch the party’s liberal, pro-EU wing and recast it as an anti-austerity, pro-Brexit champion of the national interest, as filtered through the so-called ‘Red Wall’. This process has produced some peculiarities. Sunak identifies as a low-tax Thatcherite Conservative; yet as Chancellor he has been forced to accommodate both the demands of the Covid conjuncture and the deep unpopularity of austerity, not least amongst those swing voters in deindustrialized regions. Since he took office, increased state investment – in railways, scientific research, renewable subsidies – has formed a stark contrast with Osborne’s cutbacks, whilst spending on public services has, after a decade of reduction, been increased across the board.

This partly demonstrates the impact of Jeremy Corbyn’s time as Labour leader, in shifting the balance of public opinion back towards spending. But it also reflects the shift in elite opinion in the developed world towards supporting government intervention in the economy, the better to compete with China. The Biden administration explicitly framed the sadly deflated balloon of its spending plans as an anti-China programme, meeting the ‘peer competitor’ directly through a strong domestic economy. The European Union is looking to weaken its once-sacrosanct neoliberal commitments to State Aid and a ‘level playing field’. Even its ordoliberal revulsion at shared liabilities is being eroded, most recently in proposals for EU-wide ‘energy and security’ bonds issued by the Commission.

In Britain, this shifting consensus has seen the Tory government nationalize a ‘strategic’ steel producer, some railways and one gas supplier (with plans to nationalize another currently in the pipeline). In the guise of a ‘Future Fund’, the Treasury has taken equity stakes in more than 150 small businesses across the country, from ‘vegan food makers’ to ‘trendy cinemas’. The national lockdown merely accelerated this statist tendency. Even if one excludes additional Covid spending, the government is now set to spend more as a share of GDP than the average level under Tony Blair.

This has been a managed, intentional process. The Spring Statement, however, had a somewhat different character, representing a kind of gormless political narcissism with Sunak as its avatar. Here, it seems, the forever-war of the Tory Party’s internal factions has come to dominate its political direction – eclipsing whatever traces of an industrial strategy were discernible in Johnson’s ‘levelling-up’ agenda. Like all those at the top of the party, the Chancellor’s imperatives are self-interested: to increase the strength of his Thatcherite cadre relative to Tory dirigistas, and thereby propel himself to Number 10. Yet the result of everyone behaving self-interestedly – through a mixture of factionalism and careerism – is to create kind of random walk with drift, in which different political specks jostle for advantage, but where the overall direction is set by forces beyond their control.

We are now entering a historical moment for which Tory policymaking – despite its past triumphs – is entirely unprepared. What the pandemic heralded, unavoidably and permanently, was the end of that long period of low costs and environmental stability that, in the last four decades, undergirded neoliberal growth. Combined with the apparent breakdown of the old, dollar-centred international monetary system, fragmenting into different regional blocs, the stage is set for not only high inflation but wider price and economic instability sine die.

On this question, as on so many others, Milton Friedman was completely and disastrously wrong: inflation is not a monetary phenomenon. Far better to say, with Jonathan Nitzen, that ‘inflation is always and everywhere a phenomenon of structural change’. It is what happens when the world changes, and money changes with it. The preceding centuries of price and monetary history bear this out: transformations from one inflation regime to another matter far more than the periods between those paradigm shifts. And neither the Tory Party, nor the Bank of England – forlornly pulling on a lever marked ‘interest rates’, knowing full well it will do nothing – is remotely equipped to deal with this realignment. For that would mean moving into the truly taboo regions of price control and wage-setting. From there, one could easily envision a direct challenge to the presumed right of capital to make whatever profit it can.

Since this is a line that no Tory politician will cross, government policy inevitably degenerates into a series of emergency announcements: placing sticking-plasters on a secular crisis without so much as attempting to resolve it. Within this framework, different prime ministerial contenders – Sunak, Truss, Hunt – can argue over the most effective half-measures, and pander to their blocs within the party, but none can present a hegemonic project equivalent to Thatcher’s. Of course, to many ordinary Britons, it is clear that when the most lucrative industries in the country are gas and electricity distribution, there should be a zero-tolerance approach to profiteering. If official politics can’t deliver that, unofficial politics must step in. How long before a British gilets jaunes appears?

Read on: Susan Watkins, ‘Britain’s Decade of Crisis’, NLR 121.


Cold Peace

Petrov’s Flu (2021), the latest film by Kirill Serebrennikov, opens with a depiction of a crowded commuter bus in Russia. The atmosphere is febrile, almost violent. In the grip of a fever, the protagonist suffers a coughing fit and moves to the back of the vehicle. Following closely behind him, another passenger shouts, ‘We used to get free vouchers for a sanatorium every year. It was good for the people. Gorby sold us out, Yeltsin pissed it away, then Berezovsky got rid of him, appointed these guys, and now what?’ He concludes that ‘All those currently clinging to power should be shot’. At this point, the protagonist steps off the bus and enters a daydream in which he joins a firing squad that executes a group of oligarchs.

‘These guys’ refers to Putin and his clique, while ‘now what?’ is a question that weighs heavily on the country they’ve created. What kind of society is contemporary Russia, and where is it headed? What are the dynamics of its political economy? Why did they spark a devastating conflict with its closely entwined neighbour? For three decades, cold peace reigned in the region, with Russia and the rest of Europe swimming together in the icy waters of neoliberal globalization. In 2022, following the invasion of Ukraine and the West’s economic and financial sanctions, we have entered a new era, in which the delusions that animated the country’s market transition have become impossible to sustain.

Of course, the fantasy of post-Soviet development has never matched the reality. In 2014, Branko Milanović drew up a balance sheet of transitions to capitalism, which concluded that ‘Only three or at most five or six countries could be said to be on the road to becoming a part of the rich and (relatively) stable capitalist world. Many are falling behind, and some are so far behind that for several decades they cannot aspire to go back to where they were when the wall fell’. Despite promises of democracy and prosperity, most people in the former Soviet Union got neither. Because of its geographical size and politico-cultural centrality, Russia was the gordian knot of this historical process, which constitutes the vital background to the Ukraine crisis. For beyond the military tropism of ‘Great Power’ approaches, domestic economic factors are at least as essential to map the coordinates of the present situation and explain the headlong rush of the Russian leadership into war.

Period I: 1991–1998

Russia’s aggression is part of a desperate and tragically miscalculated attempt to face up to what Trotsky called ‘the whip of external necessity’: that is, the obligation to compete with other states to preserve a degree of political autonomy. It was this same whip that led the Chinese leadership to embrace a controlled economic liberalization in the early eighties, fuelling forty years of mostly successful integration into the global economy while allowing the regime to rebuild and consolidate its legitimacy. In Russia, however, the whip broke the state itself after the Cold War ended.

As Janine Wedel documents in her indispensable Collision and Collusion: The Strange Case of Western Aid to Eastern Europe (2000), the demise of the Soviet Union resulted in a profound weakening of the country’s domestic elite. During the first years of the transition, the state’s autonomy was minimized to the point that policymaking was effectively delegated to US advisers led by Jeffrey Sachs, who oversaw a small group of Russian reformers including Yegor Gaidar – the prime minister that launched the country’s decisive price liberalization – and Anatoli Chubais, the privatization tzar and onetime Putin ally. Their shock therapy reforms caused industrial involution and soaring poverty rates, inflicting a national humiliation and imprinting a deep suspicion of the West on Russia’s cultural psyche. Given this traumatic experience, the most popular motto in Russia remains ‘the nineties: never again’.

Vladimir Putin built his regime on this motto. A simple look at the evolution of GDP per capita tells us why. The early years of transition were marked by a severe depression that culminated in the financial crash of august 1998. Far from the total collapse described by Anders Åslund in Foreign Affairs, though, this moment in fact contained the seeds of a revival. The rouble lost four fifths of its nominal dollar value; but as soon as 1999, when Putin rose to power on the back of another war in Chechnya, the economy had begun to recover.

Before the crash, the macroeconomic prescriptions of the Washington Consensus had created an intractable depression, as anti-inflationary policies and an obtuse defence of the exchange rate deprived the economy of the necessary means of monetary circulation. Skyrocketing interest rates and an end to reliable wage payments by the state resulted in the generalization of barter (accounting for more than 50% of inter-company exchange in 1998), endemic wage arrears and the exodus of industrial firms from the domestic market. In remote places, the use of money had almost completely disappeared from everyday life. In the summer of 1997, I spent a couple days in the small village of Chernorud, on the western shore of Lake Baikal. The villagers harvested pine nuts and used them to pay for bus fare to the nearby island of Olkhon, as well as accommodation and dried fish, with one full glass of nuts representing a unit of account. The social, health and crime situation was dire. A widespread sense of despair was reflected in the high mortality rate.

Period II: 1999–2008

Compared to this economic catastrophe, the early Putin era was a feast. From 1999 to the 2008 the main macroeconomic indicators were impressive. Barter rapidly retreated and GDP grew at an average annual rate of 7%. Having nearly halved between 1991 and 1998, it fully recovered its 1991 level by 2007 – something Ukraine never achieved. Investment rebounded along with real wages, showing annual increases of 10% or more. At first sight, a Russian economic miracle seemed plausible.

This enviable economic performance was made possible by rising commodity prices, yet this was not the only factor. In addition, Russian industry benefitted from the stimulating effects of rouble devaluation in 2008. The loss of value made locally manufactured goods more competitive, facilitating import substitution. Since industrial enterprises were completely disconnected from the financial sector, they did not suffer from the 1998 crash. Moreover, thanks to the legacy of Soviet corporatist integration, major firms generally preferred to delay wage payments in the nineties rather than lay off their workforce. As a result, they were able to rapidly increase production to accompany the reflation of the economy. The capacity utilization rate increased from about 50% before 1998 to nearly 70% two years later. This, in turn, contributed to productivity growth, creating a virtuous circle.

Another factor was the government’s willingness to take advantage of export windfalls to revitalize state intervention in the economy. The years 2004 and 2005 marked a clear shift in this regard. Privatization was still on the agenda, yet it continued at a much slower pace. Ideologically, the current flowed in the opposite direction, with a greater emphasis on public ownership. A presidential decree of 4 August 2004 established a list of 1,064 enterprises that could not be privatized and named a number of joint stock companies in which the state’s share could not be reduced. State activity was expanded through a pragmatic combination of administrative reforms and market mechanisms. Putin’s most important target was the energy sector, in which he aimed to reassert state control of prices and eliminate potential rivals such as the liberal oil tycoon Mikhail Khodorkovsky. Meanwhile, a combination of new policy instruments and incentives for Russian overseas investment created enterprises that could compete in areas such as metallurgy, aeronautics, automobiles, nanotechnology, nuclear power and of course military equipment. The stated objective was to use funds generated by the export of natural resources to modernize and diversify a largely obsolete industrial base, so as to preserve the autonomy of the Russian economy.

Period III: 2008–2022

One could glimpse a developmental vision in this attempt to restructure Russia’s productive assets. However, strategic mistakes in managing the country’s insertion into global markets, along with strained relations between its political leadership and capitalist class, prevented a proper articulation of this social settlement. The symptoms of this failure became apparent with the 2008 financial crisis and the agonized growth over the following decade. They were first evident in the ongoing reliance on commodity exports – mostly hydrocarbons, but also basic metal products and more recently cereals. Externally, this increasing specialization left the economy susceptible to the fluctuations of global markets. Internally, it meant that policymaking came to revolve around the distribution of an (often squeezed) surplus from these industries.    

Russia’s developmental failure could also be seen in its high levels of financialization. As early as 2006, its capital account was fully liberalized. That measure, along with entry to the WTO in 2012, indicated a double allegiance: first, to the process of US-led globalization, whose keystone was the free circulation of capital; second, to the domestic economic elite, whose lavish lifestyle and frequent clashes with the regime required them to stash their fortunes and businesses abroad. Putin encouraged this outflow of domestic capital, even as he simultaneously adopted macroeconomic policies designed to bring foreign investment into Russia. The resultant internationalization of the economy, combined with its dependence on commodity exports, explains why it was gravely affected by the global financial crisis, suffering a 7.8% contraction in 2009. To cope with this instability, the authorities opted for a costly accumulation of low-return reserves – which meant that, despite its positive net international investment position, Russia lost between 3% and 4% of its GDP through financial payments to the rest of the world during the 2010s.

Hence, in the decade preceding the invasion of Ukraine, the Russian economy was characterized by chronic stagnation, an extremely unequal distribution of wealth, and relative economic decline compared to China and the capitalist core. Granted, there have been other, more positive developments. As a consequence of the sanctions and counter-sanctions adopted after the annexation of Crimea, some sectors such as agriculture and food processing benefitted from an import substitution dynamic. In parallel, a vibrant tech sector enabled the development of a digital ecosystem with an impressive international reach. But this was not enough to counterbalance the structural weakness of the economy. In 2018, mass demonstrations against neoliberal pension reforms forced the government into a partial climbdown. They also revealed the increasing fragility of Putin’s regime, which is unable to deliver on its promises of economic modernization and adequate welfare policies. For as long as this trend continues to undermine his legitimacy, the president’s reliance on nationalist revanchism – and its military expressions – will become all the more intense.

Facing economic hardship and political isolation after its adventure in Ukraine, the prospects for Russia are bleak. Unless it can secure a rapid victory, the government will falter as ordinary Russians feel the economic costs of war. It will likely respond by ramping up repression. For now, the opposition is fragmented, and sections of the left, including the Communist Party, have rallied round the flag – which means that in the short-term Putin will have no trouble putting down dissent. But beyond that, the regime is imperiled on multiple fronts.

Businesses are terrified by the losses they will incur, and Russia’s financial journalists are openly sounding the alarm. Of course, it is not easy to predict the outcome of sanctions – yet to be fully implemented – on the fortunes of individual oligarchs. One must note that the Russian Central Bank deftly stabilized the ruble after it lost one third of its value immediately after the invasion. But, for Russian capitalists, the danger is real. Two examples illustrate the challenges they will face. First is the case of Alexei Mordashov – the richest man in Russia according to Forbes – who was recently added to the EU’s sanctions blacklist for his alleged ties to the Kremlin. Following this decision, Severstal, the steel giant he owns, halted all supplies to Europe, which used to make up about a third of the company’s total sales: roughly 2.5 million tons of steel a year. The firm must now look for other markets in Asia, but with less favorable conditions which will damage its profitability. Such cascading effects on oligarchs’ businesses will have implications for the economy as a whole.

Second, restrictions on imports pose serious difficulties for sectors such as automobile production and air transport. A ‘technological vacuum’ could open up, given the retreat of business software companies such as SAP and Oracle from the Russian market. Their products are used by Russia’s major corporations – Gazprom, Lukoil, the State Atomic Energy Corporation, Russian Railways – and will be costly to replace with homegrown substitutes. Attempting to limit the impact of this shortfall, the authorities have legalized the use of pirate software, extended tax exemptions for tech companies and announced that tech workers will be freed from military obligations; but these measures are no more than a temporary stop-gap. The critical importance of software and data infrastructure for the Russian economy highlights the danger of monopolized information systems dominated by a handful of Western companies, whose withdrawal can prove catastrophic.  

In sum, there is no doubt that the war in Ukraine will be deleterious for many Russian businesses, testing the loyalty of the ruling class to the regime. But the consent of the broader population is also at risk. As socioeconomic conditions further deteriorate for the general population, the motto that served Putin so well against his liberal opposition (‘the nineties: never again’) may soon backfire on the Kremlin. The mixture of widespread immiseration and nationalist frustration is political nitroglycerin. Its explosion would spare neither Putin’s oligarchic regime, nor the economic model on which it rests.  

Read on: Michael Burawoy & Pavel Krotov, ‘The Economic Basis of Russia’s Political Crisis’, NLR I/198.


The Shipping Forecast

In recent times, economists have come to play a central role in Irish public life, for reasons that are easy to decipher. Over the past generation, the Republic of Ireland has been a developmental shapeshifter, from ‘the poorest of the rich’ (as the Economist dubbed it in 1988) to poster child for neoliberalism, from the epitome of Eurozone dysfunction to the Troika’s star pupil. For those who take the whole island as their reference point, Northern Ireland’s shift from the cutting edge of global manufacturing to its current status as an impoverished peripheral zone of the United Kingdom should be further stimulus for thought about the wealth of nations and classes.

Unfortunately, the dominant paradigm in which Irish economists have tended to function is the one that holds sway in the more populous states of the Anglosphere. The gatekeepers of neoliberal orthodoxy in Ireland sometimes adopt the persona of a maverick outsider railing against the status quo, but their prescriptions invariably tend to reinforce the social hierarchy: one such figure, Colm McCarthy, has been called in twice by governments to compose a supposedly objective rationale for dramatic public spending cuts, first in the 1980s, then after the crash of 2008. Neo-Keynesian perspectives are rare enough in the profession. Terrence McDonough’s successful career as an avowed Marxist in an Irish economics department, before his untimely death in September last year, was as surprising and impressive as the neglect of his writings by the Irish media was predictable.

McDonough was born in California in 1952, but as their surname might suggest, his family could trace its origins back to his adopted country: his great-great grandfather had left Roscommon in 1847, the bleakest year of the Great Famine, and settled as a farmer in Wisconsin. McDonough himself paid a brief visit to Ireland in 1974 for a semester as a student, where he first encountered his future wife, Marian. They reunited when he came back for a second trip sixteen years later, after he had received his economics PhD, and McDonough settled down for an academic career in Ireland, teaching first at Dublin City University and then at the National University of Ireland, Galway until his death.

As an obituary notice by Catherine Wylie in the Irish News affectionately observed, McDonough ‘comfortably fell into the category of the absent-minded professor, having once gone to see Riverdance wearing his bedroom slippers.’ According to Wylie, McDonough’s political engagement, stoked up by the civil rights and anti-war movements in the US, had already begun when he was a school student: ‘So enthusiastic was he that his school was unhappy with his activities and he was asked to leave after his junior year.’ During his time in Ireland, he regularly assisted trade unions and left-wing campaign groups with his expertise. After his death, Vicky Donnelly of the One World Centre in Galway recalled that she took to calling him ‘the Shipping Forecast’ in the midst of the financial crisis, because he would invariably deliver talks with the most alarming economic news and predictions in a calm and reassuring voice.

In his scholarly work, McDonough touched upon the social conditions that had obliged his ancestors to leave the island. In 2005, he edited a volume with the title Was Ireland A Colony? – the need for a question mark spoke volumes about the tenor of academic debate on such questions, after the revisionist challenge to Irish nationalism congealed into an orthodoxy of its own. Three years later, he co-authored a superb essay with Eamonn Slater for Irish Historical Studies about Marx’s view of nineteenth-century Ireland.

This was a subject about which one might expect everything worthwhile to have long since been said, given the volume of commentary it has attracted, but McDonough and Slater showed that there were still new seams to be mined. Their article concentrated on an 1867 talk on Ireland that Marx had delivered to the Educational Association of German Workers in London, shortly after the abortive Fenian uprising. It tracked the successive stages of English and British rule over the neighbouring island and the mutations it had undergone. The authors stressed that Marx did not rely on a strictly economic understanding of colonial domination:

Marx’s account of Irish history in the report indicates that there cannot be a general theory of colonialism, with a single ‘prime mover,’ because colonialism depends on the conjunction of the forces operating in the political regime with those in the local economy and civil society . . . what Marx provided in the report was a theoretical framework that allows scholars to go beyond the relatively narrow economic analysis of Marxian dependency theory: one that instead sees colonialism as a complex social process operating at differing levels within the social formation as these levels interact with each other in complex ways.

This was the kind of ‘revisionism’ that Irish historiography needs, not the self-conscious iconoclasm that suggests the culpability of British politicians for mass starvation in the 1840s is a nationalist shibboleth. The fact that Ireland diverged so sharply from its immediate neighbours and remained an underdeveloped country by any measure well into the twentieth century is also a vital part of its economic trajectory, which the high growth rates and GDP levels of recent decades have not consigned to irrelevance. One feature of neoliberal ideology in the Irish context is a brusque insistence that we must look at the country through the same lens as any developed capitalist state, even though the very term ‘Celtic Tiger’ implies that it has more in common with South Korea or Taiwan than with Germany or California.

In the wider field of Marxist economic thought, McDonough aligned himself with the Social Structure of Accumulation (SSA) school, co-editing with Michael Reich and David Kotz an important 2010 volume, Contemporary Capitalism and Its Crises, that sought to apply its theoretical insights, and contributing an essay of his own on the SSA framework. But for left activists in Ireland, McDonough’s greatest impact came through a series of articles that followed the crash of 2008. To give a flavour of his perspective on the contemporary Irish economy, I’ll focus here on two articles that span the years between the financial crisis and the Covid-19 pandemic.

In ‘The Irish Crash in Global Context,’ published in 2010, McDonough analysed the meltdown of the Celtic Tiger economy, depicting it as ‘simultaneously a manifestation of the global crisis of neoliberal capitalism and an expression of its own local dynamics’. His essay showed that it was perfectly possible to take account of national specificities without broadening the category of neoliberalism to the point that it became unhelpfully vague:

There is no necessity for the local institutions to directly reflect the global characteristics of neoliberalism. Indeed, one of the advantages for business of the global neoliberal order is the opportunity to fragment the firm’s production process, locating each part in the most favourable area for profitability. This strategy depends not only on the location’s integration into global neoliberalism but also on the existence of differences between locations.

In most respects, McDonough argued, the Irish economy during the boom years was a neat fit for generic definitions of neoliberalism. Its trade policy had been outwardly oriented since the late 1950s, with the active pursuit of foreign direct investment a long-established priority of government. Its regulation of business was ‘light-touch’ and ‘principles-based’:

Functions were divided, with the Central Bank evaluating threats to the banking system and the Financial Regulator dealing with individual firms. Central Bank evaluations were frequently ignored by the regulator, which concentrated on consumer issues rather than prudential matters such as capital adequacy or the soundness of loans.

In the Irish case, McDonough noted, this permissive framework blended ‘a peculiarly Irish anti-authoritarian populism with an ideologically neoliberal approach to regulatory matters’. The Irish state’s diminutive tax take – 31.2% of GDP in 2007, barely ahead of Latvia, Lithuania, Romania, and Slovakia at the bottom of the EU’s league table – offered further evidence of domestic conformity to neoliberal doxa.

The main exception to the rule appeared to be the involvement of the trade union movement in a corporatist structure known as ‘social partnership,’ which centre-left intellectuals had frequently celebrated as an alternative to Anglo-American union-bashing policies. However, McDonough stressed that the fruits of corporatism for the Irish unions had been ‘distinctly mixed’: union density continued to fall, from 62% in 1980 to just 31% in 2007, and the national agreements traded wage moderation by workers at a time of virtually full employment for cuts to personal taxation that further weakened the state’s fiscal capacity.

Ireland also conformed to the international norm in its embrace of financialization, and it was the ready availability of credit that enabled Irish banks and property developers to inflate one of the most spectacular asset-price bubbles in the years leading up to the crash. McDonough’s conclusion brought together the domestic and international factors behind a calamitous downturn. The Fianna Fáil–Green Party coalition was ‘both right and wrong in holding the international crisis responsible for our current economic woes’. The sub-prime meltdown was certainly the immediate cause of Ireland’s malaise, but the same factors that generated that meltdown had long since been at work in the Irish system:

Global neoliberalism may have been initially imported from abroad, but successive governments created an indigenous variety that deserved a guaranteed Irish label. Where the Irish crisis differed from the international crisis was in its particular low-tax regime and in the triumvirate of developers, bankers, and politicians that created our home-grown financial and fiscal crisis. Ireland’s golden circle cannot opt out of responsibility for this crisis: where they changed the global model, they, in the end, only intensified the local crisis.

Ten years later, McDonough looked at the fate of the Irish economy since the great crash. For international observers, the outcome of the 2020 general election must have been baffling: despite all the talk about Ireland’s miraculous recovery, its voters had made Sinn Féin the largest party on the strength of a left-wing economic platform, while downgrading the two centre-right parties that had superintended the much-vaunted ‘Celtic Comeback’. As McDonough explained, this carefully constructed image, so valuable for the dominant players in the Eurozone, had obfuscated the reality of Ireland’s economic performance.

He quoted Enda Kenny’s insufferable admonition to the Syriza leader Alexis Tsipras – ‘here’s a lesson from one small country that you can take some reflection on in terms of building your own economy for the future’ – before explaining what Kenny’s tame submission to Troika diktats had actually meant for his country’s citizens:

In 2015, the number of people employed was 10% below its pre-crisis peak. The official unemployment rate was 9.7%, but many people were mistakenly excluded from the labour force and hence not considered to be unemployed. Large numbers of part-time workers were unsuccessfully seeking full-time work. Adding these people to the ranks of the unemployed would have more than doubled the official figure. Factoring in those who had emigrated to other countries in search of work would increase the figure by another 3–4%. Most of these people were in their early twenties.

In the same year, the official figures for GDP growth purported to show an expansion of 26.3%, which ‘merely underlined the extent to which Irish statistics were deeply distorted by the globalization of Ireland’s economy and, more particularly, by transnational corporate tax-minimization strategies’. 2015 had been unusually replete with corporate chicanery:

AerCap, the world’s largest independent aircraft-leasing company, moved its entire €35 billion fleet of aircraft to Ireland for tax purposes. Of course, this happened entirely on paper. The planes stayed where they always were. Two major companies conducted corporate tax ‘inversions.’ This is where a large US company moves its headquarters operations to a much smaller Irish subsidiary, so that the Irish company now ‘owns’ its bigger parent, allowing the parent to pay the Irish tax rate on profits. Apple also had a big role in this story. It took advantage of a newly created tax scam, called the ‘Green Jersey’ because the island tax haven of Jersey was also involved. It involved transferring internal intangible property assets to Ireland and writing off the ‘cost’ against the Irish taxes, driving the already low Irish tax rate towards zero. Apple jumped at the chance in 2015, shifting billions in assets and pumping up Ireland’s measured GDP.

Similar if less spectacular gambits were clearly at work in other years, when the GDP statistics looked to be more plausible.

This meant that the employment rate was the only reliable benchmark for Ireland’s economic health. It wasn’t until 2018 that Irish employment numbers finally matched their 2008 levels: ‘A ten-year recovery period is nothing to write home about. Historically, most recessions are well over after two years.’ The austerity programmes of the previous decade, first homegrown then carefully adumbrated by the Troika, cut government spending by 13% between 2008 and 2014. They made the Irish recession longer and deeper than it would otherwise have been.

For McDonough, there was nothing mysterious about the Sinn Féin surge. One needed only to look at the experience of Ireland’s younger generation: unemployment for those under thirty-five was higher in 2019 than it had been in 2006, even though labour-force participation rates from this age bracket had fallen substantially. Those who did have jobs were almost twice as likely to be in part-time employment as their 2006 counterparts. Average weekly wages had risen by less than 8% in real terms since the crash, even though average rents were 36% higher (44% in the capital Dublin).

Now, as McDonough noted, Irish youth were ‘experiencing their second once-in-a-lifetime recession in the space of ten years’, with younger workers bearing a disproportionate brunt of pandemic-related unemployment, not to mention a severe housing crisis. Against that backdrop, it is no surprise that Sinn Féin’s vote has increased further since the 2020 election, from 24.5% to an average polling score of 31.6% in 2021 – five points higher than the party’s closest competitor, Fine Gael.

McDonough brusquely dismissed the emphasis of conservative politicians and journalists on Sinn Féin’s historic ties to the IRA as an implicit repudiation of the Good Friday Agreement (GFA):

They claim that party decisions are more heavily influenced by a cadre of veteran republican activists in Belfast than by its elected politicians in the South. This charge is controversial, but in any case, it ignores the fact that the goal of the GFA was precisely to bring these political forces into the electoral arena. Sinn Féin’s internal dynamics are hardly democratic, but this does not distinguish it from any other Irish party.

From his perspective, the real question was whether Sinn Féin would live up to the hopes invested in it by those who wanted a new economic model:

After the next election, Sinn Féin will likely have the option of coalescing with the rest of the Left, although the fragmented character of these forces will make the construction of such a government challenging. The party’s other option may be an alliance with a diminished and chastened Fianna Fáil. This may appeal as a more respectable choice to those who prioritize the goal of a united Ireland over the broader left agenda. This choice, if it comes about, will decide the fate of the Irish left for another generation.

With centre-right hegemony at the ballot box no longer guaranteed, the period leading up to the next general election will no doubt see the prize-fighters of Ireland’s ruling class produce article after article and report after report, purporting to show that the state simply cannot afford Sinn Féin’s modest reform programme, let alone more radical measures. It’s a tremendous pity that we won’t have McDonough with us to cut through this rhetorical fog.

Read on: Daniel Finn, ‘Ireland on the turn?’, NLR 67.


Rentier Brazil

Although Brazil’s tumbling capital market triggered the suspension of numerous initial public offerings (IPOs) planned over the course of 2021, it did not discourage all investors. The logistics start-up Favela Brasil XPress, based in the country’s largest favela, Paraisópolis, went public last November with the expectation of raising R$1.3 million in six months and the ultimate aim to rival Amazon. In the poor communities where some 14 million people live, many of which are effectively controlled by drug traffickers, e-commerce deliveries do not always arrive. By filling this gap, Favela Brasil XPress intends to bring big business to the favelas, where it will become a stand-in for the vitiated state.

Even if Favela Brasil XPress does not succeed (as seems likely given the precipitous rise of interest rates), similar finance initiatives will continue to sweep the country. Brazil’s Landless Workers’ Movement – once a radical campaign for land reform – has recently begun to mirror the activities of agribusiness giants, issuing five-year fixed income securities to invest in organic food production. Two factors explain the prevalence of such ventures. First, they offer basic provisions which can no longer be expected from the public sector. After the 2016 parliamentary coup that removed President Dilma Rousseff from office, a raft of neoliberal reforms were implemented, the most damaging of which was the adoption of a constitutional cap on public spending – now locked in place until 2036. With austerity legally enshrined, new forms of private provision have become crucial to meet people’s essential needs. 

Second, such initiatives are connected to a widespread shift to mass-based financialization, fomented by state actions over the past two decades. By now the effects of this process are plain to see. Through fuelling aggregate demand, expanded access to credit promised to create an inclusive mass consumer society. Yet the credit boom came with serious drawbacks. Brazil’s household debt-to-income ratio rose from 18% in 2004 to 60% by late 2021, while total wages never surpassed 45% of GDP in the same period. By the end of 2021, household indebtedness affected 74% of Brazilian families and defaults followed suit, hitting 64 million adults. Rather than a step toward asset ownership, debt has become a means of survival. With the unemployment rate hovering at around 12.5%, wages relatively stagnant, interest rates rising and millions of Brazilians living in poverty, household debt is unlikely to to contract.

Low-income shareholders have flocked to the stock market in the hope of making short-term equity gains. Since 2003, their number has risen from 85,500 to over 4 million. The stakeholder mentality has seeped into society at large: a sure sign that the redemocratization of Brazil has broken with the welfare society envisioned by the 1988 Constitution. As such, the most urgent question facing the country is this: if elected in November 2022, will Lula da Silva’s Workers’ Party (PT) challenge the hegemony of big finance and rescue the economy from rentierism?

To answer, we must first understand how and why this sea change occurred. In the 1980s, when inflation rates started to skyrocket, the banking and finance sector in Brazil developed institutional mechanisms for monetary adjustment, offering inflation-protected gains derived from the public debt. Only firms and the very wealthy, who were the bulk of bank account holders at the time, benefited from such measures. This led to growing autonomy for the financial sector, which came to contest the centrality of the state in crafting macroeconomic policy, while encouraging rentier activity among non-financial firms and high-income households. The mounting influence of the banking and financial sector then shaped the commercial and financial liberalization of the 1990s. Under the Brazilian Social Democracy Party (PSDB), Brazil was integrated into global financial markets, and domestic industry was devastated.

With the Real Plan in 1994, which succeeded in bringing about monetary stabilization, the dynamic of financial accumulation shifted axis. Inflation-protected gains were replaced by high-interest income and other forms of financial income, derived from a new monetary regime that set the lending prime rate (Selic) at stratospheric heights – acting as an anchor to control inflation. The rush to buy Brazilian treasury bonds linked to the public internal debt signalled the opening of a new avenue for financial accumulation, still concentrated among the wealthiest. Profits indexed to Selic consolidated a coalition of rentier and financial interests at the helm of the Brazilian state. In parallel, a wide-array of institutional regulations were laid out for a new stage of capital-market expansion and consolidation.

The electoral victory of the Workers’ Party in 2002 changed the game. On the one hand, it preserved the inflation-targeting regime put in place by the previous government, effectively concentrating wealth. It also passed new regulations to incentivize financial investments and made no attempt to implement a tax reform to curb inequality. On the other, it granted access to credit on an unprecedented scale, promoting a massive process of financial inclusion through the creation of millions of simplified bank accounts (no fees attached) and special loans (some of them underwritten by the State). By failing in the provision of public goods and services, it also paved the way for their recommodification by finance.

Lula’s presidency therefore saw the first great expansion of financial markets in democratic Brazil. He succeeded in turning the public pay-as-you-go civil servants’ pension system into a hybrid scheme with individual private accounts. He also took steps to guarantee creditworthiness for those with no credit records and stimulated the 2004-2008 stock market boom, which attracted huge foreign investments, catalyzing a record number of IPOs. Lula engaged in dialogue with the finance sector and preserved the institutional neoliberal framework established by his predecessor. He did not check Brazil’s integration into global financial markets, nor the autonomy of its Central Bank. At no point, not even after Lula’s reelection with a huge popular mandate in 2006, did the PT government attempt to consistently tax financial wealth, or place a witholding tax on dividends. The counterpart to the implementation of the anti-poverty Bolsa Familia programme, which reached 14 million families with only 0.5% of GDP, was a primary surplus policy that further undermined public provision, allowing the financial takeover of social policy.

The financialization of social policy has been particularly evident in the education and healthcare sectors. The PT’s investment in the Student Financing Fund (FIES) provoked an IPO race that led to a wave of mergers and acquisitions, spawning educational conglomerates among the largest worldwide, whose share prices rose in tandem with the FIES’s expansion of credit. Millions of students were plunged into debt. At the same time, under Rousseff, the healthcare sector was opened to foreign capital, overriding a constitutional norm. Brazil’s public health system became increasingly dependent on private providers – international corporations and investment funds – whose power to dictate regulations grew rapidly. By 2020, the revenues of private healthcare plans that cover only the 25% of the population with the ability to pay were estimated at R$229 billion – almost twice as much the overall budget that allocated to the Ministry of Health in 2022, responsible for caring for the other 75%, or 165 million Brazilians. Most worrying is the fact that even the public sector is trapped in financialized strategies: states and municipalities now invest part of the Public Health Fund in secondary markets to increase revenues, at their own risk, to finance activities that used to be entirely funded through the tax system.

Non-financial firms also increased the share of financial profits in their balance sheets, while the Brazilian National Development Bank (BNDES), responsible for providing subsidized loans for the corporate sector, experienced a downgrade starting in 2014. While financial assets have witnessed an extraordinary surge in value, the investment rate has continued to drop sharply (falling to 14% of GDP in 2021) and the amount of productive assets has stagnated. But with the Selic base rate on the rise yet again, fixed by an independent Central Bank, no one doubts that the public debt can regain its prominence as a driver of the Brazilian financialization, this time in tandem with the rebound of the stock markets.

Financialization accelerated in the wake of the 2015-2016 recession. The Temer government (2016-2018), which took over from Rousseff, passed labour reforms that wiped out an array of employment rights. They stressed the primacy of negotiated settlements over labour regulations, abolished wage parity, enabled greater outsourcing and approved 12-hour uninterrupted workshifts. This caused the informal sector to grow, along with extreme poverty. Bolsa Familia cash transfers were disconnected from rising demand to comply with the new constitutional cap on federal expenditures. Aiming to dismantle state capacity, Temer also undertook major administrative reforms to shrink the number of available careers within the public sector from 300 to around 30, and pushed through pay cuts of up to 25%.

Yet if top-down expropriation depends on a mixture of coercion and consent, the Temer government could no longer elicit the latter. Although he preserved widespread access to credit, popular support was eroded by a deepening economic crisis, high unemployment rates and, above all, coruption allegations. His reforms were met by large protests and a general strike. As his approval ratings plummeted to 3%, Temer lost the political capital necessary to steer the transition towards autocratic neoliberal rule. It was this setback that Bolsonaro sought to rectify by turning radical conservatism (anti-communism, sexism and racism) into the dominant expression of discontent. In so doing, he discharged financial capital from culpability for deteriorating conditions and blamed a series of false culprits: leftists, feminists, migrants, indigenous people.

During his first year in office, Bolsonaro approved a controversial pension reform that raised the retirement age for women and the number of qualifying years of contribution. As the average value of pension benefits from the pay-as-you-go scheme decreased, and the survivor’s allowance was cut by nearly half, the future of the public pension system became increasingly uncertain, causing its deligitimation and increasing the attractiveness of the funded-capitalized pension regime. Bolsonaro also gutted public spending in a number of areas – health, science, social security, the environment. Recently, he approved a new law that modernizes the legal framework for the foreign exchange market and international capitals. An old demand from the financial sector, this controversial law should, among other things, facilitate the dollarization and internationalization of the Brazilian elite’s portfolios, which are currently allocated to assets denominated in national currency.

When Covid-19 arrived in Brazil, however, Bolsonaro’s presidency entered a downward spiral. As well as mishandling the public health crisis, his adoption of a War Budget marked a volte face in his programme to dismantle the public sphere. An Emergency Aid Programme raised the social safety net and provided adequate coverage to 67 million recipients, while cash transfers and furlough schemes kept low-income households afloat, despite the continued underfunding of the healthcare sector.

While such policies reduced the default rate and arrears of families indebted to big finance, they also boosted a new cycle of household indebtedness. Households cut down on balances that were in default while increasing their overall credit load, along with the average payment terms for credit portfolios. This deepened their dependence on financial markets: new loans were taken out, to be paid off over longer timelines. The cycle of financial accumulation expanded, both through a decrease in delinquencies and an uptick in credit supply. Yet, crucially, this new sequence of debt restructuring – suspension, renegotiation and expansion – did not occur within a solid institutional framework, set by the Brazilian state, to regulate the levels and mechanisms of financial expropriation. The process was rather led by the banks, who succeeded in maintaining stratospheric interest rates from previous contracts despite the falling prime rate (2% in December 2020).

The Covid outbreak has therefore had complex implications for the Brazilian political landscape. In one sense, it discredited Bolsonarismo by foregrounding the values that it sought to relegate – science, state management, social provision – and undermining the precepts of its radical conservatism. Opinion polls now forecast Bolsonaro’s defeat in the election this October. Yet, at the same time, the economic problems that Covid has consolidated are likely to destabilize an incoming PT administration. For no matter how much autonomy financial capital is granted, it will be unable to generate an economic rebound without a strong state apparatus – which must be rebuilt after years of gradual erosion.

Will the PT recognize that its previous policies produced an unustainable model rooted in financial expropriation, and take an alternative course? Or will they prove unwilling to challenge the extant economic setup? The former could be done by rescuing policies that were dismissed in by previous PT administrations: promoting the deconcentration of the banking system; breaking with the Central Bank’s autonomy; expanding the supply of public services, at a quantity and quality necessary to remove the sphere of social reproduction from the grasp of the financial sector; passing a progressive tax reform capable of effectively confronting inequality in Brazil, starting with a tax on dividends and financial income.

In recent years, the damaging consequences of financialization have been highlighted by Brazilian social movements. Last September, the Homeless Workers’ Movement occupied the São Paulo Stock Exchange, protesting the concentration of wealth amid rising hunger and poverty. Will they be listened to? That remains to be seen. However, the positions of Fundação Perseu Abramo, the Workers’ Party think tank, indicate that credit will still play a large role in their blueprint for society. The PT may once again attempt to combine anti-poverty programmes, at one end, with more credit at the other, to compensate for insufficient wages and social policies. As such, the Workers’ Party suggests that the progressive values brought to the fore by the pandemic are not in contradiction with the continuous expansion of financial markets, products and logics. If financial expropriation remains the engine for developing this peripheral capitalist economy, its already intolerable levels of inequality may be set to worsen.

Read on: Mario Sergio Conti, ‘Pandemonium in Brazil’, NLR 122.



March, 1851. In that month, the Kabylia was shaken by an insurrection; Emperor Tự Đức of Vietnam ordered the execution of Christian priests; a concordat in Spain entrusted the Catholic Church with control of education and the press; Rigoletto by Giuseppe Verdi was staged at the La Fenice in Venice. Nobody paid much attention to what happened in Chicago on 13 March. London for one was busy preparing for the Great Exhibition, while the debate over abolition was raging in the US itself. What had happened on that day in the Windy City? The first forward contract had been signed for 3,000 bushels of grain (a bushel was roughly equivalent to a hectolitre) to be delivered the following June. This agreement signalled the dawn of the futures market, which came to play host to a whole range of derivatives, eventually becoming the dominant instrument of international finance (and indeed its curse). In 2019, 33 billion derivative contracts were registered around the world amounting to a total value of $12 trillion (though their nominal value was $640 trillion).

158 years later, on 3 January 2009, another event went unnoticed, one perhaps of similar historical consequence to that exchange on the shores of Lake Michigan: the first cryptocurrency, Bitcoin, was created. Recall that it had been just over three months since the bankruptcy of Lehman Brothers on 15 September 2008, which triggered the most acute financial crisis since 1930, a crisis caused by derivatives (in this case, subprime mortgages).

That the creation of the first completely virtual currency in history went unnoticed is understandable: the planet had substantially bigger fish to fry. But the absence of political reflection on this new financial product became more and more inexplicable as the number of cryptocurrencies soared, and as their capitalization transformed them into a new branch of global finance equipped with its very own diminutive: DeFi (decentralised finance). According to CoinMarketCap, as of 16 November there were 14,289 cryptocurrencies in existence. The total capital of the companies that created them exceeds $2,600 billion: Bitcoin’s value stands at $1,138 billion, whilst Ethereum’s is $503 billion. In an editorial from September, The Economist observed that the volume of transactions overseen by Ethereum alone in the second quarter of this year amounted to $2,500 billion, equal to the value of Visa’s quarterly worldwide transactions.

Perhaps it’s this maelstrom of billions and trillions that prevents us from grasping the weight of the issue, for numbers of this kind are alien to everyday life; they exist in a stratosphere belonging to the world of magic. In this way, cryptocurrencies become one of the many forms of financial wizardry that determine our lives without us realising (on this numerical rhetoric, see what I wrote in June on the ‘Avalanche of Numbers’).

Yet cryptocurrencies pose a serious political problem, not to mention a theoretical one. Put bluntly, cryptocurrencies constitute an insidious attack on the very idea of the state.

This political import is evident from the growing list of countries that have banned their use: Bangladesh and Bolivia in 2014; Iraq, Morocco and Nepal in 2017; Algeria, Egypt, Indonesia and Qatar in 2018; and most notably China, which declared all transactions with these financial instruments illegal last September. Other states – South Korea, Turkey, Vietnam – have passed partial bans on specific types of transactions. Noticeably, no Western financial power features in this list. Only in September this year did the US make initial moves to regulate the sector, a good twelve years after its emergence.

The fundamental characteristic of cryptocurrency is its absence, at least in theory, of any guarantee from a central authority. Money has always derived its value from a convention based on trust. But this fiduciary quality has taken a radical turn ever since the Bretton Woods system (agreed upon in 1944) pegging the dollar to gold was abandoned in 1971. Since then, currencies have become known as ‘fiat money’, defined as ‘government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it’. Modern currencies are therefore based on trust in the central authorities that issue them: the Federal Reserve for the dollar, the ECB for the euro, the Bank of England for the pound and so on.

With cryptocurrencies the fiduciary role played by central banks is replaced by the mutual consent of exchanging agents, whose agreement is verified by the algorithms that decipher the double-key encryption in which the currency is codified. This mechanism of exchange and verification is made possible by a database known as the blockchain, a series of transactions represented as blocks, where any given block is marked by the one preceding it in the chain in such a way that it cannot be modified or duplicated. Thus, as The Economist noted, ‘transactions on a blockchain are trustworthy, cheap, transparent and quick – at least in theory’. Conversely, ‘conventional banking requires a huge infrastructure to maintain trust between strangers, from clearing houses and compliance to capital rules and courts. It is expensive and often captured by insiders: think of credit-card fees and bankers’ yachts’. Cryptocurrencies are like chips on a poker table: their worth is assured by an agreement between the players to assign them a particular value.

This is precisely how Bitcoin was born in 2009. Here’s how the New Yorker (wittily) describes it:

There are lots of ways to make money: You can earn it, find it, counterfeit it, steal it. Or, if you’re Satoshi Nakamoto, a preternaturally talented computer coder, you can invent it. That’s what he did on the evening of January 3, 2009, when he pressed a button on his keyboard and created a new currency called bitcoin. It was all bit and no coin. There was no paper, copper, or silver – just thirty-one thousand lines of code and an announcement on the Internet. Nakamoto, who claimed to be a thirty-six-year-old Japanese man, said he had spent more than a year writing the software, driven in part by anger over the recent financial crisis. He wanted to create a currency that was impervious to unpredictable monetary policies as well as to the predations of bankers and politicians. Nakamoto’s invention was controlled entirely by software, which would release a total of twenty-one million bitcoins, almost all of them over the next twenty years. Every ten minutes or so, coins would be distributed through a process that resembled a lottery. Miners – people seeking the coins – would play the lottery again and again; the fastest computer would win the most money.

Just like players at a poker table, ‘miners’ began selling ‘tokens’ they had won in lotteries in exchange for fiat money – dollars, euros or yuan, that is – until a market was created for bitcoins. Currencies emulating Bitcoin then appeared; a deluge that led to the over 14,000 currencies we have today including, to name only the most important: Ethereum, (ETH), Binance Coin (BNB), Cardano (ADA), Tether (USDT), Solana (SOL), Terra (LUNA).

But even though it began as a lottery, or as a game of poker, Bitcoin was since its inception conceived as a political instrument. In fact, with extraordinary – almost suspicious – timing, the elusive Satoshi Nakamoto published his online ‘manifesto’ in the most dramatic phase of the financial crisis – a month and a half after Lehman Brothers’ crash. In February 2009, he would confirm his reasoning behind the creation of Bitcoin, a system,

completely decentralized, with no server or trusted parties, because everything is based on crypto proof instead of trust… The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.

Naturally, one hardly needed to spell out the reasons for mistrusting conventional finance in the winter of 2008-09. Moreover, for several decades central banks the world over had been shielded from any ‘democratic’ control since the guarantee of their full ‘independence’ from political power. Bitcoin thus presented itself as a tool that could render the state superfluous in its guise as a guarantor of currency of last resort, the final creditors or creditors, that is to say as holder of one of its two remaining monopolies (the other being the monopoly of legitimate violence). Bitcoin was a way of realising Robert Nozick’s ultra-minimalist state in the economic and financial realm, well beyond even the most audacious Friedmanian vision, with the supply of money entrusted to the market. The fascination it provoked in stubborn anti-statists was understandable. For instance, Peter Thiel, founder of PayPal, who, as we learn in a recent article in the London Review of Books,

predicts the demise of the nation-state and the emergence of low or no tax libertarian communities in which the rich can finally emancipate themselves from ‘the exploitation of the capitalists by workers’, has long argued that blockchain and encryption technology – including cryptocurrencies such as Bitcoin – has the potential to liberate citizens from the hold of the state by making it impossible for governments to expropriate wealth by means of inflation.

But anti-finance and anti-bank left radicals – not to mention crypto-anarchists – were also susceptible to its appeal.

Of course, utopias don’t come that easy. The problem with cryptocurrencies is that as more and more are ‘minted’, the code of the subsequent block on the chain becomes increasingly complex, requiring ever more powerful computers to decrypt it. This means that whoever possesses the most advanced computers is able to mine the most tokens.

As a result, a digital arms race began, a fierce contest within the world of nerds. This variegated galaxy of libertarians, anti-finance leftoids and ‘cypherpunks’ has gradually developed into a fully-fledged sect with its own rites and lexicon, its believers, heretics and enemies.

For rather less mystical reasons, Bitcoin’s independence from state control made it irresistible to the world of crime for exchanges on the black market. In recent years, Bitcoin has sometimes been used as a means to sidestep US sanctions and the global tyranny of the dollar (though Iran has a complicated relationship with cryptocurrencies).

Bitcoin and its followers have enjoyed a remarkable proliferation. In 2018 it was calculated that 5% of Americans owned bitcoins. Certain hotel chains began accepting payment in bitcoin, as have PayPal. Cornerstones of finance such as Fidelity and Mastercard have embraced digital assets, and, as The Economist describes, ‘S&P Dow Jones Indices now produces cryptocurrency benchmarks alongside venerable gauges like the Dow Jones Industrial Average’. To come full circle, cryptocurrency futures and other derivatives are now traded on the stock exchange.

At the same time, the very success of cryptocurrency as an idea has undermined its political project ­– for physical, commercial and conceptual reasons.

The physical problem is the result of the ever-increasing number of ever-more powerful computers required to guarantee both the anonymity of users and the non-duplicability of the object of exchange as the number of tokens rises. This consumes a monstrous amount of energy. According to the Cambridge Bitcoin Electricity Consumption Index, bitcoin mining uses 133.68 terawatt-hours (tera indicates thousands of billions) of electricity, a little more than Sweden’s annual consumption (131.8 TWh), and a little less than that of Malaysia (147.2 TWh). Projections say that Bitcoin alone could increase the world’s temperature by two degrees over the next thirty years. Cryptocurrency creators claim to be searching for less energy-hungry algorithms. Ethereum in the meantime marks up its commissions (not coincidentally called ‘gas’) depending on the energy a transaction requires to process. But the problem remains thanks to Bitcoin’s dominant position on the market, and is only aggravated by the growth of its value against the dollar: today a bitcoin is worth $67,000, whilst in September 2011 it was worth just $5. This makes it worth consuming a lot of energy to mine a Bitcoin. And of course, miners install their computers wherever electricity is cheapest: this partly explains China’s hostility to cryptocurrencies; the abundance and affordability of coal there meant that in 2019 it provided 75% of the energy consumed to extract bitcoins. As it turns out, a bitcoin mine is more profitable if it digs next to a coal mine. In short, these imaginary currencies have a devastating impact on our planetary reality. Faced with this undeniable state of affairs, Greenpeace was forced to reverse its decision, made in 2014, to accept donations in cryptocurrencies.

The commercial difficulty lies in the volatility of cryptocurrencies: it is difficult to pay for a cup of coffee with a currency that has a different value when I drink the coffee than when I left home. But stabilising the value in fiat currency would mean losing what is its most coveted asset: its absolute independence from state monetary authorities.  

Conceptually, too, there are issues. They lie in the figure I mentioned at the start: the 14,289 existing cryptocurrencies. Their very number demonstrates an inability to rise to the role, proper to every currency, of ‘universal equivalent’. Even more intriguing is the number of extinct cryptocurrencies, the dead coins, which are around 2,000. To be sure, no currency is eternal, but this figure indicates a veritable monetary pandemic. Their frenzied multiplication and fleeting existence reveal them to be far more crypto than currencies, where crypto signifies not so much cryptography, but rather what is ‘hidden’, ‘covered’, ‘subterranean’ (crypts). Two stories exemplify this.

The first is that of Dogecoin, a cryptocurrency brought to prominence by Elon Musk in 2020 when he announced his decision to invest $1.5 billion in it (the previous year, Musk had announced he would accept cryptocurrencies as payment for Tesla cars, then changed his mind due to ‘environmental concerns’). Dogecoin had been invented in 2013 as a joke by two engineers – Billy Markus at IBM and Jackson Palmer at Adobe – to mock the wild speculation that cryptocurrencies were generating. The perverse result of the joke is that today Dogecoin is valued at $31 billion (thanks above all to Musk). We aren’t far from the tulip mania that gripped the Dutch Republic in the 17th century, or what English speakers call a Ponzi scheme.

The others story is that of the mysterious Satoshi Nakamoto himself who, in addition to inventing Bitcoin, wrote a series of texts that have been religiously collected into volumes – today on Amazon you can find no less than 64 that bear his name. All of a sudden in 2011, he disappeared from the scene. It is not known whether he was an individual, or whether his name was used by a collective. His writing makes clear that his English was excellent – more likely British than American – and that he was familiar with the most advanced academic publications in the field of cryptography. Many have tried to track him down, and various names have been suggested. The point is that there aren’t many people in the world capable of designing a program like Bitcoin, a couple of hundred at most, with all evidence of their activities monitored by the militaries and intelligence services of the global powers, since much of the war in cyberspace is fought with the weapons and the defences they provide. Nakamoto knew this world well: the Economist reports that ‘to register, he used Tor, an online track-covering tool used by black-marketeers, journalists and political dissidents’– and by intelligence services, we might add. We’ve moved from the realm of the Internet of Value into the murky depths of the darknet. Without resorting to conspiracies, it would be extraordinary if national agencies (as well as large banking groups) were not perfectly aware of what led to the creation of Bitcoin and other cryptocurrencies. If not, we’d be obliged to think of them as completely inept. The acquiescence of the great Western financial powers to the opening of this new $2.4 trillion front should give pause for thought. What’s clear is that whoever he is – person, group, company, military apparatus – Satoshi Nakamoto is one of the richest entities on the planet. If current estimates that he owns 5% of all hitherto extracted tokens (18.78 million) are correct, then at the current price his assets would amount to around $60 billion. So much for idealism.

Considering all these limits we’ve mentioned, in fact, cryptocurrencies appear as only one amongst many means of payment that modern capitalism has been generating for more than half a century. The fact that cryptocurrency derivatives are now being traded only undescored their function as chips in international financial poker. And just as players at the end of the night convert their chips at the cashier, so too do the partisans of cryptocurrency regularly cash in for fiat money – that is to say, they remember that without the state, there is no market. But by building this new house of cards – even if it ultimately collapses – they have taken home a lot of old-fashioned pennies with which to buy skyscrapers, fleets of ships, grand estates, industries and commercial chains. Better still, they’ve undermined the autonomy of the state by using the method favoured by neoliberals, that of starving the beast: stealing its fiscal resources so as to compel it to either reduce services or get in debt not to do so, thereby forcing it to submit to blackmail.

Translated by Francesco Anselmetti.

Read on: Victor Shih, ‘China’s Credit Conundrum’, NLR 115.


Zero-Sum Game

In my recent Sidecar piece, I developed the argument that economic disruptions unleashed by surging energy prices – especially in the gas market – can be connected to state climate policies. Adam Tooze, responding in his Chartbook #51, challenges this so-called ‘energy dilemma’ thesis. What Tooze rejects unambiguously is the theory that Western fossil fuel corporations have priced the prospect of climate related policy changes into their investment behaviour, and that this has contributed to the tensions on the supply-side that came to the fore this autumn. While I agree that stronger evidence is needed to reach a definitive conclusion, I nonetheless have several reservations about Tooze’s essay.

In the context of the current crisis, the term ‘energy dilemma’ was coined by Lara Dong, an analyst for the consulting firm IHS Markit, who explained how Chinese authorities have struggled to balance environmental concerns over coal with the need for energy security. Yet this is not a new idea. It can be traced back to the 1970s, when experts became increasingly aware of the tension between achieving affordable and reliable energy provision and limiting the detrimental impact of growing fossil fuel consumption. In 2010, the geographer Michael J. Bradshaw produced a systematic formulation of the dilemma in ‘Global Energy Dilemmas: A Geographical Perspective’, asking: ‘can we have the energy necessary for economic development and, at the same time, manage the transition to a low-carbon energy system necessary to avoid catastrophic climate change?’

Tooze, in his piece, presents the ‘energy dilemma’ thesis as follows:

The canard that continues to circulate is that the supply shortfall is directly connected to climate policy. Too much talk about net zero has discouraged fossil fuel investors, resulting in lower investment, restricted supply and vulnerability to demand shocks.

His creditable aim is to prevent this narrative being used to postpone the green transition. However, it is worth noting from the outset that the definition he presents is a narrow one, limited to the supply constraints that arise from waning private investment in fossil fuels precipitated by climate policies and related discourses. For Tooze, there is an energy dilemma only when climate policies exert an ‘indirect effect’ on private investment that results in limited supply and translates into systemic fragilities.

By contrast, building on Bradshaw’s perspective, ‘energy dilemma’ can be used to refer more broadly to the crisis tendency of capitalism driven by climate policymaking. That is, a dilemma occurs whenever climate policies hamper economic growth. This includes the direct effects of public regulation on economic actors’ operations (in particular, the impact of climate legislation on production, funding activities and consumption patterns) as well as the indirect effects of policy changes – or anticipated ones – on private investment. These elements are closely intertwined. Since both direct and indirect effects place constraints on the supply-side in terms of rising costs or reduced investment opportunities, their outcomes are similar: a cascading effect on volumes, prices and profitability that impacts growth patterns, either directly or via the financial system.

With this broader interpretation of the energy dilemma – in which both direct and indirect factors contribute to a crisis dynamic unleashed by climate policymaking – much of the evidence cited by Tooze does not contradict my thesis but rather confirms it. Take the case of China’s energy crisis. Tooze writes that ‘There is no doubt that deliberate decisions by Beijing to regulate coal-fired electricity generation played a key part.’ Although other details must also be considered, in the context of booming demand a straightforward energy dilemma causality is discernible: binding targets for energy consumption and coal use = energy shortages = manufacturing disruptions and blackouts. This process ‘plays out transnationally and by way of the spillover of Chinese supply constraints both from coal and low-carbon sources, to global LNG markets’ – an observation which appears to give the energy dilemma framework a global dimension, showing how tentative steps in the direction of carbon transition in China fuel tensions on international markets that reverberate in the rising cost of gas, particularly in Europe.

Tooze correctly points out that the attempt of EU authorities to limit their reliance on Russian gas has backfired. The building of oversized LNG storage capacities subsidized by public money in Europe was intended to set up a credible alternative to Russian supply in order to extract cheaper prices from Gazprom. But this integration into global LNG markets has ended up increasing the vulnerability of the region to gas price surges. The internal difficulty of the energy transition is thus compounded by direct exposure to the repercussions of China’s energy metamorphosis. Moreover, Tooze writes that in 2021 ‘the green factor finally does enter the European story’ since ‘a surge in the price of emissions permits in the EU-ETS’, in addition to rising coal prices, prevented European operators from switching back to generating electricity from coal. Here, climate policy directly restricts the possibilities to mobilize cheaper options which would defuse cost pressure – another iteration of the energy dilemma that Tooze purportedly rejects.

However, although many of Tooze’s examples fit within a more broadly conceived energy dilemma framework, the overall thrust of his argument is distinct. He asserts that the dramatic fall in fossil fuel investment since 2015 is not a consequence of climate policies and campaigns but of falling energy prices, themselves related to the American shale-gas revolution of the early 2010s. It is worth interrogating this point further. Focusing on the coal-gas-renewable conundrum in Western countries, we must understand the extent to which the current misalignment between supply and demand is due to decreasing investment in coal, insufficient increase of renewable supplies and/or insufficient investment in gas to bridge the gap – and how climate policies have influenced these interlocking issues.

On this very complex question, Tooze makes two claims. The first is that divestment from coal was mostly driven by a loss of competitiveness vis-à-vis alternative sources of power generation, especially gas. This was clearly a decisive factor in the short-term, but it would be reckless to dismiss the significance of longer-term financial assessments informed by government climate pledges and civil society pressure on investors. For instance, Magnus Hall, CEO of Vattenfal, explained that his company decided in 2016 to divest from coal-fired power generation in Germany for both short-term economic reasons and longer-term prospects related to climate policy:

society is becoming less and less accepting of coal-fired power generation. And there is an economic truth: it is becoming increasingly difficult to make money from coal in Europe. For our part, we sold our mines and power plants because we knew that these assets had become too risky financially.

Tooze’s second claim concerns the ambiguous position of gas supplies. While the use of gas has grown as a substitute for coal – in part because it is a more flexible complement to renewables – investment has increased in the development of LNG infrastructure for imports. However, production has also decreased in Europe and investment in US shale-gas has slackened. Tooze tries to explain the rationale for this slowdown:  

If there is a force holding back new investment in America’s shale industry today, it is not government climate policy, but the insistence by Wall Street that the shale industry actually pay out dividends rather than plowing back its earnings into new drilling.

There are good reasons to doubt this argument. In fact, from the point of view of capital, not investing – or divesting and distributing profits to shareholders – is a logical way to hollow-out a business without a future. In that sense, the financialization mantra, ‘downsize and distribute’, becomes one way to retreat from fossil fuels and reallocate capital to other sectors. Consistent with this, we observe a marked relative devaluation of the Oil & Gas firms’ market capitalization relative to other sectors in the course of the last decade (Figure 1), reflecting investors’ move away from carbon stranded assets and anticipation of deteriorating prospects. The Wall Street Journal likewise acknowledges that ‘Concerns about long-term demand are exacerbating the oversupply of fossil fuels, and companies say they have become more selective about where they invest’, contributing to one the worst-ever write-downs in 2020. All this can be read as evincing a clear – if dramatically insufficient and untimely – shift away from fossil fuel which, in specific segments of the market and amid booming demand, contributed to the recent shortages in coal, gas and electricity generation.

Figure 1. All-World index versus Dow Jones Global Oil & Gas index: last 10 years ( market data)

Tooze states that ‘What 2021 exposes is that the green push since 2015 has been enacted against the backdrop of a regime of low energy prices set by the price collapse in 2014.’ By green push, he means the fact that the replacement of some coal supplies with relatively cleaner gas was supported by a favourable evolution of their relative prices. The big picture is that this is not a viable pathway for green energy, due to methane emissions and underreporting of leakages which suggest that natural gas could be more environmentally destructive that previously thought. However, as far as the energy dilemma debate is concerned, the dividends of a price environment favourable to a shift away from coal simply adds more weight to the idea that the costs of the adjustment are real. Although they were postponed for a couple of years, they are now abruptly manifest.

In this sense, it would be unreasonable to exclude the energy dilemma from our analysis of the present conjuncture. There are straightforward and precise connections between energy market turbulence and climate policies in China and in Europe. The temporary increase in coal supply in China to defuse economic tensions testifies to at least a short-term trade-off between emissions and economic growth. It may be difficult to disentangle the role of low prices from the longer-term decline in private fossil fuel investment since 2015; but we should not dismiss the idea that the latter was partly driven by gloomy forecasts for the sector based on anticipated climate policies. High payouts to shareholders and declining market capitalization can, indeed, be read as symptoms of such forecasts.

Tooze rightly suggests that energy companies are responsible for the myopia concerning the evolution of demand patterns that resulted in insufficient investment in energy. The fact that global investment in renewables and energy efficiency has actually declined since 2015 is indicative of the sector’s lacklustre engagement with decarbonation efforts. Yet although these companies bear collective responsibility, the issue is also systemic. It reveals a deeper coordination problem that enterprises cannot handle via market mechanisms alone. The energy dilemma thesis is in this sense consistent with the IEA’s repeated warnings about the coordination challenges related to the transition, and their exacerbation by slow and inconsistent policymaking:

As the world makes its much-needed way towards net zero emissions, there is an ever-present risk of mismatches between energy supply and demand as a result of a lack of appropriate investment signals, insufficient technological progress, poorly designed policies or bottlenecks arising from a lack of infrastructure.

At present, shortages of coal and gas coincide with booming demand, but if renewable production rapidly expands, electrification accelerates and/or energy consumption significantly slows, a collapse of fossil fuel prices is possible. In spring 2020, oversupply of oil resulting from the pandemic lockdown pushed US prices into negative territory. Further decreases may occur when fossil fuel producers compete to valorize the last sellable resources in a world shifting beyond carbon. However, even if such price slumps take place amid an energy transition, their wider context will be rising costs driven by expensive investment efforts and the deadweight of carbon-asset legacies.

Tooze and I agree on the limits of the price mechanism to guide the green transition and the necessity of macroeconomic planning. When it comes to the energy dilemma question, I sympathize with his reluctance to give fossil-interests any argument that could be used to postpone further greenhouse gas reduction. Yet we must also resist the delusion that crisis tendencies related to climate policy are not at stake. A smooth transition beyond carbon is no longer an option. There is no Pareto-efficient way of eradicating fossil fuel use in a timeframe compatible with the prevention of climate disorders. A zero-sum or even negative-sum game is in play, which means that some parts of the population will bear the cost of the adjustment more than others.

This looming distributive conflict puts drastic constraints on class compromises. At this stage, I do not see what should prevent a large progressive front from rallying in favour of restrictions on the avoidable emissions related to the consumption patterns of the ultra-rich. A class-biased punitive ecology could become an effective means to stop ecologically perverse expenditure from rebounding onto the poorest. It could also be a stepping-stone to broader social mobilizations. Crucially, the primary implication of the crisis tendency is not the impossibility of humanity to handle the challenges of the energy transition, but the additional barriers to collective agency erected by the imperative of capital valorization. Subordinating profit-making to rapid decarbonation is, in my view, a price worth paying for the cause of climate justice.

Read on: Cédric Durand, ‘In the Crisis Cockpit’, NLR 116/117.


Energy Dilemma

The ecological bifurcation is not a gala dinner. After a summer of extreme climatic events and a new IPCC report confirming its most worrying forecasts, large parts of the world are now roiled by an energy crisis that prefigures further economic troubles down the road. This conjuncture has buried the dream of a harmonious transition to a post-carbon world, bringing the question of capitalism’s ecological crisis to the fore. At COP26, the dominant tone is one of powerlessness, where impending miseries have left humanity cornered between the immediate demands of systemic reproduction and the acceleration of climate disorders.  

Prima facie, one might think that steps are being taken to address this cataclysm. More than 50 countries – plus the entire European Union – have pledged to meet net zero emissions targets that would see global energy-related CO2 emissions fall by 40% between now and 2050. Yet a sober reading of the scientific data shows that the green transition is well off track. Falling short of global net zero means that temperatures will continue to rise, pushing the world well above 2°C by 2100. According to the UNEP, nationally determined contributions, which countries were requested to submit in advance of COP26, would reduce 2030 emissions by 7.5%. Yet a 30% drop is needed to limit warming to 2°C, while 55% would be required for 1.5°C.

As a recent Nature editorial warned, many of these countries have made net-zero pledges without a concrete plan to get there. Which gases will be targeted? To what extent does net-zero rely on effective reduction rather than offsetting schemes? The latter have become particularly attractive for rich countries and polluting corporations, since they do not directly diminish emissions and involve transferring the burden of carbon-cutting to low- and medium-income nations (which will be most severely affected by climate breakdown). On these crucial issues, reliable information and transparent commitments are nowhere to be found, jeopardizing the possibility of credible international scientific monitoring. The bottom line: based on the current global climate policies – those implemented and those proposed – the world is on track for a devastating increase in emissions during the next decade.

In spite of this, capitalism has already experienced the first major economic shock related to the transition beyond carbon. The surge in energy prices is due to several factors, including a disorderly rebound from the pandemic, poorly designed energy markets in the UK and EU which exacerbate price volatility, and Russia’s willingness to secure its long-term energy incomes. However, at a more structural level, the impact of first efforts made to restrict the use of fossil fuels cannot be overlooked. Due to government limits on coal burning, plus shareholders’ growing reluctance to commit to projects that could be largely obsolete in thirty years, investment in fossil fuel has been falling. Although this contraction of the supply is not enough to save the climate, it is still proving too much for capitalist growth.

Putting together several recent events gives a taste of things to come. In the Punjab region of India, severe shortages of coal have caused unscheduled power blackouts. In China, more than half the provincial jurisdictions have imposed strict power-rationing measures. Several companies, including key Apple suppliers, have recently been forced to halt or reduce operations at facilities in Jiangsu province, after local governments restricted the supply of electricity. Those restrictions were an attempt to comply with national emissions targets by restricting coal-fired power generation, which still accounts for about two thirds of China’s electricity. To contain the spillover of these disruptions, Chinese authorities have put a temporary brake on their climate ambitions, ordering 72 coal mines to increase their supply and relaunching imports of Australian coal that were halted for months in the midst of diplomatic tensions between the two countries.

In Europe, it was the surge in gas prices that triggered the current crisis. Haunted by the memory of the gilets jaunes uprising against Macron’s carbon tax, governments have intervened with energy subsidies for the popular classes. More unexpectedly, though, gas price increases have precipitated chain reactions in the manufacturing sector. The case of fertilizers is telling. A US group, CF Industries, decided to shut down production of its UK fertilizer plants, which had become unprofitable due to price increases. As a by-product of its operations, the firm previously supplied 45% of the UK’s food-grade CO2 – whose loss unleashed weeks of chaos for the industry, affecting various sectors from beer and soft drinks to food packaging and meat. Globally, the surge of gas prices is affecting the farming sector via the increase in fertilizer prices. In Thailand, the cost of fertilizers is on track to double from 2020, raising costs for many rice producers and putting the planting season at risk. If this continues, governments may have to step in to ensure essential food supplies.

The global and widespread repercussions of energy shortages and price increases underscores the complex fallout involved in the structural transformation necessary to eliminate carbon emissions. While a reduction is underway in the supply of hydrocarbon, increases in sustainable energy sources are not sufficient to meet growing demand. This leaves an energy mismatch that could derail the transition altogether. In this context, countries can either return to the most readily available energy source – coal – or cause an economic contraction driven by the surge in costs and their effects on profitability, consumption prices and the stability of the financial system. In the short term, then, there is a trade-off between ecological objectives and the requirement to foster growth. But does this energy dilemma hold in the medium and long term? Will we ultimately face a choice between climate and growth?

A successful carbon transition implies the harmonious unfolding of two processes complexly related at the material, economic and financial levels. First, a process of disbandment must take place. Sources of carbon must be drastically reduced: above all hydrocarbon extraction, electricity production by coal and gas, fuel-based transport systems, the construction sector (due to the high level of emissions involved in cement and steel production) and the meat industry. What is at stake here is degrowth in the most straightforward sense: equipment must be scrapped, fossil fuel reserves must stay in the soil, intensive cattle-breeding must be abandoned and an array of related professional skills must be made redundant.

All things being equal, the elimination of production capacities implies a contraction of supply which would lead to generalized inflationary pressure. This is even more likely because the sectors most affected are located at the commanding heights of modern economies. Cascading through the other sectors, pressure on costs will dent firms’ mark-up, global profits and/or consumer purchasing power, unleashing wild recessionary forces. In addition, degrowth of the carbon economy is a net loss from the point of view of the valorization of financial capital: huge amounts of stranded assets must be wiped out since underlying expected profits are foregone, paving the way for fire sales and ricocheting onto the mass of fictitious capital. These interrelated dynamics will fuel each other, as recessionary forces increase debt defaults while financial crisis freezes the access to credit.

The other side of the transition is a major investment push to accommodate the supply shock caused by the degrowth of the carbon sector. While changing consumption habits could play a role, especially in affluent countries, the creation of new carbon-free production capacities, improvements in efficiency, electrification of transport, industrial and heating systems (along with the deployment of carbon capture in some instances) are also necessary to compensate for the phasing out of greenhouse gas emissions. From a capitalist perspective, these could represent new profit opportunities, so long as the costs of production are not prohibitive relative to available demand. Attracted by this valorization, green finance could step in and accelerate the transition, propelling a new wave of accumulation capable of sustaining employment and living standards.

Yet it is important to bear in mind that timing is everything: making such adjustments in fifty years is completely different from having to disengage drastically in a decade. And from where we are now, the prospects for a smooth and adequate switch to green energy are slim, to say the least. The scaling back of the carbon sector remains uncertain due to the inherent contingency of political processes and the persistent lack of engagement from state authorities. It is illustrative that one single Senator, Joe Manchin III of west Virginia, can block the US Democrats’ programme to facilitate the replacement of coal- and gas-fired power plants.

As illustrated by the current disruptions, the lack of readily available alternatives could also hamper the phasing-out of fossil fuels. According to the IEA: ‘Transition-related spending […] remains far short of what is required to meet rising demand for energy services in a sustainable way. The deficit is visible across all sectors and regions.’ In its latest Energy Report, Bloomberg estimates that a growing global economy will require a level of investment in energy supply and infrastructure between $92 trillion and $173 trillion over the next thirty years. Annual investment will need to more than double, rising from around $1.7 trillion per year today, to somewhere between $3.1 trillion and $5.8 trillion per year on average. The magnitude of such a macroeconomic adjustment would be unprecedented.

From the perspective of mainstream economics, this adjustment is still a matter of getting the prices right. In a recent report commissioned by French President Emmanuel Macron, two leading economists in the field, Christian Gollier and Mar Reguant, argue that ‘The value of carbon should be used as a yardstick for all dimensions of public policymaking.’ Although standards and regulations should not be ruled out, ‘well-designed carbon pricing’ via a carbon tax or cap-and trade mechanism must play the leading role. Market mechanisms are expected to internalize the negative externalities of greenhouse gas emissions, allowing for an orderly transition on both the supply and demand sides. ‘Carbon pricing has the advantage of focusing on efficiency in terms of cost per ton of CO2, without the need to identify in advance which measures will work.’ Reflecting the plasticity of market adjustment, a carbon price – ‘unlike more prescriptive measures’ – opens up a space for ‘innovative solutions’.

This free-market, techno-optimistic perspective ensures that capitalist growth and climate stabilization are reconciliable. However, it suffers from two main shortcomings. The first is the blindness of the carbon-pricing approach to the macroeconomic dynamics involved in the transition effort. A recent report by Jean Pisani Ferry, written for the Peterson Institute for International Economics, plays down the possibility of any smooth adjustment driven by market prices, while also dashing the hopes of a Green New Deal that could lift all boats.

Observing that ‘Procrastination has reduced the chances of engineering an orderly transition’, the report notes that there is ‘no guarantee that the transition to carbon neutrality will be good for growth.’ The process is quite simple: 1) since decarbonation implies an accelerated obsolescence of some part of existing capital stock, supply will be reduced; 2) in the meantime, more investment will be necessary. The burning question then becomes: are there sufficient resources in the economy to allow for more investment alongside weakened supply? The answer depends on the amount of slack in the economy – that is, idle productive capacity and unemployment. But considering the size of the adjustment and the compressed timeframe, this cannot be taken for granted. In Pisani Ferry’s view, ‘Impact on growth will be ambiguous, impact on consumption should be negative. Climate action is like a military build-up when facing a threat: good for welfare in the long run, but bad for consumer satisfaction’. Shifting the resources from consumption to investment means that consumers will inevitably bear the cost of the effort.

In spite of his neo-Keynesian perspective, Pisani-Ferry opens up an insightful discussion on the political conditions that would allow for a reduction in living standards and a green class-war fought along income lines. Yet, in its attachment to the price mechanism, his argument shares with the market-adjustment approach an irrational emphasis on the efficiency of CO2 emission reduction. The second shortcoming of Gollier and Reguant’s contribution becomes apparent when they call for ‘a combination of climate actions with the lowest possible cost per ton of CO2 equivalent not emitted’. Indeed, as the authors themselves recognize, the setting of carbon prices is highly uncertain. Evaluations can range from $45 to $14,300 per ton, depending on the time horizon and the reduction targeted. With such variability, there is no point in trying to optimize the cost of carbon reduction intertemporally. What is important is not the cost of the adjustment, but rather the certainty that the stabilization of the climate will occur.  

Delineating the specificities of the Japanese developmental state, the political scientist Chalmers Johnson made a distinction that could also be applied to the transition debate:

A regulatory, or market rational, state concerns itself with the form and procedures – the rules, if you will – of economic competition, but it doesn’t concern itself with substantive matters […] The developmental state, or plan-rational state, by contrast, has as its dominant feature precisely the setting of such substantive social and economic goals.

In other words, while the first aims at efficiency – by making the most economical uses of resources – the second is concerned with effectiveness: that is, by the ability to achieve a given goal, be it war or industrialization. Given the existential threat posed by climate change and the fact that there exists a simple and stable metric to limit our exposure, our concern should be with the effectiveness of reducing greenhouse gases rather the efficiency of the effort. Instead of using the price mechanism to let the market decide where the effort should lie, it is infinitely more straightforward to add up targets at the sectoral and geographical levels, and provide a consistent reduction plan to ensure that the overall goal will be achieved in time.

Morgan Stanley’s Ruchir Sharma, writing on this question in the FT, raises a point which indirectly makes the case for ecological planning. He notes that the investment push necessary to transition beyond carbon presents us with a trivially material problem: on the one hand, dirty activities – particularly in the sectors of mining or metal production – are rendered unprofitable due to increased regulation or higher carbon prices; on the other hand, investment for the greening of the infrastructure requires such resources to expand capacities. Decreasing supply plus rising demand is therefore a recipe for what he calls ‘greenflation’. Sharma therefore argues that ‘Blocking new mines and oil rigs will not always be the environmentally and socially responsible move.’

As the spokesperson of an institution with vested interest in polluting commodities, Sharma is hardly a neutral commentator. But the problem he articulates – how to supply enough dirty material to build a clean-energy economy – is a real one, and relates to another issue with the putative market-driven transition: carbon pricing does not allow society to discriminate between spurious uses of carbon – such as sending billionaires into space – and vital uses such as building the infrastructure for a non-carbon economy. In a successful transition, the first would be made impossible, the second as cheap as possible. As such, a unique carbon price becomes a clear pathway to failure.

This brings us back to an old but still decisive argument: rebuilding an economy – in this case one which phases out fossil fuels – requires restructuring the chain of relations between its diverse segments, which suggests that the fate of the economy as a whole depends on its point of least resistance. As Alexandr Bogdanov noted in the context of building the young Soviet state, ‘Because of these interdependent relationships, the process of enlargement of the economy is subject in its entirety to the law of the weakest point.’ This line of thought was later developed by Wassily Leontief in his contributions to input-output analysis. It holds that market adjustments are simply not up to structural transformation. In such situations, what’s required is a careful and adaptative planning mechanism able to identify and deal with a moving landscape of bottlenecks.

When one considers the economic challenges of restructuring economies to keep carbon emissions in line with the stabilization of the climate, this discussion acquires a new framing. Effectiveness must take precedence over efficiency in reducing emissions. That means abandoning the fetish of the price mechanism in order to plan how the remaining dirty resources will be used in the service of clean infrastructure. Such planning must have international reach, since the greatest opportunities for energy-supply decarbonation are located in the Global South. Moreover, as transformation on the supply side will not be enough, demand-side transformations will also be essential to stay within planetary boundaries. Energy requirements for providing decent living standards to the global population can be drastically reduced, but in addition to the use of the most efficient available technologies, this implies a radical transformation of consumption patterns, including political procedures to prioritize between competing consumption claims.

With its longstanding concern for planning and socialized consumption, international socialism is an obvious candidate to take on such a historic task. Though the poor state of socialist politics doesn’t conjure much optimism, the catastrophic conjuncture we are entering – along with price volatility and the ongoing spasms of capitalist crises – could increase the fluidity of the situation. In such circumstances, the left must be flexible enough to seize any political opportunity that will advance the cause of a democratic ecological transition.

Read on: Mike Davis, ‘Who Will Build the Ark?’, NLR 61.