The financial crisis of 2008 was not a run of the mill recession. In the words of Gerard Dumenil, a Director of Research at the Centre National de la Recherche Scientifique in Paris, it reflected a “structural crisis,” such as those affecting the course of capitalism about every forty years, namely the late 19th century, the Great Depression, and the 1970. Above all else, it reflects a crisis in the prevailing neo-liberal paradigm, which has dominated policy-making for the past 40 years. According to Dumenil, neoliberalism is a social order, a new form of capitalism, that can be explained by recognising that there are now three classes or “social orders” in contemporary capitalism: the capitalists; the “popular class” made up of wage workers and lower-level salaried employees; and in between there is what Dumenil describes as the “managerial class”. The social order changes when the managerial class sides with one or other of the other two. Thus in the 1930s and in the post war period, the managerial class sided with the popular class against the capitalist class and we had the welfare state etc. In the neoliberal era, the managerial class has sided with the capitalist financial class and the popular class has been on the back foot. With the crisis of neoliberalism, we could look to a new realignment of this ‘social order’, with the managers swinging back again toward the popular class as their position continues to be eroded and their standards of living threatened.
Repairing our economy will require a dramatic reversal of the free market ethos that’s enveloped most of the world over the past few decades. Most importantly, it will require a downsizing of the financial sector, as the financialization of the economy has meant that finance has become central to the daily operations of the economic system. More precisely, the private nonfinancial sectors of the economy have become more dependent on the smooth functioning of the financial sector in order to maintain the liquidity and solvency of their balance sheet, and to improve and maintain their economic welfare. For example, households have increased their use of debt to fund education, healthcare, housing, transportation, and leisure, and they have become more dependent on interest, dividends and capital gains as a means to maintain and grow their standard of living.
But simply reviving the discredited policies of the last 40 years will not lead to a lasting recovery; free markets cannot turn worthless lead into gold. In addition, as the experience of the early 1930s tells us, if left alone to deal with the current problems, market mechanisms will lead to massive deflation, massive bankruptcies, massive destructions of physical assets, and enormous unemployment. This will continue until the debt structure is simplified and the underlying structure of the economy is radically changed. In the process, social unrest will grow to the point that the entire socio-economic system will be threatened.