The instability of value
Globalization of a crisis
Surprised by the worldwide financial crisis? You shouldn’t be – the alarm has been sounding for a long time. For years, people have been stressing the growing force of the so-called “economic model” of finance, emphasizing how technological revolutions have expanded the scope of what is possible. Moreover, since the sub-prime mortgage crisis erupted in the USA in 2007, these critics have been condemning reckless risk-taking and lack of direction.1
Among the developments that have been criticized are the weakening of boundaries between high-street banks and investment banks; the avoidance of the accepted rules of finance (banks are supposed to retain one-twelfth of their lending as a deposit, yet they have managed to authorize 32 dollars of credit for one dollar of capital!); the yoking of norms of accounting and evaluation to financial markets; the lack of transparency; asymmetries of information; and the detrimental effect of tax havens.
Critics have realized that the global economy spares nobody; that finance cannot be uncoupled either from the economy or from markets (everything needs credit!); and that economic globalization, rather than being at an end, is at a tipping point. French banks, we were repeatedly assured, were following good, prudential habits. But the banks were not spared and confidence was not restored, even temporarily, until after the European summit in October 2008.
Confidence has returned, but for how long? Is it enough to depend on the markets and on share prices that fell sharply only because they had earlier risen sharply? Do not believe that the future is uncertain: “It is not at all uncertain,” wrote Pierre-Antoine Delhommais. “Household consumption will plummet, house prices will fall, business profits will crumble and unemployment will soar. The only uncertainty is the proportions.2
Although the future has been predicted, it has not been taken into account. That did not stop Claude Guéant, President Sarkozy’s secretary-general, claiming that nobody had seen it coming: “It is not right to criticize Nicolas Sarkozy and the government for not having seen a year ago what nobody foresaw: that today we would be in a difficult situation.” (5 October 2008)
The problem was in fact a wilful blindness about the future. A potential crisis may exist for a long time, but will not be taken seriously until it becomes a real one.3 Politics and the media lurch between periods of optimism and pessimism, confidence and crisis, boom and bust, following a rhythm not unlike that of the financial markets themselves. Every market is fundamentally a market of opinion: financial markets operate like the media, trying to anticipate the demands and expectations of the public.
Politics itself has been sucked up into this system: it is less concerned with defending reasoned convictions than with trying to identify values on the rise among the public. All this nourishes a pattern of behaviour that flips from the euphoria of booms and bull markets to the panic of crashes and recessions. As Jean-Luc Gréau writes:
If economic actors are condemned by psychology to oscillate between optimism and pessimism, then the duties of governments and central banks become simplified. When traders’ optimism produces bull markets there is little need for them to act. Their role is in the lower reaches of the economic and financial cycle, in crises, when a bubble bursts and the economy corrects itself. Then, with monetary and budgetary reflationary policies, they work to contain the depressive spiral.4
What is for sure is that righteous appeal to regulation is not enough. Perhaps we should replay the film, investigate what brought us here. The urgency of the crisis does not prohibit taking a step back and bringing the facts out into the open.
We could start with questions that have been avoided: France’s blindness towards the Anglo-Saxon world; the illusory “retreat” of a state that has been ceaselessly re-deploying itself in ways based on models of private enterprise; the role of the parliamentary Left in financial liberalization and the insistent critique of capitalism from a far-Left piously citing Marx; France’s failure to move on from the dreams of the postwar boom to conceive of a new industrial world; the inability of world governments to imagine new regimes, having all learnt to recite the catechism of the Washington Consensus; French highbrow passions for strictly identity-based interpretations of the future of the world; reliance on mathematical models that become useless in abnormal situations. The list continues.
It doesn’t take a Marxist historian like Eric Hobsbawm to see that the dawn of 1989 was soon darkened by untamed capitalism. Note how profoundly capitalism changed as it entered the new industrial world of globalization and the knowledge economy. The current crisis has been likened to a financial tsunami, a financial 9/11. It has drowned out talk of the demographic crisis, of climate change, even of terrorism. All this demonstrates that globalization is here to stay.
As Jérôme Sgard has written, what we are experiencing is not a crisis of globalization but a crisis within globalization. Economic globalization is no longer what it seemed about to become in the 1990s. A new age of economic globalization, separate from the “Washington Consensus”, has begun – some are now talking of the “Beijing Consensus”. As Michel Aglietta and Laurent Berrebi write:
Developing countries now have a major influence on global capitalism. The Asian crisis signed the death warrant of the “Washington Consensus”, which since the fall of the Berlin Wall governed relations between the western powers and the rest of the world. […] Globalization was imagined as western-style capitalism projected onto the entire world. This ideological fantasy was destroyed by the Asian crisis of 1997, after the serious warning provided by the Mexican crisis of 1994. […] Developing countries formed a radical response to the danger posed by financial liberalisation and runaway dollar debt.5
The current financial crisis began in America, although most countries have been affected, and it is the currency reserves of China and Japan that will supply liquidity to a world that has lost it.6 Herein lies the paradox of the present moment. On the one hand the state seems in the ascendant: it is recapitalizing banks, rightwing governments are embarking on programmes of nationalization. Ideas are being floated about regulation in myriad forms, be it the control of credit-rating agencies, transparency imposed on banks, revision of accountancy regulations in line with market needs, as in Basel I and II. More than ever, we are trapped by globalization; by entering it, one hopes to “calm” it. Closed minds, on the other hand, think we are in the process of escaping.
Let us take a step back to understand what is happening – that is, to understand the role of finance and markets in contemporary capitalism; the mechanisms of a market that is inherently susceptible to fluctuations of opinion; the connectedness and disconnectedness of finance and the real economy; and political devices aimed at confidence-building and confidence-weakening in the crisis we are undergoing. Let us try to understand an historic paradigm shift by drawing on the ideas of authors published in Esprit since the 1990s, even if many of them shared a belief in democratization by the liberalization of the market.
Michel Foucault’s 1982-3 lectures on the importance of the state in neoliberal thought are much cited today. Nonetheless, Jean-Joseph Goux reproaches the author of The Order of Things for having taken his bearings from Ricardo and Marx, rather than from Walras and Pareto, representatives of neoclassical economic theory. The end of the nineteenth century brought a rupture that shaped the world, a paradigm shift in which values ceased to refer to any fixed object. Values – whether religious, metaphysical, aesthetic, or economic – no longer relied on a transcendental idea.
Meanwhile, the stock machine was coming into being; it is not by chance that normative value ended just as markets were developing. The market relentlessly converts values (shares, bonds, derivatives, etc.) into commodities, which is possible because value has itself become volatile. This is no recent phenomenon! Contemporary investigations into financial markets and their derivatives would do well to recall that finance and liquidity are one response to a world that is fluid, unstable, and losing its values.
Yet why should Walras, rather than Marx or Smith, be associated with this historic, historical paradigm shift? The value of work was central to Marx and Smith, the two authorities for liberals and socialists (Foucault, in The Order of Things, regarded work, alongside language and life,7 as one of the three devices of modernity). Walras changed this, sensing a shift from an objective to a subjective conception of value. As Jean-Joseph Goux notes, “The idea of desire as cause of value substitutes itself for the idea that the work needed for production is the only universal and exact measure of economic value.”8
The capitalist world-view absorbed these ideas long before the culture of the 1960s and 1970s and the theories of consumerism and simulacra of desire of Baudrillard and the situationists. The classical economy already imagined value as “beyond” work, utility, or productivity – beyond any single value that could be expressed in a stable currency. Thus the tradeability of value, symbolised by the market, has a long history. Most generally, it exists, “when value is no longer value in itself, inherent in things, or guaranteed by the universal rule of a fixed exchange-rate. Value does not pass from the object to the subject, but is projected by the desiring subject onto things, constituting them in passing as valuable objects.9 Ferdinand de Saussure held that linguistic meaning is constructed through the balance of different elements. Similarly, Walras and the Lausanne school argue that an economy is built from momentary equilibrium within the market system.
Two lessons can be drawn from this rupture in the institution of economic value. First, the economy ceases to be driven by poverty and scarcity. “The neoclassical school began from abundance and satiety, concerning themselves above all with situation of the man who is sated.” Hence the so-called “marginal” approach: What extra pleasure can the possession of one more object bring me? How many hats, how many pairs of shoes, do I need in order to be satisfied? How does my desire guide me, and how does it indicate the threshold beyond which it will be saturated, the threshold beyond which another object will be worth nothing – will be “marginalized”?
This forms the basis for the mathematical formulas of marginalism, which describe the point of indifference, the moment of satiety where a once desired good loses its appeal, and thus its value. The economy is no longer shaped by the need for production within a regime of poverty, but by the perspective of a consumption limited by the fatal boundary of satiety. Scarcity is not lack, but the mark of a loss of pleasure that cancels value and transfers itself to another object of desire.
The financial equivalent of this is anything but harmless. Once we cease to desire an object we change from one valuation to another. The crucial difference is that on financial and commodity markets, desire is unlimited since it focuses less on objects than on money, the desire for which is theoretically infinite. This feature of the contemporary “liquid” world has been analysed well by Zygmunt Bauman. In short, the model of value as an “equilibrium of differences” corresponds to a market model where value is unstable because it displaces itself “without limit”, depending on pleasure and satiety.
At this point, the second lesson comes into view. The market model, freed from the reality of production and tied instead to subjectivity and desire, “spreads across all domains and gradually comes to affect every way of thinking about desire, including ethics, semiotics and aesthetics”. Mallarmé’s dictum, according to which aesthetics is self-referential and the sign does not refer to any object, is explained: “Everything comes down to aesthetics and political economy.” The call to distinguish between the “spheres of justice” and the types of goods and domains that are or are not pertinent to the market – a topic I have repeatedly treated, as has Michael Walzer – collides with the old problem of the general destabilization of value.
Why this detour via Walrus and Pareto? Simply as a reminder that our conception of economics, especially since the revolution of 1870, has depended on Smith’s idea of the market, and on Ricardo and Marx’s ideas of the value of work and of goods. Yet market finance deserves to be understood by following Walras’ approach of the instability of value.
Moreover, market finance sanctions a market with no fixed points, no stable prices, and no value to its prices. The destabilization of value preceded the end of the gold standard in 1972, which explains how a “financial paradigm” came to dominate even the real economy. In a valueless world, the liquidity market aims to convert everything into exchangeable value. Then it can be correctly evaluated and priced.
Keynes, unlike the efficiency school, considered that the future is always uncertain, and that there is no necessary link between the real economy and the financial markets. Is it possible to know the worth of a business at a given moment? Keynes thought not, and therefore that it is not sufficient to reclaim transparency, the best weapon of regulation.10 It is also necessary, he argued, to be concerned about liquid assets when they become vague and undifferentiated.
Irresponsible lenders, insolvent borrowers
If the sub-prime crisis reminds us that value is mobile and fluctuates in domains other than finance, it can also teach us much about the desires and behaviour of participants within the financial market. Yet here too the situation is murky. Lenders’ irresponsible behaviour turns them into gamblers, while market finance relies on agents intervening in a market of opinion that is not rational, however reassuring it might be to believe that it is.
Why has this financial crisis, more than its precursors, touched Europe and the USA so deeply? In part because it began in the United States and moved to Europe, but also because it affected savers and borrowers who are also taxpayers. The political world could not remain in the wings.
But this financial crash has been, and will continue to be, felt more violently because it touches on the borrowing process. Brokers eagerly and recklessly lent to insolvent creditors, knowing that they would re-sell these loans in products characterised as “toxic”. Loans were granted with the knowledge that they would be converted into derivatives and property titles, and mixed with other elements until the point of invisibility. The ability to spread risk across the global market (by means of securitization) caused a loss of prudence in lending mortgages, as if the credit could have been risk-free.11 There is the catch: the risk has not disappeared but become imperceptible, more and more virtual, giving a real appearance to the fantasy of “risk-free risk”. In this context, the risk-taker becomes a gambler:
Commercial and investment banks, specialized institutions, insurers and re-insurers – all are getting involved in the credit markets, often beyond their traditional remits. What they have in common is that they are not brokers or insurers in the classical sense. They have become more or less specialized gamblers in this or that category of wager.12
Yet can we infer that irrational behaviour of the broker-gambler explains his irresponsibility? André Orléan presents two opposed hypotheses, the neoclassical and behavioural, with which to defend a third form, the “self-referential hypothesis”. Neoclassical economists defend the idea of rational actors and the efficient market hypothesis. In other words, they claim market prices reflect an underlying value, presupposing that sufficient information is available for market decision-making, and that there can be an enduring evaluation of value. Behaviourists challenge this belief in “efficient” markets. For them, the irrationality of markets is evidenced by the phenomenon of contagion.
Orléan, although defending the idea of rational actors, argues that the financial economy cannot be distinguished from a “market of opinion”. Two characteristics make this appear irrational. First, decisions are made in anticipation of the decision of other actors. Secondly, market finance is disconnected from the real economy, which is that of fundamental values. “Simply put, traders retain their rationality – but it is a rationality oriented towards the opinions of others, not just on the fundamental value of the asset.”13
Whereas neoclassical economists consider market trading to be rational, to the point where risk is downplayed entirely, Orléan’s self-referential hypothesis proposes that trading is always risky: the nature of the market means that contagion effects and switches from boom to bust are always possible. His position is thus distinct both from the neoclassical view (where, because of limits to arbitrage, rationality need not exclude risk) and from the behaviourist school, which focuses on irrationality:
This step takes from behaviourist economic theory the idea that an investment should take into account the general opinion of the market, but abandons the idea that this general opinion is the product of collective irrationality. Rather, it supposes that all participants are equally rational, and look at the market opinion in order to find the most profitable investment. In addition, behavioural conformity is not a psychological phenomenon, but the result of the nature of market trading, which forces all investors to predict the market price. The sub-prime crisis could form a case study of such contagion.14
Reconnecting disconnected finance
Analysis that pre-dates the current crisis shows a clear need for remedies going beyond those that merely prop up banks and de-freeze the markets. The need must be recognized to reconnect markets with the real economy and to avoid succumbing to the mirage of “risk-free risk”. It is also necessary to see how, ever since the value of value became floating, the stock-market paradigm has affected society and the economy at large. The desire for the disentanglement of the economy from stock markets no longer has much meaning; better would be to understand why they are one of the forces behind it. Michel Aglietta and the regulation school have identified three structural features of the form of development that, in the 1960s, displaced the USA’s primarily industrial economy. The first covers technological developments such as computers (today the Internet) and the “cognitive capitalism” described by Yann Moulier Boutang.15 The second and third features – segmentation and extension of the workforce, and globalization – were set in motion in the name of a new, democratic style of management, breaking with the hierarchical management of the past.
André Orléan, too, identifies links between markets, public opinion, and the potential for shareholder democracy. In The Power of Finance,16 he is able to champion shareholding by imagining that trade unionism could support shareholders in a tripartite system of shareholders, employees, and employers. Pierre-Noël Giraud touches on the same theme:
The bank-based, compartmentalized finance of the postwar boom was an oligarchy. Monetary and financial matters were decided exclusively by a closed club of bankers, industrialists and senior civil servants. […] In comparison, market finance is a dazzling victory for democracy. In the developed world, at least, investors are now all “free and equal in law”.17
But Giraud’s optimism is immediately tempered by the problem of asymmetric information, since a market,
can function effectively only with detailed and widely-available information about the quality of products. Yet the information required in order to evaluate the quality of financial securities is both incomplete and unevenly distributed. Moreover, the information itself is strongly asymmetrical. The result is a democracy of free foxes in a free hen house. It is easy to see who will suffer losses in times of crisis, with or without state intervention: inevitably, it is the worst-informed participants, the small-scale investors.18
Even if the hopes placed on shareholder democracy have largely been disappointed, it is true that shareholder values, such as the explosion in the financial power of shareholders, have steadily subverted the new pattern of growth. Aglietta and Berrebi write:
Shareholder value is a destabilizing element in the social structure of western societies. Combined with international competition, the arbitrary constraint of financial profitability represented by “shareholder value” creates a massive transfer of economic risk onto the workforce. The consequences are immense. The wages of almost all workers permanently stagnate or rise very slowly. Salaries become detached from changes in productivity. Inequality, unemployment and insecurity rise substantially, while social mobility declines.19
Attitudes have changed in the last decade. Analyses of company management have stressed the downside of shareholder value: new management and stock options, golden parachutes, 15 per cent Return on Equity (ROE). Attention has focused on the “instability of shareholder value, at the expense of efficiency and decision-making.”20 In practice, democratic regulation has rarely gained the upper hand. Rather, shareholding has contributed to the fragmentation of the workforce and to the jamming of the unifying mechanisms of business.
Is the call for a re-coupling of finance and the real economy tenable in this context? P-N. Giraud, for example, evokes a situation in which there was absolute separation between banks and market finance. This would mean that, “deposit banks, which would be authorised only to offer loans, would not invest in securities. The central bank would be an exception, and would hold a monopoly on monetary creation”.21 If the banking system were to be isolated from market finance, then “all risk would be concentrated on the stock exchanges and the derivatives markets. This sector would be rendered volatile, and the general public would not miraculously be protected from the macroeconomic fluctuations caused by this instability. Arguing that financial risk and its consequent crises are inevitable and necessary, Giraud admits that the idea of re-dividing risk through securitization is good in theory, “but that the operation of sub-prime loans has been accompanied by calamitous transfers of risk”.
The re-insertion of the financial economy within the real economy would mean going against the current tendency, namely the attempt to build immaterial economies separate from the physical world. Such attempts have been driven by an awareness of the scarcity of raw materials, something identified by Marx and Ricardo, but also the origin of environmental movements. If we exclude a country like Russia, rich in raw materials, disconnection succeeds. Nations have imagined ways to disconnect their economies from the physical world: with finance, with “green” economies, with a war economy (as in the USA), or with credit (as in China). Beyond this, the re-coupling of the financial and the real economy would mean changing the assumptions underpinning the new knowledge economy and web-commerce, as well as the stock-exchange paradigm and the policies of central banks.
We must consider, suggests J-L. Gréau, all major, signifying parameters of the economic state of health: growth, business profitability, employment, prices and purchasing power, borrowing by the different categories of economic agent, the international balance of payments, and sustainable development. We must master a process of growth depending on a plausible development of these parameters. Our options for doing so are limited by the EU demand for balanced budgets, and by central banks’ requirement of controlling inflation.22 Re-anchoring the economy in the real world means abandoning a vision of the economy dominated by the opinion market and by intangible factors. It means renouncing a limited and limiting vision of the economy.
But we must go further, avoiding the pretence that politics has disappeared, to be completely replaced by savage and uncontrollable capitalism. Business models are forming the template for the new tools of state governance and the organization and control of civil servants.23 State and political actors, unable to sustain themselves in the market of opinion (the media), participate (or not) in a “political economy”, an economic project in which the financial market plays a role. Not by chance is the state resurgent in the context of the crisis of mortgages and home building. Most states have more or less openly embarked on real estate policies that favour territorial stabilization and psychological security, encouraging property owning in the context of a weakening welfare state and postwar system of redistribution. The situation is therefore highly paradoxical: the crisis, both in the USA and in Europe (particularly in Spain and Ireland), has broken out on housing, the same terrain upon which confidence is to be re-established.
As the state intervenes to help the taxpayer, the borrower and the saver, it is worth remembering the inequalities that underpin our financial system. In effect, as Thomas Piketty recalls, those who do not pay direct taxes nonetheless fund the state: “Whether working full- or part-time, minimum wage-earners today pay the equivalent of two months’ wages per year in VAT and another month in social security, without counting additional indirect taxes (petrol, tobacco, alcohol) and social contributions, making for an overall rate higher than 50 per cent.”24
Re-establishing confidence is a political matter. Political leaders get themselves heard in an emergency, but it is not certain that they have comprehended the extent of an economy essentially undergoing a crisis of “shared values”, be they economic, political, metaphysical or aesthetic. Renewing confidence need not mean reinventing a transcendental reality, the value of value, an ad-hoc God or an unshakeable gold standard. Rather, it means re-imagining values that can be shared outside the market of opinion, in the media as much as in finance. It also means understanding that risks will always remain, but that we cannot take them like punters at a racetrack.
- Christian Chavagneux, Patrick Artus and Marie-Paule Virard have written articles for the general public. There are editorials by Daniel Cohen and Olivier Pastré, collective works by the Circle of Economists ( http://www.lecercledeseconomistes.asso.fr/?lang=en), and more technical analysis by Michel Aglietta and André Orléan.
- Pierre-Antoine Delhommais, "Que la crise commence!" [Let the crisis begin], Le Monde, 12-13 October 2008. http://www.lemonde.fr/cgi-bin/ACHATS/acheter.cgi?offre=ARCHIVES&type_item=ART_ARCH_30J&objet_id=1055096
- See Jean-Pierre Dupuy and André Orléan in Esprit 3-4/2008.
- Jean-Luc Gréau, L'irresponsabilité des marches [The irresponsibility of markets], Le Débat, no 151, September-October 2008. Author of Capitalisme malade de sa finance [Capitalism sick with finance], Paris 1998, and La Trahison des économistes [The treason of economists], Paris, 2008.
- Michel Aglietta and Laurent Berrebi, Désordres dans le capitalisme mondial [Disorders in the World Economy] Paris 2007, 13-14.
- Ibid., 13-14.
- These relate respectively to economy, language, and biology.
- See Jean-Joseph Goux, Frivolité de la valeur. Essai sur l'imaginaire du capitalisme, [Frivolousness of Values: an Essay on the Mentality of Capitalism], Paris 2000. See also his articles in Esprit, particularly "La double révolution esthétique et économique de 1870 " [The double ecnomic and aesthetic revolution of 1870], November 1998, and "L'argent, valeur sans fondement. Une lecture des Nourritures terrestres d'André Gide" [Money: value without foundation. A reading of Fruits of the Earth by André Gide], January 2000.
- J.-J. Goux, Frivolité de la valeur..., op. cit., p. 11.
- See André Orléan, "Au-delà de la transparence de l'information, contrôler la liquidité", in: Esprit 11/2008. English version: "Beyond transparency".
- For writings on the frontier between aesthetics and economics, see the work of Jean-Michel Rey, and publications by J.-J. Goux such as le Temps du credit [The Time of Credit] Paris, 2002 , and his interview "Qu'est-ce que faire crédit ? Entre littérature et économie" [What does "adding credit" mean? Between literature and economics], Esprit, March-April 2005.
- Jean-Luc Gréau, L'irresponsabilité des marches.
- André Orléan, "Les marchés financiers sont-ils rationnels ?" [Are markets rational?], in Philippe Askenazy et Daniel Cohen (eds.), 27 questions d'économie contemporaine [27 questions about the contemporary economy], Paris 2008, 83.
- Ibid., p. 73-74. According to Orléan, we can discuss the power of finance in terms like those of the media. See his le Pouvoir de la finance [The Power of Finance] , Paris 1999, and "L'individu, le marché et l'opinion : réflexions sur le capitalisme financier" [The individual, the market and opinion: reflections on financial capitalism], Esprit, November 2000.
- Yann Moulier Boutang, "L'entrée dans le capitalisme cognitive", Esprit 11/2008.
- A. Orléan, le Pouvoir de la finance, op. cit.
- Pierre-Noël Giraud, " Forcément inéquitables. Injustes, les crises financières sont aussi imprévisibles qu'inévitables", [Necessarily unequal. Unjust, financial crises are as unpredictable as they are inevitable]. Le Monde, 2 October 2008.
- M. Aglietta and L. Berrebi, Désordres dans le capitalisme mondial, op. cit. 14.
- Michel Aglietta et Antoine Rebérioux, Dérives du capitalisme financier, Paris, particularly chapters 6 and 7. The authors insist on the structural indeterminacy of shareholder value, in opposition to the neoclassical approach which values it for efficiency and trade-offs: "There are many sources of uncertainty. This fact prohibits linking the hypothesis of informational efficiency being linked to a particular model of evaluation. [...] Thus market variations combine different sources of volatility. One is exogenous: uncertainty about the development of future profits and dividends. The other is endogenous: uncertainty about fluctuations in the market's understanding". Ibid., 198.
- P.-N. Giraud, "Forcément inéquitables... ", op.cit.
- J.-L. Gréau, "L'irresponsabilité des marchés", op.cit.
- See Esprit 12/2008.
- Thomas Piketty, in Libération, 2 September 2008.