The Challenge of the Financial Crisis for Contemporary Sociology

Bricolage, Latticeworks, and Democracy

In After the Great Complacence, Engelen et al. have powerfully captured the reinvention of contemporary financial institutions associated with the emergence of more complex and risky finance leading up to the 2008 financial crisis. Through their depiction of financial and political elites that could not see the possible harms from recent transformations in finance, they provide a powerful critique of contemporary ‘financial innovation’. They persuasively argue that much of contemporary finance consists of ‘bricolage’, which is ‘a non-scientific improvisatory kind of rationality making structures out of events’ (p. 38). Bankers pursuing these improvisatory strategies to increase transaction fees through increasing volume and transaction steps led to a ‘collective bricolage’ of interconnected circuits that created a vast, highly vulnerable, and often undisclosed, latticework of counterparty obligations leading up to the crisis. Rather than dispersing risk, financial innovation created massive undisclosed concentrations of risk, which ultimately resulted in the collapse of the financial system.

Engelen et al. provide an effective demystification of the claims of the ‘clerisy’ of bankers, government officials, and academic economists regarding the invaluable economic contribution of finance by showing that the extensive economic and social damage caused by contemporary banking in bad times vastly outweighs its creation of employment and taxes in good times. In this vein of the ability of banking to create much greater ‘externalized’ risks than external benefits, the authors suggest that pro-finance elites can be thought of as a ‘distributional coalition’ that seeks to extract rents and dump losses on the state.

In the last part of the book the authors insightfully move beyond the confusing mass of post-crisis proposed regulatory changes to highlight the fundamental fact that, despite the enormously damaging consequences from risky finance, the conditions for highly risky and damaging bricolage of overly large financial institutions remain in place. In pursuing an explanation of this paradoxical state of affairs, the authors note how the structural importance of the complexity and technical nature of finance makes it very difficult for outsiders to provide specific criticisms of how contemporary finance functions. This ‘near monopoly of expertise’ on complex finance has led to those who benefitted from the crisis continuing to play a key role in designing the new systems of financial regulation, which, in turn, has significantly contributed to the narrowing of possible interventions considered. Of particular relevance to the attempts of sociology to address the complexities of contemporary finance, they argue that the need is not for more complex regulation but rather, more ambitiously in this contemporary political-economic conjuncture, for finance to be simplified and for the end of the misrule of contemporary experts through a revitalization of mass democracy.

This is unquestionably an important book. It is a thought-provoking contribution to the debate over the role of finance in contemporary society. The analytical framework of bricolage and undisclosed latticework of counterparty obligations powerfully characterizes how individual bank transactions cumulatively create risks in a haphazard, but ultimately systemic manner. Nevertheless, in pursuing a critical sociological analysis of contemporary risk as manifested in the crisis there are lacunae in this book that need to be addressed. While the authors do provide a powerful description of a frightening inversion of the state through the UKFI, which effectively privatizes the treasury by making the primary goal of the public ownership of banks to maximize shareholder value, they do not touch on the larger macro political and intellectual context in which these shifts between private and public are taking place. Their point about the need to move beyond the insulation of financial markets from democracy is likewise important and astute, but it might be asked whether their repudiation of the importance of the concept of ‘neoliberalism’ (p. 33) is helpful in this regard, given that it is Hayek’s focus on the insulation of markets from collective discretion and (seconding Philip Mirowski’s analysis here) the epistemic inferiority of democratic agents vis-a-vis the market’s information processing ability that is core to neoliberalism. Simply put, is it possible to achieve the authors’ objectives of moving beyond this existing conjuncture of overly large and complex finance without also moving beyond the political-economic dominance of neoliberalism?

Neoliberalism, Social Power, and the State

The insulation of the contemporary global financial system from democratic control has provided financial elites with a social power that is both significant and of questionable legitimacy – the power to create massive levels of risk for society as a whole. The immediate fallout from the ‘Lehman moment’ in the fall of 2008, both in terms of the damage caused by private financial institutions and the massive state intervention, suggested that perhaps the political response to the crisis would presage a fundamentally different relationship between markets and democratically elected governments. The edited collection, The State-Capital Nexus in the Global Crisis, based on a special issue of Globalizations published in 2012, tackles the fundamental issue of whether the response to the 2008 financial crisis by states has actually led to the return of the state. In particular, has the response to the crisis led to an ensuing movement beyond the key principles of neoliberalism, namely economic liberalization, privatization, and continued market creation in uncommodified spheres of life? Secondly, does the growing economic strength of non-western countries, such as Brazil, India, and China, who exhibit quite different relations between state and capital than ‘core’ capitalist economies, and these states’ ability to better manage the crisis, suggest the decline of US hegemony and the rise of a more multipolar global order?

Regarding the first question, the overall view that emerges out of this collection is that state interventionism following the crisis has not presaged the transition to a new ‘state-capital nexus’ (i.e. relation between state and capital), but rather the continued neoliberalization of social and economic life. Rejecting the dichotomy of states versus markets, which implies that greater state intervention entails a smaller role for markets, Van Apeldoorn, De Graaff, and Overbeek distinguish between four roles of the state with respect to capital accumulation: market creation, the correction of markets to prevent socially destructive outcomes, market direction, and external representation of domestic companies’ interests. Using these differentiations in the roles of the state they argue that while it is the case that the state intervened in markets to prevent a full-blown depression, these actions of market direction were only a temporary measure subordinated to the ultimate aim of restoring banks’ profitability and the unceasing expansion of market creation.

In fact, rather than the withering away of neoliberalism, the chapter by Soederberg, further supporting the claims of Engelen et al. regarding the UKFI, shows that in many contexts we are seeing the intensification of contemporary neoliberalism. The state-sponsored ‘debtfare state’ in Mexico accelerates the commodification of social life and the suffering of the least advantaged, under the guise of the ‘democratization of banking’, despite the contribution of these types of policies to the 2008 crisis. Brand and Wissen’s important chapter develops the concept of the ‘imperial mode of living’ to analyse contemporary lifestyles of many in the ‘Global North’, which are premised upon the unlimited appropriation of labour and resources and a disproportionate claim to global environmental sinks. Their chapter is particularly instructive in highlighting the important point that, in addition to contemporary crises of systemic financial risk, the problems of environmental risk cannot be neglected in pursuing renewed growth following the financial crisis.

As mentioned, despite the important insights of After the Great Complacence, one significant lacuna was the refusal of the authors to address the relation between neoliberalism and contemporary finance. While the relationship between contemporary financialized capitalism and neoliberalism is not easy to specify, in Van Apeldoorn’s terms, the continued focus of the neoliberal state on market correction and creation rather than market direction is directly tied into the refusal of states to scale back the size and complexity of contemporary finance. This neglect does matter insofar as the neglect of neoliberalism ignores a key explanandum, which is why has neoliberalism remained so powerful post-crisis, despite apparently failing its experimentum crucis through the massive failure of deregulated financial institutions. Konings’ chapter provides a salutary perspective beyond thinking of the tea party member as a ‘neoliberal dope’. In particular, Konings’ focus on the powerful moral appeal of neoliberal populism to many who do not feel at home amongst contemporary elites suggests the dangers of progressive thought lapsing into overly technocratic approaches.

In terms of the second key question of the decline of US hegemony, the collection exhibits a greater diversity of answers, acknowledging both the challenges to the USA and its many continued strengths. Van der Pijl’s chapter suggests that there is still the possibility that China might grow in its strength as a contender state that could undermine the hegemony of the dominance of the Anglo-American ‘Lockean heartland’. Schmalz and Ebenau, on the other hand, argue that despite the partial social-democratic turn in Brazil, the three leading alternatives to western capitalism, Brazil, China, and India have each undergone significant neoliberalization and, at this point, there has not been a post-neoliberal transformation in any of these key emerging economies. In the concluding chapter, highlighting both continuity and change, Van Apeldoorn and De Graaff note Obama’s continuation of American ‘Open-Door Imperialism’, as well as identifying some of the growing political and economic challenges to American dominance.

This collection primarily focuses on the task of describing the state-capital nexus following the crisis, yet, it does not seek to explain the ‘politics of risk and crisis’ in this context. With the crisis muted into the Great Recession alongside the underlying conditions for risky bricolage and latticeworks of obligation remaining in place, a fundamental question unaddressed in this collection that arises is: why has the political reaction been so different in this crisis from the political reaction from the last major banking and macroeconomic crisis in the Anglo-American world, the Great Depression? In addition to this explanatory question, in the quest to address the massive suffering and inequality generated by the crisis, there is also the important normative question that needs to be addressed: how should the injustice and suffering associated with this crisis be addressed?

Responding to the Eurozone Crisis: Working People and Emancipatory Routes

Crisis in the Eurozone (2012), by Lapavitsas and the other members of the ‘Research on Money and Finance’ group at SOAS, London, addresses the causes of the eurozone crisis so as to forcefully argue for a radical solution to the sovereign debt crisis. Interestingly, in this case, it is the economists who tackle the normative question head-on by directly critiquing the legitimacy of European monetary integration and the impacts of risky finance. They argue that the peripheral eurozone countries, in particular Greece, should pursue a debtor-managed default on their sovereign debt to reduce government debt to a manageable level and that as a part of managing this default Greece should pursue a ‘progressive exit’ from the eurozone, so as to devalue its currency to restart its economic recovery.

In developing their case for default and exit, the authors argue that the ultimate roots of this crisis are not profligacy of the Greek, Irish, and Portuguese governments, but the financial crisis and imbalances within the eurozone itself. They show that in the years leading up to the crisis the debt to GDP levels of the peripheral countries were declining and that it was the costs of bailing out banks as well as the drop in private investment associated with the crisis that caused the increase in government debt. Moreover, they persuasively argue that it is the high leverage of core eurozone banks and these banks’ extreme vulnerability to the sovereign debts of the periphery that has guided the actions of the core countries and the European Central Bank. They thus convincingly argue that what is actually a banking crisis has been cloaked as a fiscal crisis (p. 176), a claim powerfully seconded by the analysis in After the Great Complacence.

In addition to the analysis of the relationship between the crisis and the difficulties in the eurozone, Lapavitsas also provides an incisive analysis of problems with the eurozone itself. In particular, wage restraint in Germany has led to the German state having an increasingly large current account surplus within the eurozone since 2002, which has further exacerbated the current account deficits of Greece, Portugal, and Spain. Without significant wage increases in Germany, the peripheral countries will continue to suffer competitiveness problems, which will have to be addressed by harsh cuts to wages in the periphery countries (and which, in turn, will only further exacerbate growth problems). These problems are magnified by the attempts of the eurozone countries to develop Europe-wide money without any integrated fiscal body to defend the economic integration that needs to come along with monetary integration. Ultimately, the authors argue that the mechanism of the Euro has greatly intensified recessionary forces in the European economy, the burden of which has been borne by the working people of Europe, and that it is only by exiting the eurozone that the peripheral countries can adequately address the crisis.

There is, however, an important tension that runs throughout the study, which is its emphasis on the importance of extensive democratic debate over economic life, in contrast to the existing EU institutions’ control by technocrats, and, in apparent opposition to this, the urgent need to act immediately to stem risks such as capital flight, banking insolvency, and the further deterioration of the Greek economy (pp. 133, 214, 227). While, this unresolved tension brings to light the fact that it can often be extremely difficult to reconcile the need for immediate action to respond to many systemic risks and the time needed for democratic deliberation, by addressing the crisis in such a detailed and intelligent way this study makes an important contribution to thinking through emancipatory routes out of the eurozone crisis.

Conclusion

Each of these studies makes an important potential contribution to understanding excessively risky finance and the crisis. However, as mentioned, these three studies are not by sociologists; moreover, they include analyses of the economic and political dimensions of social life that are not often explicitly theorized in contemporary sociology. At a conjuncture of intensified socially produced environmental and financial risks this raises the dilemma of how sociology should respond to the tension between the conventional limitations on sociology and the potential for a sociological analysis of contemporary risk and recurrent crises. One possibility is to attempt to avoid interaction with other social science disciplines, which, in the context of socially produced risks, would require a significant narrowing of the explanatory reach of sociology. A second is to explore the specific ‘social’ contribution to risks that other disciplines neglect, such as how economic sociology emphasizes the embeddedness of economic transactions, which is neglected by economics. Another possibility is to extend sociology as a discipline that critically interrogates and integrates knowledge and frameworks developed in other disciplines to aid in explaining the shifting bases of social life and practices. While this review suggests some of the possible contributions of this third option, each of these paths is fraught with difficulties. Nevertheless, how sociology responds to the ‘challenge of the financial crisis’ ultimately will have a formative impact on the path that sociology pursues.