The Neoliberal Revolution

The familiar narrative about the rise of finance in the 1980s is that financial institutions grew so powerful they came to dominate all other areas of society. Productive investment declined as short-term, speculative investment ballooned. Governments felt unable to regulate and control financial institutions due to their immense size and influence over the economy. Financialization is presented as a neutral and inevitable process over which we, as citizens, had little control.

This narrative conceals more than it reveals. Drawing on Nicos Poulantzas, McCarthy argues that the capitalist state has to be understood as a social relation: “the political expression of active material forces — in particular, class struggles — whose power is both produced and reproduced through its formal institutions.” This perspective informs McCarthy’s, and my own, view of the neoliberal revolution of the 1980s, when finance capital became hegemonic.

Proponents of neoliberal policies argued that their political project aimed to promote human freedom, which had been compromised by the social democratic politics of the postwar period. They proposed measures to constrain the size and power of the state to create more space for economic interactions within the free market, supervised by an economized state apparatus.

As I argue in Vulture Capitalism, neoliberalism has not resulted in smaller states or freer markets, but a regime of oligarchic capitalist planning. This was no coincidence. A closer look at their proposals indicates that the neoliberals never really sought to shrink the state or free the market. They sought to shift the balance of power in society away from workers and toward capital — particularly finance capital. As McCarthy puts it, “The shift toward finance principally involved a fight from above, in which the political establishment acted on behalf of capitalism in general to break the power of the unions and workers in the US and the UK.”

The capitalist state was an active participant in the transformation of society and the economy under neoliberalism. Central banks used their power to wage class war on workers. Police forces were empowered to take on those who dared to fight back. The New Deal regulatory agenda was dismantled and replaced with a global system of rules agreed on by governments and private financial institutions. The state did not shrink under financialization; rather, its power became “intertwined . . . with that of financial institutions.”

Neither was the nonfinancial corporation “taken over” by finance. Instead, corporate governance became financialized — shareholders and executives came to focus on corporate balance sheets and share prices over all other metrics. This shift did not take place because bankers or asset managers somehow took over the boardroom; it took place because the interests of corporate executives and shareholders became much more closely aligned with those of bankers and asset managers.

The results of financialization are well known, and McCarthy charts them adeptly. Households became highly indebted, which increased the risks to workers of fighting back against exploitation. Middle-class households used this debt to accumulate assets, which made them identify with the interests of capital. The growing power of finance transformed the nature of corporate investment, leading to “underinvestment in the specific productive projects that society desperately needs.” Instead, financial institutions focused on short-term returns, aware that the governments they had captured would bail them out if things turned south.

McCarthy’s accurate and comprehensive description of the process of financialization sets up the central dilemma of the book: “Who controls investment?” The answer of course is capital and, in particular, finance capital. And the result of the finance sector’s unaccountable control over this critical economic process is not simply the growth of inequality, the increasing severity of financial crises, and the breakdown of the climate, but also the erosion of our democracy. As McCarthy says:

The twenty-first century has thus far been a century of mesmerizing surplus extraction, worker precariousness, macroeconomic instability, and climate catastrophe. . . . How have the financial institutions and actors that benefit from [these processes] . . . pulled off this self-defeating heist? The answer is their power in politics and the near-complete absence of the power of the demos in modern democracies.

Insulated From Democracy

In a capitalist society, financial decision-making is insulated from democracy, even as the decisions taken by financial institutions shape the trajectory of that society and the lives of all the economic actors who compose it. Financial institutions are responsible for making critical decisions about the allocation of credit and investment, with little public oversight, with the sole concern of augmenting their own wealth and power.

The power of financial institutions within a capitalist economy is a central component of what in Vulture Capitalism I call “capitalist planning.” Free-market theorists would respond by arguing that financial institutions do not plan per se; they simply respond to market signals. The job of a good wealth manager is to pick out the investments that are likely to generate the highest return for his clients. The market decides; financial institutions follow.

But this logic only applies in the make-believe universe inhabited by professional economists. In reality, the decisions made by financial institutions shape which investments become profitable, and which fall by the wayside. Financial institutions do not simply follow the market; they often lead it. These institutions are capable of wielding such power because they are, to some extent, insulated from competition. Yet this immense power is not constrained by any democratic accountability.

McCarthy deftly explains how the power of big finance rests on its “asset power”: that is, its power “over the productive assets at the core of a political economy’s accumulation model that they direct.” Capital’s control over productive assets, McCarthy argues, underlies all the other forms of power it is able to wield in a capitalist economy. Without this control over society’s productive capabilities, capitalists would not have the organizational, financial, and structural resources to “push and prod their way through the chess game of capitalist democracy.”

Rather than constraining the power of productive capital relative to finance capital, financialization has augmented the asset power of capital as a whole by making assets more mobile and more liquid. When capital assets are fixed and illiquid, it is harder to move them out of the country — as in capital flight — or cease investment altogether — as with capital strikes. Financial assets that are fixed in place, argues McCarthy, “always face a greater risk of being subject to democratic demands for appropriation, redistribution, and . . . democratic extension.”

The process of financialization has undermined this fixity, augmenting the asset power of capital. This relationships works in a number of different ways:

States have a far harder time taxing mobile assets, mobility makes the provision of social services more difficult, and labor and social democratic parties find it far harder to win meaningful reform when capital can be diverted outside of a political territory.

McCarthy uses the examples of Salvador Allende’s Chile and François Mitterrand’s France to show how finance capital learned early on how to use its power to discipline sovereign governments into submission.

But it’s not just that financial institutions are able to wield power over workers; it’s that they wield much of their power through workers. The privatization of pensions, a central part of the neoliberal revolution, resulted in the growth of large asset managers, responsible for the investment of other peoples’ savings without any democratic oversight. These institutions have channeled workers’ savings into industries that undermine their interests, such as the oil industry. They then use their power as shareholders to enforce corporate practices that further undermine workers’ interests by, for example, demanding cost-cutting measures such as wage cuts to boost returns.

In McCarthy’s view, the political power of finance capital is in large part “an effect of large numbers of people relying on financial assets to generate their own incomes and savings.” The very fact that we rely on financial institutions to manage our pensions and provide us with loans and bank accounts allows them to deepen and extend their power over our lives.

Democratize Finance

The concentrated power of finance means that investment is weighted toward assets that harm the interests of workers and strengthen those of capital. We live in a world of underinvestment in essential public goods such as affordable housing, public transport infrastructure, and renewable energy. At the same time, companies responsible for wrecking the climate, poisoning workers’ bodies, and corrupting our democracies find it easy to access lending and investment.

This imbalance is an inevitable result of the concentrated power of finance capital. You wouldn’t expect an authoritarian ruler to pay much attention to the interests of his citizens as long as there was no threat of revolution. In the same way, why should financial institutions pay attention to the interests of ordinary people who have no role in financial decision-making processes?

The only way out of this bind, argues McCarthy, is to democratize finance. McCarthy proposes a new vision of economic democracy, based on the ancient Athenian model. He proposes the establishment of new financial institutions governed by “minipublics” — much like the one described in the introduction — that would be charged with determining how the resources of their town, region, or nation should be invested.

The minipublics that would govern these new financial institutions would be chosen through a process of sortition, through which members are selected at random to ensure broad social representation. McCarthy writes:

These new democratized financial institutions, at every scale, should be built on a dialogic process of deliberation that not only [identifies] socially and ecologically desirable ways to allocate investment and credit but also [helps] to articular a common working-class political culture and identity, while at the same time giving a platform to the particular needs, grievances, and concerns of subsections of the demos.

He argues that choosing assemblies through sortition is the “most feasible and desirable way to bring working people into meaningful political deliberation and decision making.” He draws on examples from around the world to make his case. Ireland’s citizens’ assemblies helped to create consensus on controversial issues such as abortion and same-sex marriage. In Bogotá, Colombia, the Itinerant Citizen Assembly was set up to develop collective recommendations to the city council on issues such as urban planning. The government of Ostbelgien, Belgium, has set up a permanent citizens’ council to survey public opinion and develop policy proposals.

McCarthy argues that this model could be scaled up to create a tiered network of institutions governed by democratic bodies that would make decisions around investment. For example, a community-based public bank governed by a minipublic of local citizens might decide to invest in affordable housing, community parks and gardens, or community energy companies. At the national level, a public investment bank governed by a representative panel of citizens might decide to direct investment toward renewable energy or improving public transport infrastructure.

Taking On Capital

The vision McCarthy suggests should appeal to voters across the political spectrum. Those on the Left will appreciate his proposals to challenge the concentrated power of finance capital. Those in the center will appreciate his focus on citizens’ assemblies as a means to strengthen crumbling liberal democracies. Even some on the Right should appreciate the idea of handing power back to communities and allowing them to make decisions about their collective futures. The Master’s Tools provides a model that puts meat on the bones of the pro-Brexit slogan “Take Back Control.”

For precisely this reason, these proposals will be fiercely resisted by capital and its allies throughout the state. Financial institutions would resist any move to curtail their powers over investment. If this model was passed into law, these institutions would likely respond with capital flight or capital strike. But they would probably use their coordinated power to prevent these proposals from entering the political mainstream in the first place.

This is the main challenge McCarthy’s model faces: it requires a mass political movement to get off the ground. The democratization of finance is not something that can happen through legislative fiat. As McCarthy himself acknowledges, the capitalist state is a social relation, and legislative outcomes reflect the balance of power in society. His measures, if implemented, would go some way to shifting that balance of power. But this is precisely why they would never be enacted from the top down.

The catch-22 of democratizing finance is the same one that plagues all debates on the Left about policy change: you need power to get power. This is why it is so important for the Left to focus on building power at the grassroots. Realizing the promise of democratic innovations like community wealth building requires the democratization of finance. But the democratization of finance requires building power in communities, workplaces, and on the streets. These two visions of political change — bottom up, and top down — are not competing, but complementary.

Were the Left able to build the foundations required for the construction of this model, the rewards would be significant. The Master’s Tools promises the creation of a society based on equity, public participation in decision-making, and the redirection of investment toward solving the greatest challenges humanity faces. The book is a clarion call to rethink the foundations of our financial system and build a democracy that works for the many, not the few.