Inequality, Imbalance, Instability: Reflections on a Structural Crisis


  • Ashwani Saith

    1. professor at the International Institute of Social Studies of Erasmus University Rotterdam (ISS, The Hague) since 1981, and has served as an editor of Development and Change since 1983. He can be reached at:
    Search for more papers by this author

I would like to acknowledge with gratitude the valuable feedback received from Bridget O’Laughlin and Servaas Storm.


Globalization has been accompanied by worsening inequality within core countries of global accumulation processes, as exemplified by China and the USA, where income and wealth inequalities have regained the stratospheric heights of the 1920s. In parallel, there are significantly diverging life chances for the rich and the poor. Extreme inequalities are deemed intrinsically toxic due to their potential for the subversion of regulatory and accountability institutions, the corrosion of societal norms, and the quality of democracy. The present conjuncture of crises provides credible evidence that inequality, especially extreme inequality, is not just a contextual feature or a downstream outcome issue, but a crucial upstream, causal factor in the pathology of the financial meltdown. This article introduces contributions elaborating causal pathologies connecting inequality, imbalances and instability, emphasizing the centrality of global interdependence. Beyond surviving the crisis through assorted fiscal stimuli packages of emergency resuscitation and life support, there are deeper structural policy issues to consider. The crisis briefly opened up democratic space for short-term protective, and long-term corrective interventions. However, this space was equally quickly shut down again, as the political and financial establishment resisted yielding permanent ground: witness the return to fiscal conservatism, the revival of the culture of bankers’ bonuses, and persisting international divisions over coordinated global action. There is an imperative to regulate rampant and dysfunctional financialization; to cooperate internationally for sustainable balanced economic growth; for an alternative politics to pull back from an inexorable slide into plutocracy, to let the people back in. Otherwise we risk lurching from one crisis episode to another, from tragedy to farce, and back again.



The issue of inequality is ideologically turbo-charged: there seem to be unbridgeable schisms between diametrically opposed positions, all held passionately, each invoking sound theory, strong evidence, scientific methods, and sturdy ethics in support. Often debates stall before they can begin on account of differences over the terms of reference and what is construed to be basic common ground between divergent initial positions. Non-comparable or unreliable data; differences of method; variations in the categories, domains and definitions by which ‘inequality’ is to be understood; differences in the time frames and choice of countries or regions; all these combine to create a minefield of preliminaries. Even when this is successfully negotiated to establish some agreement over the behaviour and trends in particular forms of inequality, there is seldom any subsequent consensus over the causal pathologies, over the implications, or the desirability or specifics of corrective intervention. And driving the disagreements are often deeper divisions over value judgements that differently privilege alternatives in societal ways of being and doing. All this notwithstanding, there remain good reasons at present for a critical reflection on the significance of inequality.

First, there is widespread recognition that globalization has been accompanied by rising indicators of various forms of inequality within the countries at the core of global accumulation processes, as incontrovertibly exemplified by the cases of the USA and China; these are downstream outcomes of the growth regimes in place. Both countries have posted spectacular increases in income and wealth inequalities in the recent past. At the American core of global capitalism, the levels of income and wealth inequality have again attained the stratospheric heights they occupied in the 1920s leading into the crash and Great Depression; this has been accompanied by sharply diverging life chances for the rich and the poor. This seemingly local development has profound global implications.

Second, inequality has come to carry an intensifying salience in socio-political terms; there is a rising tide of informed opinion that inequality has powerful, often cataclysmic implications within countries; indeed, this has been forcefully demonstrated in recent political upheavals in North Africa and the Middle East, and in ongoing struggles elsewhere. Even where overt struggles are not immediately visible, high and rising inequalities tend to generate societal corrosion, leading to the perception and the reality of the phenomenon of ‘one country, two societies’.

Third, there is a powerful case that high and unwarranted inequalities are both instrumentally, as well as intrinsically, toxic. Given the multiple complexities mentioned at the outset, such arguments cannot be easily closed, and unavoidably incorporate elements of ethical value judgements. Yet, this line of critique effectively highlights the role of extreme inequality in the erosion of institutional norms and behaviour and the subversion of government, as those at the top end of inequality use all the instruments of power that extreme wealth puts at their command to protect and perpetuate their position in economy, polity and society.

Fourth, the present conjuncture of multiple global crises has thrown up credible evidence that inequality is not just a burning contextual feature, or exclusively a downstream outcome issue, but a crucial upstream, causal factor in the pathology of the financial meltdown. This constitutes a powerful instrumental critique on a global scale: inequality as not simply an outcome of globalization, but a vital structural causal factor responsible for the financial crisis. Indeed, this chain of causation includes the wilful subversion of institutional and government mechanisms of regulation, monitoring and accountability.

Finally, it can be justifiably argued that debating such issues can perform a useful function even when it involves raising new questions that cannot yet be fully answered.


If inequalities were not perceived to be excessive, they would not be as urgent a concern. But, arguably, they are. In the present context, just two sets of statistics will have to suffice to provide an indication of the extent of inequality.

The first group encapsulates the economic dimension. The WIDER study of global wealth inequality does provide some relatively sturdy orders of magnitude (Davies et al., 2008). The picture these data sketch is sobering and not one that would be much affected by statistical quibbling. The richest 1 per cent was found to own 40 per cent of global assets, the richest 2 per cent accounting for one half of global wealth, and the top 10 per cent owning 85 per cent; at the other end, the bottom half of the world's population owned just 1 per cent of global wealth. The Gini coefficient for global wealth for adults was a staggering 0.89 (or 0.80 at PPP adjusted estimates). All indirect indications would suggest intensification in this global concentration of wealth.

In the USA, the Gini coefficient for non-home wealth inequality was 0.91, with the top 1 per cent of households owning 43 per cent of the total non-home wealth in 2007; of the total financial wealth generated between 1983 and 2004, an astonishing 42 per cent accrued to the top 1 per cent; as much as 94 per cent went to the top 20 per cent, with the share of the bottom 80 per cent being just 6 per cent (Wolff, 2010). These figures are mirrored, not surprisingly, in the shares of incremental income generated between 1993 and 2008. Saez (2010: Table 1) computes the share of the growth captured by the top 1 per cent to be 52 per cent, rising to a remarkable 65 per cent for 2002–07, the years of the Bush expansion.

In 2007, of all business equity, the top 1 per cent accounted for 62 per cent, rising to 93 per cent for the top 10 per cent; of all financial securities, the figures were 61 per cent and 99 per cent respectively; of trusts, stocks and mutual funds, 38 per cent and 81 per cent (Domhoff, 2011: Figure 2a). This is the top end group that effectively owned and captured most of the gains from the process of global financialization.

Around 2005, the average annual pay of CEOs in typical top-500 corporations in the US was US$ 10.9 million, when the average wage of workers was US$ 41,861 — all of 0.38 per cent of the boss's take, or for every one dollar the worker earned, the CEO made US$ 262 (Mishel, 2006).

But just as the worker's take was a Lilliputian fraction of the average CEO's pay, so was CEOs’ pay dwarfed by the spoils of the managers of hedge funds in the financial sector. In 2006, the highest earning Wall Street CEO earned US$ 54.3 m in total compensation — which was 3.2 per cent of the earnings of the top hedge fund manager who had earned US$ 1.7 bn (, 2007). The impoverished top Wall Street CEO was Lloyd Blankfein of Goldman Sachs; still the poor firm, ‘nicknamed Goldmine Sachs, disclosed that it had set aside GBP 8 bn., about GBP 2 bn. more than the entire stock market value of British Airways, for employee compensation’ (Wachman, 2006). In 2004, in the golden age of hedge funds, the pay of hedge fund managers broke the billion barrier: the top earner, Edward Lampert, pocketed US$ 1.02 bn (Hopkins, 2005). A few years later, David Tepper, who bought up bank stocks as they slid down the tubes, made US$ 4 bn for the year 2009 (Taub, 2010; see also Schwartz and Story, 2010). In different forms and to differing degrees, this profile of top end inequality is mirrored on a global map.

The second statistic condenses dynamic social inequalities: longevity. The data are again for the US, reflecting the downstream social realities of the dramatically widening economic inequalities. Statistics on life and death in the time of inequality are sobering (see EPI, 2010). In the USA in 1986, male life expectancy at age 65 for the lower half of the earnings distribution was 15.0 years; by 2006, it had taken a small step up to 16.1 years. For the upper half of the distribution, the figures were 16.5 years for 1986 (which is 1.5 years, or 10 per cent more than the level for the lower half); but for 2006, the figure was 21.5 years, i.e., 5.4 years, or 33.5 per cent more than the level for the lower half. Given the known difficulties of incrementally adding years to already high levels of longevity, this huge widening of the gap suggests staggering changes in inequality in the effective access to preventative and curative health. There can be little doubt that the contrast would be far starker for the top and bottom quintiles or deciles of the population.

Finally, since global inequalities are central to the argumentation of the debate, it would be appropriate, perhaps, to comment briefly on the proposition espoused by some researchers that in the globalization era, levels of global income inequality have declined somewhat, if country borders and intra-country inequalities are not taken into account. This paradoxical result arises, of course, from the increase in the average per capita income of China and India. This poses the Chindian paradox: what is the intrinsic value of claiming that global inequality has diminished when, within a large majority of countries, inequality has actually increased over the same period? And all the more so, when inequality has increased dramatically within both China and India, the two countries whose rapid growth of average incomes is the basis for the opposite result at the global level? Subjective perceptions arise from one's sense of identity. Does an Indian or a Chinese national regard herself essentially in global terms without noticing that she was born in India, and will probably live and die there without leaving its borders? Will she perceive and calibrate her relative societal and economic position in comparison with some imagined global median person or against her neighbour, her employer and the high-profile plutocrats who run the country? This is clearly a class issue. The global perspective might well be gaining greater relevance as a referential frame for the widening imaginations and aspirations of the rising new elite and middle classes; but for the Indian aam aadmi (or, ‘the common man’) such an assumption surely would be untenable. Most Indians and Chinese are likely to directly perceive and react to the inequalities they know and experience in their daily lives, and are perhaps unlikely to be impressed by a methodological interpretation which tells them they should not be perceiving or experiencing what they do.


Propelled by these concerns, the debate that follows provides a critical reflection on the salience of inequality with a sharp focus on global inequality, imbalances, instability and crisis that have been the hallmarks of the globalization process. It elaborates a set of key propositions focusing on the causal pathology connecting inequality, imbalances and instability at the global level. The moving spotlight tracks trends and relationships at the evolving core of the global capitalist system, where developments in the US, Europe and the giant emerging economies hold centre-stage. Collectively, these innovative contributions argue that dramatically rising income and wealth inequality in the traditional heartlands of capitalism served as the propelling upstream causal force creating the financial crisis further down the pathological chain. Extreme inequality, and the forms of financialization that it induced, are identified as key suspects and are seriously implicated in the crisis. This analysis is set against the backdrop of wider structural, contextual and conjunctural factors. It is appropriate to bear in mind that no single set of contributions, especially when focused on a zone of special interest, can be expected to holistically address the full gamut of inequality-related issues.


The papers that follow in this debate section develop independent perspectives on the salience of inequality, especially extreme inequality, both for the explanation of the current financial crisis and also for a sustainable and equitable global development process. The strands of their arguments can be woven together and supplemented to develop a synthetic, yet innovative, argument linking inequality, imbalances and instability. There are three central messages that can be elicited from these contributions.

The first is on the degree and direction of economic inequality, in particular; extreme inequalities in wealth and income, that have emerged and taken hold at the global core of capitalist accumulation processes, understood here to include the major emerging economies that provide much of the global growth impulse. The empirical significance of inequality, especially top end inequality, is firmly established in the various contributions (which are reviewed in the following section).

This introduces the second fundamental contribution, collectively, of the authors of the debate. There is a powerful and innovative argument that these extreme inequalities formed a vital structural factor in the origin and propulsion of the financial crises. The profound potential significance of such a position is obvious. Without denying the relevance of other explanatory factors such as governance and regulatory deficits, this argument places the prime emphasis on inequality and has the powerful and distinctive policy implication that similar crisis episodes are likely to be reproduced if the underlying structural conditions, including especially forms of financialization that are increasing detached from the real economy, are not frontally addressed. The phenomenon of extreme inequality, and its concomitants, thus gain primary importance. That said, there is little to suggest that an economic and political system characterized by such extreme inequalities has the capacity to purge and reinvent itself in some more viable and socially congenial form, especially when all its mechanisms and engines of power have been utilized thus far to protect the privileges of inequality and to ensure its unfettered perpetuation. This spotlights the need for some version of a relatively autonomous state that has the imagination, foresight and political instruments to protect finance capitalism from its own lurid excesses. A fundamental crisis can focus political imagination and agency on prioritizing collective societal need over competitive corporate greed — but such windows of opportunity for endogenous correction are often narrow and ephemeral, as the system manages to stabilize and protect itself, and then to lurch on to the next episode.

The third major axis in the debate is its sustained emphasis on the centrality of global interdependence; like it or not, we are all in it together. The way that the trinity of extreme inequality, global imbalances and financial instability plays out at the core of global accumulation processes has profound implications also for those countries that simply stand and stare from the peripheral sidelines. While extreme and detached financialization became a source of enrichment for a global elite, the acutely regressive costs of the crash and the ensuing bailouts have to be carried by populations that were hostages, passengers, or onlookers. Resolving such domestic vulnerabilities is predicated upon global factors, as never before.


Gabriel Palma (2011) sets the scene on a panoramic scale with his magisterial treatment of the patterns of inequality using cross-sectional, as well as country-specific data and analysis. He claims that ‘about 80 per cent of the world's population now lives in regions whose median country has a Gini close to 40; … the “upwards” side of the “Inverted-U” between inequality and income per capita has evaporated’. He establishes the operation of ‘centrifugal’ forces applying to the shares of the top 10 per cent and the bottom 40 per cent, and ‘centripetal’ forces applying to the remaining 50 per cent, implying that ‘half of the world's population have acquired strong “property rights” over half of their respective national incomes’, with the other half ‘up for grabs between the very rich and the poor’, with, overall, ‘globalization thus creating a distributional scenario in which what really matters is the income-share of the rich’.

George Irvin (2011), developing the line of argumentation from his major earlier intervention in the discourse on inequality and the super-rich in the USA and the UK (Irvin, 2008), emphasizes the stagnation of real wages alongside a decline in the share of wages in national income, and questions the sustainability of a growth process built on deregulated financialization.

Photis Lysandrou's focus is sharply on the core accumulation, rather than profit-seeking, process in the financial sector. Using an unorthodox Marxian framework, his explanation of the crisis deviates from conventional ones that highlight the role of lax governance and regulation. Innovatively, he identifies as the key factor a global excess demand for securities, which in turn was driven by ‘the huge accumulation of private wealth’ (Lysandrou, 2011). A distinguishing feature of his construction of the crisis transmission mechanism is that ‘the commodities in question are financial commodities rather than material commodities. Prevented from surfacing “below” in GDP space in the form of an excess supply of material goods, the effects of exploitation have instead surfaced “above” in capital market space in the form of an excess demand for debt securities’. Top-end inequality, then, takes centre-stage as the key driver of the specific risk-bearing, profit-seeking forms of unsustainable financialization, and inexorably of the crisis.

Building on this, and on earlier contributions (Lim, 2008), Michael Lim Mah-Hui and Khor Hoe Ee (2011) provide a cogent total analysis of the link between inequality and the financial crisis. At the core is ‘the contest between labour and capital for a greater share of economic output, with capital gaining a greater share’; the resultant under-consumptionist tendencies are ‘“resolved” by the financial system through the recycling of funds from the rich minority to the average household in the form of credit’ via faulty financial engineering processes that implode. Similar under-consumptionist tendencies are also observable in China, and at a global level these are absorbed through the recycling of Chinese surpluses to the US, adding further debt to the bubble, or fuel to the fire. Inequality, global imbalances and the crisis are thus intimately connected.

A common theme that is developed by Lim and Khor, Lysandrou and Irvin is the detachment of the financialization process from the real economy, where the forces and agents that drive the former increasingly lose connection to the state and trends observed in the latter. Yet, the real economy is hardly insulated from the consequences of the financial crash; there is a certain dysfunctionality between the parameters of real accumulation and financial profit-seeking.

Finally, Cripps, Izurieta and Singh (2011), using the Cambridge Alphametrics Model (CAM), illustrate the consequences of persisting post-crisis global imbalances, and seek to answer the huge question ‘whether growth convergence can be sustained in the global economy without compromising welfare and without causing major crises’. They emerge with the salutary conclusion, amongst other things, that a reorientation of Chindian accumulation processes in favour of internal markets ‘will not be sufficient to correct global imbalances or induce improved growth rates in other developing countries’; much more would be called for at the policy level.


Substantively, the debate would benefit, and perhaps be better appreciated by the generalist, by being located within wider contemporary discourse. Just three links to the recent flow of ideas and work will have to suffice.

First, the sections of the debate need ideally to be read against the post-Keynesian systemic backdrop of Minsky's work on financialization and the ‘money manager phase of capitalism’, involving the rise of a ‘shadow banking system’ in which ‘the rapid growth of leverage and financial layering allowed the financial sector to claim an ever-rising proportion of national income’ (Nersisyan and Wray, 2010). Earlier, Minsky had argued for constraining market behaviour ‘if amplified uncertainty and extremes in income maldistribution and social inequalities attenuate the economic underpinnings of democracy’ (Minsky, quoted in Wray, 2009: 22).

Second, one of the roots of the analysis leads deep into another crucial structural domain: labour rights and wage suppression. The global accumulation regime is characterized by a symbiotic lock-in between two growth models: the one driven by credit-financed consumption as in the US, and the other by exports as in Germany, Japan and China. Stockhammer (2010) argues that both suffer from demand deficiencies arising from wage suppression. Lapavitsas et al. (2010) provide a striking analysis of the impact of such strategies that relatively impoverish labour while creating financial imbalances between core and periphery within the EU zone.

A recent contribution by Kumhof and Ranciere (2010) develops the inequality–crisis nexus of the debate through a comparative modelling analysis of two periods, 1920–29 and 1983–2008. Their analysis tends to strongly support the argument (developed by the authors in this debate section) that inequality, and especially extreme inequality, had a fundamental causal role in the emergence of the crisis.1 Kumhof and Ranciere argue that ‘high leverage and crises can arise as a result of changes in the income distribution’; empirically, both periods ‘exhibited a large increase in the income share of the rich, a large increase in leverage for the remainder, and an eventual financial and real crisis’. They conclude:‘The crisis is the ultimate result, after a period of decades, of a shock to the relative bargaining powers over income of two groups of households, investors who account for 5% of the population, and whose bargaining power increases, and workers who account for 95% of the population’ (ibid.: 3). Their model demonstrates how ‘these features arise endogenously as a result of a shift in bargaining powers over incomes’; in Kaleckian spirit, a key intervention identified is ‘the restoration of the lower income group's bargaining power’. The erosion of bargaining power of workers arises, as is well-documented for the period since the Reagan–Thatcher political onslaught on labour, from a set of mutually reinforcing trade, technological and political factors.

The third thread is the one that securely ties global imbalances and the financial crisis. Obstfeld and Rogoff (2009) argue that these are ‘products of common causes’: ‘both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through US and ultimately through global financial markets’, which eventually ‘created the toxic mix of conditions making the US the epicenter of the global financial crisis’, enabled by the possibility for the US to borrow cheaply abroad to manage its books at home, including the financing of the housing and credit bubble.

These three strands are clearly intertwined, and are variously addressed, and in several respects further advanced, in the contributions to the debate.


What is to be done? Does the wisdom of the contributions transcend from diagnostic into prescriptive space? Editorially, it has to be emphasized that the essays were directed at unearthing the logic of the process generating crises and were not primarily intended to design alternative policy frameworks in any detail. Regardless, the papers are rich with strategic import, and a string of policy inferences, whether direct or implicit, can be elicited from the analyses; each contribution identifies some points of intervention for pre-emptive or corrective action.

Beyond surviving the crisis through various forms of fiscal stimuli packages providing emergency resuscitation and life support, there are more structural policy issues to consider. The link between inequality, imbalance and instability, analysed and strongly supported by the contributions to the debate, also emphasizes the urgent need to develop more socially desirable and sustainable growth strategies globally. Overall, the strategic policy messages are clear: the imperative to move from extreme inequality to more egalitarian frameworks; from exports to domestic demand-led accumulation; to rebalancing global consumption implying, for instance, less in the US, more in China; creative productive and development-oriented uses of cumulative balances in surplus countries; re-establishing an appropriate role for the state both nationally and globally, within a suitable architecture of cooperation; and wide-ranging regulation of financialization to tether it meaningfully to the real economy,2 taking the cue from Keynes's pithy witticism that ‘speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation; when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’ (Keynes, 1936: 159).

On the issues of high-end inequality, there is a sobering message from Palma (2011):

For anybody seriously concerned with lowering inequality the policy implications of this ‘homogeneity in the middle vs. heterogeneity in the tails’ are as crucial as they are straightforward. Since the middle classes are normally able to appropriate — and defend— a share of national income that is similar to their counterparts in other parts of the world, countries with high inequality are simply those in which the rich are more successful at subsidizing their insatiable appetite with the income of the bottom 40 per cent. The direction for policies that genuinely aim to reverse this state of affairs is therefore clear. In other words, this is one of those few issues on which the problem is not ‘knowing what to do’, or ‘knowing how to do it’, but of having the conviction and the capability to do what is obvious.

Lim and Khor's analysis reinforces this policy focus: ‘rising income inequality is a structural problem that requires a major shift in policy away from market fundamentalism towards some form of policy to raise real wages concomitant with productivity increases, and to redistribute income from the rich to poor and middle-income households’.

There are also more specific policy implications that emerge from the work of the authors of the contributions to the debate. Lysandrou (2009: 1) identified three specific globally coordinated policy interventions in tax policy: closing down of tax havens ‘to prevent trillions of dollars from disappearing off governments’ radar screens’; harmonizing of tax regimes to prevent globally mobile capital from generating tax competition, inducing a race to the bottom in receiving countries; and restoring progressivity in the tax structures. Even while calling for a ‘global version of Keynesianism… to help to prevent future crises and to help finance the resolution to the present one’, Lysandrou notes that ‘it will be difficult for governments to institute the necessary tax reforms … given the pressure exercised by the very wealthy’. ‘If ever there was occasion and opportunity to exercise that countervailing pressure, it is now’; and, with some optimism, he asserts, ‘it can be done’ (ibid.: 2009: 2). In his contribution to this debate, Lysandrou argues that ‘National governments can be made to take coordinated action to restructure and harmonize tax regimes providing strong countervailing pressure is brought to bear on them, and for this to happen all that is required is that the world's progressive forces give the same overriding priority to tax regime change that the world's rich give to opposing any such change’ (Lysandrou, 2011). One could wholeheartedly agree, though in this projected battle of political wills, such intellectual optimism over the power of the excluded majority still awaits consummation. Meanwhile, important blueprints of potential interventions such as this one languish on the shelf.

At the level of global imbalances and the relationship with US deficits, McKinley and Izurieta (2007) argue that the ‘gargantuan’ US current account deficits generate matching global imbalances which, apart from posing a huge danger:

also cause a grossly inequitable distribution of global resources. Capital is ‘flowing uphill’ to rich countries — overwhelmingly to one rich country, the US. A stark illustration of this inequity: the average US current account deficit in recent years has been one-third higher than the total Gross Domestic Product of Sub-Saharan Africa…

US households have monopolized goods and services that could have a greater impact on global human welfare if they were consumed in poorer countries; … these financial resources could be invested at a higher social rate of return by low-income and middle-income countries in their own development.

They argue cogently for global policy coordination for corrective interventions that would restore balance and equity between nations: a curtailing of the voracious rate of US over-consumption; a stimulation of domestic demand in the surplus economies; and a redirection of surpluses to the development needs of poor countries. ‘For such countries’, they point out, ‘greater policy coordination is not an unrealistic ideal. It is an urgent necessity’. It is left to the reader's creative imagination to establish the realism of implementing such a policy prescription — no matter how ‘necessary’ it might be.

Following on from Izurieta and Singh (2010), Cripps, Izurieta and Singh (2011) strengthen and widen this policy imperative, underscoring the need for global cooperation and coordinated action for correcting the structural imbalances. At the same time, they also point to the wisdom and need for a reorientation of the engines of Asian growth, from their massive reliance on exports, towards a widening of the internal market based on an endogenous social rebalancing of the Chinese and Indian growth processes in favour of internal demand based on income redistributions. However, even as the symbiosis between global and intra-country rebalancing becomes explicated, using the results of alternative scenarios derived from the Cambridge Alphametrics Model, they argue that such strategies would not be enough; a wider, globally coordinated policy effort is called for if growth convergence and sustainability are to be reached.

What these, and legion other analysts, establish is the imperative of enacting such a new policy paradigm. Equally, what none of them manage to demonstrate is the political viability of such recommendations which effectively invite the well-ensconced wealthy to bear a large share of the cost of the global structural adjustment necessary for a transition to a more stable and equitable global growth scenario. Here, the biggest and growing hurdle is the degree of inequality that serves as a bulwark for the super wealthy to protect their position through fair means and foul. For instance, Irvin (2011) effectively argues that the likely precondition for an alternative democratic model of sustainable growth is the socialization of investment; Lysandrou (2011) goes a step further: ‘in light of recent structural changes in the capitalist world economy, this demand might be amended to one that calls for the socialization of ownership of the financial claims on the means of production; a globally co-ordinated system of wealth taxation would be a first crucial step in this direction’. While in terms of its political-economy rationale these conclusions might be impeccable, they remain optimistic, if not impossible, in terms of their political feasibility. The more extreme the concentration of wealth and income at the top of the pyramid, it might appear, arithmetically, the greater should be the potential democratic weight behind the call for corrective policies that reduce inequalities, enforce transparency and accountability, and restore better health to the global economy. However, the calculus of politics is more convoluted than simple arithmetic: greater inequality at the top also implies both greater stakes and greater power in protecting it, making the system more brittle, compromising regulatory institutions and democratic political processes.

Crisis: A Democratic Moment?

For a while, that aphorism, ‘every crisis is an opportunity’, did seem to resonate with reality; democratic space opened up inducing optimism, at least amongst those congenitally predisposed to be optimistic, that a deep systemic overhaul was imminent.

There were many flags and pointers. The open secret of bankers’ bonuses was ‘outed’ and hit the headlines, and governments everywhere suddenly went hoarse decrying this ‘moral outrage’ and promising to eliminate this travesty; there was a resounding call to bring the crook to the book, and indeed, at least one such was. Emergency measures were put into place to isolate and neutralize toxic debt, however much and wherever it might be, to prevent a banking collapse and systemic meltdown. Gigantic packages of fiscal stimuli were to be put in; not just cross-Atlantic but global policy was to be coordinated, including the ping-pong between the US and China over surpluses, reserves and exchange rates. The poor were to be protected; there were calls for redressing the slide in labour earnings, for progressivity in taxes to control inequalities, and (for good measure) to go green and sustainable; people were to be brought back in. In short, the crisis made instant democrats of plutocrats, shotgun Keynesians of monetarists, and reluctant egalitarians of libertarians.

But it seems it was all too good to be true and not to be: the crisis could also be used as an opportunity not to transform, but to stabilize the system and insulate it from its own worst excesses. Indeed, Nersisyan and Wray (2010) criticize the US and wider policy response to the crisis as largely an attempt to rescue money manager capitalism: ‘moreover, in the case of the US, the bailout policy has contributed to further concentration of the financial sector, increasing dangers. We believe that the policies directed at saving the system are doomed to fail’. If indeed some democratic space had opened up, it was equally quickly closed down, as the political and business establishment put up stiff resistance to yielding any permanent ground.

Here, three post-crisis tendencies deserve mention. The first is the return, especially in the EU, to fiscal conservatism, backed by the centre field of politics; in the US too, the government has had to fight desperately hard to maintain a credible fiscal stimuli package, with continual challenges on taxes, on health, on financial regulation. The rearguard action against progressive forms of fiscal stimuli resonated with the charged cross-Atlantic exchanges over the right-wing practice of what Joan Robinson had termed ‘bastard Keynesianism’ decades earlier.

Second, there is a return to the bonus bonanzas of old: in 2009, the wallets of the twenty-five top-earning hedge fund managers were even more overstuffed (with US$ 25.3 bn) than before the crisis in 2007 (with US$ 22.3 bn); the top earner cashed in US$ 4 bn. It is an ill wind indeed that doesn't blow a few more billions into the baskets of the bankers. Bankers’ bonuses have bounced back, cocking a snook at all and calling the bluff of compromised governments. Responding to a new tax on bonus income in the UK, banks tended to raise the gross amount of the bonus so that the banks, and not the staff, absorbed the tax; when some other taxes on the bonus component did bite, banks raised the basic salaries so as to absorb the tax burden. In short, not much has changed, and the system has largely reverted to business as usual as far as the bonus culture is concerned. In the words of Brendan Barber, General Secretary of the Trades Union Congress in the UK: ‘the current Government has matched fighting talk in front of the cameras with pathetic subservience behind closed doors’ (London Evening Standard, 2011).

The third pertains to one of the stronger messages to emerge from the debate and the literature, namely, the imperative for coordinated global action. The course of reality since the crisis gives few grounds for satisfaction or optimism. The chessboard is laid out differently on the two sides of the Atlantic, and the US and EU strategies form polar opposites in some key respects. The US, perhaps protected by the dollar's position as the reserve currency, and bolstered by the support provided by the Chinese recycling of its dollar surpluses back into US paper, maintains an expansionary stance using fiscal stimuli based on budgetary deficits. In contrast, on the EU side of the Atlantic, there is a sharp return to conservative fiscal prudence, with deep budgetary cutbacks that will inevitably have a significant regressive social impact. Here the underside of the euro has been exposed through the potentially fatal sovereign debt crisis leading to the emergency patching together of a 750 bn euro war chest to support embattled countries, led mostly by right-wing governments. The EU has witnessed ‘a certain amount of rush for the exits on fiscal policy’3 involving massive cuts to reduce the deficit and reassure markets; if the cuts are heavy in the secure EU core, they are draconian in the challenged EU periphery.

The brief retro affair with Keynesianism is over as economic controllers rebound into the familiar, even if oppressive, arms of conventional theories of fiscal prudence. ‘Crises often present opportunities, and it looks like Europeans are eager to take advantage; many studies show that budget cuts prepare the way for above average growth’.4 Nothing better, then, than for the EU to cut its deficits, squeeze its labour to retain competitiveness, and leave the demand generation to US deficits and Asian growth, and quite expedient for Germany to rule out notions of a joint EU fiscal policy, the bill for which would land at its doorstep. This indicates the lack of common vision, agreed theory, coordinated strategy and policy choices within the capitalist camp; not very encouraging for cooperative action for rebalancing at a global level involving the major emerging economies where governments follow their own economic interests and political imperatives.

‘The profit-seeking bankers almost always win their game with the authorities, but in winning, the banking community destabilizes the economy. The true losers are those who are hurt by unemployment and inflation’ (Minsky, 1986, quoted in Nersisyan and Wray, 2010: 28). The bankers won big when they were winning before the crisis; and the bankers are winning big again after the crisis, despite having lost — though not their own money, of course; they were not silly enough to do that.

Quo Vadis?

There seems to be a profound subliminal political message underlying all these major contributions: the need for an alternative politics, to pull back from the inexorable slide into plutocracy, recover meaningful democratic space, cooperate internationally, let the people back in. Otherwise we are destined to lurch from one crisis episode to another, from tragedy to farce, and back again. In the words of Minsky, ‘Success breeds a disregard of the possibility of failure… As a previous financial crisis recedes in time, it is quite natural for central bankers, government officials, bankers, businessmen, and even economists to believe a new era has arrived’ (Minsky, 1986, quoted in Lim, 2008: 7).

A historic moment, such as the recent conjuncture of crises, could well be a point of systemic inflexion, an entrée into a new configuration, as for instance the rise of the New Deal in America out of the Depression, or that of the welfare state in Europe out of World War II, encapsulating and giving life to the cumulative but hitherto blocked potentialities of the inherited system. Or a moment could be just that, a fleeting political snowflake, and as ephemeral, that melts with the first warmth of economic revival. And we go back to the way we were, business as usual.


  • 1

    A remarkable feature of this research is its origin — the Research Department of the IMF, though of course, ‘it should not be reported as representing the views of the IMF’. There is little chance of that anyway, although it is both heartening and infuriating to consider the ‘retardy’ learning responses of major global financial institutions. Cripps, Izurieta and Singh (2011) represent a widening consensus when they say: ‘at the moment the primary global institutions of economic coordination such as the IMF are, regrettably, more a part of the problem than its solution’.

  • 2

    Some researchers argue that for an effective solution, in addition to other interventions, ‘downsizing the financial sector by two-thirds or more’ would be essential (Nersisyan and Wray, 2010).

  • 3

    Christina Romer, head of the White House Council of Economic Advisers, quoted in ‘US and EU Oceans Apart on Fiscal Policy’, Spiegel Online International 27 May 2010;,1518,697132,00.html

  • 4

    Michael Huther, head of the Cologne Institute for Economic Research, quoted in ‘US and EU Oceans Apart on Fiscal Policy’, Spiegel Online International 27 May 2010;,1518,697132,00.html