Chomsky on the crisis

IssueNovember 2008
Feature by Noam Chomsky, Simone Bruno

Simone Bruno I would like to talk about the current crisis. How is it that so many people could see it coming, but the people in charge of governments and economies didn’t, or didn’t prepare?

Noam Chomsky Since financial liberalisation was instituted about thirty-five years ago, there has been a trend of increasing regularity of crises and deeper crises, and the reasons are intrinsic and understood.

So, for example, if you and I make a transaction, say you sell me a car, we may make a good bargain for ourselves, but we don’t take into account the effect on others. If I buy a car from you, it increases the use of gas, it increases pollution, it increases congestion, and so on. But we don’t count those effects.

These are what are called by economists “externalities”, and are not counted into market calculations. These externalities can be quite huge. In the case of financial institutions, they are particularly large.

The task of a financial institution is to take risks. Now if it is a well-managed financial institution, say Goldman Sachs, it will take into account risks to itself, but the crucial phrase here is “to itself”. It does not take into account systemic risks, risks to the whole system if Goldman Sachs takes a substantial loss.

And what that means is that risks are underpriced. There are more risks taken than should be taken in an efficiently-working system that was accounting for all the implications.

More, this mispricing is simply built into the market system and the liberalisation of finance. Risks become more frequent, and when there are failures the costs are higher than taken into account. Crises become more frequent and also rise in scale.

Of course, all this is increased still further by the fanaticism of the market fundamentalists who dismantled the regulatory apparatus and permitted the creation of exotic and opaque financial instruments.

It is a kind of irrational fundamentalism because it is clear that weakening regulatory mechanisms in a market system has a built-in risk of disastrous crisis. These are senseless acts except in that they are in the short-term interest of the masters of the economy and of the society. The financial corporations can and did make tremendous short-term profits from pursuing extremely risky actions, including especially deregulation, which harm the general economy, but don’t harm them, at least in the short term that guides planning.

You couldn’t predict the exact moment at which there would be a severe crisis, and you couldn’t predict the exact scale of the crisis, but that one would come was obvious.

There was a book, for example, ten years ago, by two very well respected international economists, John Eatwell and Lance Taylor - Global Finance at Risk - in which they ran through the pretty elementary logic of how financial liberalisation underprices risk and therefore leads to regular systemic risks and failures, sometimes serious.

They also outline ways of dealing with the problem, but those were ignored because decision-makers in the corporate and political systems, which are about the same, were making short-term gains for themselves.

You read in the press that the last 30 years, the 30 years of neoliberalism, have shown the greatest escape from poverty in world history and tremendous growth and so on, and there is some truth to that, but what is missing is that the escape from poverty and the growth have taken place in countries which ignored the neoliberal rules.

Countries that observed the neoliberal rules have suffered severely. So, there was great growth in East Asia, but they ignored the rules.

In Latin America where they observed the rules rigorously, it was a disaster.

SB Joseph Stiglitz recently wrote in an article that the most recent crisis marks the end of neoliberalism, and Chavez in a press conference said the crisis could be the end of capitalism. Which one is closer to the truth, do you think?

NC First, we should be clear about the fact that capitalism can’t end because it never started. The system we live in should be called state capitalism, not just capitalism.

So, take the United States. The economy relies very heavily on the state sector. There is a lot of agony now about socialisation of the economy, but that is a bad joke. The advanced economy, high technology and so forth, has always relied extensively on the dynamic state sector of the economy.
That’s true of computers, the internet, aircraft, biotechnology, just about everywhere you look.
So what you have is a system of socialisation of cost and risk and privatisation of profit. And that’s not just in the financial system. It is the whole advanced economy.

So, for the financial system, it will probably turn out pretty much as Stiglitz describes. It is the end of a certain era of financial liberalisation driven by market fundamentalism.

The Wall Street Journal laments that Wall Street as we have known it is gone with the collapse of the investment banks. And there will be some steps toward regulation. So that’s true.

But the proposals that are being made, which are major and severe, nonetheless do not change the structure of the underlying basic institutions.

There is no threat to state capitalism. Its core institutions will remain basically unchanged and even unshaken.

They may rearrange themselves in various ways with some conglomerates taking over others and some even being semi-nationalised in a weak sense, without infringing much on private monopolisation of decision making.

Still, as things stand now, property relations and the distribution of power and wealth won’t alter much, though the era of neoliberalism, operative for roughly 35 years, will surely be modified in a significant fashion.

Incidentally, no one knows how serious this crisis will become. Every day brings new surprises.

SB Do you think there will be a big difference between Obama or McCain as president?

NC Obama has presented himself as pretty much a blank slate. There is every reason to expect that Obama will be another Clinton. He keeps appearances mostly empty, on purpose, but insofar as there are policies they look very much like centrist policies, like Clinton’s.

The US is a business-run society, somewhat more than Europe. Basically, it is a one-party state, with a business party that has two factions, Democrats and Republicans.

The factions are somewhat different, and sometimes the differences are significant. But the spectrum is quite narrow.

The Bush administration, however, was way off the end of the spectrum, extreme radical nationalists, extreme believers in state power, in violence overseas, in big government spending, so far off the spectrum that they were harshly criticised right within the mainstream from early on.

Whoever comes into office is likely to move things back more towards the centre of the spectrum, Obama probably more so. So I would expect in Obama's case something like a revival of the Clinton years.... In the case of McCain, however, it is quite hard to predict. He is a loose cannon. Nobody knows what he would do....

The vice-presidential candidate, Sarah Palin, comes from a radical extremist background (by world standards), for example creationism - you know, the world was created 10,000 years ago, etc etc. If someone like that was running for high office in Luxembourg it would be comical. But when it happens in the richest and most powerful country in the world, it is dangerous.

Topics: Economics
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