How the informal economy took over the world

“The informalization of the world economy”, keynote lecture for the 24th Conference of the Societa’ Italiana di Economia Pubblica: “Informal economy, tax evasion and corruption”, Pavia, 24-25 September 2012

A la recherche du temps perdu

The idea of an informal economy was born at the moment when the post-war era of developmental states was drawing to a close. The 1970s were a watershed between three decades of state management of the economy and the free market decades of one-world capitalism that ended with the financial crisis of 2008. It seems now that the economy has escaped from all attempts to make it publicly accountable. What are the forms of state that can regulate a world of money that is now essentially lawless? The informal economy started off forty years ago as a way of talking about the Third World urban poor living in the cracks of a rule system that could not reach down to their level. Now the rule system itself is question. Everyone ignores the rules, especially the people at the top – the politicians and bureaucrats, the corporations, the banks – and they routinely escape being held responsible for their illegal actions. Privatization of public interests is probably universal, but what is new about neoliberalism is that, whereas the alliance between money and power used to be hidden, now it is celebrated as a virtue, wrapped up in liberal ideology.

This is the context for my lecture. The informal economy seems to have taken over the world, while cloaking itself in the rhetoric of free markets. We are witnessing the world-historic collapse of the twentieth-century attempt to impose national controls on the economy. Inevitably, when witnessing this collapse, we dream of restoring the era of social democracy, of Stalinism and of developmental states. The rules operated then with some degree of success. This nostalgia for the heyday of what I call “national capitalism” will not serve us well today. We need to analyse the contemporary world economic crisis at a number of levels. Above all, we should acknowledge that the core problem is not narrowly economic, but one of political failure, both national and international. Money and markets have escaped from public control and cannot be put back in that straitjacket. The question then concerns what democratically accountable structures might be capable of regulating the world economy and under what social conditions? I will try to answer that question today by reflecting initially on the history of a concept with which I have been closely associated.


Origins and critique of the informal economy

Before the First World War no-one believed that the state, a hangover from pre-industrial society, could manage the turbulence of urban commerce. Industrial capitalists and the military landlord class formed an alliance in the 1860s and afterwards to keep in check the proliferating working class spawned by the machine revolution. Germany and Japan took cooperation between these classes within new state structures to an unprecedented level. But the Great War revealed hitherto unimagined government powers: to raise and kill off huge armies, organize industrial production, control market prices and monopolize propaganda. After the war, the issue was which kind of state – welfare democracy, fascist, communist – would win the race to organize world society. The whole period, 1914-1945, was a nightmare: two world wars, the Great Depression, a succession of ugly conflicts such as the Spanish civil war, the Japanese invasion of Manchuria, the Italian attack on Abyssinia. Writing just before the end of all this, Karl Polanyi[1] blamed it all on the nineteenth-century experiment to make society conform to market principles.

No wonder then that, in the late 1940s, the world turned to post-war governments of various kinds to build an alternative system. Their mission, for the first and only time in world history, was to reduce the gap between rich and poor, to increase the purchasing power of working people and to expand public services. The European empires were dismantled, beginning in Asia; a new world order was inaugurated under US hegemony, implementing the accords of Bretton Woods; the United Nations was formed and “development” – a post-colonial compact between rich and poor nations — was the order of the day. All of this took large amounts of state intervention. The post-war boom began to come unstuck around 1970. By the end of that decade, neoliberal conservatives were installed in power throughout the West. Their slogan was the free market and in the 1980s, with the active support of the IMF and World Bank, they set about dismantling state restrictions on the international flow of money in the name of “structural adjustment”, at first in the developing countries. This was the context in which the “informal economy” emerged, not only as a description of the Third World urban poor, but as a universal feature of modern economies.

In the early 1990s, not long after the fall of the Berlin Wall, I wrote a critique of my own concept.[2] I made the obvious point that the formal/informal pair, representing bureaucracy and popular self-organization as they did, mirrored the poles of the Cold War, ‘state socialism’ vs. ‘the free market’. I had earlier argued, in a published lecture on money,[3] that the habit of contrasting market and state theories of money as alternatives, then Friedman’s monetarism vs. Keynesian macro-economics, was ruinous since currency was both a token of political authority (‘heads’) and a commodity (‘tails’). After three decades of welfare-state democracy, the neoliberal counter-revolution was well under way by the 1980s; and we are now possibly witnessing the start of another long swing back from over-reliance on the market to increased state intervention in some form or another. So the state/market pair has not faded away. In the immediate aftermath of the Cold War, however, I was optimistic that new paradigms could emerge; and I questioned the usefulness of the informal economy as a concept, given its origins in the nuclear nightmare of twentieth-century society’s polarities.

The formal/informal pair first saw light in the context of development debates during the world crisis of the early 70s – a sequence of events that included America’s losing war in Vietnam, the dollar being detached from gold in 1971, the invention of money market futures the next year and the dismantling of the Bretton Woods regime of fixed parity exchange rates. This was soon followed by a world depression induced by the energy crisis of 1973 and then by a glut of euro-dollar loans that ended up as the Third World debt crisis of the 80s. ‘Stagflation’ in the West (high unemployment and inflation) prepared the ground for Reagan, Thatcher and their imitators from 1979-80 onwards. After the ‘modernization’ boom of the 60s, the notion that poor countries could become rich by emulating ‘us’ gave way to gloomier scenarios around 1970, fed by zero-sum theories of ‘underdevelopment’, ‘dependency’ and ‘the world system’ advanced by the other side in the Cold War.

In development policy-making circles, this trend manifested itself as fear of ‘Third World urban unemployment’. It had been noted that cities there were growing rapidly, but without comparable growth in ‘jobs’, conceived of as regular employment by government and businesses. At this time, Keynesians and Marxists alike held that only the state could lead an economy towards development and growth. Richard Nixon reflected this consensus shortly before his fall when he said “We are all Keynesians now”. There were a few liberal economists around, but none of them influenced policy. The question was, How are ‘we’ (the bureaucracy and its academic advisors) going to provide the people with the jobs, health, education, housing and transport that they need? And what will happen if we don’t? The spectre of urban riots and even revolution raised its head. The word ‘unemployment’ evoked images of the Great Depression.

This whole story didn’t square with my fieldwork experience in the slums of Ghana’s capital, Accra. It took me some time to work out why, but the result was a paper for a 1971 conference on ‘Urban unemployment in Africa’. It eventually appeared in 1973, after an International Labour Office report influenced by my paper had launched the idea of an ‘informal sector’ in Kenya.[4] I wanted to persuade development economists to abandon the ‘unemployment’ idea and accept that there was more going on in the grassroots economy than their bureaucratic imagination allowed for. To that end, I had two sections: the first was a vivid ethnographic description (“I have been there and you haven’t”); the second tried to engage their interest in the consequences for development theory, using what I call ‘economese’ — how to sound like an economist without formal training in the discipline — something I had learned by moonlighting as a writer for The Economist.

I had no ambition to coin a concept, just to insert a vision of irregular economic activity into the debates of development professionals. This was a classic move in the genre of ‘realism’. The ILO Kenya report, on the other hand, did want to coin a concept and that is what it subsequently became, a keyword helping to organize a segment of the academic and policy-making bureaucracy. The idea of an ‘informal economy’ thus has a double provenance reflecting its two sides, suspended between bureaucracy (the ILO) and the people (ethnography). Drawing attention to activities that had previously been invisible to the bureaucratic gaze had a clear value, but I was struck later by how static my analysis had been. My aim had been to show that no single idea (‘the state’) can ever capture the complexity of real life. But I conceived of informal income opportunities as at best a minor appendage to the state-made economy, perhaps a bit more than “taking in each other’s washing”, but essentially going nowhere.

No-one could have anticipated what happened next: under a neoliberal imperative to reduce the state’s grip on ‘the free market’, manifested in Africa as ‘structural adjustment’, national economies and the world economy itself became radically informal. Not only did the management of money go offshore, but corporations outsourced, downsized and casualized their labour forces, public functions were privatized, often corruptly, the drugs and illicit arms trades took off, the global war over ‘intellectual property’ dominated capitalism’s contradictions and whole countries, such as Mobutu’s Zaire, abandoned any pretence of formality in their economic affairs. Here was no ‘hole-in-the-wall’ operation living between the cracks of the law. The market frenzy led to the ‘commanding heights’ of the informal economy taking over the state-made bureaucracy. Just as the Cold War ended in confusion between the poles that launched it (Hegel’s ‘negative dialectic’)  – ‘state capitalism’, ‘market socialism’, the Pentagon fighting for the free market as the largest non-market collective in world history – so too the formal/informal pair, inspired by the state/market opposition, leaked into each other to the point of becoming often indistinguishable. What is the difference between a Wall Street bank laundering gangsters’ money through the Cayman Islands and the mafias running opium out of Afghanistan with the support of several national governments?[5]

I concluded then that the informal economy concept was insufficiently dynamic. I thought this might be partly a consequence of living under the threat of nuclear holocaust. We didn’t want the opposed sides and their symbols to move, since the result could be the annihilation of all life on the planet. In any case, they did move eventually – at several levels. Another criticism was that ‘informal’ says what these activities are not, but not what they are. We need to know more about what is going on under the rubric of ‘informal’ when it has expanded to include activities of bewildering variety. The urgent task is to expose the positive principles organizing the informal economy and to place these investigations within an adequately broad historical framework.


The dialectics of form

General Forms have their vitality in Particulars, and every Particular is a Man (William Blake)

Most people here live substantially inside what we may call the formal economy. This is a world of salaries or fees paid on time, regular mortgage payments, clean credit ratings, fear of the tax authorities, regular meals, moderate use of stimulants, good health cover, pension contributions, school fees, driving the car to the commuter station, summer holidays by the sea. Of course middle class households suffer economic crises from time to time and some people feel permanently vulnerable, not least many students. But what makes this lifestyle ‘formal’ is the regularity of its order, a predictable rhythm and sense of control that we often take for granted. I only discovered how much of this had become natural to me when I went to live in a West African city slum almost 50 years ago.

I would ask people questions that just didn’t make sense to them, like, how much do you spend on food a week? Most households were in any case unbounded and transient. Assuming that someone had a regular wage (which many didn’t), it was pitifully small; the wage-earner might live it up for a day or two and then was broke, relying on credit, help from family and friends or not eating at all. A married man might use his wage to buy a sack of rice and pay the rent, knowing that he would have to hustle until the next pay check. In the street people moved everything from marijuana to refrigerators in deals marked more by flux than stable incomes. After completing my doctorate, I went to work in a development studies institute. There I saw my main task as trying to get this ethnographic experience across to development economists. My use of the conceptual pair formal/informal came out of those conversations.

The formal and informal aspects of society are already linked, since the idea of an ‘informal economy’ is entailed in the institutional effort to organize society along formal lines. ‘Form’ is the rule, an idea of what ought to be universal in social life; and for most of the twentieth century the dominant forms have been those of bureaucracy, particularly of national bureaucracy, since society was identified to a large extent with nation-states. This identity is now ending as a result of neoliberal policies, the digital revolution in communications and the global economic crisis.

Formal and informal appear to be separate entities because of the use of the term ‘sector’. This gives the impression that the two exist in different places, like agriculture and manufacturing, whereas both the bureaucracy and its antithesis contain the dialectic within themselves, as well as between them. There is a widespread perception that together they constitute a class war between the bureaucracy and the people. It was not supposed to be like this. Modern bureaucracy was invented by the Italian city-states of the quattrocento as part of a democratic political project to give citizens equal access to what was theirs as a right. It still has the ability to co-ordinate public services on a scale that is beyond the reach of individuals and most groups. So it is disheartening that bureaucracy (‘the power of public office’) should normally be seen now as the negation of democracy (‘the power of the people’) rather than as its natural ally.

Forms are necessarily abstract and a lot of social life is left out as a result. The gap may be reduced by naming a variety of practices as an ‘informal sector’. They appear to be informal because their forms are largely invisible to the bureaucratic gaze. Mobilizing the informal economy will require a pluralistic approach based on at least acknowledgement of those forms. Equally, the formal sphere of society is not just abstract, but consists of the people who staff bureaucracies and their informal practices. Somehow the human potential of both has to be unlocked together.

‘Form’ is an idea whose origin lies in the mind. Form is the rule, the invariant in the variable. It is predictable and easily recognized. Idealist philosophers from Plato onwards thought the general idea of something was more real than the thing itself. Words are forms, of course. In his Science of Logic,[6] Hegel shows the error of taking the idea for reality. We all know the word ‘house’ and might think there is nothing more to owning one than saying ‘my house’. But before long the roof leaks, the paint peels and we are forced to acknowledge that the house is a material thing, a process that requires attention. The ‘formal sector’ is likewise an idea, a collection of people, things and activities; but we should not mistake the category for the reality it identifies.

What makes something ‘formal’ is its conformity with such an idea or rule. Thus formal dress often means that the men are supposed to look the same, so they adopt a ‘uniform’ that cancels out their individuality. Formality endows a class of people with universal qualities, with being the same and equal. What makes dress ‘informal’ is the absence of such a shared code. But anyone can see that clothing styles in an informally dressed crowd are not random. We might ask what these informal forms are and how to account for them. The dialectic is infinitely recursive. No wonder that most economists find the conceptual dichotomy confusing and impossible to measure.

There is a hierarchy of forms and this hierarchy is not fixed for ever. The twentieth century saw a general experiment in impersonal society whose forms were anchored in national bureaucracy, in centralized states and laws carrying the threat of punishment. The dominant economic forms were also bureaucratic and closely linked to the state as the source of universal law. Conventionally these were divided according to principles of ownership into ‘public’ and ‘private’ sectors. This uneasy alliance of governments and corporations is now sometimes classified as ‘the formal sector’. On the surface they share being subject to regulation, conformity to the rule of law. How then might unregulated economic activities, ‘the informal economy’, relate to this formal order? They may be related in any of four ways: as division, content, negation and residue.

The moral economy of capitalist societies is based on an attempt to keep separate impersonal and personal spheres of social life. The establishment of a formal public sphere entailed another based on domestic privacy. The pair was meant to constitute complementary halves of a single whole. Most people, once men more than women, divide themselves every day between production and consumption, paid and unpaid work, submission to impersonal rules in the office and the free play of personality at home. Money is the means whereby the two sides are brought together, so that their interaction is an endless process of separation and integration or division. The division of the populations into males and females is the master metaphor for this dialectic of complementary unity. When the lines between the paired categories become blurred, we enter a phase of ‘negative dialectic’, from which a new idea may eventually emerge. Identifying the informal practices that constitute a bureaucracy implies such a blurring of the ideal.

For any rule to be translated into human action, something else must be brought into play, such as personal judgment. So informality is built into bureaucratic forms as unspecified content. This is no trivial matter. Workable solutions to problems of administration invariably contain processes that are invisible to the formal order. For example, workers sometimes ‘work to rule’. They follow their job descriptions to the letter without any of the informal practices that allow these abstractions to function. Everything grinds to a halt. Or take a commodity chain from production by a transnational corporation to final consumption in an African city. At various points invisible actors fill the gaps that the bureaucracy cannot handle directly, from the factories to the docks to the supermarkets and street traders. Informal processes are indispensable to commerce, as variable content to the form.

Of course, some of these activities break the law, through a breach of safety regulations, tax evasion, smuggling, the use of child labour, selling without a licence etc. The third way that informal activities relate to formal organization is thus as its negation. Rule-breaking takes place both within bureaucracy and outside it; and so the informal is often illegal. It is hard to draw a line between colourful women selling oranges on the street and the gangsters who exact tribute from them. When the rule of law is weak, the forms that emerge in its place are often criminal in character. Modern civilization protects the public image of bureaucratic processes from a hybrid reality that mixes formal order with corruption and criminality. We enjoy watching movies about cops and gangsters, but we insulate these fictions from belief in the rule of law that helps us to sleep at night.

The fourth category is not so obviously related to the formal order. Some ‘informal’ activities exist in parallel, as residue. They are just separate from the bureaucracy. It would be stretching the logic of the formal/informal pair to include peasant economy, traditional institutions and domestic life as somehow ‘informal’. Yet the social forms characteristic of these domains often shape informal economic practices and vice versa. Is society just one thing – one state with its rule of law – or can it tolerate institutional pluralism, leaving some spheres to their own devices? Communities depend on members understanding each other for practical purposes; and so they operate through culture. They use implicit rules (customs) rather than state-made laws and regulate their members informally, through the sanction of exclusion rather than punishment. European empires, faced with a shortage of administrative resources, turned to ‘indirect rule’ as a way of governing semi-autonomous subject peoples. Anthropologists played their part in making this work. Any serious attempt to combine the formal and the informal anew requires similar openness to plurality of form.


The demise of national capitalism

To talk of “the informalization of the world economy” is to point to the absence of effective rules at any level of society, from the top to the bottom. We need to be clear about the different dimensions of this crisis. It is not merely financial, a moment in the historical cycle of credit and debt. I prefer to approach our times as a formative episode in the history of money. The removal of political controls over money in recent decades has led to a situation where politics is still mainly national, but the money circuit is global and lawless. We are witnessing the collapse of the money system that the world lived by in the twentieth century. This system has been unravelling since the US dollar went off gold in 1971 and its chief symbol today is the crisis for the single currency that was meant to protect European countries from their individual vulnerability. As the need for international cooperation grows, the disconnection between economy and political institutions makes effective solutions unattainable.

The informal economy’s improbable rise to global dominance is the result of the mania for deregulation in the last three decades, linked to the wholesale privatization of public goods and services and to the capture of politics by high finance. Deregulation provided a fig leaf for corruption, rentier accumulation, tax evasion and public irresponsibility. Nowhere was this more evident than in the culture of the Wall Street banks from the 1980s. This was no secret at the time. Each major bank spawned a tell-all book written by undercover reporters or disillusioned employees – from Liar’s Poker (Salomon Bros) to F.I.A.S.C.O. (Morgan Stanley).[7] The removal of official restraints on financial practices generated a culture of personal excess from the trading floor to boardroom politics; moral responsibility towards clients was replaced by an ethos of predation. Yet, while the credit boom lasted, criticism was drowned by celebrations of unending prosperity. Even after the bust, the political ascendancy of finance has hardly been challenged. And we wonder why our leaders routinely refuse to take responsibility for their own failures.

Apart from the main financial houses, the shadow banking system — hedge funds, money market funds and structured investment vehicles that lie beyond state regulation – is literally out of control. Tax evasion is an international industry that dwarfs national budgets.[8] The Cambridge economist, Sir James Mirlees, won a Nobel Prize for proving that you can’t force the rich to pay more than they are willing to. Mitt Romney’s non-disclosure of his tax returns has inscribed this principle at the heart of the US presidential elections! None of this touches on the outright criminal behaviour of transnational corporations who now outnumber countries by 2 to 1 in the top 100 economic entities on the planet.[9] Where to stop? The drug cartels from Mexico and Colombia to Russia, the illegal armaments industry, the global war over intellectual property (“piracy”), fake luxury goods, the invasion and looting of Iraq, 4 million dead in the Congo scramble for minerals. In 2006, the Japanese electronics firm NEC discovered a criminal counterpart of itself, operating on a similar scale under the same name and more profitably because it was wholly outside the law.[10] The informal economy was always a way of labelling the unknowable, but the scale of all this goes beyond comprehension.

2011 saw the first political consequences of the financial crisis of 2008. We still tend to talk about the encroaching disaster we are living through in economic rather than political terms. Even neoliberalism’s detractors reproduce the free market ideology they claim to oppose. The euro is by no means the only symptom of this crisis, but it may come to be seen as the decisive nail in the coffin of the world economy today. We seem to be at the end of something. What is ending is “national capitalism”, the synthesis of nation-states and industrial capitalism. Its main symbol has been national monopoly currency (legal tender). It was the institutional attempt to manage money, markets and accumulation through central bureaucracy within a cultural community of national citizens. National capitalism was never the only active principle in world political economy: regional federations, empires and globalization are at least as old or much older.

National capitalism’s origins lay in a series of linked revolutions of the 1860s and early ‘70s based on a new alliance between capitalists and the military landlord class.  These ranged from the American civil war and Japan’s Meiji restoration to Italian and German unification, Russia’s abolition of serfdom, the French Third Republic and Britain’s second Reform Act. In all this, Marx published Capital and a revolution in transport and communications (steamships, continental railways and the telegraph) took place. These new national governments launched a bureaucratic revolution in the late nineteenth century and then sponsored large business corporations in a drive towards mass production. The national system became generalised after the First World War when states turned inward to manage their economies in war and depression. Its apogee was the social democracy built after 1945, what the French call les trente glorieuses.

Money expands the capacity of individuals to stabilise their own personal identity by holding something durable that embodies the desires and wealth of all the other members of society. People learn to understand each other as members of communities and money is an important vehicle for this. Nation-states have been so successful in a relatively short time that it is hard for us to imagine society in any other way. Five different types of community come together in the nation-state form:

•        political community: a link to the world and a source of law at home

•        community of place: territorial boundaries of land and sea

•        imagined or virtual community: the constructed cultural identity of citizens

•        community of interest: subjectively and objectively shared purposes in trade and war

•        monetary community: common use of a national monopoly currency

The rise and fall of single currencies is therefore one way of approaching national capitalism’s historical trajectory.

Money is the principal means for us all to bridge the gap between everyday personal experience and a society whose wider reaches are impersonal. According to Georg Simmel,[11] it is the concrete symbol of our human potential to make universal society. At present national politics and media frame economic questions in such relentlessly parochial terms that we find it hard to think about the human predicament as a whole. But money is already global in scope and the need to overcome these limitations is urgent. My fear is that only a major war and all the losses it would bring will concentrate our minds once more on fixing the world we live in.

Karl Polanyi (see note 1) is enjoying a major revival today for the good reason that our crisis is strongly reminiscent of the disaster he sought to explain then, namely the collapse of the Victorian free market ideal, resulting in world war and depression. He listed money, along with land and labour, as a “fictitious commodity” whose unregulated exchange came close to buying and selling society itself. He held that money and markets originate in the extension of society beyond its local core; society has to become more inclusive since none was ever self-sufficient. But conflict between the internal and external dimensions of an economy is often highly disruptive. This is why societies have traditionally held markets at arm’s length and why acceptance of market principles at the core of modern societies invites disaster.

Mainstream economics says more about what money does than what it is. Its main function is held to be as a medium of exchange, a more efficient lubricant of markets than barter. Another school emphasizes money’s function as a means of payment, especially of taxes to the government and hence on “purchasing power”. It is also a standard of value or unit of account, with the focus again on government’s role in establishing the legal conditions for trade; while John Locke conceived of money as a store of wealth, a new form of property that allowed the accumulation of riches to escape from the limitations of natural economy.[12]

In a little-known article,[13] Polanyi later approached money as a semantic system, like writing. He argued that only modern money combines the four functions (payment, standard, store and exchange) in a few “all-purpose” symbols, national currency. By contrast, primitive and archaic forms of money attached the separate uses to different symbolic objects or “special-purpose” monies.  Polanyi argued against the primacy of money as a medium of exchange and for a multi-stranded model of its evolution.  For him and for Keynes, it was above all a means of payment or the “purchasing power” of citizens which drives modern economies, not so much a medium of exchange for buying and selling as such.

Although this analysis was intended only to illuminate the history of money, Polanyi’s approach offers profound insight into the causes of today’s global economic crisis. Our challenge is to conceive of society once more as something plural rather than singular, as a federated network rather than as a centralized hierarchy, the nation-state. The era of national monopoly currencies is very recent (from the 1850s); it took the United States, for example, half a century to secure an uncontested monopoly for “greenbacks”; and “all-purpose money” has been breaking up for four decades now, since the US dollar was de-pegged from gold.

Since the break-up of the Bretton Woods system of fixed parity exchange rates, the world economy has reverted to the plural pattern of competing currencies that was normal before central banks learned how to control national economies in the second half of the nineteenth century through the bank rate, for example. One aspect of the crisis is that the international rule system imposed after the Second World War was systematically subverted by the creation of an offshore banking system which brought the informal economy to the heart of global finance. Nick Shaxson (Note 6 above) provides an astonishing account of how the City of London replaced the colonial empire it lost with another based on tax havens. The separation of functions between different types of monetary instruments was also crucial to money’s great escape from the rules of the Keynesian consensus that was institutionalised in the Bretton Woods system. Central bank control was eroded by a shift to money being issued in multiple forms by a global distributed network of corporations, not just governments and banks.

Some brief examples must serve to indicate the momentous changes that have overtaken money in the last few decades. In Switzerland today, euros are commonly accepted in shops alongside the national currency. If you pay with a card, you can often choose the unit of account (Swiss franc, euro, pound sterling, US dollar). But only francs are acceptable for payment of local taxes. Are national currencies a store of wealth? Hardly — they have all been radically depreciated and may even disappear; hence the flight to gold. But gold could turn out to be the biggest asset bubble of them all. As for real estate, the collapse of subprime mortgages got us into the present mess. And we have not even touched on what credit default swaps and collateral debt obligations are used for or who issues them.

Simmel considered money’s twin anchors to be its physical substance (coins, paper etc.) and the social institutions supporting the community of its users. He predicted that the first would wither away, making the second more visible. Radical cheapening of the cost of transferring information as a result of the digital revolution in communications has been transforming money and exchange for two decades now, confirming Simmel’s prophecy. But globalization has made national society seem a lot less self-sufficient than it did a century ago. This process whereby markets, money and telecommunications have extended society rapidly beyond national boundaries, even as they have invaded the core institutions of domestic society, is fraught with danger. We need to extend systems of social rights to the global level before the contradictions of the market system collapse again into world war. But local political organization resists such a move. After centuries of a unipolar divergent world economy ruled by the West, ours is a multi-polar world whose plurality of associations and convergent income distribution resembles the medieval period more than any since.


The euro crisis: an episode in the history of money

The monetary crisis that has overwhelmed the eurozone of late needs to be seen in this context. The apparent triumph of the free market at the end of the Cold War in 1989/90 induced two huge political blunders, both of them based on the premise that society should be shaped by market economy rather than the other way round. Radical privatization of Soviet bloc public economies ignored the common history of politics, law and social custom that shored up market economies in the West, thereby delivering the economy into the hands of gangsters and oligarchs. And the European single currency was supposed to provide the social glue for political union without first developing effective fiscal institutions or economic convergence between North and South.

The big mistake was to replace national currencies with the euro. An alternative proposal, the hard ecu, would have floated politically managed national currencies alongside a low-inflation European central bank currency. Countries that didn’t join the euro, like Britain and Switzerland, have in practice enjoyed the privilege of this plural option. Eurozone countries cannot devalue and so must reduce their debts through deflation or default. Argentina’s example of default after the peso crashed is directly relevant to countries like Greece and Spain today. The euro was invented after money was already breaking up into multiple forms and functions. The Americans centralized their currency after a civil war; the Europeans centralized theirs as a means of achieving political union.

The infrastructure of money has already become decentralized and global. A return to the national solutions of the 1930s or to a Keynesian regime of managed exchange rates and capital flows is bound to fail. Where are the levers of democratic power to be located, now that globalization has exposed the limitations of national economic management? The cultural logic of national capitalism leads the political classes who got us into this mess to repeat the same mistakes. Politics is a dialogue of the deaf, between those who deny the need for any political regulation of markets and others who remain trapped in the outmoded model of central bank money.

The idea of world society is still perceived by most people as at best a utopian fantasy or at worst a threat to us all. We need to build an infrastructure of money adequate to humanity’s common needs. “Economy” has multiple meanings, but the idea of putting ones house in order in a world shaped increasingly by markets combines several of them. In this conception, economy is pulled inwards to secure local guarantees of a community’s rights and interests; and outwards to make good local supply by engaging with outsiders through the medium of money and markets of various sorts, not just our own.  The trick is to manage this dialectic of internal and external forces effectively.

Our societies are becoming increasingly emancipated from their territorial base. Three things count above all in these societies — people, machines and money, in that order. But money buys the machines that control the people. Our political task – and I believe it was Marx’s too – is to reverse that order of priority, not to help people escape from machines and money, but to encourage them to develop themselves through machines and money. To the idea of economic crisis and its antidotes, we must add in 2011-12 the possibility of political revolution. Europe has become the main focus once more of a world revolution. Meanwhile, the EU persists with purely monetary measures such as the European Central Bank’s latest commitment to underwrite sovereign debt, when the issue is the political union itself and its current democratic deficit. National capitalism was based on a class compromise that reached its peak in the post-war decades. In the absence of a replacement with some prospect of offering economic democracy to the masses, informality and extreme inequality will continue to be the norm, until the next world war, that is.


A footnote on periodization

As an antidote to the daily news, I attempt a historical periodization of the last two centuries or more, mainly to indicate that the present rupture in history opens up the prospect of several decades of turbulence. It is commonplace to compare the current crisis with the 1930s, but this is misleading, since the Great Depression was part of a sequence launched after three decades of financial globalization by the outbreak of war in 1914.

1776-1815            Age of war and revolutions

1815-1848            The industrial revolution

1848-1873            Origins of national capitalism

1873-1914            First age of financial globalization

1914-1945            The second thirty years war

1945-1979            The golden age of national capitalism

1979-2008            Second age of financial globalization

2008-                    Another age of war and revolutions?


[1] The Great Transformation: The political and economic origins of our times, Boston: Beacon (1944).

[2] ‘Market and state after the Cold War: the informal economy reconsidered’ in R. Dilley (ed) Contesting Markets, Edinburgh University Press, Edinburgh, 214-227 (1992).

[3] Heads or tails? Two sides of the coin, Man 21.4, 637-656 (1986).

[4] ‘Informal income opportunities and urban employment in Ghana’, Journal of Modern African Studies 11.3: 61-89 (1973); International Labour Office Incomes, Employment and Equality in Kenya, Geneva: ILO (1972).

[5] Keith Hart The Hit Man’s Dilemma: or business, personal and impersonal, Chicago: Prickly Paradigm (2005).

[6] G.W.F. Hegel Science of Logic, New York: Humanity.

[7] Michael Lewis Liar’s Poker, New York: Norton (1989); Frank Partnoy F.I.A.S.C.O.: The inside story of a Wall Street trader, New York: Penguin (1999).

[8] Nicholas Shaxson Treasure Islands: Tax havens and the men who stole the world. London: Bodley Head (2011).

[9] John Perkins Confessions of an Economic Hit Man, New York: Plume (2004).

[10] Adrian Johns Piracy: The intellectual property wars from Gutenberg to Gates, Chicago: University of Chicago Press (2009).

[11] The Philosophy of Money, London: Routledge (1978 [1900]).

[12] Two Treatises on Government, Cambridge: Cambridge University Press (1960 [1690]).

[13] Money objects and money uses, The Livelihood of Man. New York: Academic Press, 97-121.

Comments |2|

Category: APE | Economy | World