The financial crisis has caused a swift decline of neo-liberal intellectual hegemony, leaving us with a rather uncertain collection of visions on the current state of affairs. Most policy proposals and arguments focus on, first, imposing more regulatory control on the financial sector (by states or other controlling agencies) or, second, the need for a new ethic within the financial sector (or business and society at large), whether inspired by sustainability, corporate responsibility, “soft law” or other discourses. Most observers correctly state that the incentive structure within the financial sector must be changed to limit excessive risk taking and short-termism. However, while all this makes some sense, we note that there is a dearth of new intellectual paradigms to enable a fresh, fundamental analysis and rethinking of the current trajectory of Western capitalism.Footnote ¹ Many critiques of globalized, financial-sector dominated capitalism remain firmly grounded within a capitalist discourse, portraying current neo-liberal capitalism as simply a slight aberration of a capitalism assumed to be sound that, as Adam Smith warned, might just need some stronger moral policing. Terms like “turbo-capitalism”, “casino capitalism” or “jackpot capitalism” have rapidly become common terminology in the mainstream press since 2008. It indicates that we have rediscovered the moralist side of Adam Smith in addition to Smith's “invisible hand” of maximization of benefits for all through self-interested individual behavior.Footnote ² In a more nuanced tone the new “behavioural economics”, so well represented in Obama’s White House, argues in principle the sameFootnote ³. A stronger fatherly hand combined with a bit more state, and capitalism can steam ahead again. There is little scrutiny on offer of how the combination of financialisation and globalization is dramatically changing the system from within.

This article tries to contribute to a rethinking of the issues, not by studying the phenomenon of financialisation and globalization head on – which has been done well by historical sociologists such as the late Giovanni Arrighi (Reference Arrighi1994, Reference Arrighi, Kalb, van der Land, Staring, van Steenbergen and Wilterink2000) and the comparativist anthropologist Jonathan Friedman (Friedman and Friedman Reference Friedman and 2008a and Reference Friedman and 2008b; see in general also Kalb Reference Kalb2005), with whose general claims we tend to agree – but by making a side step: we use a comparison with the planned economy of the Soviet Union in order to argue that the actual workings of the neo-liberal, globalised economy at the eve of the 2008 financial crisis, with its dominance of the financial sector, shows some striking analogies with the workings of the Soviet economy at the eve of its collapse. State capture by enterprises “too large to fail”; a large “virtual economy” and shadow systems; the inability of supposedly public agencies to obtain insight into core economic and financial operations; the short term orientations of actors going against economic viability; and a “mystification of societal risk” are some of the family resemblances that will be discussed. To be perfectly clear: we are not arguing that late Soviet system and financialised capitalism are in fact somehow empirically similar. What we suggest is that analogical mechanisms were playing out in the hidden abodes of respectively “state-planning” and the “allocation of capital”, supposed to be the control centres and the driving engines of the respective systems. These mechanisms were flanked, as we shall see, by formally identical mythologies of high science and material expansion, and the systematic cultivation of public silences, including the active sidelining of more historically realistic forms of knowledge.

The mainstream view in the West of the Soviet economy as characterized by an all-powerful state was based on superficial observations of the early Soviet economy under Stalin. Western scholars of socialism have repeatedly shown that this rather abstract and ideological idea of a totalitarian and strong state was by and large wrong, not only in the field of culture but also and especially in the field of the economy. The Soviet economy was neither adequately planned nor well controlled (Kornai Reference Kornai1980, Grossman Reference Grossman1977). Rather it was riddled with contradictions: ubiquitous negotiations on all levels, informality, and a huge shadow system. Nevertheless the view of the all-powerful state remained dominant in public opinion in both the West and the East throughout the Cold War and after it. Similarly, in global and financialised capitalism, an abstract and ideological view of the economy, rooted in an outdated ideal type of individual rational actors navigating anonymous market signals and making optimal decisions in the allocation of capital and the pursuit of selfish gain, has remained dominant. It took the current crisis for it to disclose its own shadowy underside, the shaky basis of its claims to objectivity, and the amazing measure of oligopolistic control over the state and the public sphere. It is an open question whether alternative paradigms less enchanted by methodological individualism can regain some of the terrain lost.

We argue that if one looks beyond the discourse of market versus state, two fundamental similarities in both social economies can be discerned, which explain the unstable constellation of virtual production and shadow economy, creeping state capture, and the related distortions and perversions. These two similarities are the weakness of horizontal countervailing powers and an attendant diverse ecology of institutions and discourses, and the related absence of active democratic information, deliberation, and public control. In short, the checks and balances have been dangerously weak in both systems and public spheres failed to function on both sides. On the institutional level this translates into a lack of transparency and realism. The perverse incentives and structural weaknesses as observed in the Soviet productive system by authors like Kornai (Reference Kornai1980, Kornai et al. Reference Kornai, Masku and Roland2003) and Grossman (Reference Grossman1977) are also applicable to the financial engines of neoliberal capitalism in its globalist phase.Footnote ⁴ This suggests that the entire edifice of markets versus hierarchies loses much of its significance. Whether market based or hierarchy based, monadic non-diversified power and information structures associated with oligopoly in both systems lead to the corruption of both. The consequence is state capture, “regulatory capture”, as well as the actual capture of civil society, the public sphere, and democracy by special interests.

The real functioning of the planned economy: informal structures

The common sense conceptualisation of the Soviet economy, as characterized by a powerful state with strong control over its enterprises and their managers, which uni-directionally determined what and how much enterprises would produce is incorrect. This view ignores the informal relations which existed between managers and planning agents, and within which managers had substantial influence on the formulation of planning targets and prices. Plans, though “decided” top down, were developed on the basis of information and proposals processed “down-up” by enterprise managements. This led the Hungarian Imre Vajda to speak of “commands written by their recipients” (Nove Reference Nove1980, p. 95). Managers of large enterprises had substantial bargaining power in their contacts with the planning apparatus over fulfilment of plans (as will be pointed out later). Behind the formal, impersonal and hierarchical planning structures existed the more informal level, with economic transactions embedded in social and personal relations. Already Berliner (Reference Berliner1957) and later Grossman (Reference Grossman1977) and others convincingly argued that the planned economy could not function without the “second or shadow economy” of informal relations which oiled the machinery of the planning apparatus. In addition, later studies by sociologists and anthropologists have stressed that formal structures and informal relations were (and still are) very much interwoven (e.g. Ledeneva Reference Ledeneva1998, Reference Ledeneva2006).Footnote ⁵

Colossal Capital and State Capture

The large size of enterprises was a well known characteristic of the Soviet Union (SU), with only one or a few companies producing a certain product. In 1990, industrial enterprises in the SU were over five times larger than in Western Europe measured in number of employees. If construction and agro-processing were excluded the difference would be even more extreme, with enterprises in machine building and metal working, for instance, over 13 times larger (EC 1990, p. 36). By the end of the Soviet period almost three-quarters of Soviet manufacturing employees worked in firms with more than 1,000 workers, and roughly one-fifth of them in companies of over 10,000 workers.

The negative effects of the large size of enterprises in the SU have been extensively documented by scholars of socialism, especially with regard to the agro-food sector (e.g. Lerman et al. Reference Lerman, Csaki and Feder2002). In the course of the Soviet era, enterprises were continuously enlarged. They were transformed into kombinaty, and these were in turn integrated into centrally managed industrial complexes or obyedineniya. Although much evidence pointed to the inefficiency of this continued enlargement, there was no debate about reversing this process. On the contrary, when enterprises performed badly, the universal recipe was the take-over by a more successful firm, resulting in further enlargement. Even managers, who could more directly observe the negative effects, strove for enlargement of their enterprises. They had a personal incentive to do so, as being director of a larger enterprise meant more prestige, more influence on the plan and the state, and better chances for their further career (Kuznetsov Reference Kuznetsov1994, Nove Reference Nove1980, p.82). Finally, the Soviet state could not allow bankruptcy because there was usually only one such a factory in a country or even in the whole Soviet bloc, and large economic regions depended on their survival.

In the West, although full monopolies have been rare, the problem of financial organizations simply being “too big, too complex, and too interconnected to fail” has been powerfully forced into public awareness over the last two years.Footnote ⁶ Now it turns out that processes of “state capture”, for which Soviet and post-Soviet countries have been strongly criticized as one of the crucial obstacles for further social and economic development, have not been uncommon in the West either. While in the SU the problem extended throughout the productive economy, in the contemporary West it is especially pertinent for the financial sector (though not exclusively so : see the problems associated with allowing the automotive industry to collapse). This difference reflects, of course, the difference between a “productivist” socialist industrial economy and a capitalist one driven by global finance and liquidity.

Through mergers and takeovers, Western financial corporations have become larger and more concentrated, a process that accelerated in the last decade. There are only three major Wall Street Investment banks in operation today (five before the collapse of Lehman Brothers and the integration of Bear Stearns into J. P. Morgan). These five/three are arguably the actual engines of financialised and globalised capitalism, the ultimate “market-makers” in Philip Augar’s (Reference Augar2005) wording. This group of five/three is dominated by just two, Goldman Sachs and J. P. Morgan. Both have disproportionate influence over the global banking scene as well as disproportionate political influence over the state-finance nexus of the American state. Historically it was J. P. Morgan that served as the anchor for the US financial regime, and was in fact the cradle from which the Federal Reserve was born. In the last two decades Goldman Sachs has overshadowed the state-influence of J. P. Morgan, and has been more of an “innovative” market-maker worldwide, in particular also with Mortgage Based Derivatives. It has seen a whole range of its top executives serving important functions in the state from the early 1990s onwards, the most visible of which were Robert Rubin and Hank Paulson. After the repeal of the Glass Steagall Act in the US (1999), deposit taking commercial banks were also allowed to play in the Investment Banking league, while the investment bankers could register for the state guarantees that normal retail banks had been enjoying since the 1930s (as all three of them did at once in late 2008). Some European retail banks, such as UBS, Barclays, ING, and Deutsche Bank, started to operate in particular niches in the investment banking field too, as did numerous smaller “investment boutiques”, but all remained critically dependent on the performance and market-making capacities of the five/three established Wall Street giants. Indeed, the repeal of Glass Steagall seems only to have reinforced the oligopolistic tendencies, from which Goldman Sachs in particular profited.

Parallel with the increasing tendency toward oligopoly in investment banking and the growing size and activities of integrated banks, their share of total capitalist profitability soared. In the 1970s and early 1980s the US financial sector never earned more than 16 % of total profits; by 2004 it was claiming over 40 % of the profits of corporate America (Johnson Reference Johnson2009). Goldman Sachs and J. P. Morgan strove for profit levels on their own equity of 20 to 30 % while profitability outside the banking sector was practically frozen at around 7 % (Augar Reference Augar2005). Earnings and bonuses in the financial sector peaked, outgrowing the incomes of any other population segment of Western societies, not unlike in the late 1920s. At the same time, the financial elite successfully lobbied for minimal taxes. In the City of London, investment banker Nick Ferguson publicly questioned whether it was not slightly unfair that he paid less tax than his cleaner (Peston Reference Peston2008, p. 20). The fierce competition between global cities such as New York, London and Paris assured the continuation of low tax regimes for financial corporations and their specialists, either officially, via loopholes, or through special statutes. Action against off-shore centres such as Jersey or the Cayman Islands, if discussed, was never meant to be concerted or fully effective. Though the contribution of financial operators to the tax bases of small finance centres like Luxemburg, the Netherlands, and the UK has been quite substantial (around 10 %), corporations and workers in the non-finance sectors have consistently been taxed much more heavily than operators in the financial markets, even though the latter’s earnings and profits have massively outgrown all the rest.Footnote ⁷ More than 400 ex-members of the House and the Senate now work among Washington’s army of lobbyists for the financial services, assuring very effective influence by big finance on the US regulatory environment, which exerts in its turn tangible pressure on other global financial locations.

The handful of global financial operators, who undeniably indulged in excessive risk taking, could comfortably do so because they insured their investment risks via Credit Default Swaps and other Collateralized Debt Obligations with an even smaller handful of “insurers of last resort”, in particular AIG. AIG, now nationalized by the Obama administration, became in effect the heavily underfunded welfare state for global financial capitalists, guaranteeing their assets against unforeseen all-over-the-board deflation. That deflation, however, was largely unexpected. There was a lack of reliable modelling of highly interrelated correlations and the absence of historical data basically meant that all modelling was simply based on assumptions of continued growth in all or most sectors of the economy, including housing and banking, reflecting the last few years of a credit driven boom.

After the nationalization of AIG, billions of US state injections in AIG immediately flowed into the global investment banks, including non-US banks such as ING, as part of contractual obligations associated with Credit Default Swaps. After the short experiment with the bankruptcy of Lehman Brothers, Western states decided they could not let any more financial giants go out of business as the entire global financial system and the financial systems of multiple individual countries would collapse. AIG was in fact the most important of all these institutions and had to be rescued at once (on the Monday after the Sunday that Lehman was allowed to collapse). While Goldman and others dumped their greatest risks onto AIG, AIG in the final instance dumped them on the State Treasury. Similar processes of concentration have been even more pronounced in smaller highly financialised countries such as Switzerland, Belgium, the Netherlands, and the UK. In the Netherlands the outstanding obligations of the largest bank, ING, were twice the GNP of the whole country. This outstrips the importance of any industry in the Soviet Union. The most dramatic example was Iceland, where the liabilities of the main banks were several times the country's GNP.

The ratings agencies have always been imagined as a publicly accountable bulwark against the financial sector’s potential speculative behaviour. They were thought to analyze and evaluate risk with reliable precision. This, of course, did not occur. The first implosion of the banks was caused exactly by the supposedly least risky assets on their balance sheets, the AAA rated “super senior risk” (Tett Reference Tett2009). The models of the ratings agencies, just like the models the investment banks used, could not deal with all the unpredictable correlations involved in a full deflationary crisis, as analysts conceded. Moreover, since mortgage derivatives were such a recent innovation, there were no reliable time series to feed their models with. More crucially, ratings agencies are paid and owned by the very investment banks and investors (Warren Buffet and the media tycoon Rupert Murdoch for example, who also owns the Wall Street Journal, an important business paper) for which they do the work, and they are therefore a part of the system, not quite the independent state-like watch dogs the public imagines them to be. The rating of escalating numbers of derivative products during a financial expansion was immensely lucrative. By 2005 it already accounted for half the earnings of Moody’s, for example (Tett Reference Tett2009, p. 119). Moreover, since the ratings agencies were dealing with just a small oligopoly of banks, they were very vulnerable to pressure “from above”. Tett writes that the investment banks “constantly threatened to boycott the agencies if they failed to produce the wished-for ratings” (ibid., p. 119). The ratings agencies, just like accountancy firms a few years earlier in the fraudulent Enron and Worldcom collapses, postured as the handmaiden of an imagined “objective” state but had in fact become part of the financialised machine, just like other parts of the state-finance nexus. They were as much gripped by greed as any insider, and exploited their position as “flex-organizations” (Wedel Reference Wedel and Spoor2004) on the blurred boundaries between state/public and private sector.

In August 2008, just a month before the great implosion, in a letter accompanying a commissioned report on the US banking sector for Hank Paulson, Minister of Finance, Jerry Corrigan, a former New York FED chief now working for an investment bank, wrote that “elevated financial statesmanship” was needed in the banking industry, but he lamented that “there appeared to be precious few such bankers left” (Tett, Reference Tett2009, p. 268). Not more than a month later, the absence as well as the urgency of such “elevated financial statesmanship” finally combined and occasioned what one should perhaps call “open state capture” by big finance: a three page document by Paulson, not meant to be discussed openly, was sufficient to create a 700 billion dollar bail-out fund, available at once and operating under full ministerial discretion, forcibly underwritten by a national public excluded from decision-making.Footnote ⁸

A not entirely dissimilar plot played out in Europe in May 2010. After having received a personal letter from the leaders of the 25 biggest European banks on the Friday before their meeting, and after telephone calls by the Head of the IMF and President Obama, top EU leaders decided entirely unexpectedly to create a similar 750 billion Euro guarantee fund to bail out states in the European Union whose budgets were bankrupted by the financial crisis. These public monies are not supposed to help weaker European Union states, in spite of the rhetoric, but rather, in the revealing words of a former President of the Bundesbank, Karl Otto Poehl, “to save the European banks” whose sovereign loans to the Southern tier might not get repaid (Spiegel International, 03/06/2010). As in the US, large public guarantees were extended for banking assets, loans and claims. The public was forced to save the big banks from deflation in a situation of threatened insolvency.

We suggest that the financial crises of 2007-2010 brought the fact of state capture by big finance into the open by at once forcing Western states, in the space of a few days and without democratic deliberation, to use hundreds of billions of future tax incomes to re-capitalize the whole system and guarantee outstanding credits to their owners, without allowing much pay-back or roll-back. AIG, indeed, was quickly allowed to be nationalized, as well as some big but less crucial players in smaller Western countries. But after the money grab the financial institutions on the whole, including the nationalized ones, have allowed very little say to politicians in return. Nor, tellingly, have politicians concertedly pressed for greater control, emphasizing that these new state properties should be quickly returned “to the market” after their insolvency had been reversed by public funds. Indeed, these were largely the same political personnel that had previously given the banks free rein.Footnote ⁹

Despite profound anger, the wider public has been surprisingly unable or reluctant to recognize the hard fact of state-capture, and has instead allowed itself to be deflected by moral outrage over isolated scandals in the markets and unjustified bonuses for individual bankers paid from their tax money (the limited public recognition regarding state-capture will be discussed in more detail later on). In Europe in 2010, Greek street protests were certainly fierce. But they addressed a state that had become completely powerless, while the wider European public was more concerned with the identity politics of deserving and undeserving Europeans than ready to grasp how the fragmented European political landscape had been captured by big finance. That finance was securing the full repayment of its sovereign credit portfolio at the cost of durable public stagnation and serious mid-term repercussions for the European project.

Thus, state capture in the West was hardly recognized until recently, except for some left wing academics (Arrighi Reference Arrighi1994, Reference Arrighi, Kalb, van der Land, Staring, van Steenbergen and Wilterink2000, Sassen Reference Sassen1998) and alter-globalization voices (e.g. Hertz Reference Hertz2001). In fact, if you put “state capture” in your internet search engine you will see that the World Bank and other global institutions reserve the concept exclusively for poor countries in the Global South and the countries of the former Soviet Union. The concept is meant to explain a lack of economic performance, openness and transparency among corrupt countries that are dependent on the export of a single crop, commodity or mineral. We would argue that the one-sided growth of finance in the West in the last thirty years has produced similar de-differentiations of a prior more complex and variegated social and economic ecology in the West, and made core states ever more dependent on one single sector, giving this sector ever more prestige and power. Indeed, Simon Johnson, a former IMF Chief Economist now openly calls them “banana economies” (Johnson Reference Johnson2009) and his recent book is tellingly entitled “13 bankers”, graphically signalling oligopolistic control over the state-finance nexus in the US (Johnson and Kwak Reference Johnson and Kwak2010). Any recent study of the “liberalization” of finance over the last three decades highlights the prevalence of “regulatory capture” (see Kay Reference Kay2009 for a review) as big finance was allowed to write its own operating rules under Greenspan’s mantra of the market knows best. But beyond regulatory capture, which given limited space we will not discuss here, we argue that it makes analytic sense to talk about state capture by finance tout court. Or as Willem Buiter, a former member of the monetary committee of the Bank of England wrote, finance was “almost a law unto itself” (Financial Times 01/09/2009).

Virtual Economy

Individual greed and corruption have mostly been painted as exceptions or personal excesses in both financialised capitalism and the Soviet system. In reality, they are not just personal attributes but systemic properties intimately linked to fundamental characteristics of both systems, in particular the generalized short-termism and the spread of a virtual economy. Continuing and increasing pressure for material expansion in an economy where the productive base is increasingly under-invested or obsolete (the SU) stimulates managers to create virtual production. In both systems managers have an incentive to create “quantifiable” but largely “paper-based” production to satisfy actors outside the enterprise (the state in the Soviet Union, and investors in the West).

In the Soviet Union short-term production increases were generated artificially by creating production figures (or at least statistics suggesting such production) to fulfil state quota. As Nove (Reference Nove1980, p. 49) notes, the SU was known as being “obsessed with the future, being ever ready to sacrifice the present to it, as may be seen by the high rate of investment and the priority of producers’ goods. [...] But, paradoxically, given the adaptation of ambitious plans for growth, the choices made and decisions taken reflect above all immediate concerns”. Despite the ideological orientation on pyatiletki (the five year plans), both managers and officials were in practice increasingly oriented towards short-term performance. As Nove (Reference Nove1980, p. 49) stated at that time: “They are in trouble if they do not raise the production in this year’s plan and it is easy to see that longer-term orientations can conflict with this objective”. This was especially acute at the enterprise management level. Yearly plans were sometimes adjusted top down in December of the year to which they applied (ibid., p. 40). Manager’s time-horizons were strongly affected by the likelihood of not keeping a position for long. The focus on quantitative indicators of performance further stimulated short-term opportunistic behaviour, including outright corruption by whole enterprises. Firms secretly kept their surplus production (production above the quota established by the planning apparatus), and did not include it in the accounts for the state (Granick Reference Granick1954, p. 132), in order to insert it into the officially registered output at times when an enterprise would otherwise be unable to meet the plan, or to exchange it for shortage goods within the shadow economy. Through such informal barter, enterprises were able to obtain unregistered inputs or spare parts. Humphrey (Reference Humphrey1998) called the hidden production the “manipulable resources”. These resources could be used by the enterprise management to load on or load off from the registered production at strategic moments to gain incidental enterprise level bonuses [and, mostly hidden personal favours or career perspectives] for good performance while avoiding state knowledge of actual production capacity which would lead to permanently higher production targets. In sum, “[ac]counting secrets were the best hidden secret, despite the many indicators, the actual state of affairs remained mostly obscure” to the planning authorities and society at large (Broekmeyer Reference Broekmeyer1995, p. 81).

The lack of insight in the real economy, and subsequently the limited ability to monitor, was true on all levels. The problematic labour performance of Soviet employees was well known. Alcohol and a lack of motivation were increasingly widespread. The central apparatus had little insight in the real productive capacity of enterprises. Managers of these enterprises in turn had very limited insight in the real functioning of the units within them, as branch/unit heads as well as workers themselves had an incentive to hide their real performance and capacities from people higher up in the hierarchy. The overarching pattern of pretence was aptly summarized in the Soviet joke: “workers pretend to work and the state pretends to pay them”.

The reputation and career prospects of industrial managers depended first and for all on their production figures (Kuznetsov Reference Kuznetsov1994, p. 962), and this was true also for the agricultural sector. “The main concern of a bad kolkhoz chairman was: to fulfil the plans on paper and not disturb the relations with the rayon or province. How the harvest was in reality, was of secondary importance, and the consequences for the people were of even less importance” (Broekmeyer Reference Broekmeyer1995, p. 80). As employees had minimal formal influence on enterprise issues, it was easy for managers to ignore their objections. In particular, recently appointed directors or chairmen had “many opportunities for window dressing, and consequently virtual success” (Broekmeyer Reference Broekmeyer1995, p.79 citing a Russian source on the Russian agrofood sector).Footnote ¹⁰

In the West a comparable virtual economy has been created through business reports and favourable stock exchange values (often through fraud; see Enron, Worldcom, Ahold) that bear little resemblance to real production. Most corporations, under pressure of shareholders to show short-term improvements without the necessary base of investments, often extended their quarterly reports during the 2000s. Whereas enterprises initially only made prognoses of profit per share and turnover, now they mostly felt obliged to predict these figures in detail, separately for all their divisions. This spectacle of three-monthly figures, analyses and predictions gave a strong incentive to practise short-term policy and doubtful accountancy practices which were not entirely unlike the situation in the Soviet economy.

Mystification of Risk

The virtual economy in both the SU and the West was not only virtual because of unrealistic production and/or profit indices; it also gave misleading signals/information about risks. Probably the most destructive aspect of the lack of realism associated with the virtual economy in both systems is what we would call the “mystification of risk”. In the Soviet Union, managers and their enterprises did not feel the effects of the risks they took. The state normally did not allow enterprises to go bankrupt. In the case of enterprise failure the state simply increased subsidies or forced a more successful enterprise to merge with it. As a consequence, it seemed that risk, bad performance and failure did not exist. Both enterprise managers and state officials kept pretending that the economy functioned well, and that misleading production plans and figures reflected the real economy. Enterprise failure and stagnating production were compensated by increased lending. However, the debts of the Soviet and East European states with Western institutions grew enormously. By the early 1980s the debt burden became so large (over 90 billion dollars in the case of the SU, 40 billion for Poland, 25 billion for Hungary etc., the GDR paid 60 % of its yearly export incomes to West German creditors) and the prospects for generating sufficient export income in an increasingly hyper-competitive world economy to ever pay it back became so negative, that Western banks began to refuse to roll over their loans. As a consequence, state-elites were forced to start serious economic restructuring which indeed finally resulted in increasing disaffection and ultimately the end of the planned economy.

In the West, especially in the US and UK, as in the SU until the credit stop by the West, an internationally declining manufacturing sector was hidden by increased international borrowing. Risk taking in the financial sector (but also in society at large), increased sharply in the 1990s and 2000s, but, as in the Soviet Union, managers and their companies rarely took full responsibility for the risk. Risk was spread throughout the whole economy via financial engineering. What happened through complicated bureaucratic state procedures in the SU, eventuated via complex financial instruments in a deregulated global economy in the West. Bankers became ultra creative in their efforts to slice, dice, redistribute and even literally hide risk, while households and firms eagerly took up the loans offered to them on the assumption of endless growth. Overall indebtedness in the West, consequently, has reached phenomenal and unique proportions.

In the 2000s a crucial new but hidden feature was added to the financial system that further multiplied risk. It was only in 2006 that reporters, in particular the anthropologist Gillian Tett (Tett Reference Tett2009), working for the Financial Times, started to alert the wider public to the existence of escalating global debts that were literally hidden away in what Tett called the “shadow banking system”. Credit derivatives based on mortgages had been introduced in 2001 and were booming. These liabilities, however, were immediately shifted from the public balance sheets of banks into “off balance sheet vehicles”, which, by 2006, were hiding some 20 trillion dollars in debt from public scrutiny (it would double in the years until late 2007, coming close to annual US GDP). These debts went far beyond what could be warranted by the capital bases of the banks; some of them were taking on a hidden leverage of 25 or 30 times their own equity while their official leverage remained well within the Basle rules of 10 %. In a G8 meeting in Washington in April 2007, some months before Lehman brothers collapsed, state officials from the G8 were interviewing hedge fund managers, who, as the unregulated part of the global financial system, were supposed to be the ones causing risk (recall the drama with LTCM in 1998). However one of them explained in no uncertain words to the officials that; “it is not us you should be worrying about – it’s the banks! It is the regulated bits of the system you should worry about” (Tett Reference Tett2009, pp.190-191). Officials did not yet understand that regulated banks had been operating a huge covert system that was going to blow up soon.Footnote ¹¹ The ticking time-bomb was the increase of interest rates which would inevitably come. As it happened, it came in response to staggering speculation by the same actors in oil and basic commodities (“futures”), partly a “flight to safety”. This speculation was driving up basic prices for all economies in 2007-2008 and creating the first generalized global concern about insufficient food supplies and famine throughout the system for the first time since the 1960s.Footnote ¹²

The immediate cause that triggered the financial crisis was the interest rate on sub-prime mortgages, which was going up exactly at the moment that housing prices started to fall, driving mortgage holders into insolvency. It turned out that not only banks had pretended to be more liquid and reliable than they actually were, house owners, too, had pretended to earn more income than they actually did (often invited to do so by brokers driven by perverse incentive structures). The Soviet joke of workers pretending to work while the state was pretending to pay them comes to mind. Applied to the current capitalist context it reads: “Debtors pretend they can pay their debts and banks pretend that they have the money to lend”.

Orthodoxy, Unquestioned Modelling and Capture Beyond the State

In the SU perverse processes could not fundamentally be corrected within the existing institutional framework, as the communist ideology was dominant, and opposition parties, independent academia, and free media were not allowed. In the West, the “silence” of society regarding the enrichment, excessive risk taking and state capture by an oligopolistic financial sector, needs more explanation. The dominance of the financial sector was not only a result of the powerful lobby by the financial corporations (recall the 400 ex mp’s) with their enormous market concentration, but it was also enhanced by the way the orthodoxies of neo-liberalism, “market fundamentalism” in George Soros’ words (2008), were taken over by state administrations, controlling and rating agencies, as well as the media and large parts of academia in the last three decades (see also for the “success” of neoliberalism, Friedman Reference Friedman2010). The presentation of absolutist figures and complicated models with the aura of the high sciences played an important role in the game of managers and planners in convincing external actors (the state or shareholders) of their firm grasp of reality.

In the Soviet Union the real mechanisms behind such planning statistics, models and decisions were completely obscure. Although statistics on national, regional and enterprise level were presented in a very absolutist way, the planning of production was actually based on a “process of iteration, bluff, counter-bluff and misinformation between planners and enterprise managers, in which central planners routinely assumed that real production costs were less than enterprise managements claimed they were, and enterprise managements tried, in turn, to ‘second guess’/influence what the prices were going to be by manipulating production costs” (Kitching Reference Kitching2001, p.69).

In the West the operations of hedge funds and banks in the late 1990s and early 2000s, were increasingly characterized by similar phenomena: statistics, modelling and decision-making, with little grounding in reality. It seems that the controlling agencies in the West were more naïve in their monitoring of enterprises than the Soviet state. Key persons in controlling agencies maintained an unlimited belief in the indicators and models provided by the financial sector, including the Value At Risk equations that were pioneered by Morgan Stanley.Footnote ¹³ Thus analysts, controlling institutions and rating agencies such as Standards and Poor and Moody’s (“the emperor’s legitimacy”) exulted in myths of objective control with two figures behind the comma.

Public ignorance in the West about creeping state capture by the finance sector above all testifies to the all-encompassing influence of neo-liberal thought (supported by the belief in figures and models) over the media, which in this respect has dramatically reduced its role as a critical fourth force, among others because of similar processes of privatisation, concentration and oligopoly as we saw in the financial sector. Newspapers and TV channels were bought up or launched by the financial elite (Murdoch, Kirch, Berlusconi, not much unlike what happened in Russia after the fall of the SU) and it would be hard to find examples of mainstream media in the West that have been consistently critical of finance-driven growth and the neoliberalisation of social life. The British financial journalist Peston (Reference Peston2008, p.14), is a rare example of a journalist who (already before the financial crisis), recognized self-reflexively that he had acted merely as “a cheerleader of the über-capitalists”.

Here again, the similarity with the Soviet system comes to the fore. Of course we are not suggesting that the independence of the press in late capitalism is as constrained as in the Soviet era. However, with regard to the economy, the media played a similar role: orchestrating silence and loyalty. Signs of the fundamental flaws of the system were presented as instances of deplorable individual greed, moral hazard, fraud or corruption and were pictured as exceptional excesses that would be punished. It left the status quo largely undisputed. Recall how Gorbachev ultimately focused only on worker alcoholism and the corruption of individual managers when he was supposedly carrying out glasnost and perestroika of the system as such.

As a result of insufficient information, analysts, politicians, trade unions and NGOs representing the population outside the financial sector, have been unable to address core problems within the global system such as state capture by big finance, speculation, global trade imbalances and financial imbalances, let alone the less overt but even more fundamental overall global decline of social wages compared to the incomes derived from capital. Some of these issues have now come on the agenda of the G20, in particular the global imbalances, which reflects the interests of the US state, though much of the exercises of the G20 remain mired in neoliberal orthodoxy and the mythical belief in the return to “normality” of endless growth. One of the functions of neoliberalism in the last decades was to keep national publics frantically focused on their own national budgets and their national competitiveness among the global players (Brender and Pisani Reference Brender and Pisani2009 for the systemic and fatal lack of global vantage points in banking, and Martin Wolf for the ingrained “passing the parcel” in the global economy, FT 29-6-2010). Ultimately, the obsession with winning the competitiveness game has led to a weakening power of the public – so deeply fragmented over national jurisdictions and associated interests and viewpoints – vis-à-vis global capital.Footnote ¹⁴

The silencing of civil society and institutions also included think tanks and universities, which became increasingly dependent on external funding, disbursed through peer review mechanisms that are based on professional consensus. Policy relevance and scientific consensus, privileging a strong quantitative or model-based approach to society, was favoured over pluralism, contestation, and deliberation fed by a diverse ecology of universities, research groups, intellectuals, and other institutions. Only recently, with the downfall of the financial system, are scientists who warned of the almost sacral, mythical belief in statistics and models being heard (see for instance Taleb Reference Taleb2008). This may offer a window of opportunity for alternative insights and broader visions on markets and economics, such as those based on fractals and chaos theory (Mandelbrot and Hudson Reference Mandelbrot and Hudson2004); the historical studies on bubbles and financial crises; on the global analysis of hegemonic cycles; and in general on an “expanded institutionalism”.