Poppy Harris
Watson’s
paper aims to offer a challenge to the economic orthodoxy of the view of
capital as a ‘hyper-mobile’ entity as a result of globalisation or, in others
words, rejecting the ‘logic of no alternative’ purported by the classical
neo-liberal dogma that has permeated global economies since the fall of Bretton
Woods.
The
West has tailored a view of capitalism whereby if the market cannot (or,
indeed, is not ‘allowed to’) reach a global equilibrium, capital will naturally
relocate to newly emerging lower-cost economies, since capital is inherently
instinctive towards maximising profit and will move to do so. This has led to
the view that states are unable to regulate their own economic spaces, or
impose their own “distinct national identity upon capital” since capitalism
transcends borders. Moreover, upon this orthodox view of global state
interrelations and global capital movements, states are considered to not have
the capacity act autonomously in regard to domestic economic policy. The logic of this argument suggests that economies
are exporting capital at the expense of domestic capital and consumption.
To
what extent is this the case? It appeared at the time of writing (1999) that
domestic consumption was satisfied by domestic capital. Furthermore, Watson
used the example that investors were holding stocks in their home country
stock-markets with US at 94% of home-country investment and UK at 82% suggesting that capital is not as mobile as the spatial theory suggests. Of course, this needs re-visiting in light of when the article was written and the huge leaps that globalisation has made since 1999.
Therefore,
rather than explaining capital shortage in the West with these ‘logic of
globalisation’ arguments, Watson suggests that it is instead the result of the
neoliberal regime “providing a range of incentives for rationally-acting,
profit-seeking capital investors to concentrate an ever-larger proportion of
their investment in financial assets”. Capital has not relocated as is often
understood; investment in production has been scuppered due to the widening gap
between finance and the real-world economy, contra to the original aim of the
financial industry to exist to regulate these differences. This has resulted in
large capacity gaps in many Western economies (the difference between the
actual output of an economy and its potential output).
How
has this happened? Watson appears to argue that political economy has been too
preoccupied with the spatial mobility
of capital at the expense of its functional
mobility. It is these two distinctions he continuously refers to in support of
his argument. Spatial arguments maintain that capital will move across nations,
transcending borders in search for the optimal maximisation of profit. A
functional understanding, by contrast, should be understood as the impediment
of investment flows into production, standing in contrast to a free-flowing
understanding of capital. Viewing capital through the lens of spatiality presupposes
that at some point it will always “touch down” in distance places. Looked at
through functional mobility, we are forced to assume that finance capital does
not touch down at all. A lack of this
understanding can, and has, have serious implications for policy-makers.
Watson
uses the example of derivative markets to defunct the spatial model of capital
movement. The very existence of derivative markets, he suggests, are an example
of the limitations of this argument. The spatial argument is based upon an
understanding of capital’s ability to assess all available market options,
placing itself where it will earn the highest premium. Taken to its logical
conclusion, this would impact “upon domestic money supplies in such a way so as
to eliminate the interest rate differentials which triggered the [movement] in
the first place”. With such an understanding, we are forced to believe that
domestic interest rates will be ‘policed’ by “speculative activity towards an
international average”. However, he points out that derivatives markets exist
in the first place because this international convergence failed to
materialise. Uncertainty needs to exist to some degree for these sorts of
markets to be viable.
Since
the fall of Bretton Woods, interest rates have increased due to a loosening of
capital control. A growing desire for liquidity meant that capital costs
increased as a result, which affected small to medium-sized firms the most.
Moreover, financial transactions were mobile in terms of geographical location
(crucially also meaning they were outside the control of governments), which
led to lowered transaction costs and thus the financial flow appeared to grow,
whilst not being passed into the hands of production. For a shift to changing
incentives from holding capital as money to holding capital as productive
assets, new regulations of the market regime need to emerge in the form of a
new set of interventions. This, he argues, will have the effect of “ending the
notion of competitive austerity”. As it stands, governments attempt to market their
workforces cheaply due to the supposed alternative being capital will leave for
far-flung cheaper lands. These short-cuts in regards to labour and production
costs have resulted in a relative fall in wages for the average worker. Only in
regulating the flows between finance and production capital can the difference
between the financial sector at large and the real-world economy begin to be
stabilised.
