Peet, R., (2011): Inequality, crisis and austerity in finance capitalism

Poppy Harris

The neoliberal state imposes sanctions, not on the speculators, but on the hard-working people whose taxes bailed out the financial system. Austerity is societal punishment for the crimes of the wealthy. It is imposed on everyone but the guilty.

In this article, Peet is arguing that to understand austerity measures (which, he suggests, is a form of 'class warfare'), finance capitalism needs to be fully understood, since it was the rise and expansion of global financial capital that allowed excess wealth to be contained by a few. Moreover, understanding finance capital and its close links with domestic governments and how they work closely in tandem can better allow us to see the reasoning behind austerity measures in times of crisis. 

The shift from Keynesian policies to neoliberalism

Peet suggests that the shift from the Keynesianism policies from around 1945 to 1970 to neoliberal economic practices in the 1970s was not stagflation (high rates of inflation simultaneous with high rates of unemployment) happening in an apolitical vacuum. Stagflation offered “capital to reassert itself, to regain control over the government, to produce new propaganda, to discipline organised labour”. Deregulation and the weakening of welfare and social services, as well as open-border trade resulted in increasing “the share of income going to the elite [and reducing] benefits received by the working class”. He appears to be suggesting, then, that the impetus behind the perpetuation of neoliberal ideas was precisely for the goal of driving large amounts of financial capital to little amounts of people. 

Since the supposed aim of neoliberalism is long-term economic growth, one would assume that growth would indeed be higher under neoliberal policies. However, it appears that rates of growth under such policies are in fact 1.5% lower than what they were under Keynesianism. Neoliberal policies do produce some growth but it “almost exclusively benefits the rich and super-rich in terms of income”. He also points out that a divergence in the type of wealth owned, such as financial wealth, was one of the “key factors causing these secular changes in class incomes” in the post-Keynesian era. The resultant factor is that too much money is accrued into too few accounts, which can then be used for speculation causing the economy to become unstable. Indeed, this “produces instability, recession and depression” as we saw in the financial crisis. 

Finance capital and the government

Peet is a Marxist theorist, and offers a couple of different Marxist theories of the state.

1. structural dependence: the state serves the interest of capitalists “because private owners of productive assets impose binding constraints on the effectiveness of governmental operations”. Here, investors can simply choose not to comply with governmental policies they do not agree with, by simply choosing not to invest.
2. Power elite theory: governments act on behalf of the capitalist because they are all part of the “same elite club”. 

This starts even before politicians enter office, he argues, since elections are expensive (note he is referring primarily to the USA here, but points out that this can be observed in the UK), with the bulk of donations coming from 1/10 of the top 1% of society (231,000 individuals), at around $2000 each. Once in office, contributions help keep politicians in line, but lobbying plays an important role, with a stark distinction between labour unions and insurance and business unions: the former spending around $30 million per year on lobbying, with the latter at a huge $3360 million. This, he argues, is how the government is “bought”. Finance finds its way in from the outset in the form of election donations, and continues to permeate into policy-making practices, something that is starkly observable in the aftermath of events since the financial crisis. 

Once the financial crisis hit, with this understanding of the government, it follows that deficit reduction measures would serve those towards the higher bracket of society. Indeed, marginal tax rates to the capitalist class have stayed around 28-50% (mostly at the lower end), in contrast to a rate of 70-90% during the years of Keynesian policies. This is concurrent with speedy rates of income rises for the wealthy. The rationale for this low rate of taxation was to increase competition and growth, but Peet maintains it was rather a “massive redistribution of the tax burden onto working class people at a time when their income was stagnant”, thus maintaining and, indeed, increasing the class divide.

How are we to remove ourselves from this crisis? According to Peet, money and power needs to be taken away from the financial elite: “this can be done immediately through mildly Keynesian policies”. Taxation must be increased with the intention to redistribute to the poor in the form of social service subsidies. Moreover, this will have the double benefit of decreasing the speculative capacity of financiers, meaning the economy will be stabilised in the long-term.