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Disaster capitalism: some doubts

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Could “disaster capitalism” actually work? This is the question posed by Grace Blakeley, who writes: A no-deal Brexit is to Johnson and Hunt what the financial crisis was to Cameron and Osborne – an opportunity to rebalance power and wealth in society away from labour and towards capital. Here, some distinctions are necessary. One is between effects and intentions. A precedent for successful disaster capitalism was the 1981 recession. It greatly weakened workers’ bargaining power and caused capital scrapping, both of which helped to restore profitability. This, however, was not Thatcher’s stated intention: she did not expect her policies to cause a recession. And it might not have been her actual intention either. Similarly, I don’t know whether Johnson really believes a no-deal

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Could “disaster capitalism” actually work? This is the question posed by Grace Blakeley, who writes:

A no-deal Brexit is to Johnson and Hunt what the financial crisis was to Cameron and Osborne – an opportunity to rebalance power and wealth in society away from labour and towards capital.

Here, some distinctions are necessary.

One is between effects and intentions. A precedent for successful disaster capitalism was the 1981 recession. It greatly weakened workers’ bargaining power and caused capital scrapping, both of which helped to restore profitability. This, however, was not Thatcher’s stated intention: she did not expect her policies to cause a recession. And it might not have been her actual intention either.

Similarly, I don’t know whether Johnson really believes a no-deal Brexit will help increase capitalists’ wealth and power: I can’t read minds and in his case I don’t want to. But it doesn’t matter. No-deal might or might not have this effect, whether Johnson intends it or not.

A second distinction is between free market policies and pro-capitalist ones.

Grace claims that “Cameron and Osborne used the financial crisis as an opportunity to shrink the state.” I’m not sure about this. As Sam says, they “totally failed to make a broad-brush case for free markets” and failed to sufficiently improve public sector efficiency with the result that their cuts were unsustainable. As a result, the share of public spending in GDP this year, at 37.9%, is greater than it was in the early 60s or in the early years of New Labour.

But no matter. Healthy capitalism requires a biggish state not only to provide subsidies to banks, corporate welfare, infrastructure and automatic stabilizers, but also to provide good enough public services to diminish discontent. Shrinking the state and supporting capitalism are two different things. 

A third distinction is between capitalism’s material conditions and its ideological climate. For reasons I’ll come to, I’m not sure that no-deal Brexit would materially benefit capitalists. But it might create an ideological climate favourable for some. We know that tougher economic times breed pessimism, illiberalism and intolerance. This would be especially the case if the EU, Ireland and the “Remainer establishment” get the blame for the ill-effects of no-deal. This would hurt the left, not least by shifting the agenda towards reactionary nationalism. That would help some sections of capital.

A fourth distinction is between the interests of financial capital and industrial capital. There are ways in which a no-deal Brexit might help financial capitalists. But aside from Johnson’s promised cut in incomes tax, I’m not sure they are terribly powerful, for example:

 - A fall in sterling would give windfall profits to holders of overseas assets. There’s nothing especially Machiavellian about this, though. Anybody with a moderately well-managed Sipp can take some advantage of this.

 - A recession would devalue some companies sufficiently to make them cheap for vulture capitalists who have either the leverage or liquidity to snap them up. Doing so, however, is a very risky strategy with huge downsides as well as upsides. As John Campbell has pointed out, distress risk doesn’t pay off on average. Those who bought Carillion or Debenhams when they looked cheap would confirm this.

 - The policy response to a no-deal recession would involve cuts in interest rates and QE which would promote financialization and boost asset prices. Now we are near the zero bound, however, the scope for rate cuts is limited. And Johnson’s promises suggest that an (albeit half-arsed) fiscal easing might limit the extent of QE*.

Nor am I convinced that disaster capitalism would improve the prospects of industrial capital. Baldrick-and-blackadder-620x372

It could do so in theory in the way it did in 1981 – by causing widespread capital scrapping which would raise returns on capital partly by reducing competition and partly simply by cutting the denominator.

A striking feature of recent years, however, has been that this mechanism has not operated. Even at the height of the crisis there were fewer corporate liquidations than there were (pdf) in the 80s and early 90s. Low interest rates and banks’ forbearance have limited capital scrapping. It’s not obvious why this should dramatically change in the next recession.

What’s more, the restoration of real profitability requires more than capital scrapping. It also requires an expansion of profit opportunities. No-deal, however, would have the opposite effect. Increased (pdf) trade barriers and greater policy uncertainty would actually restrict such opportunities and deter investment.

I don’t, therefore, see how a no-deal Brexit would reinvigorate capitalism. To claim that it is part of a cunning plan by Johnson is to give the man too much credit. Sometimes, people are as stupid as they look.

* Given the inflation target, more fiscal easing means less monetary easing.

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