The viability of western democracy is now being put to a severe test: can the economic crisis be tackled in a way that recognizes the situation of the great majority of the population, or must the interests of the banks who caused the crisis in the first place through their irresponsible use of secondary markets always be privileged? It is a deep irony that, while the earnings of capital are justified on the grounds that shareholders are the ultimate risk-bearers, in the contemporary global economy it is the interests of bank shareholders that have first claim on resources.
To express the issue as starkly as this is to be demagogic, and some correction is necessary. Although it was the behaviour of investment bankers that caused the initial crisis, and although they profited and continue to profit most from that behaviour in personal terms, millions of us received some gains from their activities. Many Americans and others were able to maintain their consumption during the 1990s and 2000s despite stagnant wages, because banks allowed them to raise large unsecured mortgages on their homes and indulge in credit card debt. As banks in other countries started to buy the over-rated assets of US and UK banks and join the game of selling them on further at even more over-rated values, an illusion was created that the western world was becoming richer. Governments and households indulged in spending that was supported solely by this illusory growth. These castles in the air had to collapse eventually, and they did so in 2008. Now we are all being brought back down to earth and required to return to a standard of living closer to where we would have reached had the bankers' boom never taken place.
It is therefore not possible to argue that ordinary workers should be protected from all negative consequences of the eventual collapse of the secondary market phenomenon. However, we can and must examine the disparity in the way that financial interests and those of nearly everyone else are being treated. In the US and the UK bankers' own earnings and bank profits had by 2010 already returned to the extraordinary levels they had reached before the crisis. At the same time private-sector workers around the advanced world were facing static wages, while those in the public sector were often confronting actual wage reductions. That bankers' incomes continued to rise is doubly surprising. First, their earlier astronomical levels had been achieved only through those activities in the secondary markets that we now know were false and based on erroneous information about asset values. Second, their post-crisis bonuses and profits were rising while banks were still being massively subsidized by the same taxpayers whose own incomes were static or falling.
If we ask governments - or at least the US and UK governments - why they are continuing to allow this to happen, they tell us that we need the banks to be profitable again, because we all depend so much on them, as the crisis demonstrated. In effect, though they cannot say so too boldly, they want the banks to go back to the same kind of behaviour that caused the problem in the first place. They seem to understand no other way of returning the world to prosperity than the creation of false increases in wealth from financial deals. They will say that they will put some regulation in place to prevent bankers from behaving quite as irresponsibly as they did before, but the record to date suggests that these measures will be purely cosmetic.
This explains why, although the crisis marked a massive failure of the neoliberal model of unregulated markets, that model has emerged stronger from the crisis than before. Through our governments, we have revealed our dependence on deregulated banks, however irresponsibly they behave; indeed, the worse they behave, the more dependent we become, because the most unrestrained behaviour brings the highest profits.
But to state the matter this way still under-estimates bankers' power, as it implies that governments would have been able to judge the matter differently had they rated dependence on banks' investments in secondary markets less highly. In fact, for various different reasons governments are incapable of separating themselves from the interests of the large investment banks. And it is here that the crisis of 2008 becomes not just a major economic problem but a challenge to western democracy itself.
To start with the most extreme case, it is not clear that the US government can be seen as an institution separate from the country's banking sector. From the beginning of the banking deregulation process in the 1980s until the faint attempts at reregulation today, there has been a revolving door between personnel associated with the leading investment banks and hedge funds and senior administration officials. Meanwhile the Conservative-Liberal government in the UK introduced some tougher-looking regulation - and then announced that it would not be implemented until 2019. The European Commission is promising a tougher approach. The financial sector is not as important to the economies of Continental Europe as it is to those of the Anglophone world. The UK government can be guaranteed to fight these attempts from within the EU; the US from outside. At the time of writing the outcome remains uncertain.
But in the Eurozone there is a different problem that has similar consequences. The rules of European Monetary Union follow neoliberal economic theory in assuming that virtually all markets function perfectly except for labour markets (where trade unions try to interfere) and public spending (which is outside the market frame). Therefore all harsh adjustments to economic problems must be borne by labour (whether through wage cuts or unemployment) and public spending (which has to be reduced, creating more unemployment). There is no mechanism for recognizing that financial institutions might have operated in a way that would produce a major market failure. So banks have to be protected, as they are seen only in their role as external economic judges, whose good opinion is necessary to the reputation of the common currency. They are not seen as participants whose own market behaviour might be defective and who should therefore face correction.
These were at least the initial assumptions behind the recent approach to the debt crisis in Greece and some other countries. Finally the impossibility of this strategy was realized; Greek society simply could not bear the full burden without its economy completely collapsing. The banks that had lent money to Greece had to accept a share of the burden. But this was an exceptional package. Overall, the rules that concentrate burdens on labour and social spending remain intact.
Financial institutions are a special case, because of the role of the sector in enabling the whole economy to work. But they are not alone in demonstrating the power of business interests in contemporary societies. Political debate over economic issues is usually set up as a conflict between states and markets; but hiding behind the latter are often giant firms, so dominant in their markets and so close to governments that they break most of the rules of what economists understand by the free market. Economists see markets as comprising large numbers of producers, giving consumers extensive choice, with a clear separation between economic and political power. From the 1970s onwards economic lawyers associated with the University of Chicago have been arguing that consumer choice is not so important; what matters is consumer welfare, and this is enhanced by improving efficiency, and (a big leap in argument this) efficiency is nearly always improved when large firms take over smaller ones or drive them from the market. Therefore the destruction of a competitive market by large firms may be a desirable outcome. These theories have never completely dominated competition law, particularly in the European Court, but they have been very important in undermining anti-trust law in the USA, leading to the emergence of corporate giants dominating many markets.
While there is room for debate over the Chicago School's economic arguments over what suits consumers' real interests, there can be no defence of the political outcomes of the school's success. The vast, oligopolistic corporations that have resulted from it can devote immense resources to political campaigning, including (as with the investment banks) placing their personnel in government positions. Middle-sized enterprises operating under strongly competitive conditions can rarely afford such political expenditure.
No democratic political theory even tries to defend the domination of government by a small number of giant corporations; conservative theorists merely deny that such a phenomenon exists, but it is already the dominant reality of US political life, and it is spreading beyond. The US already has a degree of economic inequality more usually associated with third-world dictatorships than with advanced democracies. This inequality is both cause and effect of the close relations between giant corporations and politics. Only the rich can afford to 'buy' politics in this way, and major results of political influence are favourable regulation, government contracts and other favours that intensify further the concentration of wealth. A major contributing factor to the economic and political dominance of large corporations, in most of Europe as much as in the US, is the contracting-out of public services - another strategy favoured by neoliberal ideas. Typically, a small number of producers enjoys a cosy relationship with a small number of government purchasing departments, gaining lucrative contracts on soft terms.
The power of the major banks is a special case of this combined political and economic power of giant corporations in general. The neoliberal ideas - very different, it should be noted, from economic ideas about free markets - which have assisted its development have not suffered a setback as a result of the financial crisis, because nothing about that crisis has served to separate the entanglement of firms and governments. Indeed, the opposite.
Possibilities for resistance
It is increasingly difficult for political parties, whether social democrats or true free marketers, to challenge this situation, particularly in those countries where corporate funding has become vital to the ability of parties to wage election campaigns. But this does not mean that the entire political community is just accepting the situation. There are two main developments here.
First, we increasingly see campaigns that are targeted directly at corporations themselves, rather than at governments and parties. Firms involved in, say, environmental pollution or the employment of child labour in their supply chains, are likely to be directly criticized, and they find it increasingly difficult to say, as they once did: 'We are here to make a profit, we are not politicians; if you want action on these issues, you must pressurize governments to introduce regulations'. They find this difficult for two main reasons. First, as part of neoliberal rhetoric, corporations have been claiming for some years that they are more efficient than governments and should be allowed to take over government services. Second, we know that they use their powerful resources to fight regulation, so it is disingenuous of them to claim to be outside the politics of regulation.
Second, the growing inequalities of wealth that neoliberalism is producing are creating major gaps between the top tiny fraction of the income distribution and the rest of society. A political consensus of the early 2000s seemed to be that society's big problem was a bottom 10-20% who were drifting away from the top 80-90%, into poverty and crime. The financial crisis and the subsequent behaviour of the leading banks has started to draw the attention of even people in the top 20% to what has been going on among those at the very summit.
In earlier decades tiny, powerful and wealthy elites came to terms with democracy when they could make alliances with middle-class groups against the potential threat of a growing industrial working class. Those alliances governed most of the democratic world for much of the 20th century. Today there is no growing, threatening working class, while the wealthy elite has become global and is not very interested in the political structures of any country, except perhaps the USA. The elite may therefore be neglecting its need to build alliances. This leaves it vulnerable to attack by a disenchanted middle class, potentially linked to increasingly globally organized and sophisticated citizens' initiatives. We may therefore be in the early stages of a major reorientation of socio-economic interests. It is far too early to say whether this might, in some countries, produce a realignment of political parties. If corporations have now, as a paradoxical consequence of neoliberalism, placed themselves in the public arena, the divisions between economy and polity that once produced the idea of political parties as forms of action distinct from other forms of social conflict and action may have become outmoded. This is especially the case when the major issues facing the world have become global, while formal politics, even in Europe, remains doggedly national. Electoral conflict around parties may therefore go on in its old familiar way, increasingly ritualistic, while major social realignments and issues are fought out elsewhere in new and fascinating ways.