Decline & Fall

“decline” by Vasilyev Serge is licensed under CC BY 2.0

The final stage of a great power’s decline is often marked by a shift towards finance-driven capitalism.  In the 1980s and ’90s, finance-driven capitalism was touted as the future of economic prosperity. However, this narrative has lost its lustre, and the financialisation of an economy is now seen as a detriment to society. This raises the question of whether this state of affairs is a mere failure of policymaking or a deeper, more entrenched issue within the capitalist free market economy. It is easy to blame the current crop of self-serving and power-hungry ‘leets for this state of affairs. However, a closer examination of history reveals recurring instances of financialisation that bear striking similarities. This suggests that the predicament in the American economy in recent decades is not unique and that the unchecked rise of Wall Street was, in a sense, inevitable. The financialisation of an economy is not a new phenomenon, but rather a recurring theme throughout history. The fact that it continues to persist, despite its negative impact on society, speaks to the deep-seated nature of the issue. A more comprehensive analysis is required to truly understand the root causes of this problem – only then can effective solutions be sought. The story of the cyclical rise and fall of great powers, is a tale as old as the emergence of capitalist systems themselves. From the Italian city-states of the 14th century to the modern world, each hegemon follows a similar trajectory. Financialisation is not merely a financial phenomenon but a political and economic one, serving as a fertile ground for the emergence of the next hegemon. As the ascending power emerges, it avails itself of the financial resources of the financialised and declining power, perpetuating the cycle of financialisation, crisis, and hegemonic shift. By understanding this process, we can better comprehend the current state of todays global economy and the challenges and opportunities that lie ahead, ultimately demanding a more equitable and just economic system that serves the needs of all, not just the few.

Giovanni Arrighi
Kkharris, CC BY-SA 3.0, via Wikimedia Commons

To better understand this phenomenon, it is worth visiting the work of Giovanni Arrighi, an Italian political economist and historian of global capitalism. Although Arrighi is often labeled as a Marxist historian, this classification is far too narrow to encompass the breadth of his work. In his theory, Arrighi explores the origins and evolution of capitalist systems, dating back to the Renaissance, and demonstrates how recurrent phases of financial expansion and collapse underpin broader geopolitical reconfigurations.  Arrighi traced this path through the Italian city-states , the birth of the modern world, and the marriage of Genoese capital and Spanish power that produced the great discoveries. He then follows this path through Amsterdam, London, and finally, the United States. In each case, the cycle is shorter, and each new hegemon is larger, more complex, and more powerful than the previous one.  Arrighi’s work on financialisation and hegemony sheds light on the recurring pattern of financial expansion and collapse in capitalist systems throughout history. The first wave of financialisation began around 1560 when the Genoese businessmen withdrew from commerce and specialised in finance, forming a symbiotic relationship with the Kingdom of Spain. The subsequent wave began around 1740 when the Dutch began to withdraw from commerce to become “the bankers of Europe.” The financialisation in Great Britain emerged around the end of the 19th century, and for the United States, it began in the 1970s.

At the heart of Arrighi’s theory is the concept of hegemony, which he defined as “the power of a state to exercise functions of leadership and governance over a system of sovereign states.” Central to this concept is the idea that historically, such governance has been linked to the transformation of how the system of relations among states functions in itself, and it consists of both geopolitical dominance and intellectual and moral leadership. The hegemonic power not only rises to the top in the jockeying among states but actually forges the system itself in its own interest. Key to this capacity for the expansion of the hegemon’s own power is the ability to turn its national interests into international interests. The current American hegemony is a prime example of this, as observers will recognise the transformation of the global system to suit American interests. The maintenance of an ideologically charged “rules-based” order, which is supposedly for the benefit of everyone, fits neatly into the category of conflation of national and international interests. The previous hegemon, the British, had their own version of this, which incorporated both free-trade policies and a matching ideology that emphasized the wealth of nations over national sovereignty. This is a recurring theme throughout history, where the hegemonic power uses its influence to shape the global system in its own image, invariably at the expense of other nations.

Fernand Braudel (1902-1985)
Contributeur19322, CC BY-SA 4.0, via Wikimedia Commons

The concept of financialisation as a sign of a society’s impending decline was first introduced by the French historian Fernand Braudel, a mentor to Arrighi.  According to Braudel, the rise of finance as the primary driver of a capitalist society is a harbinger of its decline. Arrighi built upon this insight in his seminal work, “The Long Twentieth Century,” where he developed his theory of the cyclical pattern of ascendancy and collapse within the capitalist system, which he termed the “systemic cycle of accumulation.” In this theory, the period of ascendancy is characterised by an expansion of trade and production. However, as this phase reaches maturity, it becomes increasingly challenging to profitably reinvest capital in further expansion. The economic activities that fueled the rising power’s rise to prominence become less profitable as competition intensifies and a significant portion of the real economy shifts to the periphery, where wages are lower. Rising administrative expenses and the cost of maintaining an ever-expanding military also contribute to this, which marks the onset of what Arrighi calls a “signal crisis,” an economic crisis that signals the shift from accumulation by material expansion to accumulation by financial expansion. The ensuing phase is characterised by financial intermediation and speculation. In simpler terms, as a nation loses its actual basis for economic prosperity, it turns to finance as the final frontier where hegemony can be sustained. The financialisation phase is thus marked by an overemphasis on financial markets and the finance sector.

Take, for instance, Great Britain during the so-called Long Depression of 1873-1896. As the undisputed hegemon of the era, Britain suffered the most severe consequences of this prolonged slump, marked by a stagnation of industrial growth and a diminished economic standing. This, Arrighi argues, was the ‘signal crisis’ – the juncture where productive vigor dissipates and financialisation takes hold. But, as if by some sleight of hand, the clouds parted, and prosperity returned. Landes’ ‘ Unbound Prometheus’  (1969) recounts the remarkable turnaround: “In all of western Europe, these years live on in memory as the good old days—the Edwardian era, la belle époque.” A general euphoria, reminiscent of the early 1870s, swept across the continent.

However, there was nothing supernatural about this sudden revival. The reality is that as Britain’s industrial dominance faded, its financial prowess ascended, and its role as a global intermediary in trade, shipping, and insurance became more critical than ever. In essence, financial speculation experienced a massive expansion. At first, the burgeoning financial income stemmed primarily from interest and dividends generated by prior investments. However, a substantial portion was soon underpinned by the ‘domestic conversion of commodity capital into money capital.’ Meanwhile, as surplus capital shifted away from trade and production, British real wages began to plummet after the mid-1890s – a stark reversal of the previous five decades’ trend. This scenario of an affluent financial and business elite amidst a general decline in real wages should of course strike a chord with those familiar with the contemporary economies of the Western world………

In adopting financialisation, Britain was merely postponing the inevitable – the impending collapse of its imperial power. Beyond the financial façade lay the devastation of World War I and the ensuing volatility of the interwar period, a chaotic episode that Arrighi terms ‘systemic chaos’ – a phenomenon that becomes glaringly apparent during signal crises and terminal crises. Throughout history, Arrighi notes, these breakdowns have been characterised by a descent into full-blown conflict – specifically, the Thirty Years’ War (1618-48), the Napoleonic wars (1803-15), and of course the two World Wars. Paradoxically, these wars rarely featured the incumbent hegemon and the challenger on opposing sides, with the Anglo-Dutch naval wars being a notable exception. Instead, it was often the actions of other competitors that hastened the arrival of the terminal crisis. However, even in the case of the Dutch and British, conflict coexisted with cooperation, as Dutch merchants increasingly channeled their capital towards London, where it yielded superior returns.

The striking parallels between Britain’s financialsation in response to a signal crisis and that of its successor, the United States, are unmistakable. The 1970s marked a tumultuous period for the US, plagued by high inflation, a depreciating dollar following the 1971 abandonment of gold convertibility, and, most significantly, a decline in the competitiveness of American manufacturing. With emerging powers such as Germany, Japan, and later China outpacing it in production, the US reached a critical juncture, resorting to financialisation as a last resort, much like its predecessors. Historian Judith Stein refers to the 1970s as the “pivotal decade” that “sealed a society-wide transition from industry to finance, factory floor to trading floor.”

Financialisation enabled the US to draw in colossal amounts of capital and shift towards a deficit financing model, characterized by escalating indebtedness of the US economy and state to the rest of the world. This shift bolstered the US’s economic and political power, particularly as the dollar solidified its role as the global reserve currency. The US enjoyed a veneer of prosperity during the late 1980s and ’90s, with the notion under the uber optimist Reagan, that the US had ‘come back’ gaining traction. The collapse of its primary geopolitical adversary, the Soviet Union, undoubtedly fueled this optimism, reinforcing the belief that Western neo-liberalism had triumphed. However, beneath the surface, the foundations of decline continued to erode, as the US grew increasingly reliant on external funding and intensified leverage on a dwindling economic activity base that was rapidly being offshored and hollowed out. As Wall Street gained prominence, many traditional American industries were dismantled for the sake of financial gain. Arrighi argues that financialisation merely delays the inevitable, and recent events in the US have only served to expose this truth.

By the late 1990s, the financialisation process began to falter, with the Asia crisis of 1997 and the subsequent dotcom bubble burst marking the beginning of its decline. This was followed by a reduction in interest rates that inflated the housing bubble, which culminated in the spectacular 2008 financial crisis. Since then, the accumulation of financial imbalances has only accelerated, and the US has managed to prolong its hegemony through a combination of financial manipulation and coercion. In 1999, Arrighi, in collaboration with American scholar Beverly Silver, encapsulated the prevailing predicament of the era with striking prescience. The passage of time has done little to diminish the relevance of their words, as if they were penned only yesterday:

“The global financial expansion of the past two decades serves not as a new stage of world capitalism or a precursor to the impending ‘coming hegemony of global markets.’ Instead, it is the most glaring indication of a hegemonic crisis in progress. Consequently, this expansion should be regarded as a transient phenomenon, destined to conclude in a manner that is, at best, tumultuous.”

The myopia of ruling groups throughout history has often led them to misconstrue the ‘autumn’ of their power as a renaissance, precipitating an untimely and catastrophic end. Regrettably, a comparable myopia pervades contemporary society. In his later works, Arrighi cast his gaze towards East Asia, contemplating the potential transition to the ensuing hegemony. He identified China as the likely successor to American hegemony, yet he also acknowledged the limits of the cycle he described, doubting the feasibility of indefinitely expanding organisational structures. He questioned whether the US might not be the ultimate manifestation of capitalist power, having pushed the capitalist logic to its earthly limits. Arrighi regarded the systemic cycle of accumulation as an intrinsic aspect of capitalism, inapplicable to pre-capitalist eras or non-capitalist systems. When he died in 2009, Arrighi maintained that China remained a predominantly non-capitalist market society, leaving its evolution an open question.

In their 1999 article, Arrighi and Silver foreshadowed the impending decline of the West from its dominant position in the world capitalist system, deeming it possible, if not likely. They cautioned that the US, with its superior capabilities, could transform its waning hegemony into an exploitative dominion. If the system were to disintegrate, they argued, it would be primarily due to US resistance to adaptation and accommodation. Conversely, US accommodation to the burgeoning economic influence of the East Asian region would be a prerequisite for a non-disastrous transition to a new world order. The prospect of such accommodation, however, remains uncertain. Arrighi expressed skepticism, observing that, as a hegemon’s dominance wanes, it often experiences a ‘final boom’ during which it pursues its ‘national interest’ without regard for systemic challenges that necessitate systemic solutions. This description encapsulates the current state of affairs with striking accuracy. The systemic challenges continue to mount, yet the rigid, antiquated regime in Washington remains unresponsive. By misconstruing its financialised economy for a thriving one, it has overestimated the efficacy of weaponising the financial system it commands, once again mistaking ‘spring’ for ‘autumn.’ Regrettably, as Arrighi predicted, this miscalculation would appear to be only expediting its end……
 

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