Will Greece, the site of much social unrest since the onset of the crisis in 2008, play the role of the Minotaur-slaying hero Theseus? (Photo: Piazza del Popolo/Creative Commons)
In what is likely to become a classic, Greek political economist Yanis Varoufakis traces the origins of the global crisis and looks beyond the U.S.-dominated world.
By Boris Stremlin
In 1944, just as the institutions of the postwar monetary order were being fashioned at Bretton Woods, Karl Polanyi published his now-classic historical reconstruction 19th century capitalism, “The Great Transformation.” Polanyi’s main argument was that the “self-regulating market” was ultimately undone by “fictitious commodities” – land, money and labor that lay at its very foundation, because they were not in fact created for the purpose of market exchange, while their treatment as such elicited a defensive reaction on the part of society that, by 1930s, had taken both socialist and fascist forms. As the various movements representing the self-protection of society entered into a life-and-death struggle with one another in the Second World War, Polanyi hoped that the conclusion of the conflict would lead to the formation of a new system characterized by a balance between “habitation” (social stability) and “improvement” (socioeconomic progress), one in which the market would be embedded in a wider framework of social relations.
In many ways, Yanis Varoufakis’ “The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy” constitutes a sequel to Polanyi’s narrative. It tells the story of the embedded market society whose foundation was laid down in 1944, and whose crisis began in 2008. Varoufakis, a Greek political economist who has taught in Great Britain and Australia, chairs the Doctoral Program in Economics at the University of Athens, and is currently a visiting professor at the University of Texas. A sometime economic advisor to the center-left Panhellenic Socialist Movement (PASOK) government in the previous decade, Varoufakis has also gained prominence as a commentator on European integration and the global crisis in such left-wing venues as Monthly Review andLeft Business Observer. With the publication of “The Global Minotaur” and the Greek election of May 2012 that has apparently pushed the Eurozone to the brink of disintegration, Varoufakis has been thrust into the limelight as a leading proponent of the reformation of the European Union and an economic consultant of the anti-austerity Syriza Party.
Echoing Polanyi, Varoufakis contends that the smooth functioning of the surplus-producing capitalist machine is hampered by the presence of two “gremlins” – the labor and money markets. As two commodities that are unwanted for their own sake – (borrowed) money because it must be repaid, labor because it must be remunerated and compromised with, these gremlins represent necessary evils in the pursuit of higher profits. When confidence in their ability to earn profits drops, the market malfunctions: uninvested capital and unemployed labor expand, but despite the fact that their price continues to fall, so does the demand for them. When this happens, a capital C Crisis, like the Great Depression or the Global Crisis that began in 2008 causes the system to break down. The solution to this breakdown lies in recognizing the presence of a living ‘ghost’ in the machine of market society, and re-initiating a process similar to Polanyi’s embedding of the market in social relations. In speaking of the renewed creation of value, Varoufakis means a reconstruction of a pattern of social relationships that allows valuation to take place – something that a mere expansion of automation, commodification, and things cannot do. In such a way, crises can serve as ‘laboratories of the future’.
For Varoufakis, the key to overcoming Crises and re-embedding markets in social relationships involves the establishment of a Global Surplus Recycling Mechanism (GSRM). Ameliorating class conflict and growing imbalances between surplus and deficit countries, stimulating demand, and creating a basis for social valuation, a GSRM comprises a set of institutions and policies that directs investment toward productive activities in particular key regions that ensures the restoration of growth of the world economy as a whole.
In the post-Great Depression history of capitalism with which the bulk of Varoufakis’ book is concerned, two distinct models of GSRMs are evident. The first, which he terms the Global Plan corresponds to the period between the establishment of the Bretton Woods system and the mid-1970s, after the United States’ closing of the gold window and the onset of the first oil shock. The story Varoufakis tells here is largely familiar to readers of Fred Block or Giovanni Arrighi.Having rejected Keynes’ proposed blueprint of a global currency, or Henry Wallace’s suggestion of an effective postwar alliance with the Soviet Union, U.S. policymakers opted for a dollar-based international financial in which they would make all the key decisions. At the same time, the surplus capital accumulated in the US would be recycled primarily for the benefit of two zones that had been largely destroyed during the war, but had the potential to become the main competitors of U.S. industry – Western Europe and Northeast Asia. The initiation of this strategy in the context of the Cold War with the Soviet Union, and against the explicit economic interests of U.S. elites, because it exposed the domestic market to competition from cheaper imports, speaks to the dominance of political priorities.
Though this tale has often been told, Varoufakis does deserve credit for highlighting two points that are commonly under-emphasized. First, the specific selection of Germany and Japan by the administrators of the Marshall Plan and General MacArthur’s occupation government, respectively, as the anchors of U.S. strategy of promoting regional recovery followed from the imperative to further undermine the teetering colonial empires possessed by European powers on the Allied side. Thus, the main American partnerships under the Global Plan were established with two defeated, occupied, semi-sovereign states that lacked legitimacy for independent regional leadership, thereby further strengthening the U.S. globally. Second, the promotion of an economically-, but not politically-based regional integration centered on its chosen partners was a U.S. driven policy – a point frequently obscured, Varoufakis contends, by the Founding Fathers of European integration, who presented the project as a ‘third way’ alternative, independent of the Cold War superpowers.
As the policies favoring surplus accumulation by German and Japanese manufacturers, combined with the profligate military spending of the Vietnam War era turned the U.S. from a surplus to a deficit country, the Global Plan came undone. However, rather than leading to the dissolution of the system or its revolutionary transformation, as many radicals expected at the time, successive administrations from Nixon to Reagan succeeded in replacing the Global Plan with a new surplus recycling mechanism that operated because of, rather than despite, the expansion of U.S. deficits, reversing the global flow of surplus back to the revived hegemonic power. The study of this latest GSRM, which Varoufakis calls the “Global Minotaur,” forms the centerpiece of the book.
The metaphor of the Global Minotaur hearkens back to the classical legend that narrates, in mythic form, the history of a Minoan tributary empire that dominated the Aegean and the Greek mainland in the middle of the second millennium BCE. In the story, the Minotaur – the product of an unholy union of a Cretan queen and a sacrificial bull is placed in a labyrinth, where he feeds on young men and women supplied by Crete’s vassals, which, at the same time, benefit from the commercial prosperity and political stability underwritten by Minoan power. In applying this metaphor to the global economy between the mid-1970s and 2008, Varoufakis means to underline the political character of the decision to abandon the Global Plan and replace it with an essentially tributary structure that allowed the U.S. to retain freedom of action, rather than, as neoliberals argue, a shift back to ‘free markets’ (or, as more mainstream critics contend, a simple victory of finance over the ‘real economy’). Although he certainly condemns the Global Minotaur for its inegalitarian character and its proliferating disequilibria that ultimately made its perpetuation unsustainable, Varoufakis does express some admiration for the Minotaur’s designers because of their ingenious prolongation of U.S. hegemony, their ability to attract other countries to participate in the new global order, and, at bottom, their very recognition of the necessity of a surplus recycling mechanism in a modern economy. The latter lesson, he contends, is one that has not yet been learned by austerity-minded European policymakers struggling to deal with the consequences of the global crisis.
The Minotaur’s strategy for effecting a reversal of capital flows back to the U.S. (in order to avoid cutting spending and raising taxes while finding support for expanding deficits) centered on breaking the dollar’s gold peg, allowing its Persian Gulf allies to drive up the price of oil, and arresting the wage growth of U.S. labor. As a result, the European and Japanese economies – more dependent on imported energy, based on higher-priced labor, and lacking hegemonic status, became increasingly uncompetitive relative to the that of the U.S., allowing the dollar to maintain its reserve currency status. What Varoufakis calls the Minotaur’s “four charismas” – reserve currency status, rising energy costs, cheapened labor, and geopolitical might succeeded in luring capital back to U.S. markets.
The hiking of interest rates by Federal Reserve Chairman Paul Volcker in the early 1980s completed the transition to the Minotaur’s regime. At the price of a recession in the U.S., Volcker was able to attract foreign capital while driving indebted Third World and Soviet client states into default or austerity measures, thus shattering the compact between populations and revolutionary nationalist regimes. The collapse of the USSR less than a decade later not only delegitimized any possible alternative to the Minotaur, but also drew the erstwhile socialist bloc into a single globalized economy geared to financing its U.S. deficits.
The onset of the Minotaur’s “Golden Age” at the end of the Cold War betokened changes on the economic, ideological, cultural and epistemological domains that reflected the beast’s unrivaled power, and near-universal efforts to imitate its behavior. Varoufakis characterizes the main supporting institutions of the Minotaur regime – Wall Street, Walmart, trickle-down politics, and supply-side economics as its monstrous “handmaidens”. While Wall Street hedge funds inflated financial bubbles through the de facto creation of private money in the options and mortgage markets, Walmart supplied the U.S. market with cheap imported goods at a time when wages remained stagnant, creating an illusion of growing prosperity. Concurrently, neoliberals in government presided over an attack on the welfare state, a deregulation of business and a decline of taxation on the “creative classes”, while at the same time increasing the size of the national security state, thereby generating spinoffs in the high-tech sector that were branded as the new “knowledge economy”. Notwithstanding its planned and state-oriented character, the economics profession provided scientific legitimacy to the Minotaur regime. In generating the complex algorithms behind Collateralized Debt Obligations (CDOs) and proclaiming unbridled faith in the power of markets to export American-style prosperity to the rest of the world, professional economists came to play a key role in building the Minotaur a labyrinthine maze that no one truly understood, but from which there was no escape.
Easily the most interesting part of the book deals with the vicissitudes of Europe and Asia under Minotaur rule. Despite the policy of ‘controlled disintegration of the world economy’ explicitly enunciated by Volcker and others, the existence of a surplus-recycling mechanism meant that other countries could achieve success in the medium term provided they played by the Minotaur’s rules. In the 1970s and 1980s, the most notable performer was Japan, which retained its relatively untrammeled access to U.S. markets in exchange for reinvesting its surpluses in U.S. treasuries and equities, thus fueling the growth of its budget and trade deficits. Japanese dynamism would ultimately be reined in by the 1985 Plaza Accords, which devalued the dollar relative to the yen, leading to the inflation of a Japanese bubble economy ill-equipped to absorb the heightened supply created by Japanese industry. Competition for U.S. market share by export-oriented industries in Southeast Asia, fashioned with the help of Japanese banks in search of profits also contributed to the onset of Japan’s ‘lost decades’, though, as Varoufakis argues in the face of mainstream analysis, continued state support for its integrated keiretsusystem precluded the crisis of its banking sector in the early 1990s from turning its economy into an unmitigated disaster.
The second pillar of the Global Plan – Germany – fared rather better during the Minotaur’s Golden Age, owing to the continued expansion of European integration. Like Japan, Germany restructured its economy as a surplus-producing industrial powerhouse that recycled its profits in the U.S. financial sector. Unlike Japan, Germany had a backup option in the form of a demand-producing European periphery, one that steadily gained importance in the wake of the 1992 Maastricht Treaty that laid the foundations for the European currency union. In exchange for universalizing the Bundesbank’s stringent monetary policies throughout Europe and preventing competitive devaluations that had previously hamstrung the Deutschmark and German industry, the deficit economies of the Eurozone gained access to cheap credit that a strong Euro allowed, as well as to high-quality German products. The success of European integration was further underwritten by the reunification of the two Germanies, which depressed German wages, allowing German exports to retain competitiveness abroad while the surpluses accumulated by German banks continued to pile up. Second, the Franco-German partnership allowed the burgeoning German domination of the European Union to remain obscured behind French-driven European political integration. The illusory character of the political integration, and the growing imbalances between the surplus and deficit zones of the Euroland that threatened to tear the whole of the EU asunder only became exposed once the entire Minotaur-centered system crashed in 2008.
The final key pillar of the Minotaur regime was China. Originally projected as the central component in the Global Plan’s Asian strategy, China followed a different trajectory after the establishment of the People’s Republic in 1949, but under the leadership of Deng Xiaoping, it began to follow the export-led model developed by Japan and the Southeast Asian Tigers. Owing to its geopolitical weight and a careful analysis of the errors of its forerunners, China’s rulers kept its renminbi pegged to the dollar and rejected any demands to revalue it, thus ensuring continued industrial expansion and surplus accumulation at the expense of the Tigers and other competitors such as Mexico. By 2003, China had displaced Japan and Germany as the largest underwriter of U.S. deficits. Around the same time, its own economic growth and rising incomes fostered a restructuring of the global economy to accommodate its rise. Thus, countries like Brazil and Argentina, fearful of the inflow of hot money and chastened by the Asian Contagion and their own crises in 1998 and 2001, respectively, began to abandon export-oriented industrialization in favor of supplying agricultural goods and raw materials to China. The rise of commodity prices during the “noughts” decade reflected the growing influence of Chinese markets, as well a hedging strategy against a dollar that had begun to lose the unquestioned faith as a guarantor of global stability. Varoufakis does not, however, view the last decade as laying a foundation for a future Chinese hegemony. Anticipating criticism of his analysis of China as incomplete, he answers that the rise of China can only be understood as a factor of the Minotaur system, albeit, most likely, its final stage.
By 2008, the imbalances of the system had become unmanageable, and the ‘controlled disintegration’ spun out of control. The run-up to the crisis – the mortgage and energy bubbles, the proliferation of CDOs and private money, extensively analyzed over the last four years does not interest Varoufakis as much as the crisis’ outcome. Initially, the deep-seated Keynesian instincts, especially in the U.S., came to the fore in policymakers’ actions. Governments bought up bankrupt enterprises and banks, while central banks stimulated economies through increased liquidity. But, as in a bad horror movie, a fatally wounded or undead Minotaur came back for one last anticlimactic scare. Using government handouts under the Geithner-Summers Plan, indebted banks formed new hedge funds to not only rid themselves of toxic debt, but to resurrect the system of private money creation by bidding up the value of this debt. Once relieved of its burden, Wall Street – the Minotaur’s ugliest handmaiden – moved against the politicians that brought them back from the edge of destruction, and threw its support to those political forces (the Tea Party) that supported less regulation. In Europe, this ‘bankruptocracy’ took the form of the European Financial Stability Facility (EFSF), which created a CDO-like vehicle for buying up the debts of European states even as it enabled the formation of hedge funds that bet against the weaker economies – first Varoufakis’ native Greece, then other members of the PIIGS (Portugal, Ireland, Italy, Greece, Spain), thereby driving up their borrowing costs, proliferating austerity regimes, and increasing the likelihood of the Eurozone’s collapse. In both cases, the bankruptocracy deliberately weakened the ability of governments to address the consequences of Crisis.
Ultimately, unlike some commentators on the North American left, Varoufakis does not believe in a post-crisis restoration of a tributary, U.S.-centered neoliberal regime. Notwithstanding the bankruptocracy, the U.S. is no longer capable of generating sufficient demand to restore a GSRM for the world economy (much of the recent talk about a return to export growth, re-industrialization and the shale revolution suggests, more than anything else, the imminence of the Minotaur’s final demise). But what then? We are not as far along the road to the formation of a new regime as Polanyi was in 1944, but a few of the outlines may be coming into focus. With China, in his estimation, too weak to single-handedly generate a new GSRM, perhaps a more globally cooperative order based on mutual agreements between the BRICS (Brazil, Russia, India, China, South Africa) and other emerging powers could stabilize the system. Alternatively, Varoufakis envisions the fulfillment of Keynes’ dream of an International Currency Union, though he admits that such a scenario is far-fetched. Given his continued belief in the possibility of a quick solution to the European sovereign debt crisis (recapitalization of the banks in exchange for writing off all debt plus turning the European Investment Bank into a regional version of the World Bank), perhaps a series of smaller GSRMs, spearheaded by the EU, can turn the tide on the deepening chaos (Varoufakis sees the departure or expulsion of Greece and other peripheral economies from the Eurozone as triggering a global disaster of catastrophic proportions). For the time being, Varoufakis’ story is without its Theseus, though in supporting Syriza’s rejection of the European Central Bank’s bailout regime, he is clearly hoping that Athens will play a role in recapitulating the Minotaur-slaying feat of its mythic hero. There is no sense in “The Global Minotaur,” as in some other post-crisis works like Minqi Li’s “The Rise of China and the Demise of the Capitalist World Economy,” that a surplus-generating order as such has become impossible due to structural or environmental limitations. But perhaps, once the fact that the Minotaur will not return becomes universally recognized, the more positive schemes combining habitation and improvement will at least be attempted.
Boris Stremlin is Visiting Assistant Professor at Manhattanville College.