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Review of Anastasia Nesvetailova and Ronen Palan, Sabotage: The Hidden Nature of Finance (PublicAffairs Books, 2020)

Big finance is sabotaging the real economy — that’s the central thesis of Anastasia Nesvetailova and Ronen Palan’s new book, Sabotage: The Hidden Nature of Finance . Far from being a few isolated incidents of malpractice, the lying, cheating, and stealing exposed during the financial crisis constitute the main source of the sector’s huge profits. Sabotage is woven into the fabric of modern finance — only extensive and well-designed regulation can prevent it. The story told by Nesvetailova and Palan is not new. Earlier works like Nicholas Shaxson’s The Finance Curse , Oliver Bullough’s Moneyland , and Michael Hudson’s Killing the Host have all made broadly similar arguments: although the finance sector is not inherently extractive, it has now grown so large, so monopolistic, and so corrupt that it has become a drain on productive economic activity. According to these authors, financial “rentiers” — those who make their money by extracting economic rents from the production process — are enemies of the healthy functioning of an otherwise efficient capitalist economy.

Keynes and Veblen Most of these writers base their analysis on the work of John Maynard Keynes, who famously called for “the euthanasia of the rentier.” Nesvetailova and Palan, on the other hand, draw upon the work of one of Keynes’s predecessors, Thorstein Veblen, a nineteenth-century political economist most famous for his theory of conspicuous consumption, laid out in a book called The Theory of the Leisure Class . In some ways, Veblen’s analysis is more radical than that of Keynes. The latter’s theory of the business cycle suggested that the finance sector would exacerbate the propensity of capitalism toward boom-and-bust cycles by lending too much in the good times, and not lending enough in the bad. The pro-cyclical tendencies of finance were, for Keynes, an inherent feature of any modern capitalist economy. Individual financiers could not be blamed for providing high-interest loans to businesses or consumers that were clearly unable to repay them: they were simply responding to the incentives that exist in a free market regulated by the state. Veblen did not consider capitalist rentiers to be quite so blameless, as should be clear from his use of the term “sabotage.” He argued that financiers actively sought to control and dominate markets in order to maximize their profits — even if that meant adopting anti-competitive, immoral, and occasionally illegal business practices. Like Karl Marx, he insisted that capitalism had an inherent tendency toward market concentration, which would give rise to extreme inequalities of wealth and power.

Controlling the Market As Nesvetailova and Palan put it, financiers “never believed in markets in the first place. They believed, instead, in controlling the market. By whatever means possible.” Today’s financiers have become expert monopolists; a few huge, international institutions — with close links to regulators — dominate financial market, and use their quasi-monopolistic power to extract “super-normal profits” from ordinary investors. This tendency has become acutely clear during the coronavirus pandemic: in the United States, the chief secretary to the Treasury is reported to have solicited senior advisers from Goldman Sachs to oversee the now-defeated bailout package put forward by the Republicans in Congress. How do these saboteurs achieve their monopolistic ends? They innovate. Financial innovations like the development of the mortgage-backed security (MBS), the collateralized debt obligation (CDO), and the credit default swap (CDS) all dramatically increased the profitability of big international banks in the 1990s and early 2000s. They also helped cause the financial crisis of 2008. Nesvetailova and Palan argue that these and other financial “innovations” represent nothing more than regulatory arbitrage: “technique[s] for sabotaging the public welfare and government.” The solution to the problem of sabotage is fairly simple, for disciples of Veblen and post-Keynesians alike. The state — the only set of institutions with the necessary power, legitimacy, and resources — needs to take back control of financial markets and impose regulatory control over the saboteurs. The authors call for a return to the “pro-market, anti-business” approach to regulation pursued in the wake of the Wall Street Crash, which guards against the monopolistic instincts of businesses and protects the functioning of free markets. Such an approach would, they claim, allow regulators to find a third way between statists and free marketeers, and “[protect] the consumers of finance from sabotage.”

Technocratic Illusions Most economists, it appears, are terrified that they might be accused of allowing ideology to influence their arguments. To guard against that, they frenetically seek out seemingly neutral, objective, technocratic “solutions” to modern policy problems, from inequality to climate change. By furnishing policymakers with an objective understanding of an issue and providing them with a set of neutral tools to solve it, economists claim to facilitate an evidence-based approach to regulation, free from any ideological baggage. Such is the approach of Nesvetailova and Palan, who plead with policymakers to “move beyond the binary dichotomy of ‘market vs regulation.’” The trouble is, there’s no such thing as an apolitical policy intervention — and there’s certainly no such thing as a non-ideological approach to the economy. The authors may draw on the work of Veblen, but the ideological approach that really underpins Sabotage is the liberal Keynesianism described by Geoff Mann in his book In the Long Run We Are All Dead . Like Keynes, the authors believe that free-market capitalism is a sound economic system that occasionally malfunctions, whether due to uncertainty, liquidity preference, or — in this case — sabotage. And, like Keynes, they believe that it’s the responsibility of the state to step in and prevent such malfunctions from happening, or at least to clean up when they do occur. Nesvetailova and Palan assume that the problems generated by capitalism are a bug in the system, rather than an inherent feature of it. In part, this is due to the classic liberal assumption of a separation between the political and the economic. Sabotage is a political — or even moral — issue that compromises the normal functioning of the economy. In order to make the economy work again, the state — conceived as a neutral enforcer of the common good — simply needs to step in to regulate the system and punish the saboteurs.