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Introduction

What crisis? Is 'austerity' the result of excessive spending on welfare? Or were the financial crisis and the decline in living standards it produced the result of the failure to regulate finance in the interests of the 99 per cent?

These rival interpretations of 'the crisis' drive different intellectual and political agendas. 'Austerity' focuses attention on the reduction in welfare spending and on the structural adjustments to the economy through which it is achieved. 'Financial crisis' focuses attention on the deepening of democracy so that the regulation of finance in the interests of the whole society becomes possible once again. At the heart of the debate is whether 'markets' are the most 'efficient' mechanism to govern the economy and distribute its benefits, or whether regulation by democratic states is necessary to ensure markets are not distorted by powerful interests.

Most people, including economists and other social scientists, did not see the crisis coming. The theoretical tools to foresee the crisis did exist but had been so marginalized that few knew of them. This book excavates those theories and reworks them in the light of evidence and theory generated during the current crisis. It offers a renewal of the theory of society to analyse not only the current crisis but also future ones.

The crisis has cascaded through society: first, a crisis in finance; next, a crisis in the real economy of production and employment; then a fiscal crisis over government budget deficits; and a political crisis, which is on the edge of becoming a democratic crisis. Some small instabilities, such as 'bubbles' and 'business cycles', can be regarded as 'normal', in the sense of being frequently repeated and with few consequences for the wider social system. Other crises are not so contained, and lead to large changes, catastrophe and societal transformation or collapse. The current crisis is not yet over, and continues to cascade through political systems.

The effects of the crisis are borne unevenly, exacerbating class and other inequalities. The crisis is gendered, in both its causes and its consequences. After the first wave of the recession when men lost their jobs, women have borne the brunt of austerity, and are central to alternative visions of the future. These issues concern democracy, not only in the sense of voting occasionally, but also in the depth of application of democratic principles to the governance of the economy. The failure in the governance of finance is gendered: the exclusion of women from economic and financial decision-making is part of the cause of the crisis. The potential routes out of the crisis into economic growth are also gendered strategies.

For some, crises, as when banks crash and the economic order is challenged, are firmly established objects for investigation (Calhoun and Derlugian 2011a, 2011b, 2011c). For others, crises can be socially constructed out of minor events to serve political projects (Hay 1996); or, at least, can be manipulated (Klein 2007) as suggested by the notorious phrase 'never let a crisis go to waste' (Mirowski 2013). How the crisis is 'narrated' (Ricoeur 1984) matters; positioning causation within the temporal sequencing of events that are identified as significant, the emplotment of agents and victims, has implications for the definition of the crisis event itself. However, the way social science 'narrates' the crisis is not merely a 'story'; it depends upon the sifting of evidence and the development and testing of theories.

While the current focus of the crisis is often considered to be 'austerity', the argument here is that the crisis in many countries in Europe and North America had several interlinked phases, which jointly constitute 'the crisis': first, the banking, credit and financial crisis between 2007 and 2009 caused by the deregulation of finance, in which banks went bankrupt and the supply of credit to the economy ceased, and where the financial system and banks were rescued by the government and large bailout funds; second, a deep economic recession and contraction of economic output caused by the financial collapse and ensuing credit crunch, followed by a long period of near-zero growth, then a recovery in output but not in wages or living standards; third, attempts to reduce government budget deficits by cutting public expenditure under pressure from financial markets, international financial institutions and domestic political forces; and fourth, a political crisis that might become a democratic crisis, as governments and traditional political parties fall and the European Union faces either fragmentation or restructuring. The cascading crisis starting in finance intersects with other crises that follow different trajectories, particularly those concerning the environment and energy, creating a 'perfect storm' (Beck 2009; Urry 2011).

Financial Crisis: Democratic Failure

The financial crisis was a result of a failure in the governance of finance, as many official inquiries have established (G20 2008; de Larosière 2009; Stiglitz 2009). For example, the G20 (2009) declared that 'major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis'. There had once been legislation and policies to regulate finance, which had been put in place after the lessons of the Great Crash of 1929 had been learned. These policies, inspired by Keynes and negotiated at Bretton Woods in 1944, were intended to stabilize finance and regulate capital in the wider public interest. But they were removed during the 1980s as part of the deregulatory project to free up markets.

The justification for the deregulation of finance was that this was good for the economy as a whole. The development of finance and financialization had been seen as a route to economic growth. The financial services industry was supposed to deliver capital to those places in the economy where its use would be optimal; instead, it delivered a catastrophic crash. With hindsight, the head of the Financial Services Authority (FSA), which was supposed to regulate finance in the interests of the public, declared that much of this financial activity was 'socially useless' (Turner 2009). Yet financial derivatives have been allowed to grow to many times the size of the real economy: the value of financial derivatives was $693 trillion in 2013 (Bank of International Settlements 2013), nearly ten times the $73 trillion value of the world gross domestic product (GDP) (World Bank 2014).

Those who argued that finance was intrinsically destabilizing to an economy and needed careful regulation to minimize these risks had been marginalized in social science and ignored by governmental policy makers. Minsky (2008 [1986]), building on Keynes (1936), had argued that finance was inherently pro-cyclical; exacerbating rather than mitigating booms and slumps in the economy. During the early stages of a cycle he found enthusiasm for investment and the ability to pay returns to such investment from profits. During the middle stages the ability to pay returns becomes dependent on funds from further investment. As prices fall in the latter stages it becomes impossible to pay returns and bankruptcy ensues with spiralling downward effects. Finance is intrinsically destabilizing of the real economy unless it is robustly and effectively regulated by government and central banks.

So why did central bankers and regulatory authorities such as the FSA allow finance to expand in a way that was dangerous to the economy and useless to the public? It has been argued it was due to complacency among the elite (Engelen et al. 2011) or a failure by many central bankers to understand the complexities of financial systems that require a macro-prudential approach (Haldane and May 2011). Alternative views are that this is a more deep-rooted failure of the capitalist system driven by the exhaustion of the regime of capital accumulation (Aglietta 2000a [1976]; Arrighi 2007) or was a result of excessive commercialization undermining the conditions of its own existence until civil society intervenes to restore balance (Polanyi 1957).

Is the failure to regulate finance prudently, gendered? There are few women involved in financial decision-making (van Staveren 2002; Schuberth and Young 2011). Finance is a high-risk masculine monoculture (McDowell 1997). There are few women on the boards running finance companies (Singh and Vinnicombe 2004) or on governmental finance committees. The male monoculture could be reduced by including women through measures such as gender quotas on corporate boards, thereby reducing uncritical high-risk group-think practices (Armstrong and Walby 2012; Terjesen et al. 2009). If the problem is more deeply rooted, involving the separation of finance from the democratic processes where the interests of a wider public are more likely to be represented, more fundamental action is required. According to the Economics Nobel Prize winner and head of a UN Commission investigating the crisis, Stiglitz (2010), all those who were exposed to the risks that finance creates are entitled to a voice in the running of finance.

Economic Crisis: Recession

The Great Crash in finance caused the Great Recession in the economy. Financialization has had devastating effects on the economy and society, creating a deep and widespread...