Capitalism, Crisis, & Ethics

An Interview with Michel Rocard

Michel Rocard
Capitalism, Crisis, & Ethics : An Interview with Michel Rocard - Caroline Meledo


Michel Rocard was Prime Minister of France from 1988 to 1991, under President Françoise Mitterrand. Previously, he was French Minister of Planning, of Town and Country Planning and of Agriculture. He was First Secretary of the French Socialist Party (1993–1994), then Socialist deputy to the European Parliament from 1994–2009. He currently chairs the Scientific Committee of Terra Nova, a think tank for the intellectual revival of the Left. In March 2009, President Nicolas Sarkozy nominated him French ambassador for international negotiations relating to the Artic and Antarctic poles. This interview was conducted in Paris in February 2008. In the course of the discussion, Michel Rocard identifies three phenomena at the heart of this transformation: the drift away from the capitalism of “les Trente Glorieuses” that has been brought about by deregulation, the replacement of traditional values of work and thrift with those of profit and fortune, and, finally, the potentially criminal practices of the banking and financial sectors.


That which we casually call a “crisis” is not only a crisis; it is more of a transformation. The word “crisis” is one that comes from the medical lexicon and characterizes the peak of a sickness after which the patient dies or improves. The implicit hypothesis underlying this is that there exists a state of normalcy that one calls “health.” A crisis occurs when we have left this state of health and are trying to return to it. We are obviously headed toward something else that I would rather call a transformation, that is to say, a profound change rendered necessary by the unsustainable character of certain “inherited situations” which are bound to change. Moreover, what we are currently experiencing is actually an overlapping of three phenomena that offer profoundly different answers to the question of ethical capitalism. I will discuss these phenomena in turn.

The Financial and Banking Crisis

I will begin with the last phenomenon that emerged, but also that one which is the most visible and which concerns the entire world: the financial and banking crisis. This crisis has two elements.

The first is endogenous to the American economy. It all began with a change in the behavior of American mortgage lenders who, since the beginning of the 21st century, had adopted an attitude, implicitly encouraged by the public sector, that everyone needed to be a homeowner, everyone needed to be a shareholder, everyone needed to play the stock market, and we needed to rid ourselves of class antagonisms and eliminate wage-earners. This philosophy, explicitly backed by the Bush Administration, led the banking system to renounce its prudent customs in the domain of mortgage credit. Instead of lending 75–80% of the value of what was purchased, the banks began to accept, simply on demand, loans for 100%, 110%, and even 120% of the value of the purchase. These same banks ceased to give employees the time and money to question borrowers on their capacity to repay their loans. They lent to anyone who asked. For the banks, this seemed to make sound business sense, since there was “double-remuneration”; as soon as a loan was made, banks earned a commission, and then they would earn money again on the interest paid. The bankers no longer held a vision of loans guaranteed by the ability of borrowers to pay back their debts and collateralized by the value of their houses. Instead, they were dependent on continued and increased speculation in the housing market. This is supposed to work well, since in the long term, land prices are always increasing a little faster than the average prices in the rest of society.

Since they realized, all the same, that at times they had lent to people of less solvency than would usually be the case, they imposed a standard of “sub-prime.” Now, recall that we are not analyzing the crisis but rather discussing its relationship with ethics. We are not yet talking about a crime; we are simply describing the “horror of human brutalization” of the processes accepted by the entire system. The banks offered sub-prime mortgages that allowed borrowers up to three years without payment and at variable interest rates, and in doing so enticed people into impossible situations. The banks effectively asked their clients to commit themselves to their financial instruments, knowing clearly that the massacre would come, while also knowing that their clients wouldn’t realize it until it was far too late. The crisis appeared around 2007. That year, the numbers showed that 1.7 million American families were evicted in the US. The assessment of the accounting situation shows that it was not, by a long shot, sufficient to make up for the defaulted payments—they would have had to evict 3 or even 3.5 million people. Even so, at this stage we are still discussing “banking brutality,” and are not yet at a stage of “grand larceny.”

There was a second element, closely linked to this, which created further crisis in the American financial world. The perception of defaults on payments and that there are large amounts of increasingly uncertain debt concerns bank managers. They could have, and should have, evaluated risk and submitted these evaluations to the oversight authorities of the banking system. Having done so they should have asked the oversight authorities to ensure that they would have sufficient provisions to guarantee solvency and therefore the confidence the banks deserve. They carefully avoided this. Here is where the second element comes in: all or almost all the American banks embarked on operations characterized by the words “packages” and “securitization.” The process of “securitization” corresponds to taking out a loan from the balance of the bank, with the name of the client, in order to make a financial investment, that is to say, an anonymous and sellable security (hence the “securitization”). In addition, financial science encouraged them to develop a second practice; one entirely intertwined with the first, which was grouping five, six, or eight individual loans into one sole financial security—which is adequate as long as it is of sound credit. The behavior that spread into the American banking system around 2008 was to mix bad credits and debts in unknown proportions, and without telling anyone, into these securities. Since the banks are all in constant interaction with one another, the packaged credit securities invaded the entire world and spread to all the banks of the developed countries. With this second technique, we switched to something that must be brought to justice. This is where the words hurt. For the bankers, it was a matter of the dilution of risk. Their idea was to dilute the risk in terms consistent with the probability ratios of bad debt, so that the perceived risk increased only slightly. For ordinary mortals, I call it “grand larceny” and I look forward to hearing the courts define it as such. Selling debt reputed to be good and mixing it with bad debt without saying so is robbery. This robbery amounts to tens or possibly even hundreds of billions of dollars, and now the world is infested. In the second half of 2008, the banks found out that their portfolios were infested with bad debt, knowing neither the probability of default nor the overall volume, while each bank believes that the same could be true of any other bank in the system. Each global bank is thus in a position of not being able to trust its colleague. In this way, we had a blockage of inter-bank credit activity caused by mistrust. Lehman Brothers are the main example, but it wasn’t just them: all the major American investment banks collapsed in some form in 2008. Returning to the question of the place of ethics in this situation, we face this question: How is it that a profession, recognized honorably until now, let itself drift into behavior which borders on crime, on robbery, without being careful and without paying any attention? This is the first problem with the banking crisis.

The Decadence of Original Capitalism

The bad health of our economy was, however, established earlier and is due to something else. In this context, there are two classifications—one large and one small. The small classification is the following: since 2002 or 2003 we have experienced an incredible increase in the price of oil, of certain metals, and especially of wheat, corn, and soybeans. In 2008, we had famine riots in Africa, as people could no longer buy the wheat they had been eating. I had the opportunity to ask an expert in the wheat market about these famine riots, and received this answer: there had not, at any time, been any shortage of physical supply to meet physical demand on any given day. This is the same case with oil. Thus, this is not a sudden, massive insufficiency of supply that made prices increase so dramatically; it was the result of derivatives. Now we are opening a special subcategory: an incrimination of capitalism on account of these derivatives, and why this happened.

In 1944, the world was anxious to restart a suitable economy and to give it a stable base. Hence, a world monetary conference at Bretton Woods at the end of 1944 that laid the foundations of the system, creating the World Bank, the International Monetary Fund, and the Secretary General of GATT. At the same time we witnessed a titanic struggle, lost by John Maynard Keynes, who spoke in the name of Great Britain but also in the name of a pre-nascent Europe. It was won by Harry Dexter White, US Minister of Finance and a monetary theoretician, who wanted to impose the imperialism of the dollar on the international system. Instead of having what Keynes dreamt about, a monetary arrangement between several currencies trading their parity, we created quite a different system called the gold exchange standard, which had the great virtue of allowing fixed exchange rates, and so for traders, stable prices. This was formed under the condition that each power, trading with each other, agreed to only pay in the three currencies accepted by the system: gold, the dollar, and the pound sterling. The stability of the system was conditioned on the parities between gold, the dollar, and the pound remaining stable. Quickly enough, the pound sterling was abandoned because it was not strong enough: the volume of commerce that it covers was just too small. Thus, the standard system of exchange was based on the fixed gold price in dollars, at $35 an ounce. It was not always a smooth ride but all the same it worked fine until 1971. This mechanism allowed the beginning of the globalization of economic activities and commerce, along with the global circulation of capital in which, for a commercial dollar paid for products and services, there also circulated a financial dollar, to be used in loans, borrowing, bonds, shares, and financial accounts.

In so doing, America soon discovered that, since their dollar is the currency of the world, they themselves no longer had the need to balance their accounts. Therefore, the Americans began a policy that they have kept ever since—one of giant deficits that the entire world gladly accommodated, since the entire world demanded its dollars. In addition to this, as the costs of the Vietnam War became unbearable for the American budget, doubt was introduced into the reliability of the system. The Americans could not accept $35 per ounce of gold. Around 1969–70, Germany asked for a reimbursement of its reserves of dollars in gold, something the Americans were unable to do at the time. So a huge debate occurred inside the American administration: Do we suppress the Vietnam War? Do we suppress social programs? How do we balance the budget? Or do we extricate ourselves from this system? Richard Nixon was President in 1971, while it was Dick Cheney who led and won the battle for dropping the dollar from gold. The Americans, therefore drop the dollar from gold. Immediate results: all exchange rates become volatile, as they are floating. The floating exchanges include, of course, regular exchange rate movements due to slow structural movements. But market by market and product by product, a momentous disequilibrium of supply and demand can be added up, which implies immense variations of prices, even with small quantities. Therefore, we enter into a completely chaotic system with breathtaking extremes, prices that double and triple. This worsens after 1971; it creates panic for everyone involved in international commerce because there is no longer a forecasted price, and without forecasting, one cannot work.

Hence, the whole world of international commerce poses a question to the banks and especially to the insurance industry: can you invent insurance for us against these crazy peaks and troughs? They invented it, calling it derivatives. These are contracts of purchase or payment of longer or shorter terms—one pays differently depending on the length of the periods, but it has a stabilizing effect. The supplier’s reasoning for such services is that, as long as the long-term business trend is increasing, even if only by a little, we can amortize the costs of offering derivatives and therefore pay the insurance on the excessive economic spikes in one direction or another. That’s how we gradually invented derivatives. Then, a second discovery: there is no reason to limit derivatives to the accompaniment of every physical transaction of product or service. These promises to buy or to sell can be exchanged regardless of the actual trade: I have provided an offer to purchase 300 tons of wheat or oil on a certain date, I will sell, you will buy it, and so on. During 2007, the final year of the launch of derivatives, we moved from a world where one dollar traded for one “financial” dollar to a world where, for every one commercial dollar in the system, there circulated between 60 and 80 “financial” dollars.

Returning now to the question of ethics, is it immoral to trade promises of transactions? I do not know. But what I see is that it is not morality that answers this question, but efficiency, because we do not know if it is immoral, but we know it is dangerous, evidenced by this crisis.

They Have Changed Capitalism without Telling Us

We have already covered a good deal, but not the principal thing. The third, principal phenomenon is that they changed capitalism without telling us, and that the amazing and beautiful features of capitalism, which we call les Trente Glorieuses (from 1945 to 1975), have disappeared. Here are the features for the developed countries:
• Rapid growth;
• Steady growth – all around 4.5 or 5% growth per year;
• Absence of financial crisis—any national bankruptcy (as in Turkey, Brazil, Mexico, and Argentina) remains local and is immediately treated, cauterized nationally, it is not contagious;
• Full employment everywhere—30 years of full employment in France, everyone seems to have forgotten; in Japan, they were proud to never have layoffs; the United States had 2.5% unemployment.

Forty years later, growth is only half of what it was before. There are financial crises every five years: Latin America, crisis of the European Monetary System (EMS), Asian crisis and the crisis of the e-economy to name but a few. The new capitalism is the problem here. Its main feature is a lack of growth because of low levels of consumption.

How did we go from full employment to a generalized situation of unstable employment? Oddly enough, a lot of economists wanted us to enter into the despicable debate—I hold to that word—on the question of whether it would be preferable to have workers in insecure jobs than workers completely unemployed, because it seems work has its own virtues. However, when the salary of a precarious worker is less than the legal level of poverty, it is really unacceptable. It is stupid. Indeed, it is true that France and Germany have much more unemployment but less permanent precarious employment than Britain or the United States. Interestingly, what no one stresses and what still strikes me often is that the sum of precarious workers, the unemployed, and the poor, that is to say those who are in the worst situation in that they are thrown out of the labor market, make up everywhere a quarter of the population. And it is this quarter of the population who starts to vote “No” for all referendums that are presented—something that happened in Denmark, the Netherlands, Ireland and France, and, if the Germans had to vote on the Treaty establishing a Constitution for Europe, I have little doubt that they would have rejected it as well. Europe has nothing to do with it, as the poor thing is not capable of doing anything. This is a rejection of the system. The main reason for this rejection is instability in the labor market and the loss of familiar landmarks. That’s what makes the political behavior frightening, because it is populist, marked by absenteeism, and is on the margins of society.

This change in behavior is linked to two things. First, the gradual doctrinal abandonment of any reference to the fact that wages are the crux of the economic balance, because they are the medium of consumption. In the modern view of Milton Friedman, this reference disappears. There is nothing important but profit, and therefore it must be made. Bringing together the shareholders enabled this to happen. The shareholder was the great vanquished of the les Trente Glorieuses, when we paid workers rather than shareholders. For the regulators (shapers of the system), such as Henry Ford as well as John Maynard Keynes, social security and high-wage policy were paramount. Later, shareholders took the form of pension funds, investment funds, and eventually hedge funds. The large package of investment funds, and the two small packages of pension funds and hedge funds started to demand higher dividends, as members of the boards of companies. It resulted, in the 1990s, in “the waltz of CEOs”—the word has almost disappeared because we are well beyond this, which simply. This meant that CEOs would be threatened with dismissal if dividends were not large enough. This led companies to outsource tasks and allocate as much as possible of what was done in their firms to SMEs (Small and Medium-Sized Enterprises) on the outside, in order to make the companies first, less unionized; second, not dependent on the pay scales of traditional enterprises—upon which they pin their dignity—and finally, because the outsourced supply contract could be changed every year by playing the competition off one another, thus crushing subcontractors and reducing overhead costs. That is how we have moved from full employment to unemployment, which is now 8–10% in France and Germany and 5% in the United States (where, nonetheless, employment is far more precarious).

The result is weakened purchasing power and therefore the collapse of the strength of demand. Is a mechanism that weakens demand morally wrong? I am not yet sure. However, this pressure leads to a slowdown of growth in all developed countries at different speeds and on different dates. So where did the money go? It did not go into taxes; it went into the general, vague category that is known as profits. In profits you find rent, interest revenue, fees and so on. But you find that it also hides the salaries of the big-company bosses. At the time of les Trente Glorieuses, these earnings were about forty times the average real wage; starting from the 1990s they rose to 300 or 400 times the average real wage. This is true for large businesses as well as for banks. But as long as his retirement savings are in a pension fund, the small-salaried American, Canadian, or English employee likes that the representatives of his pension fund put upward pressure on shareholders’ compensation. He trusts a system that brings enrichment and bigger pensions via sudden capital gains. It is as if, in the upper-middle classes (a few hundred million people in the developed world) the hope of achieving affluence through labor was replaced by the hope of access to fortune thanks to instant profit. This has been substantiated by deregulation and the tax exemptions—which go in the same direction—and the worship of profit at the heart of the system, as verification of its effectiveness.

The results that I draw are as follows. First, the resilience of the system to economic hiccups is linked precisely with the purchasing power of employees, therefore attempts to get rid of employees and make “everyone an owner” completely fail. It should probably be that economic science recognizes and authenticates this. Secondly, we should note that behavior oriented towards capital gain is not compatible with the generally smooth operation of the system.

Did capitalism need all this? My thesis is that in the post-war period, capitalism worked remarkably well. Its stabilizers were based on Keynesian policies according to which each isolated national power used its monetary and fiscal policy to counterbalance exogenous jolts. The revolution that Keynes brought protected against any world crisis for twenty years, and that’s not bad. These idiots have broken it all. But there is more. There is the fact that we need to maintain a balance between social protection and compensation pay. If we fall below this equilibrium, it weakens demand, and we break the system itself. Could the quest for that equilibrium be entrusted to moral maxims, like “Be fair with your employees?” I don’t believe in anything like that. The effectiveness of the system tells us that we must maintain a decent—not minimal, but decent—level of purchasing power so that there is enough consumption for an ingenious system of mass production to continue working. This coincides pretty well with ethics.

However, take the official public discourse: isn’t it trying to pull us out of this crisis only through finance? It is only talking about banking and finance. I have a hypothesis: as the banking crisis is explicable by the immorality of the financial system—a clear and convincing argument—it has the enormous advantage of not putting into question the general organization of the economic system. Here’s a great debate: do we still need rules and sanctions? Will we return to more morality in economics by simple persuasion? On the macroeconomic level, deregulation is related to the fact that optimization of market equilibria allowed people to do whatever they wanted, and thus to get rid of any reference to a balance that would need to be preserved by regulations. Here, the formulation of a diagnosis opens a sensational debate in economic science. For thirty years it has been the case that, in order to be appointed a professor of economics in the developed world, it has been necessary to conform to the vision of Milton Friedman. Economic advising to governments is in line with the monetarist thinking of Milton Friedman. It would be very difficult to expect that failure of Friedman’s system speaks louder than deeply rooted convictions; that the assessment of the situation contradicts the paradigm of the organization, that is to say market optimality: “Laissez faire, laissez passer, don’t regulate anything, we will be even better.” Acknowledging the failure of the market would wreck the theoretical discourse of this scientific era. You can imagine, for example, what it would be like if some in the medical field started saying that everything that comes from Louis Pasteur is wrong. This is what economists are going through. They have developed a science for themselves without worrying about the connection with sociology, history, political habits, modes of regulation of governance, etc.; they are left stuck in internal dogmatism.

But does this still mean that it is necessary and/or likely that this is the end of capitalism? Of course not. The market is like “sedentary agriculture” or “writing,” we do not know who invented it three or four thousand years ago. We should absolutely not get rid of the market. Nothing else has worked so far and it ensures a basic level of freedom. If there is no market, it is unlikely that there will be basic freedoms like freedom of expression.

We have therefore been brought back to the fact that capitalism is a variable entity that can take many forms. The form we had from 1945 to 1971 provided us with thirty unprecedented years, while the form we had in 1990–2000 was abominable and put us in the hole. Capitalism should aim to preserve the grand equilibrium. At the moment, the big problem is the world’s inability to agree on the diagnosis of the overall system, beyond what is happening in finance. Will we have enough political willpower to impose a change? I am not sure because there are still a bunch of fanatics who continue to make money regardless.

Caroline Meledo is a 1st year MA student in International Relations and International Law at Johns Hopkins University, SAIS, Bologna in Italy. She previously received a double diploma in European Studies from the French Institute of Political Science (IEP) Lille in France and the Political Science Department of the Westfälische Universität Münster in Germany.