Financial Crisis as a Crisis of Capitalism: Strange, Polanyi, and Arrighi

Introduction

Starting from 2008 onwards, the world has been experiencing an unremitting state of economic recession. Each of the three theorists examined in this essay holds a different perspective on whether that recession indicates a crisis of capitalism. Susan Strange and Karl Polanyi take a relatively optimistic view: Strange suggests the recession reflects a misplaced paradigm — a distorted perspective on power — while Polanyi sees it as a temporary dislocation that requires government intervention to correct. Giovanni Arrighi, by contrast, regards the situation as evidence of something intrinsically and irremediably wrong in the structure of capitalism itself. Each of these views is examined in turn and then compared in order to assess how each theorist understands the financial crisis and its relationship with capitalism.

Susan Strange on Capitalism

Susan Strange published Casino Capitalism in 1986 at a time when few others recognized that the world of finance was growing to dominate the global economy in a way increasingly detached from production. Writing in the 1970s, Strange had already perceived that finance was becoming a global phenomenon, breaking free of states and of industrial production. Nixon's decision to sever the dollar from gold, together with the rise of global communications technology, would lead to financial markets that operated 24 hours a day, seven days a week, spanning the entire globe.

In Mad Money: When Markets Outgrow Governments (1998), Strange argued that governments harbored mythical beliefs — that what they had created rested on an eternal order, or on the workings of an "invisible hand." They were equally mistaken in assuming that inflated loan systems could be willfully sustained indefinitely. Their erroneous belief that they had created something natural and permanent was, she argued, rooted in ignorance of history.

To elaborate: historically, nations operate on myths. America, for example, believed it possessed a certain economic hegemony — that it was the land of gold and opportunity. Today, many believe that America has lost that hegemony and become just like any other nation, as evidenced by the recession. This too, according to Strange, is a myth, and a dangerous one. In historical memory, American optimism offered itself and others an attainable and better future. Today, the myth of lost hegemony is apt to introduce "only pessimism, despair and the conviction that in these inauspicious circumstances the best and only thing you can do is fight for your own self-interests" (States and Markets, 1998, p. 204). Strange warns that this can spell anarchy for a nation and leads to a breakdown of international cooperation.

The world has changed, but America has not lost its power — it has simply had to adjust to a global economic market that operates according to a different political logic. Where states once competed over territorial possession, today they compete over market share as the surest means to greater economic security. "The most successful and industrialized countries are those who have been able to take and keep a larger share of the world market for goods or services or both" (p. 224). This reality has been obscured from the United States largely because of its sheer scale. It was Japan, lacking the advantages of large defense contracts, that was more alert to this shift and turned to the global market as a means of applying existing technology.

A survey of the world's top corporations — whether the top 100, 500, or 1,000 — reveals that the leading names are overwhelmingly American, and that decision-making power over global production remains correspondingly American. This reflects the fact that the United States provided the first large mass market for manufactured consumer goods; its laws and policies therefore shaped the corporations that now dominate the world market. The operating norms of today's business world were created in America, and developments in the United States continue to influence developments elsewhere.

America also retains the power to dominate the supply and availability of credit denominated in dollars. The dollar remains the only currency that is universally saleable and credible, and through it the United States effectively controls the world's monetary system. Beyond this, America is preeminent in the knowledge economy — whoever commands the knowledge that others seek is positioned to dominate, and in technology, America continues to lead.

Taking all of these factors into consideration, the assumption that America has lost its power is precisely that — a myth. America still possesses its hegemony, perhaps more firmly than ever, but its analysts fail to perceive it because the paradigmatic markers of power have shifted. Where territorial sovereignty once defined a country's might, today it is the extent of global market presence. With a shift in perspective and the shedding of outdated myths, America could recognize that the current financial crisis does not spell its doom, nor does it represent a crisis of capitalism. On the contrary, America remains as strong as ever. Economic and political realities have shifted, and America must adjust to the new situation — but in doing so, it may find that the present moment offers opportunity rather than crisis.

Karl Polanyi on Capitalism

Karl Polanyi challenges the assumption that there is anything "unnatural" about modern markets. Modern markets have cultural and political underpinnings and are the outcome of modern industrial society. They are human and contingent entities, based entirely on social affairs, and they must therefore be regulated and controlled by the state. There is no "hidden hand" operating behind the scenes, and for that reason the workings of markets must be monitored by governments.

In the preface to Trade and Market in Early Empires (1957), Polanyi and Arensberg offered the following description of what the free market actually entails:

"In the free market of supply and demand, a man can reverse roles, being supplier or demander as he can or wills. A man can go to this market or that as he sees his advantage; he is free of fixed and static obligation to one center or one partner, he may move at will and at random, or as prices beckon. He can offer to all and any comers, dole or divide among them, 'corner the market' so that they all pay his price and so dance to his tune." (p. 225)

Capitalism, as Polanyi argues, is generally understood as a system of traders and merchants seeking profitable opportunity. Classical economists such as Adam Smith attributed the functioning of this system to behind-the-scenes forces — the "invisible hand" of competition. Yet this framework places all emphasis on merchants and traders while ignoring the sphere of production entirely. Capitalism requires a market for labor, and that market cannot be a naturally occurring, freely functioning entity. By defining it as a purely self-regulating system, classical economists described something that, in Polanyi's view, cannot actually exist. What is needed, he argues, is protection by the state. Unrestrained, unregulated competition will prove destructive for companies and nations alike. For productivity to succeed, it requires governmental oversight and intervention.

Land and money, similarly, cannot be valued purely at their cost of production and therefore do not conform to the laws of classical market competition. For this reason, the state must also intervene to monitor these dimensions of the economy. As Polanyi points out: "Economic history shows the genesis of national markets was not the consequence of the slow and spontaneous emancipation of the economic realm from state controls. Rather, the market was the result of a conscious and often violent intervention by the government in society for non-economic reasons." (p. 331)

The invisible hand, then, is only part of the picture. For businesses to coexist and compete peacefully, government intervention is necessary. History demonstrates this repeatedly, and it is precisely such intervention that has propelled society forward. From this perspective, the recession can be understood as a failure of the state to adequately monitor its economic operations — a deficiency that can, and must, be corrected by government action. Just as Roosevelt's New Deal represented government intervention that moved economic affairs forward, so too may future interventions resolve the current crisis. This is no crisis of capitalism — it is a fork in the road, waiting for government action to set things right.

Polanyi's arguments call for the end of laissez-faire orthodoxy and demand that government step in to enforce fair wages, structure labor markets, and regulate greed. The government must also protect private property, particularly in the intellectual domain. The free market cannot function on laissez-faire principles alone; it needs the guiding hand of the state. The recession may be a manifestation of the failure of unregulated trading, but it does not necessarily signal the failure of capitalism itself. With appropriate government intervention, a path forward remains available.

Conclusion

Each of the three theorists discussed in this essay holds a different perspective on whether the recession indicates a crisis of capitalism. Whilst Susan Strange and Karl Polanyi take a more optimistic view, Arrighi sees the situation as manifesting something intrinsically and inherently wrong in the structure of capitalism itself.

According to Strange, the assumption that America has lost its power and no longer dominates is precisely a myth. America still commands its hegemony — perhaps more firmly than ever — but its analysts fail to perceive this because the paradigmatic markers of power have shifted. Where territorial sovereignty once defined a country's might, today it is the extent of global market presence. With a revised perspective and the elimination of the myths that distort its self-understanding, America will recognize that the current financial crisis does not spell its doom, nor does it represent a crisis of capitalism. On the contrary, America remains as strong as ever; economic and political realities have shifted, and America must adjust — but doing so, it may find opportunity rather than crisis.

Polanyi, by contrast, sees capitalism as a system that must be protected by the state. For businesses to coexist and compete peacefully, government intervention is necessary, and the history of economics has demonstrated this repeatedly. From this perspective, the recession can be understood as a failure of the state to adequately monitor its economic operations — a deficiency that can and must be corrected. Just as government intervention in the past moved economic affairs forward, so too may it do so in the future. This is no crisis of capitalism, only a fork in the road awaiting the corrective hand of government.

Arrighi, however, offers a sterner verdict. Social productivity is organized in such a way that goods are produced not primarily for consumers but to increase the stock of capital. The result is an excess of social product oriented toward accumulation rather than need. Producers receive diminishing returns, consumption contracts even as production expands, and the structural result is recession — not as accident, but as systemic outcome.

Three theorists; three views. Optimistically, we may conclude with the observation that the events of the mid-2000s — and the unprecedented interventions of the United States government and the European Union in financial markets — lent concrete support to the arguments of both Polanyi and Strange.