an interview with Joseph Vogl
“The room for maneuvering is becoming very narrow”

Joseph Vogl
Foto (Ausschnitt): Stephanie Kiwitt | Photo (detail): Stephanie Kiwitt

​That politics and economics are separate spheres which reciprocally limit each another is a “legend of liberalism”, says cultural studies scholar Joseph Vogl in his book “Der Souveränitätseffekt” (The Sovereignty Effect). Numerous alliances determine the relationship between these areas.

Mr. Vogl, in your book “The Sovereignty Effect” you trace the interdependencies between politics and economics. What issues do you pursue in detail?

In my book I ask about what today constitutes the powers of political decision and action. The perspective is twofold: first, we can observe that very many decisions that affect society as a whole are made in a close exchange relationship between economic actors and political institutions in a gray area between economics and politics. The usual distinction between state and market is not sufficient to grasp the key elements of modern governmental power.

The second perspective is historical: I try to show how precisely the modern financial system could come about only through a close symbiosis of political and economic power. These processes can be traced to the late Middle Ages, as in the Republic of Genoa in northern Italy, where in the twelfth century private investors were already integrated into the exercise of policy. In the early modern period – for example, in the Netherlands of the seventeenth century and later in England – public debt and public finance became the main engines that formed a politically influential financial power.

Dogma of radical independence

You describe the genesis of the central banks of the seventeenth century up to the present. To what extent are central banks paradigmatic for the interaction of politics and economics?

Central banks have assumed an important liaison role within the financial system. First of all they gathered private creditors, as did the Bank of England, founded in 1694, who loaned the state money and in turn profited from these loans by the transference to them of customs and tax privileges. Thus arose a close-knit public-private network, a mixture of government institution and private company. On the one hand central banks filled sovereign functions; on the other they worked like joint stock companies and were also beyond political control. In the course of the twentieth century the mission of central banks has changed. Their task now is essentially to provide a safeguard for the financial and monetary system.

This function is usually associated with the dogma of radical independence. The European Central Bank, for instance, as one of the most independent financial institutions ever, has completely taken over an unquestionable right of sovereignty, namely the control over currency and liquidity. The Maastricht Treaty expressly stipulates that no national parliament and no European institution have the power to direct the ECB. With its decisions the ECB directly determines the framework of government policy, but independently of elected governments. It therefore, so to speak, is a para-democratic institution.

On the financial markets, too, political and economic principles work together; to designate this interaction you’ve coined the term “regulative capitalism”. What is the mark of this regulative capitalism?

The term is a counter-thesis to the idea that financial markets are free, more or less “unleashed markets”. They are instead a highly regulated area of economic life in which states, parastatal institutions such as central banks, international organizations such as the International Monetary Fund, influential private players with a public service mission such as rating agencies, international treaties and large private investors such as investment companies and banks interact in a highly nuanced network of rules. There is no “free” market here, accessible to everyone, but rather a systematic privileging of large capital assets.

Risks redistributed downwards

In the context of the financial crisis that has been going on since 2008, government policy has shown a great willingness to support financially troubled banks with public funds. At the height of the Greek crisis in 2015 it became clear that the rehabilitation of national budgets comes with significantly higher conditions. Do the alliances you describe between politics and economics come to bear here?

A thesis of my book is that an essential element of sovereignty in the present financial system is the so-called “lender of last resort”. This function, which was traditionally exercised by the central and issue banks, has been more and more transferred to the financial markets. In this way private investors and business dynamics largely determine the volume and flow of the money supply. Against this background political logic has gotten used in critical situations, and to guarantee conditions of basic economic survival, to first saving the investors.

One of the most prominent examples of this since 2008 has been the big financial service providers in the United States, that is, the private insurance companies, which invested large sums of money in real estate loans and had to be rescued with public money because they manage the majority of American pension funds. The state had placed itself under private economic pressure that made it necessary to rescue the major investors so as to prevent the collapse of the pension system. And yes, you’re right, the current financial regime has cemented this asymmetry: big private investors are usually refinanced unconditionally with public funds, but sovereign debtors only under ruthless conditions. The risks of the financial markets have been, so to say, distributed downwards.

Buying time for political maneuvering

This political predicament has also been described by the American political scientist Charles Lindblom, whose statement you quote: “no market society can achieve a fully developed democracy because the market imprisons the policy-making process”. Do market processes inevitably restrict democratic processes?

This perspective is directed first of all against the thesis that capitalism and democracy belong together, are twins, as it were. History shows that capitalism is less interested in democratic processes than in profitable business models, and can therefore enter into coalitions with government forms of any kind. It requires at most minimal legal security; for instance, the protection of property.

What Lindblom describes as the “prison of the market” may also be seen in the reputation competition to which the euro-countries are subjected on the markets. One of the chief problems of governments is buying time for political maneuvering on the financial markets. The creditworthiness of states is continually being assessed by rating agencies. As soon as a state slips, its rating deteriorates, its creditworthiness falls and the interest rate on government securities rises, aggravating the difficulty of refinancing on the financial markets. A vicious circle. The only thing that governments can then do is dismantle public services, reduce investments, allow the erosion of social security systems and the neglect of public infrastructures. In this way they regain, as the refrain goes, the “confidence of the financial markets”. Through this politically motivated accumulation of action and decision-making power in the hands of private sector actors, the maneuvering room of governments has grown very narrow.

Dependence on the interests of the financial economy

How could states recover their power to act politically, that is, their sovereignty? Do we need to disentangle politics from the economy?

It’s not a struggle between markets and politics, but rather a question of politics re-setting certain economic priorities and standing up against the implementation of what we may call neo-liberal, economic principles in all areas. At the core of the current financial regime is a conflict or class struggle between the financial markets, that is, the financial industry and large investors, and the democratic voting public.

A cascade of measures and decisions in recent decades has politically strengthened the financial regime: debt brakes, tax privileges on interest-earning assets, dismantling of financial controls, refusal to tax transactions, privatizing of public services and the conversion of solidarity-based insurance concepts into financial market-based models. These are some of the minimal political stakes that will be at issue in future – a political struggle about how far the public good and the circumstances of our lives will depend on the financial sphere.

Joseph Vogl is a scholar of cultural and literary history and lectures at Berlin’s Humboldt University and Princeton University. 2015 he published the book “Der Souveränitätseffekt”.