Governing the system: Risk,finance,and neoliberal reason

Introduction

A notable trend since the financial crisis of 2007/2008 has been the growing public prominence of concerns about systemic risk: the possibility that the risk assumed by large institutions could jeopardize the stability of the financial system at large. The issue has featured prominently on international and national reform agendas and it has become the subject of a rapidly growing political-economy literature (Baker, 2013; Datz, 2013). That literature has argued: that systemic risk problems had been building up since the start of financial expansion from approximately the early 1980s; that the influence of neoliberal interests and ideas suppressed awareness of this and that the magnitude of the issue was only fully recognized with the financial crisis of 2007/2008; and that post-crisis regulatory agendas broke out of the neoliberal framework to address systemic risk problems. By and large, this literature has tended to interpret recent history on a “cyclical” or “Polanyian” model, according to which the crisis was the outcome of several decades of market-friendly regulation and the post-crisis era would see a return to more interventionist and restrictive forms of regulation (Block, 2011; Streeck, 2012).

However, in a fairly short period of time, this literature has moved from relatively optimistic assessments of the prospects of the post-crisis reform agenda to a concern that it has failed to make much headway (e.g. Helleiner, 2014). The role of international organizations in financial governance has not been substantially strengthened, and initiatives at the national level have imposed relatively few restrictive regulations on financial institutions. The main explanation for the failure of the reform agenda has centered on the “capture” of policymaking institutions and discourses by financial elites (McCarty, 2013; Rixen, 2013). Although this model has considerable descriptive relevance, it is less clear that it can stand on its own as an explanation — what needs separate explanation is precisely how the wider context of financial governance has functioned in such a way as to protect those interests at a time of intense critical scrutiny of bankers and their regulators (cf. Kiersey, 2011: 25). The capture model, in fact, reproduces what has often been identified as a major problem in Marxist explanations of neoliberal modes of pro-market governance (e.g. Harvey, 2005): an instrumentalist or even conspiratorial character understanding of institutional power. Furthermore, it is not entirely accurate to say that the systemic risk agenda has been blocked. Central banks currently devote significant resources to stress-testing and scenario-planning (Langley, 2013), and policymakers have taken systemic risk concepts — network dynamics, contagion, resilience — quite seriously (Cooper, 2011). Although it is certainly true that post-crisis governance evinces a remarkable continuity with pre-crisis governance, we should not characterize this continuity in terms of regulators’ disinterest or passivity, or the way in which their cognitive framework has been captured by laissez-faire doctrines.

The difficulty that political-economy scholarship is currently experiencing in offering a convincing perspective on post-crisis developments is related to its often overly politicized critique of neoliberalism. Even as political-economy scholars have come to reject the notion that neoliberalism is simply about markets overpowering state institutions, what has persisted is the somewhat one-sided idea that neoliberalism represents an incoherent and irrational belief in the self-regulating properties of markets that offers no basis for legitimate and prudent public governance. Political-economy scholarship has been prone to prematurely announcing the demise of neoliberalism, and it has tended to conceptualize the persistence of neoliberalism as an exceptional phenomenon, as a deviation from a normative model of mixed governance. Although the perceived failure of progressive reform in the wake of the crisis has led many scholars to devote greater attention to the question of neoliberalism, this wave of scholarship has so far heavily relied on instrumentalist accounts of policy and politics (Crouch, 2011 ; Mirowski, 2013; Streeck, 2014).

Focusing, in particular, on the neoliberal era in US financial policy, this article proposes a shift of emphasis away from capture explanations. When we consider that era’s most iconic moment (the turn to monetarism in 1979), it is worth noting that this was by no means undertaken either on the behalf or at the behest of financial elites. Worries about inflation were widespread, and some of the strongest pressures for the adoption of monetarist procedures came from Congress. Moreover, one of the key authors of the policy shift, the new Federal Reserve Chairman Paul Volcker, was fiercely independent, and there is little reason to think that he sought to further this or that set of interests. It is therefore important to consider how we might understand neoliberalism even if we assume little about the ability of capitalist elites to capture state institutions or the minds of policymakers — that is, if we assume that state personnel are not necessarily corrupted by private interests, but primarily minded to stabilize the economic system, relying on an imaginary that is not readily reducible to a specific set of interests or ideas. To depict neoliberalism as a naive faith in market self-regulation that amounts to a neglect of systemic risk issues is an overly dismissive critique, which fails to engage the ways in which neoliberal policies have, in fact, been able to mobilize their own specific sources of cohesion and resilience. In other words, there is something that deserves to be termed “neoliberal reason” (Peck, 2010) — understood not as formal ideational consistency, but as a degree of cohesion at the level of practice and the imaginaries that orient it — and critically inclined scholarship needs to take it more seriously than it so far has. To this end, the article takes its cue from Foucault’s late work and, in particular, his emphasis on the way in which neoliberalism brings uncertainty into the heart of governance.

Neoliberalism and speculation

At the core of the understanding of neoliberalism that Foucault advanced in his later work is the notion that it involves something quite different than a simple revival of classic liberalism (e.g. Foucault, 2008 [1979]: 118, 131, 147): whereas the latter simply demanded space for the utilitarian logic of market exchange to unfold, the former embraces a speculative orientation toward the future as an organizing principle. Foucault’s late lectures have already been the subject of a great deal of commentary, but what has remained somewhat underdeveloped is a consideration of Foucault’s comments on neoliberalism through a direct confrontation with questions of political economy — a discourse that the later Foucault saw as a defining aspect of modernity. This article suggests that an examination of the changing ways in which the state has related to the financial system represents a useful way of specifying what is at stake in Foucault’s understanding of neoliberalism. This is especially important because it would be all too easy to quietly subsume Foucault’s comments on neoliberalism under established political-economy critiques of speculation as an irrational practice — which would be to reduce Foucault’s argument to a variation on the familiar narrative according to which the encroachment of financial forces onto the political terrain chips away at the state’s capacity for governance.

We need to have some appreciation here for the specific emphasis of Foucault’s later work compared to his earlier work: it effects a shift in focus from the role of knowledge in constructing disciplinary regimes (e.g. Foucault, 1977) to a more open-ended concern with the ways in which modern polities govern through risk. Of course, even prior to the publication of Foucault’s late lectures given at the Collège de France, a related shift had already been visible in his tendency to relativize the efficacy of discipline over the course of the History of Sexuality trilogy (Foucault, 1978–1986). However, if that development could still be interpreted as a shift from a structuralist to a postmodern perspective on discourse, Foucault’s analysis in the Collège de France lectures goes beyond a postmodern emphasis on indeterminacy. Instead, it is centrally concerned with the specific character of modern political order: the distinctive forms of authority and cohesion that emerge in a society that is increasingly concerned with the uncertainty of the future. Indeed, whereas the earlier Foucault had advanced his analysis of disciplinary socialization precisely as a critique of the concern with sovereignty, his later work brings back questions related to state power (Lemke, 2007).

The substantive thrust of Foucault’s (2008 [1979]; see also 2003 [1976], 2007 [1978]) later work has been discerned with particular acuity by scholars who have noted the convergence in it of security and political-economy problematics (e.g. De Goede, 2012; Langley, 2013). The modern subject, no longer beholden to the notion that the future is unfolding according to a divine plan, understands the future as open and its own relation to the world as involving a key element of risk. It is centrally driven by a concern with security: the awareness that it must act to safeguard its identity into the future. However, the awareness that action is imperative is never accompanied by a perfectly accurate understanding of the consequences of different actions, and so the subject must speculate. Seen from this angle, speculation does not represent an irrational divergence from fundamental values, but is the constitutive orientation of the modern subject. When this modern logic comes fully into its own, the pressure to make decisions in the absence of full knowledge poses a challenge to any clear-cut distinctions between defensive and offensive moves: we must make speculative investments even if only to secure the identity that we currently enjoy.

In this context, the idea of riskless security comes to function as a regulatory horizon: a point of orientation that forever recedes as we approach and so forever demands a renewed commitment to speculation. The distinctive imaginary of capitalism is that we may move through risk beyond risk — that, if we play our cards right, we may provide our lives with neutral, non-speculative foundations. We can get a better grip on the logic at work here by highlighting the paradox embedded in the orthodox conception of market neutrality. For orthodox theory, money is a paradoxical combination of pure contingency and pure necessity. When money works properly, it is simply a neutral measure: it is precisely because money is an arbitrary accounting fiction that it can function as a fully objective standard. In this way, the orthodox conception of money embodies the distinctly modern imaginary according to which we may speculate our way to a life that is immune to the uncertain effects of unpredictable events. It is important here to resist the common tendency to dismiss the orthodox image of neutral money as simply pro-capitalist ideology. Especially in the US context, the emotional appeal of this imaginary is borne out by a long history of populist and republican sentiments that have had the achievement of market neutrality as their core objective (Postel, 2009). Moreover, neoliberalism’s ability to align itself with such discourses has been key to its success (Kazin, 1998).

This does not mean that neoliberalism relates to the orthodox economic imaginary cynically or instrumentally — that would again be to reproduce a somewhat conspiratorial and intentionalist image of neoliberalism. Rather, it is to argue that neoliberal reason is not constrained by a literal reading of the specific way in which neoclassical theory has formalized the orthodox economic imaginary — that is, it is more engaged with the spirit than the letter of that imaginary. The relevant difference can be brought out with reference to Hayek’s work, which Foucault considered as holding important clues as to the nature of neoliberalism even though he was not able to pursue this in much detail (Gane, 2014). Whereas neoclassical theory suppresses the ongoing role of speculation in economic life, Hayek’s work thematizes it. Rejecting the positivism of neoclassical theory, he insists that any hope for complete and certain knowledge is illusory, that ordering through centralized knowledge is principally impossible, and that uncertainty and not-knowing are constitutive and ineradicable aspects of the problem of economic coordination. However, this insight never led him to abandon orthodoxy’s commitment to the tenet of market neutrality. Instead, in Hayek’s work, it comes to serve explicitly as a regulatory horizon, out of reach as a matter of principle, only ever receding and forever demanding an intensified commitment to the uncertainties of the market.

Crucially, Foucault’s concern with the sovereignty–risk axis should be understood not as a blanket definition of modern governance, but as a general characterization of a relationship that has continued to evolve. This is to pursue an insight that is present in Foucault’s writings but has been made more explicitly by François Ewald (a student of Foucault and the editor of his Collège de France lectures), who suggests that the development of risk governance can be understood in terms of a transition from defensive orientations that are primarily concerned with organizing insurance for the impact of future events to more purposely proactive orientations that work on “an ethic of the necessary decision in a context of uncertainty” (Ewald, 2002: 294). Whereas the former employ the logic of the normal distribution, the latter push into areas of risk that challenge meaningful actuarial calculation. With specific respect to modern financial governance, we can note that even though it has always involved the alignment of governmental operations with the logic of risk, until well into the 20th century this had a rather passive and reactive orientation, accommodating rather than using the dynamics of speculation. It is here that neoliberalism intervenes, insisting that politics should embrace entrepreneurial principles and proactively engage the speculative dimension of economic life. As Ewald (e.g. 2002: 285) emphasizes, however, this should not be understood as a clean replacement of one principle with another. Rather, the speculative orientation of neoliberal governance always articulates with the continued operation of normalizing forces and the principle of insurance. The neoliberal concern to provoke the future is complemented by a reactive moment that manifests itself fully when uncertainty threatens to tip over into failure.

Norm, exception, and the state

The implications of Foucault’s late work for the understanding of neoliberalism can be pursued by highlighting how it moves beyond two related limitations of his earlier work, namely, the tendency to overstate the disciplinary efficacy of discursive norms, and the tendency to downplay the role of the state and its claim to sovereignty. The most relevant philosophical critique of that perspective was formulated in Agamben’s (2005) work — which restores the question of sovereignty to a central position, seeing it as rooted in the state’s ability to except itself from society’s basic normative order when an emergency situation presents itself. Agamben’s work is of interest here as it gives philosophical expression to the tendency to ground the analysis of neoliberalism in an assumption of its exceptional character, the idea that its date of expiry has long passed and is only held together by political tricks and schemes.

Of course, Agamben’s dramatic depictions of sovereign exceptionalism in the tradition of Carl Schmitt have been subjected to cogent criticism (e.g. Huysmans, 2008; Johns, 2005), and his conceptual schema has been largely appropriated in a “pluralized” form that depicts neoliberal sovereignty as a complex construction of competing claims to exceptional status (Connolly, 2005; Ong, 2006). However, such perspectives dilute rather than solve the problem. On the one hand, they still understand neoliberal authority as working through bypassing a more basic normative structure that is needed for consent and legitimation. On the other hand, to simply reject the idea that acts of authorization ever align themselves to produce authority structures that are sovereign in the distinctive sense of that word — that is, unconditional and non-negotiable — would seem to turn a blind eye to the form that state intervention often does take in contemporary capitalism. For instance, such a perspective does not allow us to say much about the interventions that the US state has undertaken in response to the financial crisis, which involved sovereign interventions on an extraordinary scale that operated with a high degree of necessity.

However, to follow Agamben in portraying this in terms of the suspension of normal mechanisms of interaction would be to essentialize the state’s claim to sovereign status. We should be able to understand the seemingly instantaneous conversion of intense uncertainty into unambiguous authority not as involving a transcendence of risk, but precisely in terms of the principles endogenous to it. Here, the conceptual innovations of Foucault’s later work offer interesting ways forward. Of particular importance is his differentiation of risk-based normalization from the disciplinary norm (Foucault, 2007 [1978]: 55–57, 63). Foucault recognizes that even as his earlier writings used the notion of discipline to criticize the sovereign model of power, it served, in fact, to reproduce an idealist understanding of power. Foucault’s depiction of the process of normalization, by contrast, involves a pragmatic understanding of the norm as an endogenously generated point of reference. Normalization works not through rule-following or literal internalization, but through the subtle ways in which a process of ongoing mutual anticipation endogenously comes to revolve around a particular point. The resulting norm is never the final word on or absolute measure of the process from which it arises: rather, it is just a value around which a process of interactive speculation provisionally organizes itself.

This conception of normalization accomplishes two important things. First, it makes room for an understanding of uncertainty as a productive element in the creation of norms and order, rather than as an external limit to knowledge (cf. Kessler, 2009). If human knowledge always faces the question of how to handle its own limitations, actors know that others are plagued by similar epistemic limitations and this itself becomes something that they strategize around (Davies and McGoey, 2012). The interactive logic of speculation involves rhetorical elements that have as their objective reputation and impression management: in a context characterized by continuing mutual anticipation, authority derives not just from knowing, but equally from being known, the ability to be recognized as a stable point of reference in a field marked by uncertainty. Second, precisely because uncertainty continues to function as a productive moment, the hierarchization of norms is an ongoing process. The endogenous logic of speculative investments never generates a norm or measure that eradicates uncertainty for good. Furthermore, the continuous generation of new sources of risk creates a permanent pressure for the creation of more encompassing normative structures to handle these uncertainties.

Thus, the rejection of sovereign exceptionalism does not automatically commit us to a pluralist conception of authority: it is precisely the immanent character of financial authority that creates a continuous pressure for further hierarchization. This gives modern authority a distinctly dual character that manifests itself fully during times of crisis, when acute uncertainty tends to create its own kind of certainty — precisely not an ability to act on accurate knowledge of the future, but a definite certainty as to what needs to be done in the absence of such knowledge (cf. Tellmann, 2009: 18). As risk becomes incalculable, a compelling certainty emerges as to the only possible course of action: we must fortify the nodal points of the financial system, and this means safeguarding the investments of the banks. During the financial crisis, sovereignty became highly speculative, investing itself in assets whose value was fundamentally in doubt; however, at the very same time, its policies were grounded in the widespread (if resentful) recognition that it was doing what had to be done. An intense concern with the future thus comes to be marked by a strangely reactionary quality.

Reframing Minsky along Foucaultian lines

A conceptualization of banking is important for the further pursuit of this argument: it represents a key mechanism whereby speculative interactions endogenously generate more or less stable values. The role of banks in economic life can usefully be understood on the late-Foucaultian model of normalization: they represent ordering devices that work from within the logic of risk, never transcending uncertainty, but, instead, providing a technique for productively handling the limits of knowledge about the future. A bank’s promises function as a standard against which the value of other promises is measured, allowing the bank to capitalize on uncertainty by offering its commitments as a relatively safe asset. Precisely because banks never eradicate uncertainty and, in fact, produce new sources of risk, financial systems always experience a pressure for hierarchization, for more secure forms of money generated by banking institutions with greater normalizing force.

An emphasis on the endogenous character of money and its origins in the way in which banks mediate relations of debt and credit can also be found in post-Keynesian theory (Dow, 2006; Wray, 1990). From such an angle, it might seem a little extravagant to lead into questions of banking and finance by way of Foucault. However, the reason that we need the additional conceptual complexity proposed here is precisely that post-Keynesian theory has remained deeply beholden to the critique of speculation as an irrational distortion of the “real economy” and that it associates capacities for regulation centrally with the suppression of financial speculation (Palley, 2012). The limitations of post-Keynesian theory derive in large part from its tendency to separate risk and uncertainty, according to which actors either operate with probabilistic knowledge (where we can make rational bets) or face genuine uncertainty (where all bets are off). This involves a problematic understanding of probability as knowledge about the future rather than as a means to handle our lack of such knowledge (Esposito, 2007): uncertainty features as an external limit to statistical probability rather than as something that is always at play in evaluations of risk. When risk and uncertainty are separated in this way, the emphasis on the endogenous origins of money loses its critical thrust — as the latter is dependent precisely on an understanding of the techniques that permit ordering amid uncertainty.

The post-Keynesian critique of speculative finance is most prominently associated with Hyman Minsky’s work. The notion of the “Minsky moment,” which rose to prominence in the wake of the financial crisis, is widely used to refer to the moment when an unstable structure of speculative fictions begins to unravel. Although this article makes no claims about the “correct” interpretation of Minsky’s work, it does argue that his work also offers insights that point in a quite different direction, ones that we can exploit to move beyond the limitations of post-Keynesian theory. Two issues are key here, both of which point to the usefulness of rethinking Minsky along Foucaultian lines. Minsky was acutely aware that all investments were to some degree speculative in the sense that their return would only be determined in an unknown future. Second, he paid considerable attention to the ways in which the ongoing creation of new sources or risk served as a driving force in the continuous hierarchization of financial institutions.

Minsky understands financial authority not as imposed externally, but as arising organically out of the ordering principles internal to economic processes. In particular, central banking does not represent a means of exogenous regulation, but is itself a form of banking and engages a similar logic of normalization — which is a point missed not just by much of contemporary economic theory, but equally by authors who characterize the role of central banks as involving a Schmittian exceptionalism (Ashton, 2011; Scheuerman, 2000). When a bank comes under pressure, the response is never an across-the-board credit contraction: large borrowers, too-big-to-fail constituents, are the last to experience the contraction of credit and can count on the most accommodation. Central banking similarly responds to the particular systemic properties exhibited by financial networks, that is, the existence of financial nodal points and the possibility that their failure will take down wider social structures. A too-big-to-fail logic based on backstopping and shifting risk away from large institutions is therefore a core feature of capitalist financial management. A keen appreciation of this point led Minsky to be skeptical toward claims of discretionary precision management made on behalf of modern monetary policy.

Crucially, however, Minsky did not take the non-exceptional nature of financial policy as reducing the importance or effectiveness of central banking. As Beggs (2012: 17) has pointed out, the answer suggested by Minsky (1982) himself to the question “Can ‘it’ [i.e. the Crash of 1929] happen again?” was something like “probably not” because of the level of protection embedded in the operation of the system. From that angle, “the bailout and not the crisis itself might be seen as the real ‘Minsky moment’” (Beggs, 2012: 17). The endogenous nature of financial policymaking is something of a double-edged sword. On the one hand, it means that the governance of finance always falls short of an imagined version that works through external observation and intervention and delivers a neutral financial structure. Financial governance is forever plagued by its embeddedness: the impossibility of cleanly extricating itself from the processes that it seeks to regulate. On the other hand, the fact that financial authority is not an external imposition, but organically connected to lower-level financial practices, means that at times of intense uncertainty, it can operate with tremendous immediacy, activating embedded chains of connections.

Risk, banking, and governance

Minsky (1982, 2008 [1986]) ¹ conceived of economic actors as balance-sheet entities that issue short-term debts in order to make longer-term speculative investments with a higher return. The need to generate sufficient cash proceeds from one’s investment in order to permit the servicing of payments on one’s debt constitutes a payment constraint (Mehrling, 1999). The interaction of balance sheets is characterized by a process of endogenous organization: through banking operations, the interaction of speculative investments becomes oriented around and stabilized by a financial standard. Historically, banks were institutions settling payments and clearing debts and credits, and, to this end, they often issued their own short-term promissory notes. The latter often began to circulate without being presented for redemption, and, in this way, bank obligations came to serve as a measure, a promise against which the value of other promises is assessed, which therefore acquires normative force (Ingham, 2004).

A bank is thus an institution that enjoys no special foresight and does not escape risk, but is positioned in such a way that its promises come to function as a normative standard, conferring on it a distinctive systemic importance and allowing it to borrow funds seemingly by unilaterally creating them. The basis of the bank’s systemic importance has less to do with what it knows or sees than with what it is known or seen as; its operation is premised on the possibility of projecting itself as a reliable point of orientation in an uncertain world. That is, holding bank money is a means of insuring against risk, the best way of securing value when faced with a future of unknown events (cf. Esposito, 2011). Of course, it is the bank’s very role in providing this insurance that permits it to further expand the amount of notes it issues and make riskier investments.

That the bank never eradicates uncertainty becomes apparent when confidence in a bank’s promissory notes falters and a bank experiences a sudden withdrawal of short-term financing (i.e. a “run on the bank”) that tightens its payment constraint (Kindleberger, 2011). As a bank seeks to maintain its liquidity by disposing of assets, it puts downward pressure on their value and passes the effects of liquidity pressure on to other actors, so becoming a key agent of contagion. In pre-capitalist Europe, such crises often resulted in a complete collapse of bank-centered financial networks, leading rulers to impose wholesale bans on multiplier banking (Kohn, 1999). However, with the development of capitalist finance in England, crises often came to serve as paradoxical occasions for accelerated hierarchization (Knafo, 2013). Thus, even though the capitalist landscape looks like a complex constellation of overlapping standards and measures, it is characterized by a dynamic of hierarchization, with new forms of banking not just emerging alongside existing ones, but also layering themselves on top of those (Mehrling, 2000b).

Key here was the emergence of bankers’ banks (such as the Bank of England), which related to banks in the same way as the latter related to the public. Such bankers’ banks often came to function as “lenders of last resort,” alleviating the payment constraints that systemically important banks experienced during crises and so allowing them to meet obligations without having to sell off their assets (Bagehot, 1873; Hawtrey, 1932). With each crisis, the promissory notes of the Bank of England came to occupy a more central position in the system as a whole, and the transformation of these key private banks into public institutions was driven by the awareness of the possibilities for governance and system stabilization that they made available. The adoption of national currencies through the conferral of a monopoly on note issue should similarly be seen as a formalization of the increasingly pivotal position occupied by notes issued by the bankers’ bank (Hawtrey, 1932: 32).

That last-resort lending does not manipulate the logic of banking from the outside, but precisely employs some of its key modalities, also means that it often serves to amplify rather than suppress the dynamics of leveraging and deleveraging. That is, the very same central banking practices that could tide banks over during times of liquidity pressure often laid the basis for a more severe deleveraging movement later on. To some extent, financial policymakers have always been aware of the moral hazard that their policies entail (Bignon et al., 2012). In the US case, financial volatility during the late 19th and early 20th centuries was not counteracted, but promoted by the availability of lending-of-last-resort facilities and their institutionalization through the Federal Reserve System (Degen, 1987) — instabilities that culminated in the crash and depression. In response to awareness that an ordinary, reactive lender of last resort offered insufficient system-level protection, financial policymaking became infused with a more anticipatory quality. This found expression in the shift of control away from the Federal Reserve Banks (above all the New York Bank) to the Board of Governors, charged with the task of making policy in separation from the immediate imperatives of last-resort lending and bankers’ banking. However, the real work was done by the creation of a system of deposit insurance that undercut the rationale behind bank runs, and so, as Minsky (1982: 144; 2008 [1986]: 52) observed, functioned as an integral part of the central banking function. Deposit insurance worked simultaneously as central banking and as social policy, guaranteeing the funds of ordinary people while also serving to relax the liquidity constraints of banks — in this sense, it can be seen as emblematic of the New Deal’s character as a class compromise.

If episodes of deleveraging and deflation now seemed to be a thing of the past, this regime created a new, distinctive problem of governance: a permanent inflationary pressure that worked on self-actualizing expectations (Minsky 2008 [1986]: 296). In this context, the Federal Reserve came to increasingly understand its role in terms of securing system-level price stability, but it lacked the instruments to enforce this commitment. Whenever the Federal Reserve sought to constrain banks’ money-creating abilities, the result was a rapid growth of new forms of banking outside the existing regulatory framework: what has recently come to be known as “shadow banking” is composed of institutions that operate as banks even if they are unable to issue money in the specific sense of official legal tender. Minsky (1957) was one of the first to note this trend and viewed it as a forceful reminder that, pretenses of precision notwithstanding, the basic operational rationality of financial management consisted in last-resort lending and the provision of insurance. The dilemmas facing the Federal Reserve became even more pronounced as it became clear that uninsured shadow banking meant a return to the dynamics of financial leveraging and deleveraging that entailed significant system-level risk and would therefore need a response. Extending insurance arrangements to the capital markets was not a viable option for both political and economic reasons, and so a future of ad hoc bailouts seemed to be in the offing. Minsky seemed to feel that there was no real solution here: short of a major political shift that would democratize investment, there seemed to be no way for the US state to escape the kind of awkward dynamic in which it was embroiled.

Neoliberalism’s Hayekian rationality

It is against this background that we should see the turn to neoliberalism, and, in particular, the turn to monetarism. Monetarist doctrine can be viewed as a particular expression of the orthodox imaginary of neutral, non-speculative money, seeking to ensure that money functions in that capacity by proposing strict control over the quantity of its creation (Friedman, 1956). Many of those who led the adoption of monetarism as a Federal Reserve policy, chief among them Federal Reserve Chairman Paul Volcker, were skeptical about its merits as an economic doctrine (Silber, 2012). However, forced by Congress to engage more closely with the idea of quantity targeting, they intuited its productive potential and rhetorical uses. Volcker was well aware that the state’s lending and insurance functions were an integral part of the banking operations that served to constitute the dollar as a stable unit, and that replacing financial governance with a part-time operator guarding the quantity of money (as Friedman’s (1982: 117) literal interpretation of the quantity theory suggested) was not a viable option. However, he equally saw the role of the state as a problem insofar as it contributed to inflationary dynamics.

Volcker thus perceived the problem as one of how the state might change the way it related to a process in which it was constitutively implicated and could not just extricate itself from. We might say that his thinking reframed the problem of financial management along Hayekian lines: how is ordering possible if the state cannot place itself outside of the logic of risk and speculation? As various authors (Cooper, 2011; Foster, 2005; Kessler, 2013) have recently suggested, Hayek’s work contains a systems-theoretical problematic, addressing the question of how political steering is possible in the context of an evolutionary logic that rules out arbitrary decisions and external interventions. Minsky and Hayek both saw the problem of economy as one of coordination amid uncertainty. In Minsky’s words, which could easily have been written by Hayek: “Uncertainty (or unsureness) is a deep property of decentralized systems in which a myriad of independent agents make decisions whose impacts are aggregated into outcomes that emerge over a range of tomorrows” (Minsky, 1996: 360). However, whereas a Minskyian perspective emphasizes the impossibility of fully resolving this problem of order within the institutional confines of capitalism, for Hayek there was a clear solution and this consisted precisely in a more faithful commitment to the principle of speculation — conceived not narrowly as a specifically financial technique, but as the condition of possibility for order tout court.

At the core of Hayek’s work is the notion that order cannot be rationally designed by an outside authority and can only arise through an evolutionary process of spontaneous self-organization. We can understand Hayek’s perspective on economic order as a more fully secularized version of Adam Smith’s (1977 [1776]) notion of the invisible hand. Smith advanced his famous metaphor in order to address the question of how order might still be possible in a world that has growing difficulty believing that human history is governed from the outside, regulated by a divine mind. Hayek (1988), by contrast, proposed his understanding of “catallactic” order not to address a concern about the limitations of modern reason, but precisely in response to its “conceit,” the faith in rationalist constructivism that he saw as the defining characteristic of 20th-century socialism and progressivism. His claim was not just that acting without certainty was acceptable, but that it was necessary and imperative, that there is no source of order other than the interaction of speculative positions. For Hayek, the very notion that we might ever transcend a condition of uncertainty through politics was the problem to begin with.

The approach to the political significance of Hayek’s thought taken here differs from a more familiar line of critique — one that views Hayek’s work, and the neoliberal project that it articulates, as closely bound up with a Schmittian sovereign decisionism, exempting itself from the subordination to the rules of the market that it demands (Bonefeld, 2012; Scheuerman, 1997). Hayek did not criticize progressivism for its inability to understand the problem of uncertainty only to then make naive claims himself about the possibility of centralized knowing. The Hayekian political project is not to rehabilitate a sovereignty beyond risk, but to produce the limitations on knowledge that it takes to be the precondition of order (Davies and McGoey, 2012). Mirowski has characterized this as the rhetorical art of agnotology: the strategic production of ignorance and uncertainty (Mirowski, 2013; drawing on Proctor, 2008). Agnotology has a performative and proactive quality that ideology (at least as it is conventionally understood) lacks, seeking not simply to legitimate an existing state of affairs, but to speculatively produce a reality. It should not be misunderstood as a sure-fire way to elicit ignorance in others and manipulate with predictable consequences. Mirowski’s own analysis tends to slide back into such a perspective and accordingly presents a highly instrumentalist model of cognitive and institutional capture. Rather, the agnotological orientation involves an awareness of the ways in which the normalizing properties of capitalist life can be activated by engaging the outer reaches of probability. Whereas the idea of Schmittian exception is premised on the possibility of suspending normalizing mechanisms, agnotology is precisely premised on their operation. Aware that there is no outside to the logic of risk, it pushes at its boundaries in the expectation that such speculative transgressions will become integrated into the system’s dynamics.

It is useful here to briefly note the curious position that financial questions occupied in Hayek’s oeuvre as a whole. His early work (Hayek, 1933) was characterized by an acute understanding of the role of banks in the production of money and the dynamics of leveraging and deleveraging that this entailed — even if this was still superimposed on an orthodox equilibrium notion of how money “should” work. Hayek’s (1948) critique of socialist planning led him to a distinctive perspective on economic order as at its core a problem of knowledge, but he never had much interest in using this theory to return to questions of money and instability. Had he done so, he might well have ended up with something very much like Minsky’s theory, emphasizing the dynamic of instability, hierarchization, risk-shifting and the endogenous role that the state plays in the financial system. However, instead, when amid the financial tumult of the 1970s, Hayek (1976) finally returned to questions of money and finance, his argument was simply that the state had corrupted the market and its money. Here, the work that Hayek had never done became consequential as it blocked a recognition that the role of the modern state in the production of money was, in fact, the outcome of an evolutionary process characterized by its own internal rationality — something that Minsky understood all too well. But it is precisely such a willful misreading of history that is at the heart of the productive force of the neoliberal imaginary.

Governing neoliberal finance

Paul Volcker never believed that the creation of money could be exogenously controlled. Instead, he looked to monetarism as a rhetorical device, as a way for the state to productively engage — rather than just accommodate — the endogenous dynamics of banking (cf. Holmes, 2013; Kaplan, 2003). Volcker saw the US financial system heading for a potentially catastrophic crisis — one that would put the US financial system at the mercy of external forces, foreign investors increasingly reluctant to hold US dollars. He acted on this awareness by triggering a potentially productive crisis: the turn to monetarism was meant to provoke, driven by the intuition that a sudden policy turn could activate some of the financial system’s key endogenously situated ordering mechanisms. Far from the Federal Reserve making external interventions, it aggressively engaged the endogenous mechanisms of money production, creating new sources of uncertainty with a view to stabilizing the financial standard. In Volcker’s hands, financial policy no longer just served to accommodate the dynamics of banking; instead, it brought speculation into the operation of government.

What was not, in itself, surprising was the rapid expansion of shadow banking that followed the policy turn; that was precisely why, in the past, the Federal Reserve had held back from contractionary policies or quickly reversed them. The Volcker speculation consisted precisely in the wager that the instability caused by the Federal Reserve’s persistence with those policies would set in motion wider processes of adjustment. Crucially, the change in policy put considerable pressure on the Reagan administration to embark on a program of austerity without delay (Roberts, 1984). The extent to which the success of the monetarist turn was contingent on wider adjustments was illustrated by Volcker’s (2000) admission that the Reagan administration’s confrontation with organized labor had been crucial to the conquest of inflation (cf. Axilrod, 2011: 99). And that was only one element in a wide-ranging set of policies that accelerated the destruction of the secure employment contracts of Fordism. It was precisely the resulting precarity and uncertainty for the bulk of the American population that offered a wealth of financial investment opportunities (Barba and Pivetti, 2009; Lazzaratto, 2009; Martin, 2002). The Volcker shock restored the value of the dollar not by enforcing an external quantitative limit on the creation of credit, but by activating some of the financial system’s key self-organizing mechanisms.

Even as neoliberal restructuring brought down inflation and alleviated external pressure on the dollar, these developments were accompanied by significant financial volatility, a return to dynamics of leveraging and deleveraging, and a series of bank failures. The 1980s saw a number of bailouts of systemically important institutions, which fostered expectations regarding the way in which the US state would handle such events in the future (Sprague, 2000; Stern and Feldman, 2004). Sufficiently large and interconnected financial institutions increasingly did business in the expectation that if their speculations went sour, the state would step in to alleviate their payments constraints. Although this amounted to an insurance regime for the shadow banking system, it did not fan inflation because it remained informal and so could operate much more selectively than blanket deposit insurance (Panitch and Gindin, 2012: 179).

This new institutional configuration entailed a significant change in the practical orientation of financial policy. The ability of banks to create money outside of the central bank’s regulatory capacity was no longer the source of anxiety that it had been during the 1970s, and the Federal Reserve gradually relaxed its efforts to constrain the expansion of banking dynamics. Most visibly, the Federal Reserve routinely used interest rate changes to relieve liquidity pressures on large financial institutions even before such pressures could begin to hurt — the (in)famous “Greenspan put” (Ferguson and Johnson, 2010; Watson, 2014). At some levels below the surface, the Federal Reserve increased insurance for the key nodes of the nation’s payments system, with a view to containing the system-level risk associated with bottlenecks in settlement and clearing (Faulhaber et al., 1990). The growth of government-sponsored enterprises and the infrastructure of securitization techniques that they supported fulfilled a similar function as they allowed financial institutions to liquidate their assets on an ongoing basis (Ashton, 2011: 1803–1804).

This did not mean that financial governance simply abandoned all concern with the dangers of financial expansion. While until the 1970s policymakers had been deeply concerned not just about the morally problematic character of bailouts but equally with their knock-on effects on inflation, this now became a more complex issue. The more pragmatic approach that emerged recognized that crises were likely to continue to occur periodically, that the use of bailouts could not be ruled out, and that the aim should be to manage their application and minimize their undesirable side effects. As Golub, Kaya, and Reay (2014: 3) put it, during the neoliberal era, the Federal Reserve increasingly focused on “post-hoc interventionism,” aiming to improve its ability to contain the effects of a crisis after it occurs. Panitch and Gindin (2012: 266) capture this development in terms of a shift of concern from “failure prevention” to “failure containment,” terms drawn from a 1998 report to Congress.

Of course, the interaction of instability and regressive risk-shifting did not feature prominently in the official doctrines of monetary policy that emerged during the Greenspan era. These were formalized in the “New Keynesian” literature (e.g. Bernanke and Gertler, 2001; Woodford, 2003), which can be understood as a monetarism reworked along Hayekian lines (cf. De Long, 2000): still singularly focused on delivering a neutral money by combating inflation, it conceptualized this not in terms of a quantitative limit on money creation, but as a function of the interplay of speculative expectations about the future. It declared serious cyclical instabilities to be a thing of the past and argued that the central bank should exclusively devote itself to maintaining price stability and refrain from meddling with the wider dynamics of financial speculation. This was always a case of protesting too much as, in practice, the management of asset prices and the regulation of consumer price inflation could not be neatly separated: New Keynesian theory suppressed the extent to which the neoliberal conduct of monetary policy had become bound up with the redistribution of liquidity constraints in favor of large financial institutions (cf. Kane, 2013).

Heterodox perspectives have often criticized neoliberal monetary policy as reflecting the influence of free-market ideas or the role of financial interests, both unconcerned with financial stability. This article has instead emphasized factors internal to the rationality of governance, interpreting the neoliberal turn as a pragmatically driven response to the problems of financial management during the 1970s. If the results of those moves looked nothing like a rationally engineered financial system, this should not lead us to dismiss the practical sources of cohesion embedded in the governance of neoliberal finance. Grounded in a critique of rational-constructivist planning and the active engagement of risk, neoliberalism is predicated on mechanisms that are able to incorporate instability into their dynamics and can draw strength from investments gone wrong. By its very nature, such a project enjoys no guarantees of success and there is always the possibility of failure from which there is no bouncing back. However, the frequency with which neoliberalism has survived announcements of its demise suggests that our critiques of neoliberalism become somewhat one-sided if we take the absence of guarantees about the future as simply indicating the incoherence of neoliberalism (Konings, 2011).

The political-economy critique of neoliberalism is characterized by a tendency to see crises as moments when normal mechanisms of ordering and legitimation stop working, producing a political openness that permits regime change. From the perspective developed in this article, crises are often more usefully seen as representing the limit case of the way in which neoliberalism makes uncertainty productive. Often enough, imminent failure, far from making room for arbitrary decisions or external interventions, activates patterns of normalization. In such situations, even as we are in the dark about the specific origins of the problem, it is often perfectly clear what must be done: we must protect the banks, the nodal points of our investments. In the context of profound uncertainty about the future, there is certainty as to the only possible course of action. The interventions during the recent financial crisis, whereby the central bank became fully enlisted in directly supporting the balance sheets of the largest banks, mark a paradoxical moment — where authority becomes both highly speculative and fully reactionary. The bailouts represented risk socialization pushed to a spectacular extreme, the expansion of the central bank’s basic function of protecting the financial system’s nodal points (Le Maux and Scialom, 2012; Mehrling, 2011; Thompson, 2013).

Of course, the “Polanyian” schema is quite right to emphasize that a crisis often entails a politicization of economic questions. Indeed, the financial crisis of 2007/2008 triggered widespread anger and demands for reform. However, we need to appreciate that the effects of such politicization can be quite complex and paradoxical, and not assume too quickly that it constitutes a moment readily available for rationalist regime reconstruction. It is precisely neoliberal discourses that have had a remarkable ability to speak to such popular sentiments, promising to restore a neutral financial system that promotes rather than corrupts a republican market order. Moreover, it is in this context that the critique of exception finds rhetorical traction as a means to attribute the failures of the market to progressive-liberal elites’ unrelenting attempts to use the levers of public authority for experiments in social engineering. This critique has a very significant emotional and moral charge: it condemns the conceit of reason, seen to consist in the inability of progressive-liberal elites to let people navigate their own risks and allow the market to produce its own norms and standards to coordinate human activities in a neutral way. What the critique of neoliberalism as exceptional does not register is that neoliberalism already offers its own critique of claims to exceptional status. If capture theory (first formulated, we should remind ourselves, by George Stigler (1971), one of the founding members of the Mont Pelerin Society) has always served the neoliberal cause exceedingly well, there is considerable irony in the fact that it has now found such traction among its critics.

Conclusion

To conclude, then, by returning to the post-crisis conjuncture: the tendency to view the rise of systemic risk discourses as indicating a departure from neoliberalism was always premised on a one-sided interpretation of neoliberalism, one that set too much store by neoliberalism’s anti-state pretensions and consequently had difficulty discerning the ways in which it has evolved new governance practices, with their own internal cohesion. That is, the growing prominence of systemic risk discourses represents not a sudden ideational change that was subsequently prevented from materializing by financial interests, but rather a more explicit thematization of governance practices that have always, to some extent, been embedded in the structures of neoliberalism (Aquanno, 2015; Cooper, 2011). Thus, central bankers have tended to associate systemic risk thinking not primarily with outside interventions that impose restrictive regulations on the financial sector, but rather with new ways to understand the adaptive mechanisms in the financial system and how to protect these. Systemic risk techniques are primarily taken not as means to eliminate uncertainty, but rather as instruments in a logic of financial governance that recognizes the endogenous role of both instability and risk-shifting (Levitin, 2011). Therefore, to view the fact that the too-big-to-fail logic has largely remained intact simply as policy failure is to ignore the ways in which it has always been an integral part of neoliberal governance. Indeed, for the practical purposes of financial policy, concerns with systemic risk and financial stability have become closely allied to an awareness that the state’s support for the banking system and crisis management will henceforth centrally involve the Federal Reserve’s balance sheet (Adrian and Shin, 2010; Goodhart, 2011).

The analysis presented in this article is by no means intended to deny the possibility that neoliberalism can falter or be replaced by a different policy regime. Instead, it is meant to caution against critiques of neoliberalism that fail to recognize the internal cohesion of the governance mechanisms that neoliberalism has developed and to stress that the sources of neoliberalism’s resilience are often quite paradoxical. These paradoxes become pronounced during times of crisis, when neoliberal capitalism becomes a curious combination of future orientation and reaction, and when the speculative disposition comes to coincide with a practical certainty that has us rally to bail out society’s key investments. In a sense, this is just capitalism at work, which is forever preoccupied with risk yet is incapable of imagining a past in which it did not (at least incipiently) exist or a future in which it no longer exists. However, neoliberalism is distinctive for the way in which it has intuited the force of this imaginary and put it to work in the interest of renewing the vitality of capitalism.