Finance Capital and the Social Construction of Crisis

The concept of crisis has not been clearly developed sociologically. Conventional usage assumes a medical model that understands crisis as a critical turning point in institutions (O'Connor 1981). Traditional Marxist theory borrows from this medical model, defining economic crisis as "an interruption in the accumulation of capital" (O'Connor 1981, 301; see also Fine 1975, 51). This model views economic crises in capitalism as objective processes or turning points within the structure of the political economy—the product of the system's internal laws, independent of conscious human creation or prevention (although human effort can postpone the inevitable crisis).

O'Connor (1981, 1987) identified three kinds of crises in Marxist writings. Some observers (Haberler 1958; Sherman 1979; Mandel 1978) identify crises as a recurring tendency in the normal business cycle. Others believe they are structurally produced by the long-term tendency for the rate of profit to decline (Mandel 1978; Sweezy 1970) or by the deterioration of one structure of capital accumulation and its replacement with another (Hobsbawm 1976). Still other theorists identify crises as uneven development caused by the tendency for capital to accumulate in some regions or sectors at the expense of others (Bluestone and Harrison 1980).

These three Marxist analyses assume that the capitalist political economy is inherently unstable, with a normal tendency toward crisis. And all three share the premise that capitalism is "crisis-dependent," in that "crises are the mechanisms whereby capitalism regulates itself" (O'Connor 1981, 304). Because traditional Marxist thought conceives of economic crisis as a broad, objective, inherent feature of the capitalist political economy, it overlooks the role humans play in defining, and thereby creating, crisis. Moreover, it fails to analyze crisis as a political economic process rather than a purely objective economic force.

Neo-Marxist theorists (e.g., Habermas 1975) reject the notion of

crisis as an objective economic dynamic and broaden the arena of crisis to include social, political, and cultural spheres. According to Habermas, crisis occurs "when the consensual foundations of normative structures are so much impaired that society becomes anomic. Crisis states assume the form of the disintegration of social institutions" (Habermas 1975, 3). This formulation introduces human experience and interpretation as an element in crises, though retains the traditional Marxist assumption of the inherent instability and crisis tendencies of capitalism. Neither model entertains the notion of crisis as a social construction.

O'Connor's notion of crisis combines the structural tendencies of the capitalist political economy with human experience (O'Connor 1987; 1981, 325). He does not define crisis as anomie and the deterioration of social structures, but rather as a dialectical process of struggle and "social reintegration." This conception allows for the understanding of crisis as a social construction, particularly in its argument that entrenched dominant classes or factions will struggle vehemently against perceived threats to those structures and relations that foster their position.^[2] Thus for O'Connor the inherent contradictions and instabilities of capitalism make possible the social construction of "crises in established institutions and social and economic processes [that] are produced through reconstituted human intervention" (O'Connor 1981, 326). This analysis of crisis still focuses on the broader structural levels of economic, social, and political institutions, but its insights help us analyze corporate and state crises as social constructions manifested in struggles between banks, nonfinancial corporations, labor, local and federal governments, and nation-states.

Because the study of crisis has been confined largely to the discipline of economics, it usually assumes a purely economic definition of the concept. A sociological understanding of crisis improves our grasp of intercorporate and state behavior patterns and the pro-

cesses of power they entail. Moreover, approaching crisis as a social and political process helps us articulate the processes of bank power and unification.

In arguing that corporate crises and state fiscal crises do not necessarily begin as objective economic situations, I will examine actual processes and relations to specify how the banks' definition of a situation affects the business community and the state.

Corporate Crisis

Observers typically define corporate crises in vague and narrow terms of managerial discretion (or indiscretion). For example, Ross and Kami (1973, 21) argue that corporations experience crises when managers violate the "Ten Commandments of Management" governing managerial behavior and the internal structure of the firm. This focus implicitly examines the firm in isolation and fails to acknowledge the external constraints on managerial discretion. For example, relations with financial institutions, networks of corporate board interlocks, and joint ventures between firms all serve as constraints, as does the general state of the economy. Economic definitions thus equate crisis with low or declining profitability, overlooking corporate crises that have nothing to do with low profitability. Furthermore, the restricted definition of crisis does not consider possible dynamic or interactive aspects of the phenomenon, treating it instead as a singular event or point in time (see James and Soref 1981).

One perspective that includes some notion of external constraint on managerial discretion is the theory of the "invisible hand" (Smith 1776). According to this view, widely accepted by business analysts, unseen forces of the market act as an external constraint on managerial discretion. But that constraint appears as a neutral mechanism free of conscious or subjective interference. In this sense the invisible hand defines managerial decisions as the cause of corporate difficulties and defines crisis, once again, as a situation of low or declining profitability.

I argue that a corporate crisis is not always a mechanical economic reaction of the invisible hand of the market brought on simply by low profitability. Rather, it is a reflexive definitional process, involving shifting levels of discretion and constraint, that can seriously damage a firm's long-term business trajectory. Because

banks play a central role in capital flow relations, they often control this definitional process. And the structural organization of the banking community enables them to enforce their definition.

According to W.I. Thomas (1928, 572), "If men [sic ] define situations as real, they are real in their consequences." Banks' collective definitional perception and self-fulfilling prophesy determine whether a given corporation's financial position will threaten its business trajectory (Merton 1968, 475–490). Once banks define the situation as a crisis, other persons and institutions will respond as if it is. Consequently, in a reflexive process these responses may actually produce the crisis presumed to exist. As a self-fulfilling prophesy, the crisis is then no longer a subjective political decision but a matter of economic fact. Indeed, sometimes the crisis may escape the control of those whose definition originally precipitated it.

Financial decline and corporate crisis are thus not synonymous. Declining financial health may result from poor managerial decisions, from decisions constrained by economic imperatives that are detrimental to the firm in the long run, or from a poor general national economy. But until a declining performance is defined as a crisis, no real crisis exists. I argue that the financial institutions can exercise this definitional power because of the banking community's collective control of capital flows.

The business press often refers to self-fulfilling prophesy as the "herd effect." Individuals and small institutions assume that large financial institutions act on "inside information." They therefore follow the large institutions' lead for fear of being the last investor to sell their holdings or to call in their loans from a crisis-ridden firm. The more institutions that divest in or deny loans to a given firm, the greater the chance that other investors will follow suit. The herd effect also operates when financial institutions determine that a firm is "healthy": "The more institutions that invest [in a firm], the greater the chance that the others will follow" (Business Week , 28 Jan. 1980, 87). Furthermore, the herd effect is often long-term or permanent. In contrast, singular responses by the banking community to individual instances of low profitability are not necessarily permanent or without alternatives. Other competing banks can define the situation differently. Ongoing and active intervention by the banking community into corporate affairs is unnecessary to perpetuate the banks' definition of the situation.

Some observers argue that banks would only invoke bankruptcy or stock dumping as a last resort to extreme situations. For example, Emerson (1981, 1) claims that "last-resort" sanctions are invoked only when "'normal remedies' . . . are specifically inappropriate or . . . have failed to contain the trouble." Although Emerson focuses on the use of last-resort sanctions in social control institutions (such as mental institutions, correctional institutions, and so on), his thesis suggests that extreme bank behavior such as stock dumping and provoking bankruptcy and default could also be interpreted as actions of the last resort. In the following chapters we will examine case studies to determine whether the banks' decisions to pull their collective purse strings were indeed remedies of the last resort after less extreme approaches had failed.

State Crisis

State crises are as poorly understood as corporate crises. Some observers portray state crises as the result of legitimacy crises produced by despotic, corrupt, or inept governments (Breckenfeld 1977). This is the political version of the invisible-hand theory of the marketplace. Other observers root state crises in economic cycles that inexorably bring the state to recessions, depressions, and budgetary slumps (O'Connor 1973; Habermas 1975). Still others attribute state fiscal crises to the failure of state leaders to keep expenditures in line with revenues (Mollenkopf 1977; Schultze et al. 1977). As with corporate crises, no one has analyzed state crises as definitional processes or examined them as social constructions caused by capital flow relations. And like corporate crises, state crises often reach public forums (such as congressional hearings) that uncover the processes of financial relations that may either avert or precipitate a crisis of the state. The disinvestment and redlining of St. Louis illustrate the social construction of urban decline (Ratcliff 1980a, 1980b, 1980c). In contrast, New York City in the early 1970s is an example of a crisis averted (Lichten 1986). The case study of Mexico's 1982 foreign debt crisis reveals the processes of international crisis formation.