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Chapter One— The Importance of Financial Institutions in the Political Economy
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Financial Institutions and the State

The role of the state in capitalist society has increasingly become the focus of debate. Weber (1947) argued that the increasing complexity of the capitalist economy required the development of rational, unbiased bureaucracies to manage society's needs. Therefore he viewed the state as a politically neutral entity that mediated competing interests and demands, producing compromises in the common good. Although he recognized potential problems in state bureaucracies, he attributed them to individual leaders and their styles. He did not consider the dynamics of structural and social contradictions that are the context of bureaucratic processes. And because he also did not include a class analysis of the interests of those individuals who fill leadership positions within the state bureaucracy, he did not address how leaders' class interests and allegiances might affect the neutrality of the state in balancing competing interests.

Pluralists share Weber's premise that the state is a neutral arbiter that enforces politically unbiased laws and rules (see Dahl 1961; Lipset 1960; Rose 1967). According to this argument, the state is able to function as referee for several reasons. First, there is a balance of power within the state between competing agencies and branches. The natural give and take among these groups produces compromise and negotiation, which constrains each group's ability to dominate (Latham 1976; Neustadt 1976). Second, competing branches and agencies offer the various interest groups a variety of state agencies to which they can appeal, thereby ensuring multiple avenues of access to the state (Truman 1951). Third, competition between parties limits domination by any one party (Aron 1950; Presthus 1964), reinforcing the process of negotiation and compromise in the common good.

The pluralist analysis of the state as neutral mediator assumes equal strength and equal resources among all competing interest groups, parties, and government agencies—an assumption that bears examination rather than assertion as fact. Furthermore, pluralists ignore the allegiances and interests of state leaders, arguing


that in the long run competition between the political parties assures that neither party will dominate. This analysis presumes fundamental differences between the interests represented by each party. And it assumes that, once in office, state leaders will eschew their prior allegiances and legislate in the interest of the common good. The definition of "the common good" remains unspecified. Various observers have taken issue with the pluralists' conception of the state as neutral arbiter of competing and equal interests. The key participants in the ensuing debate over the role of the state in capitalist society have been instrumentalists, structuralists, and class dialectic theorists. Instrumentalists (Domhoff 1983, 1984; Kolko 1976; Miliband 1969; Useem 1984; Weinstein 1968) and structuralists (Poulantzas 1973, 1975, 1978; Mandel 1978; Jessop 1982) assume a separation between the economic and political sectors, although they disagree about which sector dominates the other. Class dialectic theorists (e.g., Skocpol 1985; Whitt 1979, 1980, 1982) see some overlap between the two sectors, but they also disagree about which sector dominates.

Instrumentalists argue that the economic sector dominates the state. Capitalists capture key positions within the political structure to attain their goals and further their interests. Mills (1956) specified these relations in his analysis of the circulation of the power elite among the commanding positions of military, corporate, and government institutions.

Both Domhoff (1967, 1978, 1984) and Miliband (1969) present a variant of the instrumental viewpoint. Capitalists need their representatives to capture the state only to maintain the state rule in the interests of capital accumulation. Moreover, capitalists may generate the continuing state support of their interests because they can bring economic power to bear on the state. But this type of analysis (with the notable exception of O'Donnell 1973) does not clearly differentiate between industrial and commercial capitalists, on one hand, and finance capitalists on the other. Therefore it does not weigh the relative significance of the resources each can bring to bear on the state. The case studies of state crises analyzed in this book—Cleveland's 1978 default and Mexico's 1982 foreign debt crisis—help unravel the problem by tracing the various resources the participants used in each case.

Structuralists (Poulantzas 1973, 1975, 1978; Mandel 1978; Jessop 1982) reject the instrumentalists' "capture theory" of the


state. Instead, they argue that the political sector is relatively autonomous from the economic sector. For example, Poulantzas (1973, 1975) argues that the state mediates class struggles. In his view the state's relative autonomy from control by individual capitalists derives from the presumed competition between capitalists. But Poulantzas never specifies the mechanisms by which the state acts as mediator or policy maker in the interest of the capitalist class without being run by that class. Like the instrumentalists, he does not differentiate between industrial and commercial capitalists and finance capitalists. The failure to make this distinction obscures the varying resources, pressures, and tactics each may apply to the state.

Class dialectic theorists view the state as the arbiter of class antagonisms. They argue that the state has more autonomy than instrumentalists or structuralists presume. It is possible, for example, for the state to implement policies that benefit the poor and working class while still preserving the long-run interests of the capitalist class. For example, although unemployment insurance, food stamps, and Aid to Families with Dependent Children are social welfare programs targeted at the poor, these same programs protect capitalist interests by ensuring a minimum level of consumerability in the broader economy. Unlike pluralism, the class dialectic perspective acknowledges power differentials between various interest groups and classes.

Whereas instrumentalists, structuralists, and class dialectic theorists presume the separation of economic and political sectors, critical theorists assert a fusion of these two spheres (see Offe 1972a, 1972b, 1974; O'Connor 1973; Habermas 1975). They argue that the state must regulate and take on the economic functions of the "free market" economy because of the deepening contradictions and crisis tendencies of capitalism. At the same time the state relies on the private corporate giants to provide jobs to the working class. The increasing economic crises produce a political crisis, or legitimacy crisis, for the incumbent administration. State expenditures, such as social welfare programs, may mediate class struggle by cooling off the working class (Piven and Cloward 1978). State regulation of the economy may temporarily postpone fiscal and economic crises. Yet these contradictory expenditures set the stage for deeper state fiscal crises in the long run, including burgeoning budget deficits (see Blain 1985). This critical analysis


implies the possible role of finance capital in influencing the relative autonomy of the state (primarily by financing deficits), although critical theorists have never specified the influencing process. The critical viewpoint also emphasizes the state's ability to make decisions affecting the allocation of resources already at its disposal. But it does not specify how collective capital flows to the state affect the relative autonomy and discretionary powers of the state.

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