How Finance Wrecked Democracy (and a Radical Plan to Rebuild It)

Michael A. McCarthy’s The Master’s Tools is about the power that finance exerts over people. He inquires into the problem and how it could realistically be solved:

Why has finance capitalism left people worse off and further wrecked democracy along the way? Why does the financial sector increasingly determine our lives and politics… ? [H]ow might an alternative to investment for profit leave people better off, reinvigorate the demos, and rebuild democracy? (xii)

When I started reading the book I thought maybe McCarthy’s response to these questions could be better reviewed by someone whose work is directly related to them. Still it seemed like an excellent resource for someone who is seeking to learn about the subject. It soon became apparent that the point of his book — ‘democratizing finance’ (9) — calls for responses from outsiders to the author’s field.

After a few pages, I could see a connection between McCarthy’s work as a sociologist and my own as an academic lawyer: the notion of moral legitimacy. My research has grappled with ways in which aspects of legal systems embody claims (albeit imperfect) to moral legitimacy. This idea should guide analyses of interrelated systems in which power is held — financial, legal, political, among others — if we are concerned about their implications for the people who must live with them.

McCarthy contrasts the power held by the financial sector with its respectability:

Though [it] continues to occupy a dominant position in business, there are cracks in its ruling edifice. Shifts in popular opinion … have done away with any hint of finance’s moral legitimacy (6).

If, as Immanuel Kant insisted, people are moral ends who should be treated as such rather than as mere means, then the systems in which they live should be designed and operated respectfully of this inherent dignity. Accordingly, given the intensifying tendency of financial capitalism to reduce people into profit-generating instruments, it is not difficult to appreciate why, as McCarthy says, this system is afflicted with a ‘legitimation crisis’ (6).

The Master’s Tools introduces the problem in terms of moral legitimacy by illustrating the human cost exacted through the private power of financial capitalism and its extension into public power by way of political control. ‘[F]or good reason’, writes McCarthy, ‘[t]he banks, hedge funds, asset managers and insurance companies that dominate Wall Street in the US and the City in the UK are widely viewed as sources of human suffering’. The financial sector, comprised by these private entities, generates ‘tremendous upward redistribution, stagnant wages, and increased worker precarity’. It also makes ‘political economies more prone to economic volatility and hasten[s] the ecological crisis’ (6). One would have been wrong, however, if they expected that the ‘[l]oss of legitimacy’, following the 2008 financial crisis, would lead to the curtailment of ‘the power of large financial institutions’. This is because, McCarthy reasons, ‘these same institutions have also eroded democracy’ (6).

Before progressing that far, the reader can appreciate the big picture of how the moral decay fuelled by the power of financial capitalism has spread into supposedly ‘democratic’ political systems of public authority. As McCarthy puts it:

[F]ormal democratic institutions [—] the principal conduits of public policymaking are less responsive to the needs of ordinary people [—] because the [public’s voice] is increasingly [silenced] by financial power. Finance has come to occupy the driver’s seat in the economies of advanced capitalist democracies … and their financial logic radiates outward to the peripheries. They put finance at the very heart of global capitalism. The corresponding importance of credit allocation and the growth of the value of financial assets in generating income and economic activity has bent the will of politicians in its direction, with the demos rarely noticing. And this structural power is only one source of leverage. Hedging their bets … financiers flood capitalist democracies with money and influence to corrupt and undermine the democratic process and keep popular opinions and proposals off the political agenda (6–7).

The following sentence warrants pause for reflection: ‘Since the 2008 financial downturn, the private power of finance has become entangled with the public power of the state (ibid).’ Suppose this is so, and widespread harms inflicted through private financial power can no longer be meaningfully resisted through public institutions. In that case, the moral legitimacy problem demands greater democratic control over both spheres.

A likely reason why the problem remains unsolved is that it is so difficult to understand. Fortunately, Chapter 3 provides a helpful ‘primer’ to ‘historicisz[e], descriptive[ly] simplify[y], and evaluat[e]’ financial capitalism and the ‘crises [it] hoists upon humanity and the planet’ (54). A powerful narrative of finance’s erosion of democracy unfolds in Chapter 4 which analyses ‘the social causes of the disproportionate political power of finance and its wreckage of democratic institutions’ (85–86). Given the convolution of finance, unsurprisingly, ‘many of today’s utopians, including the cryptonian variant, ignore, the problems of power and democracy’ (9). In Chapter 5, he reveals ‘how a subset of bold alternatives to finance capitalism reinforce its oligarchic governing principles’ (114). His contention that ‘either people democratically control finance or finance controls government’ (9) is substantiated in Chapter 6 wherein he categorises, and demonstrates the deficiencies of, previously formulated ‘reform paths’ (136). We can thank McCarthy for his gateway into a subject we would find daunting to investigate and challenging to grasp. His illustrations of various aspects of both the problem and the solution are engaging and compelling (see e.g., 62–63, 173–178).

McCarthy offers a chaser of optimism in explaining the essence of his solution: ‘If investment got us into an oligarchic mess, democratized financial institutions can get us out of it’ (xii). The title, The Master’s Tools, is ‘an inversion of the poet Audre Lorde’s famous phrase’. The tools themselves, as well as an understanding of how they work, must be grasped by the ‘the demos’ (xii). The ‘political organizations’, for which McCarthy advocates, would be ‘extended into the economy’ and ‘build on a spirit of … collaborative difference’ (xii). This would require contributions not only among experts like himself. Under McCarthy’s model, the collective ‘you’ would be ‘paid to deliberate’ on Fridays which would be ‘set aside specifically for the work of democracy’ (5). In Chapters 7 and 8, he respectively addresses how ‘democracy, traditionally understood as collective say over public policy, might be applied to finance’ (159), and ‘the cooking process of [a] recipe [for] ‘a democratized pool of finance’ (184). Convincingly, McCarthy presents his proposal as the renewal of an ongoing democratic endeavour which historically made gains through what he calls ‘democratic ruptures’.

Collective consciousness, however, must be cultivated throughout communities before a democratic rupture could succeed. He explains:

Democratic ruptures transfer power from the elite to the demos, the working classes, leaving an imprint on the formal institutional terrain of politics, the economic institutions such as the workplace, and even civil society institutions such as the household (49).

Chapter 2 conveys the elements of this transfer (46–49), which entails taking ‘democratic control’ of ‘the master’s tools’, namely the ‘flanking subsystems’ through which ‘the state responds to crisis … to support capitalist accumulation’ (45). Only an organised and active demos can make this happen. The majority of us, however, including those already attuned to the self-protective complexity of financial capitalism, would benefit from a deeper understanding of the existing system and a viable alternative. We might then be better equipped to contribute constructively and collaboratively toward a viable democratic transformation.

Collective understanding is advanced when together we analyse the relationships between the financial capitalist system, which suffers a ‘legitimacy crisis’ (116), and other systems that empower it. One aspect of McCarthy’s thought on ‘democratic ruptures’ particularly caught my interest. Namely, that ‘they break with the ontological presumption that the public and private are indeed at odds and with the view that the state and economy are in practice separate’ (49). The Master’s Tools resonated with my perspective that whatever authority can be asserted by a social and economic order — especially one in which private financial power dominates — is borrowed from claims to legitimacy made by political, and no less, legal systems and their distinct components.

In my work, the ‘public-private’ distinction is crucial although we may appreciate that it is constructed. My teaching and research focus on private law. It concerns the kinds of ‘civil’ (not criminal) matters that arise between ‘private’ individuals (i.e. human and artificial persons). My work, therefore, spans legal doctrines of contract, property, tort (civil wrongs like negligence and defamation), as well as equity and trusts. They, at least most immediately, govern relationships and dealings between private parties (including public entities acting in private capacities). It concerns ‘private’ planning, negotiations, transactions, rights, disputes, and litigation. In contrast, public law concerns relations between the person and the authority of the state. If McCarthy were a lawyer, he would focus on the artificiality of the private/public law divide: private law often serves private interests as private power is amplified through the authority of public institutions; public law often serves private interests whose power influences and is reinforced by that of public institutions. Like McCarthy, however, we should avoid oversimplifications. Both finance and law should be understood and used for the morally legitimate aims — the common good — of the demos.

Private law, in an applied sense, facilitates financial capitalism. Property rights held by financial institutions embody the astronomical amounts of leverage they exercise over the demos whose aspirations depend upon those institutions tendering loans in exchange for repayment and interest. This enables financial institutions to perpetually accumulate more property with support of the law of contract which, subject to a range of equitable and statutory protections, holds that intensely extractive terms will be enforced. As McCarthy recognises, ‘debt-driven consumption’, results from the ‘financialised schemes’ into which ‘middle-income and poor workers’ are ‘channelled… for survival’, and sustains ‘[t]he growth model of finance capitalism, which diverts gains away from workers to shareholders’ (76). This ‘[e]xtraction is good for business’ and our ‘debt to income’ ratios worsen to sustain it (76–77). That upward pipeline of wealth transfer relies on private law systems to keep people making more and higher payments that fuel their increasing power over the people. Yet, as McCarthy observes, ‘[d]ebt is not the only source of financial worry for the working class’ (80)!

Relatively speaking, individuals own little. Much of what they do own is concentrated into pools of financial power which are effectively — and through private law mechanisms — weaponised against them. For most people ‘financial uncertainty and insecurity’, says McCarthy, is ‘not only manifested in the precarity of work’ but also the contingency of their futures upon ‘turbulent financial markets’ especially ‘with respect to retirement income’ (80). He notes that ‘an increasing share of the wealth of the demos is held in pension entitlements …’ (62). Those ‘financial assets technically owned by workers are typically controlled by fiduciaries and asset managers that invest them in ways that prioritize returns over all other considerations’ (ibid).

The law of trusts enables elite classes to rely upon financial professionals to keep their wealth in a constant cycle of reproduction (Cotterrell 1987, _). It simultaneously, through contractualised forms, empowers elite classes to through control of the collective wealth of ordinary working people which is bound up in their pension funds. ‘Fiduciaries’ in private law language, are those who hold special duties of loyalty in their management of others’ interests. Our fiduciaries, especially trustees, can usually be trusted at best to focus on our interests insofar as they concern maximisation of financial return. Often, however, investments are made to the detriment of other interests, especially working conditions (64–65). Even then, the fiduciaries often get away with financial underperformance (151–152). This situation is enabled by a private law system which recognises special relationships wherein one’s trust and confidence is conceived to concern isolated interests placed in the hands of those who manage them. That occurs under ‘contractualised’ arrangements designed typically in the interests of investors rather than workers. This is how private law contributes to the result, of which McCarthy writes, being that ‘ownership, in the case of labor’s capital has no relationship to control’ (65).

Private law systems, then, play an essential role in the system of ‘[c]apitalist property relations, whose basic feature is’ in McCarthy’s words:

private control of the investment function in the hands of the few, generate systemic barriers to human flourishing and democratic life [including] ecological destruction, inequality and precarity, and … high concentrations of political power for those with the capacity to make decisions about productive investments (206).

That role, however, goes beyond the day-to-day facilitation of financial business.

While finance declines in popular legitimacy, its power is also sustained by the claims to moral legitimacy made by private law systems which are much less widely criticised. This suggestion comes by way of extension of the consciousness McCarthy advances:

If [we should decisively reject] one liberal claim, it is that there exists a sovereign people, composed of free individuals who all share the same political liberties and formal rights under the law, among whom no group enjoys any systematic advantage in politics over any other. This is the liberal democratic delusion (192).

Those ‘formal rights’ are valorised through private law doctrines. Ideas of ‘freedom’, ‘ownership’, ‘quid pro quo’, and ‘trusting’, are deeply embedded into popular moral consciousness. They take particular forms in the private law of property, contract, and trusts, which sustain financial domination. We were raised to honour our word, repay what we borrow, and not interfere with others. Private law systems, which assert these values, are less often subject to the criticisms of moral illegitimacy that are levelled at finance. The forms into which private law translates these values have places within the master’s toolbox. When we appreciate the artificiality of the private/public divide, however, we know that moral claims made through private law systems tell a deceptively small segment of the story about our relationships with financial institutions. That is because finance is able to use private law, like our supposedly ‘democratic’ institutions, as cogs within their machines which perpetuate their accumulations of wealth out of our pockets. The daily operation of private law does not merely facilitate financial capitalism. Private law also enables unrelenting human and ecological extraction by financial capitalism through its claims to moral legitimacy. Those claims are scarcely exposed to public scrutiny.

Meanwhile, as McCarthy elucidates, finance presently has public power sufficiently in thrall to largely resist democratic efforts aimed at countering its dominance. He surely warrants juristic engagement. Such responses, then, should contemplate democratic ruptures through both private and public avenues of law.

The Master’s Tools is worth reading for all who want better to understand financial capitalism’s implications for ordinary people and contribute to a morally legitimate alternative, which I am convinced must account for the present and future role of private law. McCarthy succeeds in illustrating the harms inflicted by financial capitalism through its private power as well as through its capture of public power which prevents us from restraining it. His solution is a compelling method of consolidating collective and legitimate power through public control, over private financial power. Hopefully, the book will prepare readers to contribute to collective understanding by elucidating the relationships between the financial capitalist system and interlocking systems with which they are familiar. One of those systems must be that of private law.

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