Democratic finance and the new abstractionism: A conversation with Michael A. McCarthy

An earlier version of this interview originally appeared in Swedish in Röda Rummet. 

Mikael Omstedt (MO): First things first. The title of your book The Master’s Tools: How Finance Wrecked Democracy (And a Radical Plan to Rebuild It) is an inversion the Black feminist writer Audre Lorde’s famous declaration that “The master’s tools will never dismantle the master’s house.” You, on the other hand, argue quite forcefully that we can indeed use the tools of finance to dismantle the house that capital has built. Could you tell us why you have come to this (perhaps counterintuitive) conclusion? 

Michael A. McCarthy (MM): To understand this, we must begin with the historical trajectory of workers’ finance, the subject of my earlier work, Dismantling Solidarity (Cornell: 2017).  Financialization and asset-manager capitalism is not an accidental outcome that emerged behind our backs, it’s the result of a poisonous class compromise that took hold in the 1940s. Here we need to look squarely at the institution of pension funds and ask, “why was it that pension funds around the world developed in such a way that they became a subsidiary part of global finance capitalism, instead of becoming a source of strength for working-class people and for working-class organizations such as unions?” 

In America, the answer to that question has its origins in the New Deal order. During the 1930s, U.S. labor militancy pushed for massive, universal state-administered redistributive programs – the Social Security Act of 1935 was the result of this militant push. But in retrospect, it was embryonic. Instead of universal pensions becoming the heart of our retirement system, what we have now is a patchwork system of profit-driven funds heavily reliant on the management practices of Wall Street. 

Why did history turn out this way? In the period after the passage of the Social Security Act in 1935, the American labor movement fought hard for collectively bargained pensions and healthcare plans. Many unions believed at the time that if they made strong demands on employers for costly pension and healthcare plans, employers would opt to become pro-welfare state. Labor’s assumption was that capitalists would rather have a larger pension fund run through the state than be forced to eat the costs of sponsoring their own private plans for their workers. But labor’s calculation was wrong. American capitalists would rather bear the cost of pensions and healthcare themselves than support a larger state-run pension system – what they all saw as creeping socialism. Labor forgoing workplace control for private retirement and healthcare emerged as the class compromise of the era. 

In the period after World War Two, American unions won pension and healthcare plans. But this caused an immediate crisis for the American business and political class. While the funds started small, they soon became massive. To give you a sense of just how big they got, by the mid-1970s, pension funds in the U.S. came to own 25 percent of all U.S. corporate equity.

From their adoption, the American ruling class understood clearly that these funds, if they were controlled by labor, would end up becoming a war chest for unions and a source of incredible power for the working class. In response to this threat, the Taft-Hartley Act was passed in 1947, which makes it so American unions can only control 49 percent of the seats on the boards of their pension funds. The majority must be controlled by the employers. 

This gets to the heart of my interest in the ability of workers to control investment. What we have seen in the long period between the New Deal and today is the massive growth of different funds, pension funds but also other massive, passively invested funds controlled by money managers. These funds have become the master’s tools, but I don’t think they should or even can merely be thrown away or destroyed. While it is true that the capitalist class controls the vast majority of financial assets, working-class people themselves have a significant share of their own wealth tied up in these markets and funds.

This is why it is so important that working-class people and their organizations have a say over how this these pools of finance are run and how they are invested. This transformation of global capitalism and the rise of these massive funds are a crucial opportunity for movements today to start making demands about democratizing investment. The master's tools can be a great source of power for the working class. The key is controlling investments democratically, not in ways that simply mimic Wall Street investment practices.

We can add world-historic urgency to this. We’re in the midst of a massive underinvestment crisis in housing, in community wealth, and in the green technologies and green retrofitting to ward off further climate catastrophe. These are areas that are underinvested in precisely because they're not profitable. If we think about these pools of finance as political institutions then we might start to think about how we can construct new ways of allocating them that is not only in the interest of workers, but also in the interest of ecological flourishing. This means, as it did back in the 1930s when these systems were installed, extending democracy into the market.

MO: Your thinking along these lines has evolved in collaboration with organizers and community groups. You have, for example, collaborated with Public Bank LA, a community coalition advocating for the establishment of a public bank in Los Angeles, California. Could you say something about these movements? 

MM: What originally got me interested in finance was being a part of Occupy Wall Street in 2011. In the encampment, the principal object of contestation was inequality and the power accumulated by the 1%. Looking back, it is clear to see that Occupy Wall Street was about the way in which financial institutions had become deregulated and engaged in predatory investment practices. The movement sought to address and name the principal problems of the conjuncture: finance capital run amok. But Occupy was unable to articulate a real alternative to them. The encampment movement did not address the question of what actual institutions we might collectively create to replace the predatory financial institutions that continue to dominate Wall Street and the world. In this respect, it was a reactive movement rather than an emancipatory one.

Today we have precisely those kinds of movements in the U.S. While it is very hard to see the good in politics recently, there are important ways in which the left and popular movements are now advocating for concrete emancipatory institutions. That includes the people who are part of the California Public Banking Coalition, who are organizing for democratic public banks. The strongest groups are in San Francisco and Los Angeles, but there are ones in other cities. These coalitions of labor and community-based organizations, ordinary working-class people, are trying to set up public banks that are run democratically. If you take a project like Public Bank LA, for instance, its coalition includes the service employee’s union SEIU Local 271 as well as a racial justice organization called ACCE Action. These new movements understand that controlling investment is key to dealing with the issues that matter to them and in a way that can address the different needs of multiple segments of the working class in Los Angeles.

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MO: Let’s move on to talk about what we’re up against. You make a clear case throughout the book that to devise a political strategy we need to understand capitalism conjuncturally—it is simply not enough to approach capitalism as a static, ahistorical constraint, but we need to understand how capitalism changes over time and across space. How would you characterize the current capitalist conjuncture, with an emphasis on the articulations of finance, state power, and democracy? 

MM: We must resist the temptation of a static, abstract anti-capitalism that offers the same approach for all contexts. This is what Nicos Poulantzas referred to as the “general theory,” of the capitalist state, which he dismissed as wholly insufficient for actually doing politics. Instead, a rigorous left strategy requires conjunctural analysis – mapping the specific articulations of state power, class forces, and the institutional constraints that bear down on working in a historical moment. When it comes to thinking about strategy, we must always first think of the actual historical and geographical context we find ourselves in. 

The United States and other financialized capitalist democracies today are in entirely different situations than those produced by the Fordist compromise of the 1930s or the neoliberal upturning of that compromise in the 1980s. 

We live with three fundamental transformations. First, over time working-class people in the U.S. since the 1980s have a greater share of their own wealth in financial markets or tied up into financialized assets. Second, as the welfare state has eroded and capitalism proved itself incapable of providing a stable working-class life, many young people have turned to gambling on their futures. Young working-class people are investing more and more in financial markets, including things like crypto and meme stocks. And third, that not only changes where people’s interests lie and the forms that their political consciousness take, it has also changed the broad political economy of the rich capitalist democracies. Places like the US and the UK are increasingly financialized economies, where finance, insurance, and real estate make up a growing percentage of GDP. 

The institutional form that finance capitalism takes are precisely the gigantic pools of financial assets that are managed by third parties, the asset managers. These funds, everything from pension funds to large passive investors like Vanguard, play an outsized role in the American economy. These would simply not exist were it not for the establishment of pensions funds after World War Two by unions themselves. Finance capitalism, in perhaps an ironic twist, can be directly tied back to that supposed postwar compromise.

The result is deeply anti-labor and worker, however. These funds siphon investments away from socially useful things into merely profitable things. But they also present to us a contradiction: by establishing a massive institutional infrastructure, they create in the first time a centralized capacity for coordinated democratic investment. In my view, the fundamental challenge facing the working-class today is not only the lack of organization at the workplace, but also lack of organization with respect to how these financial assets are invested. A principal concern of our time is the politics of investment.

Social movements understand this. When you look at the recent history of contentious politics, you see that organizing finance is a key area of struggle. Take, for example, student-based movements. In the U.S., many are organizing around how university endowments are invested. That is precisely what the Palestine solidarity encampments were about over the past two years. They were about the disinvestment of university endowments in companies that are directly profiting from Israel’s genocide. Look back even a little further after Hurricane Maria in Puerto Rico, which devastated the island in 2017. A hedge fund called Baupost Group, run by Seth Klarman, held a huge amount of debt in Puerto Rico and sent representatives down to the island to not just lobby but force the Puerto Rican government to sell off its public assets such as schools and the public energy company in order to get that debt repaid. Who held that debt? American universities themselves had assets managed by the Baupost Group. These assets are not just abstract things; they matter directly in working peoples’ lives and present us with a key political challenge in this moment.

MO: In your analysis of the current conjuncture, you argue that the forms and degrees of capitalists’ power are determined by the nature of the productive assets that stand at the heart of any particular economic model. You call this capital’s “asset power” and argue, specifically, that the changing degree of mobility and liquidity of capitalist assets are key to determining the political strategies that are available to capitalists to influence society at large. Financial capitalism is characterized by the dominance of highly mobile and liquid assets over the fixed and illiquid assets that seem to dominate agricultural or manufacturing-based economies. What are the implications of this for how capitalist power works today? What are the forms of financial power that are available to capitalists in this conjuncture?

MM: Finance capitalists have three different forms of power that they wield in politics. I call the first engagement. This is lobbying, campaign spending, giving money to politicians, and so on. The financial sector by far spends the most money in American politics. However, that is not the only way financiers are intertwined into politics.

They are also logistically intertwined into the actual institutions of the state and in non-financial corporations. In the book, I call this entanglement. For example, the ways in which the Federal Reserve creates and enacts its policy is through financial markets. State actors, like central banks, depend on these financial markets and in ways that allows finance capitalists to actually govern state policy in crucial ways. This is also true of non-financial corporations, who themselves are increasingly intertwined into financial markets because they themselves increasingly draw profits from financial channels. And even if they're not invested in financial markets, if they’re a smaller or medium-sized firm, they’re heavily dependent on finance for debt. This has made finance the hegemonic sector of capital.

We see this as clear as day in lobbying. There are multiple studies in political science that compare the bills that come before the U.S. Congress, and the different sectors that either lobby against those bills, stay silent, or support them. What these studies find clearly is that the bills that come before Congress that aim to regulate finance are the ones that are most lobbied against by non-financial sectors of capital. Agriculture is lobbying against financial regulations, manufacturing is lobbying against financial regulations, the retail sector is lobbying against financial regulations, and so on. This is a clear-cut indication that finance capital has a hegemonic position in capitalism today. It is the driving sector of business, precisely because of the ways in which the financial and non-financial sectors and the state are intertwined.

Finally, I call the third form of financial power prominence, which relates to the sheer size of the financial sector. Because so many corporations, capitalists and workers depend on it, politicians themselves have an incentive not to regulate the sector because they think it will have negative effects on voters and therefore their own ability to be re-elected.

Undergirding all that is “asset power,” really the key concept for understanding the power of capitalists. Asset power is the power that capitalists derive from the particular kinds of productive assets they control. What is distinct about financial assets is that they are mobile and liquid – finance can be moved around and converted into cash quite easily. When finance is lobbying the state with its money, finance capitalists use the threat of disinvestment. When pushes business associations to lobby against financial regulation, it says “you’re going to get fewer loans or loans at higher interest rates if the regulations are passed, because we will withdraw our funds.” In fact, all three different forms of power (engagement, entanglement, and prominance) are made more salient and important because of that mobility and liquidity. 

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MO: Complementary to financial power is the power of the state. At the heart of your argument is an analysis of the nature of capitalist states, which you argue are much more contradictory than that simplified Marxist view that only sees these as instruments for the powers to be. You call this the “Frankenstein problem,” invoking Mary Shelly’s novel from 1818. What is the Frankenstein problem and in which ways does it open up the capitalist state to radical challenges?

MM: The “Frankenstein problem” captures the central contradiction of the capitalist state: to stabilize accumulation, the capitalists are forced to support the creation of institutions that they cannot fully control. Drawing from Claus Offe’s analysis of crisis management, when market mechanisms fail states typically respond to those crises by creating “flanking subsystems” – new state institutions like central banks or regulatory agencies to manage the crisis. But, as these new institutions are created, immediate contradictions emerge. First, different interest groups try to control them, which makes them into new sites of contestation. Second, if they become too large and the state overspends, these flanking subsystems can create fiscal crises. Third, creating them can have normative effects, opening up the scope of possibility for ordinary people and showing that markets are always necessarily political and intertwined with states.

The Frankenstein problem is fundamentally about the ways that creating state institutions always create the possibility that those very institutions come back to destroy the master, just as Frankenstein’s monster did in Shelly’s novel. For the left, then, the strategic task is not smashing the state tout court, but working upon the internal contradictions of a given conjuncture that are expressed in the institutions of the state itself. The idea of invoking the Frankenstein problem is to argue that we can create institutions that have an anti-capitalist character within the current capitalist state, that act as pockets of resistance that can be built upon.

MO: Let us move on to your political vision. The conventional narrative of a leftist book is page after page of gloomy analysis with some undercooked radical solutions tacked on at the end to inspire a little bit of hope in all the misery. But your book is different. It is a driven by a positive vision of how we might organize our economic and political lives differently. This is a system in which investments are not made by unaccountable private individuals seeking profit but by democratic assemblies deliberating on which investments are socially desirable. You are also proposing a particular way in which these assemblies should be constituted, by randomly drawing lots rather than through more conventional means of either representative or direct democracy. Can you walk us through how an investment decision is made in your vison and explain why you have designed your system in this way?

MM: My proposal centers on class-based sortition – the random selection of working-class residents of a political territory – as the key mechanism for drawing working people together to deliberate over and make decisions about investment. To understand why sortition is so necessary, we need to first consider the two dominant models of democratic governance that constrain our political imagination: representative democracy and direct democracy. Both, in my view, are flawed.

Representative democracy, as Bernard Manin shows in The Principles of Representative Government, is historically and functionally a form of elected aristocracy. Over and over again, wherever it is used, representative democracy tends to generate a systematic rule by the elite and was, in fact, designed to do so by the American founders. So, what we have seen in the history of representative democracy is actually just the reproduction of different forms of oligarchy. Rule, in other words, by different sections of the elites at different times. The sectors from whom the elite are drawn has changed, but elite rule hasn’t. And, in those moments where we have seen representative democracy actually generate good results, it has been because of the organizational force of the working class outside of the state putting pressure on it.

Direct democracy, the favored alternative of many on the contemporary left, suffers from a different but similarly fatal qualities for democracy: self-selection bias & scalability. First, the model of the open, consensus-driven assembly privileges a specific type of participant, the person with the time, cultural awareness, and desire to attend meetings. Rule by the interested does not produce assemblies that genuinely reflect the cleavages and sub-sections of the working class itself. Instead, it produces a distortion in terms of the people it draws in to make decisions. Second, open assemblies are simply not scalable beyond the local scale and therefore as a form of democracy its utility would only seem to fit tiny groups.

This brings us to the radical potential of sortition. There is a profound democratic value in being governed by people that do not want to govern and governing in return even if you yourself might have no ambition for political power. By selecting participants through a lottery, we can bypass the ambition of well-resourced politicians and the motives that drive a person to self-select into meetings.

There has been a huge explosion of democratic experiments through these kinds of randomly selected citizens assemblies. In France, there were several about euthanasia and end of life decisions as well as problems related to environmental change. In Ireland, they had them on the issues of abortion and gay marriage, which overturned constitutional bans on both. There have been many more around the world.

They are also effective. This might be counterintuitive, but from studies of these new experiments in democracy we find that if you take a group of randomly selected people who are different (cognitively different, demographically different, etc.), they tend to make better decisions than if you have a group of people that are all the same but maybe exceptionally smart. If you get a group of, for example, Harvard economists and ask them how they should invest and then you just take a random group, I have confidence that with the right information the random group will make better recommendations.

Another thing that we find through democratic experiments is they are also more legitimate in the eyes of the public more broadly. Professional politicians are viewed with near universal suspicion. However, social science experiments have shown that the public views deliberative decisions made by groups of randomly-selected working people with far greater legitimacy than decisions made by politicians or technocrats.

We have already seen attempts to begin to put such ideas in place for finance. This is precisely what Public Bank LA wants to do. It is also what the Public Banking Act 2023 put forward by Congressional Representatives Rashida Talib and Alexandria Ocasio-Cortez aims to do. The Act proposes that banks with assets greater than $500 million have a random selection process whereby a board approves the services the bank offers as well as the investments of its assets. This is not utopian; it is a concrete proposal to place the “master’s tools” – institutions of investment allocation – into the hands of a representative cross-section of the working class. 

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MO: Let’s move on from the specificities of how we might design a more democratic financial system to the politics of how we get there. It is of course all fine to envision an alternative to present arrangements, but we know that capitalists will not freely let go of their power. We therefore need to organize the working class to force an alternative arrangement, and to be able to do this we first need to understand the nature of class politics. You have made a series of interventions that are critical of the prevalence of something you call “class abstractionism” in important corners of the U.S. left. What is class abstractionism and why does it constitute a misunderstanding of the nature of class politics?

MM: To really think about democratic finance as a class strategy, we need to think through a pervasive error in contemporary socialist thought – this is the fallacy of class abstractionism. Class abstractionism tends to arise out of a confusion between two core Marxist categories: class structure and class formation. Class structure concerns how we understand what class is and how we might map it out in a mode of production or a social formation. Of course, here we get into all sorts of debates about who is a part of each class, where to draw the line, and so on. Class formation, on the other hand, concerns how classes come to be organized politically and fight for themselves. Classically, how classes go from “in themselves” to “for themselves.”

The error of class abstractionism – which is increasingly common on the left in the U.S. – derives a political strategy for class formation directly from a highly abstract and ahistorical understanding of the class structure. The most abstract understanding of class structure is that there is a working class and that there is a capitalist class, and these classes quite simply have opposing material interests. The problem of “class abstractionism” occurs when we take these basic categories (such as worker and capitalist) and then rely on those categories exclusively to understand and predict how class formation itself works. Class abstractionism here is simply the idea that you can understand working-class movements explicitly through the language and lens of working-class interests, understood in the abstract. Class abstractionists seem to believe that if we can simply strip “divisive cultural issues” away from class politics, a cohesive working-class subject will be able to emerge.

History flatly refutes this. Working-class movements are always articulated out of different sections of the working class, that have different identities and different specific issues they care about. Working-class movements are always a patchwork of segments drawn from the class as a whole; they are not merely a collective action of different previously atomized workers with always interchangeable sets of interests. Solidarity is not some pre-existing condition that gets discovered once culture issues are ignored, it is something actively constructed through people’s differences, not despite them. 

This is where democratic finance comes in and is so critical. Sortition isn’t a technical fix, but a platform for class formation. The installation of democratic institutions that are dialogical, that bring people together who share a similar abstract class position broadly but have very different social positions and experiences in the world and therefore different needs and wants, is the means to generate common class projects. This is precisely what the working class is, a differentiated demos not a homogenous group of generic workers. It is only through the friction of dialog and deliberation over the allocation of capital that you can articulate something that addresses each of those needs via a common project and working-class people come to understand themselves in common class terms. 

So, the critique of class abstractionism is that it treats the working class as a homogenous, unitary actor, when in fact that is not what the working class is or has ever been. This is at best a fantasy and distortion. Instead, the working class is a highly differentiated group that do not simply and straightforwardly have the same immediate wants and needs. That starting point is the challenge of political organizing on the left. How do you take a diverse group of people and formulate a political movement out of it? It’s a challenge, but anyone that ignores it is doomed to irrelevance. 

MO: Let us end with a final question that concretizes this argument a bit. In the wake of Donald Trump’s second presidential victory, some voices on the U.S. left have more or less accepted the rightwing talking point that Trump’s victory can at least partly be attributed to “ordinary workers” dissatisfaction with radical identity politics or “wokeness.” How do you understand the emergence of what we, for lack of a better term, might call the “anti-woke” left and why do you think it is misguided? 

MM: As a political term, “woke” is now largely drained of value and mostly used in a reactionary way by the right to dismiss movements and substantive debate. But I would describe my position on this debate as anti-anti-woke. Though we see the anti-woke posture across the political spectrum, its embrace by corners of the left is uniquely destructive and runs counter to our shared goal of emancipatory politics. By taking up conservative criticisms of American liberalism and then using them as the starting point of a left analysis and politics, it is essentially reactive. While we should criticize the cynical ways that Democrats and liberals use identity politics to hide their subservience to capital, anti-woke discourse first emerged on the right as a means of discrediting the Black Lives Matter protests and valid working-class concerns. Among the sections of the U.S. left who have taken this talking point to heart, the basic idea is that the left should not focus on identity issues, or at least not lead with them in politics. Instead, the left should simply focus on bread-and-butter issues that are in the interests of the working class as a whole. 

This strategic starting point is a false one, it rests on a sociological fiction about class itself. There has never been a unified working class composed of people with interchangeable sets of interests. There has never been a class politics that is simply in the universal interest of the working class. And in terms of working-class politics itself, it is always subsections of the class that organize and fight, even in the context of bread-and-butter labor politics. Most strikes are of individual groups of workers, fighting for particular demands, not the interest of the working class as such. We also see this in the context of a political program by a party or someone running for office. There is no singular thing that is in the interest of the working class as such other than international socialism, and nobody is running on a campaign message or organizing a strike for that. 

Therefore, the task of working-class coalition-building is not one of subtracting the issues of minorities or sub-groups. Instead, the way you build a coalition is by stitching it together with different segments of the working class. To do this requires neither economic populism nor identity politics alone, but rather a program that serves both particular interests, of say different identity groups and subsections of the class, and the general interest of the class as a whole. That is the hard part about actually doing class politics that people that seem to think having the right slogan alone will win seem to miss. This requires a stitching together of demands, an articulation of different groups within the working class into a common political force. 

It is wishful thinking to think that you can do that by dismissing the needs of migrants, trans people, gay people, women, etc., in your program. It is wishful thinking because if you dismiss the concerns of these people, they will rightly reject your coalition. And if you are rejecting the marginalized in your coalition to appeal to some mythical working-class majority, the only ones you draw in will poison the well of solidarity needed to win in the first place. The way you win certain people over in your coalition is speaking to their particular needs as well, not dismissing them as insufficiently class based. A socialist politics that rejects the specific conditions of the most vulnerable members of the working class is not universalist, it is a capitulation to the cultural politics of the Right and more a step toward irrelevance than political power.

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