By David Fields
My attempt is to suggest that, although laudatory, the neo-Marxist contributions to fiscal sociology put forward by James O’Connor’s (2002 ) The Fiscal Crisis of the State and Erik Olin Wright’s (1977) Class, Crisis, and the State ultimately fail to accurately explicate the contradictions concerning the logic of capital during times of urban economic duress. I incorporate a dialectically materialist framework that manifests the interconnections between urban governance, capital accumulation and the structure of the state, with an emphasis on what I call a Cartalist sociological approach to money as an institution of social power to make my argument.
The empirical backdrop is the United States, and the aim is to reassess the theoretical significance of the so-called ‘fiscal crisis of the state’ and its effect on the American urban built environment, in order to reconsider the broad historical contingencies that lead to the transformation from the so-called Keynesian managerial metropolis to the ‘neoliberal city’ (Harvey, 2009). I emphasize that the transformation was more the result of a deliberate policy by the federal government, so as to set in motion a set of institutional rigid social, political, and economic constraints (structural reforms is the euphemism) to enhance the process of rent-seeking, empirically manifested by the process of gentrification & austerity.
The starting point is a pre-analytical vision that no particular pattern of urban social development is inevitably destined, evolutionary, or instantaneous. Endogenous political-economic forces and historically specific qualitative transformations of social structure that are altogether not linear condition spatial forms of social organization.
Capitalist society does not harmonize individual interests in the process of promoting collective social welfare in the way mainstream economics contends. The essence of capitalism is an inherently unstable historical evolution of antithetical social relations systemized by a modus operandi of ‘accumulation by dispossession’ (Harvey, 2003: 127-173). In this sense, the ‘urban question’, so to speak, is a sociopolitical problematic that highlights the role of cities as socio-spatial arenas in which the contradictions of class conflict are continually produced and fought out (Brenner, 2000). What specifically are these contradictions? To answer this question, it is necessary that we formulate an abstract general presentation of the process of capitalist development.
The mechanism of ‘accumulation by dispossession’ can be expressed using the following ‘circuit of capital’ diagram:
M – C (LP, MP)…P…C
This is what Marx delineates as the production-valorization/realization chain, which captures the capitalist procedure of producing an economic surplus, in the form of net profits, or what Marx notes as surplus value, to be realized by a class of capitalist elites who possess a monopoly over the means of production (MP), such as machines, factories, technology, sources of energy, raw materials, land, etc. By implication, a class of laborers exist who are forced sell their capacity to produce, or labor power, (LP), to these elites, as wages for sustenance. With the basic class dynamic outlined, the production-valorization/realization process is as follows: at the start of the production-valorization/realization chain, the capitalist elite invest money (M) to buy productive inputs (C), in the form of (LP) and additional (MP); next, in the process of actual economic production (P), commodities (C’) are produced, such that the combination of (LP) and (MP) ensure a net profit (M’) for the capitalist elites in the market sphere of commodity circulation, and this depends on the level of effective demand of salable commodities.
The necessary amounts of money advanced by capitalists for the production and realization of surplus value is governed by a system of payments based on financial assets, i.e. the availability of loanable funds, credit, irrespective of past-accumulated savings out of capitalist revenue. The implication is that gross profit is quantitatively distributed between ‘financial’ capitalists and ‘industrial’ capitalists , which elucidates to a qualitative distinction between ‘interest’ and ‘profit of enterprise.’
[ … ] profit of enterprise is not [just] related as opposite to wage-labor, but to [the rate of] interest [on credit]. Assuming the average profit to be given, the rate of the profit of enterprise is not determined by wages, but by the rate of interest. It is high or low in inverse proportion to it (Marx, 1894: 379).
‘Financial’ capitalists lend interest-bearing capital, various forms of credit, e.g bonds, stocks, bills of exchange, etc., whereby ‘industrial’ capitalists employ such borrowed capital in the sphere of production to produce potential surplus value. In this sense, interest-bearing capital is transformed into productive capital . As such, credit appears as money capital (M), since it is employed in the process of production through the purchasing of necessary resources, like labor power (LP) and additional means of production (MP), if necessary. Thus, the ‘industrial’ capitalist, by not only working with his own means of production, pays an interest to a ‘financial’ capitalist from net surplus value created and realized; what is left over is his ‘profit of enterprise’ (Panico, 1980).
In this sense, the presence of financial instruments, which represent titles to future flows of income, makes it so that the center of distributive class conflict in capitalism lies not just in the technical conditions of production, but also in the financial sphere, so to speak, which pins the relative powers of finance capitalists against those industrial capitalists.
Since capitalism “creates its own legal relations, form of government, etc […]” (Marx, 1973: 242), the fundamental concern, specifically with respect to the topic of this article, is under what social conditions does a particular urban social structure constitute the capacity of the ‘aristocracy of finance’ and that of material production to continuously yield profits, so that situations of capital accumulation ‘crisis’ are, to some extent, negated.
Capital Accumulation and Urbanization
According to Chard Hill (1984: 299), there is a symbiotic, interdependent, co-determinous relationship between the process of capitalist accumulation and urbanization. Capitalist accumulation presupposes a ceaseless process of material investment, in order to uphold and enhance the distribution of, and effective demand for, salable commodities, i.e. secure market share and expansion, such that the capitalist system does not fold under the logic of its own pretenses.
Urbanization refers to the ‘constitution of specific spatial forms of human association’ that is characterized by a qualitatively distinct concentration of social activities (Castells, 1972). Under capitalism, spatial forms of concentrated social activity take the form of particular ‘built environments’ (Harvey, 1978), which represent ‘spatial practices’ (Lefebvre, 1991) of capitalist material production. The urban built environment is specifically the locus for the reproduction of the labor force, a market for the circulation of commodities and the realization of profit, and a social control complex governing capitalist social relationships (Chard Hill 1977). The ‘habitus’, or ‘life’ of a city, is determined to the extent to which it has the capacity to ensure that that the logic of capital accumulation perseveres without negative externalities, either internal or external.
Neo-Marxist Fiscal Sociology and ‘The Fiscal Crisis of the State’
To ensure a suitable urban environment, such that a relatively ideal geographical space of material infrastructure for production, circulation, exchange and consumption is constructed, what is requisite is stable macroeconomic coordination. This includes a range of state social expenditures that relate primarily to the processes of reproduction of labour power, which can usefully be divided into investments directed towards the qualitative improvement of labour power (e.g. investment in education and health by means of which the capacity of the laborers to engage in the work process will be enhanced), investment in science and technology (the purpose of which is to harness science to production and thereby to contribute to the processes which continuously revolutionize material productive forces), and investment in co-optation, i.e. the integration and repression of the labour force by means of ideological, military and various other tools by which the state has a ‘monopolization over the means of violence’ (Harvey, 1978).
Only [a] sociology [of public finance] can show how social conditions [of the built environment] determine public needs and the manner of their satisfaction by more direct or indirect means, and how ultimately the pattern and evolution of society determine the shaping of the interrelations between public expenditure and public revenue. (Goldscheid,  1958: 202)
Effective macroeconomic coordination by the state presupposes a critical analysis of the social struggles over public finance; the social processes that underlie fiscal policy have extensive influences on the nature of economic organization (Schumpeter, 1954: 6-7; Campbell, 1993), since they reflect ‘the immanent contradiction between capitalist economy and [a] socially productive […] economy’ (Goldscheid,  1958: 202). James O’Connor’s ( 2002) The Fiscal Crisis of the State and Erik Olin Wright’s (1977) Class, Crisis, and the State together provide a unique sociological framework for analyzing the intricacies with respect to the urban built environment.
Following O’Connor and Wright, we can divide the state budget into three categories that correspond to Marx’s reproduction schema of capital accumulation: Social Capital Expenditure corresponds to Marx’s value category of constant capital, which consists of expenditures on capitalist means of production that include physical economic infrastructure, research and development, and outlays on various forms investment that enhance the productivity of labor power; Social Consumption Expenditures correspond Marx’s value category of variable capital, which corresponds to reproduction of labor power, and consists of state investments on labor training services, housing, education, health (medicare/medicaid), and various forms of social insurance, e.g. publicly funded pensions; and Social Legitimization Expenditures, which are outlays that serve to legitimate the capitalist social structure, and serve as a Keynesian source of aggregate demand management (Baran & Sweezy, 1966).
The O’Connor/Wright model highlights the essence of specific elements of public spending that condition the level of stability for capitalists to make reasonable calculations about expected rates of return on investment. In this sense, there is a direct connection between urbanization and growth in public spending, as outlined above, as states socialize a large share of the costs of urban investment projects. Hence, as long as the state, through various types of expenditures provide for a favorable environment capital accumulation, the capitalist economy of the urban built environment economy tends to expand vigorously.
Given that capitalism is essentially ‘anarchic’, i.e. highly difficult to tame, it is not a social fact that potential transformations of economic and social conditions will not eventually undermine the system at hand. If public spending is unable to overcome the doubling over of contradictions that arise from the process of capitalist development, uneasiness and uncertainty predominate.
As the capitalist state assumes the responsibilities for maintaining capitalist economic growth and social stability through social capital, consumption, and legitimation expenditures, the dialectically controverts its mode of operation, as such policies “become progressively increasingly out of proportion to the requirements of [capital] accumulation” (Wright 1979: 157). The increasing pertinence of fiscal policy outweighs the state’s capacity to finance it through tax receipts, especially if social consumption legitimization expenditures take more of the state’s fiscal outlays.
Cities in the United States, nonetheless, have historically been permitted to issue bonds, to be bought by private investors, particularly by financial institutions, to cover budget shortfalls. Finance capital, yet, does not make funds available, for any economic activity if it competes with ‘laws of motion’ of capital accumulation (O’Connor,  2002: 193-4). As such, balanced-budget requirements ensure that city governments are more-or-less dependent on banks and other financial institutions, so that the proper scope of city government is largely enmeshed in ensuring that the urban political economy fosters ‘business confidence.’ This guarantees that borrowing to finance social capital, consumption, and legitimation expenditures strictly serve to expand the productiveness of the capitalist economy, so that tax revenue from the potential increased income/output can immediately offset original debt incurred.
Bond-rating agencies evaluate the creditworthiness of city governments, which, in the United States are privately administered (e.g. Moody’s, S&P, and Fitch). Ratings are based on assessments of city government’s financial history (past and current public debt), its administrative structure and history (whether there is evidence of government malfeasance, lack of accountability, or mismanagement), and the potential for extensive urban economic vitality (whether growth is likely to occur). The threshold that the rating agencies police is whether or a bond is rated as ‘speculative’ or ‘investment’ grade’ Speculative-grade bonds resemble a city’s relative incapability of being fiscally prudent, for keeping finances limited to capitalist growth, and tax revenues high. As such, the ‘politics of creditworthiness’ not only will determine how expansive a city’s loan will be, but essentially will the affect the general nature, scope, and functionality of city government (Hackworth, 2007: 20-23).
In theory, nonetheless, the federal government of the United States can provide resources to help city governments escape the predicaments of ‘fiscal crisis’ by way of the US Federal Reserve purchasing bonds issued by city governments. Given the unique political structure and regulatory divisions between the local and federal level in the United States, however, institutional constraints make this source of urban fiscal support an impossibility (Swanstrom, 1986: 104-5).
At any rate, it is argued, such federal use of monetary policy would be inherently inflationary (O’Connor,  2002: 192), as this implies an ever increasing growth in the money-supply, creating a classic problem of too much money chasing too few goods, which only adds further fiscal strain to cities governments suffering from ‘fiscal crises’ (Block, 1981). The only means by which the federal state can assist city governments in the United States is through federal fiscal transfers from accumulated federal tax revenue (Friedland, Fox Piven, & Alford, 1984: 284; Block 1981). Moreover, the capacity for the federal government to engage in fiscal transfers is measured by the degree to which federal taxes are matched by federal fiscal transfers (Block, 1981). The O’Connor/Wright neo-Marxist fiscal sociological model presupposes a ‘mettalist conception of money’
A Mettalist Conception of Money
A ‘mettalist’ view of money sustains that money is the result of its function as a medium of exchange. Money is simply n asset that spontaneously arises to reduce economic transaction costs, and allows for a more efficient working of the capitalist market economy. There are objective qualities (e.g., divisibility, difficulty to forge, etc) that are required for an asset to be used as money, but ultimately, it is argued, money depends on the subjective acceptance by market participants.
The fundamentals of such a conception of money essentially rest on what is referred to as ‘real’ analysis, to use the term created by Schumpeter, which represents an ‘ideal type’ of the operation of the market economy as a system of ‘natural’ barter relations between rational calculating utility maximizing individuals (Ingham, 2004). Real analysis presupposes that money is ‘the unpremeditated resultant of particular individual efforts of the members of society, who have little by little worked their way to a determination of the different degrees of salableness in commodities’ (Menger, 1892: 250).
To maximize barter options, so the argument goes, agents hold stocks of the most tradable commodity, which, consequently, inevitably emerges as the media of exchange (Ingham, 2001). The implication is that money is a special commodity because of its salableness, which is then used for the reconciliation of all economic exchanges that are, in the Smithian sense, defined by the extensiveness of the social division of labor. It is a ‘neutral veil’ that is little more than a socially agreed upon symbolic generalized medium of communication and interaction that facilitates the integration of market participants so that exchanges is carried out effectively (Ingham, 2004: 60). The assumption is that money is nothing but an ‘ex post’ codification of social customs that oils the wheels of commerce (Bell, 2001).
In this sense, money is “only the instrument which men have agreed upon to facilitate the exchange of one commodity for another” (Hume, 1955: 33); “it flows between [economic agents] like water between vessels […]” (Hume, 1955: 64-64). Increased money supply conditions, per the argument, raise domestic prices of commodities. The rise in the domestic aggregate price level leads to a loss of competitiveness, as result of inflationary consequences, which not only lead to a doubling over of contradictions concerning aggregate demand of material production, but significant losses in financial assets to the detriment of financial capitalists.
The conventional wisdom argues that the Prince should not directly control the money supply. This infers that a separation of monetary and fiscal policies are the trademark of good policy making, which is the reason the United States federal government is limited in its capacity to engage in monetary policy to the extent that it provides fiscal resources for city governments, and why the federal government is limited in its ability to provide fiscal transfers to cities by the degree to which its fiscal outlays are matched by federal tax revenue.
To prevent fiscal crises at the federal level that would imply a doubling over of fiscal stress within the confines of cities, the federal state, just like city governments, must convince participants in the capitalist marketplace that it is ‘well-behaved’ through ‘appropriate’ budget conservatism. Implicitly, it is a question of trust that can be seen as the means to ultimately ensure that [budget] credibility is earned and maintained’ by capitalists (Ingham, 2004: 145).
A Cartalist View of Money
In contrast with Metallist views of money, the Cartalist (or Chartalist) approach (Goodhart, 1998) emphasizes that money has definite social and political conditions of existence. In this view, in terms of its functions, money is essentially the unit of account that allows calculations to take place, and from that characteristic the other functions are acquired. However, the Cartalist approach is not functionalist (Ingham, 2004); money becomes an ‘institutional fact’ (Searle, 1995) as a unit of account through the social and political power to establish a particular asset as the currency in the economic system. In this sense, money is the expression of the capacity to enforce the unit of account in which economic calculations are made.
Money is not a medium that emerges from mere barter exchange of goods and services. Rather it is a means for accounting for and settling of financial debts, the most important of which are tax debts, i.e. money that is owed to the state by its citizens. The measure of which these tax debts are calculated is expressed as the ‘money of account,’ the unit in which a socially defined amount of currency is expressed (Knapp  1973: vii-viii).
The modern state can make anything it chooses generally acceptable as money […] If the state is willing to accept a proposed money in payment of taxes and other [financial obligations] the trick is done. Everyone who has obligations to the state will be willing to accept the pieces of paper with which he can settle the obligations, and all other people will be will to accept these pieces of paper because they know that taxpayers accept them in turn (Lerner, 1947: 313).
The ‘unit of account’ is “[the state defined] [store of financial value] […] by which debt-contracts [throughout the economy] […] are discharged, and [of which] General Purchasing Power is held […] (Keynes, 1930: 3). In the United States, the Fed and the federal government regulate the value of this unit account, the Dollar, through interest-rate policy, which serves as a means of regulating the extent to which the federal state can engage in the use of fiscal policy.
Through open market operations, the federal government sells government bonds, treasury securities, which is then either bought ore foregone by the Fed. If the Fed commits to a policy of purchasing Treasury securities, the interest rate by which the Federal government is liable on its interest payments on past Treasury securities, held by the Fed, is lowered. Symmetrically, if the Fed sells Treasury securities, the Federal Government’s interest burden, which is paid through taxes denominated in dollars, is raised. In this sense, taxes are the primary means of determining the financial health of the federal state. The degree to which the federal government has the capacity to engage in aggregate demand management by way of fiscal policy is determined by the burden of its interest payments to the Fed, which, in turn, is regulated by monetary policy measures.
By providing a guarantee for state debt the Fed through monetization allows the federal government to use budget deficits to stimulate economic activity. In this sense, it should not be surprising that the creation of national currencies in the nineteenth century preceded the expansion of the federal state, from a night-watchman that provided only security and the rule of law, to a welfare state that participated actively in the economy and guaranteed an extensive set of social and economic benefits to its citizens Moreover, this gives credence to the notion that the appearance of budget deficits at the federal level are not signs of fiscal precariousness, as Block (1981) suggests; they merely represent the workings of an instituted accounting process that ensures the federal state’s fiscal solvency. Thus, concerns over budget deficits, should be a matter of to what degree:
Government expenditures [are used] to ensure that total spending in the economy is neither more nor less than that which is sufficient to [reach] full employment […] If this means there is a deficit, then is neither good nor bad, [it] simply is the means to the desired end of [establishing] [a sustainable] [process of material capitalist accumulation] (Lerner, 1943: 354).
Thus, the US state is always creditworthy, and default is impossible, since the Fed can always buy government bonds. Monetization may, under very specific conditions, lead to inflation, but this seldom has any connection with conventional monetarist stories about excess money supply. If monetization raises the specter of inflation of the domestic currency, it is only in the case that the economy is exactly at full employment, excess aggregate demand, which in the history of capitalism has certainly been a rare phenomenon.
In contrast to the neo-Marxist O’Connor/Wight fiscal-sociological model, the center of distributive conflict lies not just in the technical conditions of production in the urban political economy, but is governed by the rate of interest at the level of the nation-state, sphere of antagonism between financial and industrial capitalists as discussed above. High rates of interest, for instance, induce fiscal retrenchment at the cost of aggregate demand management, and thus unemployment, to the detriment of the working class, since the implication is not only losses of future wage earnings, but severe cutbacks in social welfare-enhancing social capital and legitimation expenditures. The value of the money, as opposed to being specifically with respect to matters over the federal budget, is the center of capitalist class conflict (Ingham, 2004: 81). Nevertheless, as mentioned above, given the structure of the vertical separation of powers between states and the federal government in the US, nationalization, so to speak, of municipal debt monetization is nonviable.
From Urban Managerialism to Urban Entrepreneurialism
With a cartalist understanding of money, we can paint a different picture, from that of the neo-Marxist Wight/O’Connor, of what contributed to the rise of the ‘urban fiscal crisis’ in the United States by the early 1970’s. This provides a reinterpretation of what led to the process of neoliberal gentrification, what Harvey (1989) describes as ‘urban entrepreneurialism’.
From 1940 to roughly 1973, the economic architecture of the United States was socially structured along the lines of federally and locally managed engineered Keynesian capitalist accumulation, as a response to the devastation wrought by the Great Depression. With socially-engineered capital-labor compromises and active state regulation in decisions with to respect capitalist capacity utilization, along with social consumption and legitimation expenditures, and a co-respective form of competition among large corporations, which brought together large banks and large industrial capitalists, monopoly capital (Baran & Sweezy, 1966), the post-World War II urban social structure was governed by Keynesian urban managerial capitalism (Harvey, 1989).
By the late 1960s, however, the very success of the Keynesian urban social structure of accumulation started to wane. Marginalized segments of the population in the built-environment, particularly minorities left out of the capital-labor compromises, called for rising demands of municipal services (Friedland, Piven, Alford, 1985: 290). As predicted by the neo-Marxist O’Connor/Wright Model, calls for expanded role of the state in meeting citizen’s needs dramatically circumscribed capital accumulation. Pressures for higher nominal wages induced through increased social welfare expenditures and funded through increased taxes on capital investment spawned inflationary wage-price spirals. Consequently, the rate of capitalist profit fell (Dumenil and Levy, 2004: 24).
Cities turned to municipal bond sales to local commercial banks, but with rising social expenditures outweighing city government revenues, and hyperinflation from wage-price spirals diminishing the profitability of financial assets, the era of Keynesian aggregate demand management saw its last days. According to Tabb (1984: 328), the death-knell came when President Ford, on October 30, 1975, refused to provide much needed fiscal transfers to the city of New York, citing federal fiscal budget shortfalls. Cities from New York to Cleveland were forced into a downward spiral of austerity.
According to Block (1981), the refusal of the federal government to provide vital fiscal transfers to cities stemmed from a federal crisis as a result of similar problems facing cities, namely the outweighing of expenditures over government revenue. From a cartalist perspective, however, this argument is weak. Given the monetary sovereignty of the United States, the federal government could easily have provided necessary fiscal assistance through appropriate fiscal policy. The reason it chose not to, was not an economic problem, but rather more of a social and political issue reflecting a class conflict between financial & industrial capitalists and the working class. Rising federal fiscal assistance would give more strength to working-class militancy, potentially doubling over the contradiction of inflationary wage spirals, causing further depletion of financial assets and diminished rate of capitalist profit.
Coupled with federal fiscal retrenchment and pressures for austerity from commercial banks, cities were forces to transform the uses of public debt into enhancing the value of commercial real estate (Hackworth, 2007: 152). The urban built-environment became a marketable space for crass commercialism. Through ‘civic booseterism’ by way of the promotion of urban government sponsored beautification initiatives, the intention was to attract wealthy residents and associated businesses into the urban built-environment, so as to accumulate potential tax revenues such that the city could be perceived as being in good financial standing, per commercial lenders associated credit-rating agencies. Tax abatements, land giveaways to various sorts of financial and industrial capital and lax or nonexistent zoning have became the modus operandi for cities across the United States, setting in motion a ‘spatial fix’ of urban neoliberal governmentality .
The US, from a cartalist fiscal-sociological point of view, is a monetary sovereign. Budget deficits that arise from the local to the federal level are more-or-less social and political issues resulting from distributive conflict. I presented an argument, along these lines, to highlight that the so-called ‘fiscal crisis of the state’ and its affect on the American urban built environment assessed from the O’connor/Wight fiscal sociological model is unsuitable, in order to reconsider the broad historical contingencies that lead to the transformation from the so-called Keynesian managerial metropolis to the ‘neoliberal city’. As such, I emphasized that this transformation was more the result of a deliberate policy by the federal government, such that rigid constraints could be introduced to enhance the process of rent-seeking, embodied in the process of urban gentrification.
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 Tooke (ibid: 36) defined this process as ‘business behind the counter’, which entails the collection of ‘capital from those who have not immediate employment for it, and to distribute or transfer it to those who have’; this consists of financial intermediaries (banks) ‘collecting unemployed (unproductive) capital and facilitating its productive employment’ either through loan advances or indirectly by the way of discounting bills of exchange.