The neoliberal trap


Credit isn’t extended to help people get ahead. It’s the means for producing securitizable debt, which means financialization (one of the key features of neoliberalism) needs poor people, poor people cut off from public services and left to fend for themselves.

Jodi Dean
17 July 2013

One result of the financial crisis of 2008 was the sad truth that some banks are “too big to fail.” Even as politicians and financial analysts lament the “moral hazard” accompanying the array of neoliberal policies propping up a rapacious finance sector, they keep on doing the same old thing because they can’t let the banks fail.

“Too big to fail,” however, is a non-explanation, omitting important questions like “says who?” and “how come?” Banks have failed in the past. Sovereign states have defaulted on their debts. “Too big to fail” displaces attention from the larger political economic circuit of contemporary neoliberal capitalism by condensing it onto a single location - big banks. “Moral hazard,” similarly directing us away from the constitutive immorality of an approach to production and distribution premised on exploitation and dispossession, nonetheless takes us a step closer to neoliberalism as a capitalist system, one in which knowledge of the system has effects on the system, one that is reflexive.

Ever since Socrates challenged his fellow Athenians to justify their opinions, reflexivity has been a primary feature of reason (not to mention a constitutive element of critiques of reason).  Most thinking people link reason to self-consciousness and give this link a moral valuation.

Psychoanalysis, however, breaks this link. The psychoanalytic category of “drive” offers the vivid alternative of reflexivity as a trap, a vicious repetitive cycle ensnaring us in deeply destructive practices. Drive can thus illuminate how neoliberalism, that extreme capitalism wherein government pursues policies for the benefit of markets not people, captures its subjects.


In his classic work on drive, Sigmund Freud attributes four vicissitudes to the drives (unfortunately translated as “instincts”): reversal into its opposite, turning round upon the subject’s own self, repression, and sublimation.

Freud uses scopophilia, voyeurism, as an illustration.  More than just a desire to look, scopophilia is accompanied by a drive to be seen.  The voyeur wants to be seen seeing. From being the observer of the system, the voyeur becomes a component of the system, thereby changing, expanding, the situation he initially just set out to see. This reversal into “being seen” converges with the second vicissitude: it is a “turning round upon the subject’s own self.” The self becomes the object (what is seen). As it does so, its activity is transformed into passivity, stuckness.

Freud’s third and fourth vicissitudes likewise converge. The third, repression, is a kind of dam. Dammed up water can overflow into a network of tributaries, breaking out in multiple directions.  Like water creating new channels, the drives, Freud explains, are “extraordinarily plastic.” “They may appear in each others’ places. One of them may accumulate the intensity of the other.” 

Sublimation, the fourth vicissitude, is this finding of new outlets, new paths of expression, for the repressed desire. Indeed, drive is only expressed as sublimated, as an effect of repression. And while this effect takes the form of a circuit (turning round upon the subject’s own self), the circuit isn’t closed. In the course of it movement outward and back, drive can alter, shift, disperse, and branch.

The reflexive movement drive designates is a loop, an uneven repetition and return that misses and errs. Stuck in the loop of drive, the subject tries to get the same result by doing the same thing over and over, but fails.  Still, the subject gets something, a little bit of enjoyment, in the repeated effort of trying. This little enjoyment is enough of a payoff for the subject to keep on keeping on, although each moment is a little different. Why is each movement a little different? Because it comes next; it adds itself and thereby changes the setting of the next circuit. So in addition to reversal and dispersion, the movement of drive involves accumulation, amplification, and intensification.


Vortex Street cloud formation.Wikimedia Commons/NASA. Public domain.

Because drive designates a turning back upon one’s self, it provides a concept for theorizing reflexivity. A keeping on beyond pleasure, beyond use, drive makes reflexivity appear as a loop ensnaring the subject, thereby disrupting the assumed coincidence of reflexivity and reason.

Reflexivity involves a loop, a turning back. This looping installs an infinite regress, an unpluggable gap, as an irreducible feature of consciousness. Subjectivity encounters a “halting problem” at its very core (in computer programming, a halting problem arises when a program gets to a point where its only options are stopping arbitrarily or running infinitely; children play with this problem when they invoke reflexive loops like “I know that you know that I know that you know that I know …). 

Conceiving the reflexive turn via the loop of drive draws our attention to our capture in the picture we ourselves draw, the loop we ourselves designate. Rather than an operation that can come to an end or answer, reflexivity oscillates between an eliminable choice between the arbitrary and the infinite. Repetition is compulsive, difficult to stop even when obviously damaging.

Slot machines illustrate the idea. People ostensibly play the slots because they desire to hit the jackpot. This desire alone, however, can’t account for the appeal of slot machines, as if slot machines were vehicles for players’ rational calculations of expected financial return given a specific expenditure of capital.

Instead, slot machines are assemblages for and of the drive. They rely on little pleasures of anticipation, seeing pictures disappear and appear, experiencing the little rush of noise and lights, being seen by others as one who might be the big winner. Each pull of the handle occurs at a different moment, so no pull is exactly the same. Our anticipation with the fourth pull may be invested with more excitement and delight than we have at the ninth one, when we might be anxious, worried about how much we’ve put in the machine. 

By the fortieth pull, our attachment to the machine, our capture in the circuit of drive, has disruptive effects of its own, making us late for dinner or unable to pay our phone bill. What we started for pleasure, perhaps as a way to escape from the constraints of pragmatic day-to-day responsibilities, reverses into something from which we want to escape but can’t. 


Financial analysts rarely use psychoanalysis to explain market crises. They do, however, invoke bubbles, feeding frenzies, and feedback loops, that is, the extremes and ruptures brought about by reflexivity in complex networks. In his account of the crash of 2008, financier George Soros is explicit on this point, theorizing reflexivity as the two-way connection between participants’ views and their situation and analyzing the crisis in terms of this two-way connection. 

Consider risk management. In the nineties, financial firms began to assess the amount of capital that they needed to have on hand to back up their investments in terms of “value at risk” (VAR). VAR is a number that lets a bank determine how far its portfolio can drop in a single day.  VAR is calculated in terms of asset volatility—how much an asset’s price jumps around in a given time period. The assumption is that price movements vibrate within a standard deviation; their distribution takes the form of a bell curve.  Armed with their VAR, banks can calculate how much capital they want to carry in light of their overall risk exposure. Seeking to escape from government determined standards of acceptable risk, financial firms in the nineties argued that their investment strategies were better pegged to the market.  Rather than sitting dormant as an unnecessary back-up or safety measure, their capital could be leveraged to create more opportunities for the generation of wealth. VAR would let them know what they could reasonably risk.

Problems set in when multiple parties adopt this approach to risk. Presuming that all the other players have taken appropriate measures to insure against risks, firms and money managers are likely to think they are more secure than they actually are. They may assume that diversifying their holdings provides sufficient protection against declines in a particular asset class since prices of different assets tend to move in opposing directions (they are negatively correlated). In extreme circumstances, however, everything might start to drop. Why? Because a firm trying to protect itself from losses in one area starts selling assets in a second area in order to maintain its VAR. This selling pushes down the price of this second area, which begins or can begin a further downward cascade, particularly insofar as other firms see prices falling in this new area and don’t want to get slammed there as well as in the first area. The dynamic is reflexive in that it relies on the fact that observers of the system are agents in the system. So it’s not only a matter of what a given firm is doing. It is also a matter of the firm’s (always partial and distorted) knowledge of what it is doing, its knowledge that others have knowledge or expectations of what it is doing, and its entrapment in the loop of this knowledge of knowing.

Derivatives are instruments of reflexivity, custom-made financial tools that step back from an asset’s relation to its setting to bet on how investors will assess that relation in the future. A derivative is not just a bet; it’s a bet on how others will bet. This reflexivized bet acts on the future on which it is betting. Derivatives enable enormous leveraging.  Small outlays of capital can have huge pay-offs or pay-outs in the future. Because the immediate cost of risk is comparatively small, firms can undertake more investments than they would with regular stocks and bonds, adding to the overall complexity of the system. So even as derivatives emerge out of the perceived need to protect against the risks involved in complex speculative financial transactions, they make these transactions possible and thereby produce, their own conditions of emergence. In the words of LiPuma and Lee, “once the speculative capital devoted to financial derivatives becomes self-reflexive and begins to feed on itself, it develops a directional dynamic toward an autonomous and self-expanding form.”  The circulation of money detaches itself from production; money is purely self-mediating. Since abstract financial relations are themselves treated as underlying assets, money markets can expand seemingly without limit - that is, as long as everyone involved believes that they will, as long as the circuit keeps on going on and no one tries to cash in or call.

When a market is made for a specific designer instrument, like derivatives such as collateralized debt obligations and credit default swaps, the surplus risk shifts from being a byproduct to being the product; it occupies the place previously held by the asset. The riskiest tranches of a collateralized debt obligation (CDO) are the ones with the highest potential reward. When investors, particularly hedge funds and others looking for something to short, want them, banks look for more bad loans to buy, whether these loans are for houses, education, or municipal improvements. Low net worth individuals, people unlikely to be able to repay their loans, are necessary for high risk loans. Credit, then, isn’t extended to help people get ahead. It’s the means for producing securitizable debt, which means financialization (one of the key features of neoliberalism) needs poor people, poor people cut off from public services and left to fend for themselves.

At this interface of the extremes of profit and loss, poverty-like risk isn’t an unavoidable byproduct of capitalism but its condition and content. The debts of poor and working people drive the neoliberal finance machine. Just as the subprime mortgage market bubble required low income people, a shortage of affordable housing, and investors eager to buy debt, so does the encroaching student loan crisis depend on young people unable to pay for higher education, a public sector unwilling to fund higher education, and a finance sector hungry for debt. Each element impacts the other in a vicious cycle: families facing foreclosure lack the financial resources to pay their children’s college tuition; the children take out exorbitant student loans; banks bundle and then sell the loans to the wealthy, who, in part because of their investments can fund their own kids’ education and who thus lack any incentive to pay higher taxes and support public education, which then leads states to raise tuition, cut faculty, increase class sizes, push students into MOOCs, and diminish the quality of education for those less able to pay, who now find themselves less competing in a shrinking job market, and ever more dependent on credit. In the circuit of amplified inequality, the increase in the number of poor people isn’t a social problem, it’s an investment opportunity. The system turns in on itself and feeds on its own excesses.

If the Marxian formula for capital is money begetting money, its neoliberal version is debt begetting debt. Neoliberal capitalism runs as a circuit in which reflexivity is a mechanism of capture rather than reason, where the loop of drive amplifies the worse tendencies rather than employing feedback as a mechanism of self-correction. Neoliberalism, the version of capitalism that has been dominant since the 1970s, is neither a formation well-defined in terms of free, unregulated markets nor one well-understood in terms of competition as a moderating force. Instead, it’s a system that unleashes drive for the benefit of the rich and the exploitation of the poor – that’s why banks are the institutions that are too big to fail but universities and hospitals are not.


Neoliberalism’s reliance on amplifying the inequality between rich and poor was explicitly acknowledged in the notorious Citigroup report, ‘Revisiting Plutonomy: The Rich Getting Richer.” A set of recommendations for investors to buy stock in luxury goods, private banks, and financial services (a group of stocks the authors refer to as the “plutonomy basket”), the report points out the insignificance of poor and middle class consumers.

The only consumers who matter are rich ones, the ones who have been benefiting and can be expected to continue to benefit from neoliberal globalization. The rich drive demand (not the mass of middle and working class consumers). The rich have an increasingly larger share of income and wealth and thus greater proclivity to spend. In the words of the report, “Asset booms, a rising profit share and favorable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in the plutonomy countries.”

The super-rich purchase luxury items and investment vehicles. The poor rely on cheap, low quality goods and massive amounts of corn, that is, the sub-standard food of corporate agriculture.  For everything else, there is debt, the debt the finance sector needs to function.

Freud’s observation that the objects of the drive can appear in each others’ places, accumulating the others’ intensity, alerts us to the ways that multiple, minor achievements (a higher daily book value on a portfolio, a quarterly decrease in unemployment, the recovery of a stock market) can well be moments in larger circuits of failure and decline. The system is failing even if one particular element in it is being kept aloft.

The big banks successfully fought against serious regulation of derivatives with the argument that banks would just come up with even more complex and dangerous ways to transfer risk from their books and produce new sources of profit. 

Reflexivity in markets means that agents will incorporate changes in their setting into the behavior, and so just work around any changes (like water going downhill). But we should immediately be suspicious of such an appeal to reality as indicative of what Mark Fisher theorizes as “capitalism realism,” the excuse for capitalist excesses offered as if there were no alternative.

But there are alternatives. Don’t regulate derivates - eliminate them. Don’t supervise speculative finance - abolish it. Don’t expend bizarre amounts of time and resources on an elaborate banking system - have one global bank with multiple regional branches to fund experiments in developing places that need development, organizing places that need organization. There are alternatives – we just need the political will to seize them.


This article is part of an editorial partnership between openDemocracy and the Centre for Modern Studies at the University of York. It was funded by the University of York's Pump Priming Fund, the British Academy, and York's Centre for Modern Studies.

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