Global economy: Neoliberal Meltdown?

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Beset by endless political and social crisis, market crashes, banking disasters and ultimately a failure to reverse the falling rate of profit, has neoliberalism come to the end of the road? asks Rob Hoveman

In June 2016 the International Monetary Fund (IMF) published a paper from its economics research department entitled ‘Neoliberalism oversold’. The very fact it used the word neoliberal was remarkable enough, for this was a word hitherto only used by neoliberalism’s critics and banned completely by its advocates, of which the IMF had been the leading international proponent. More importantly, the report was a devastating indictment of the neoliberal policies that the IMF had been promoting and imposing on weaker economies for many years.
These policies had led, the report said, to rising economic inequality across the world, repeated economic and particularly financial crises and lower economic growth. Four years later the United Nations Conference on Trade and Development (Unctad) has produced a rather similar report but focussed on the scale of the economic meltdown that has occurred in response to the threat from Covid-19. It is certain, the report says, that were neoliberal policies to be pursued in response to this meltdown, there would not be any sort of significant recovery any time soon from the unprecedented fall in world economic output and hundreds of millions will lose their jobs and descend into dire poverty.
What is neoliberal economics and why has it become so dominant? Definitions differ as to what neoliberalism is but these seem to be some of its principal components. First and foremost was the belief that markets were the best way to distribute scarce resources. Government monopoly, or indeed any form of monopoly, leads to the misallocation of resources and their inefficient and unproductive use. Therefore, the state needed to be rolled back, publicly owned industries privatised and trade union power diminished, if not eliminated, in order to “free up” the labour market. The rollback of the state also meant that barriers to free trade needed to be dismantled, subsidies to “protected” industries reduced and eliminated and the financial sector freed up to allow money to flow freely across the world to wherever profits could be made.
This view became dominant in the 1980s replacing the previous consensus that, whilst capitalism was basically sound, it nonetheless needed regulation in order to prevent the kind of crisis that in the 1930s had led to the Great Depression. The economic orthodoxy of this interventionist social democratic consensus, known in the 1950s as ‘Butskellism’ after the Labour leader Hugh Gaitskell and the Tory chancellor, Rab Butler, was Keynesianism. Keynesianism, named after John Maynard Keynes, was the view that markets could not be relied on by themselves to maintain full employment and economic growth. Left to itself, a capitalist economy could go into crisis as a result of deficient economic demand, that is spending, arising from low wages or a change in the “animal spirits” of those with the wealth to invest or both. Governments, above all, had to counter this deficient demand by boosting spending when economies turned down.
The authors of the Unctad report, and many others critical of the contemporary Washington neoliberal consensus, take the view that there was simply an unfortunate change of mindset among policy makers in the 1980s, shifting from Keynesianism to neoliberalism. This is a completely mistaken idealist analysis. The old Keynesian consensus had itself been discredited in the eyes of increasing numbers of the rich and powerful as a result of the crisis of the 1970s with declining economic growth and high inflation. This was the situation in which Thatcher came to power in the UK in 1979. She was committed to the monetarist policies of Milton Friedman whose pathetically simplistic view was that inflation was created by an excessive creation of money by the central bank. Bribery The money supply needed to be controlled therefore by strict targeting and ultimately by a central bank independent of the machinations of politicians, who might always be tempted to pump up the money supply to bribe voters at election time with the inflationary consequences only occurring later. But in addition, she and those who did her thinking for her, celebrated the ideas of Friedrich von Hayek. Hayek was a fanatical anti-communist and not that much of an economist but he fitted the zeitgeist among this establishment. In particular, he had the view that only the individual could know what was best for that individual.
It was impossible therefore for governments to allocate resources in such a way as to meet the needs and desires of a population in almost any area. It was from Hayek that Thatcher derived her famous soundbite that “there is no such thing as society”. It was Hayek’s ideas that were purloined by the likes of Jeane Kirkpatrick, Reagan’s foreign secretary in the 1980s, to justify any form of dictatorship in Latin America or elsewhere so long as it was committed to the neoliberal economic agenda. This afforded the retrospective justification for the military coup in Chile in 1973 and the dictatorship of Thatcher’s very good friend Augusto Pinochet. The coup served the interests of a higher form of democracy, it was claimed, the economic democracy of the “free market” against the “totalitarianism” of the modestly redistributive policies of the Allende government. Spending Neoliberalism also stressed the importance of not crowding out “wealth creators” with “excessive” government spending. This was an inversion of the truth.
The real wealth creators are the workers who make things and do things. The neoliberal “wealth creators” are the rich who steal that wealth through exploitation. But the name of the neoliberal game was to try to restore conditions of higher profitability in the private sector and that meant increasing exploitation. Hence the desire to weaken unions, thereby forcing down wages, cutting corporation tax and freeing up financial markets to allow big money to pursue profit wherever it could be made. In this respect there was a certain logic to neoliberalism. It was the decline in profitability that precipitated the instability that pervaded the world economy in the 1970s and it was only much higher profitability, under capitalism, that would restore the economy to anything like its “golden age” in the 1950s and 1960s. Neoliberalism also seemed to be vindicated by the collapse of the state capitalist countries which formed the Soviet bloc.
Surely their collapse and turn towards forms of free market capitalism vindicated the whole neoliberal outlook. There really seemed to be no viable alternative, to misquote Thatcher, to the kind of economics that was coming to dominate Western capitalism, a view refuted later by the extraordinary rise of the state capitalist Chinese economy. The consolidation of the neoliberal consensus in the UK needed two further moves. The first was confrontation with and the defeat of trade union power. Using salami tactics devised by one of Thatcher’s master tacticians, Nicholas Ridley, she planned to take on key trade unions and powerful groups of workers one by one, seeking to avoid workers combining across industries.
So there were major confrontations throughout the 1980s, first with the steel workers, then the miners, then printworkers and finally ferry workers. The miners in particular could have defeated Thatcher, as we now know, but they were let down by the leaders of other key unions and in particular by Neil Kinnock, the leader of the Labour Party, and Norman Willis, the general secretary of the Trade Union Congress. In the US, Reagan similarly picked a fight with the air traffic controllers union Patco which he won to devastating effect. The second thing required for neoliberalism to be consolidated as the new consensus was the complicity of the Labour Party leadership and this was obtained decisively with the accession of Tony Blair to leader and then prime minister.
Blair, it has rightly been said, was Margaret Thatcher’s most important achievement. It is worth noting that the independence of the Bank of England in determining monetary policy, a key objective of neoliberalism, was only finally implemented in 1998 under Gordon Brown, who also masterminded other neoliberal initiatives including the Private Finance Initiative and Public Private Partnerships. It was under Blair too that state schools began to be turned into academies bringing the private market into public education. In the US Bill Clinton played a similar role with respect to the Democratic Party in consolidating the neoliberal consensus, although the Democrats as an openly probusiness party needed even less persuading. As ever, the neoliberal orthodoxy that emerged was nonetheless applied only inconsistently.
Monetarism so popular in the 1980s — and the pursuit of which led to such a rise in the value of the pound in 1980 that this alone contributed massively to the destruction of manufacturing in the UK and more than three million unemployed — was itself discredited when none of the measures of the money supply correlated at all closely to the actual rate of inflation. It has in more recent years been wholeheartedly abandoned through so-called quantitative easing with central banks creating vast amounts of money to stop the financial system imploding, although you can still find monetarists warning that sooner or later the spectre of inflation will re-emerge. Neoliberalism has constantly pressed for curbs on public spending and government debt.
That’s what is behind the so-called Maastricht criteria in the EU that the government annual budget deficit should not exceed three percent and total government debt should not exceed 60 percent of total annual production. But on the other hand, private sector debt has hugely increased under neoliberalism. This was indeed the motor of the Reagan boom in the 1980s and has led the slow recovery from the 2008 financial meltdown. Moreover, although publicly owned industries were subject to various forms of privatisation, government spending in fact as a proportion of total spending in the economy hasn’t significantly declined. Ironically, this sustained government spending has countered to some degree the repeated economic downturns and crises over the last 40 years of neoliberalism.
The European Union also committed to more and more neoliberal policies internally and in the wake of the financial crisis of 2008 imposed severe economic austerity across the EU through the European Central Bank control over the Euro. And through the so-called Troika, it triggered a catastrophic decline on the bankrupted Greek economy. But the EU also retained protective barriers around the EU not only to try to keep migrants out but also through tariffs to protect the European economy at the expense of those outside the zone.
This is, of course, one of the key issues now at stake in the vexed Brexit talks, with the threat that the British economy will have tariffs imposed on it that the British government had previously been happy to impose on others. Rate of profit The remarkable thing in many respects is that after some 40 years of neoliberal economics designed to lower wages and raise the rate of exploitation, to clear out less efficient and low profit companies and massively reduce government ownership of industry, the rate of profit in the real economy has still not returned to high enough levels to stabilise the system. On the contrary, more and more money has poured into financial speculation rather than direct investment. This has massively increased the wealth of the already wealthy and hugely increased inequality.
But it has also itself led to a succession of financial crises, the worst of which thus far in 2008 threatened to bring down the entire financial system and with it the world economy. The emergency measures taken after 2008 may have stopped that collapse but the world economy was heading back towards recession in late 2019 and early 2020, prior to the massive decline brought on by the great lockdown. We should, of course, welcome the undermining of the neoliberal consensus that has been forced on governments by the lockdown economic collapse, including the policies of austerity that have been so damaging over the last ten years.
But the Keynesian alternative is itself threadbare based as it is on the assumption there is some easy way under capitalism for economic demand to be boosted, thereby stimulating economic growth through the raising of wages and increasing government spending, as suggested in that latest Unctad report. Higher wages would cut into profits. And government spending will sooner or later come under pressure from the financial markets from which governments will have to borrow. There is no doubt that an emergency programme for jobs, services and safety and to save the planet from the climate crisis is very much needed. However, that programme will have to challenge not just neoliberalism but the logic of a capitalist system that always puts profit before people.