In mid November the British prime minister, David Cameron, warned that the world economy was heading for another major economic crisis. The British economy has not even escaped from the crisis that erupted in 2007.
What is notable about the advanced capitalist states and their central banks is that so little has been done by their leaders since the emergence of the world economic crisis to prevent its recurrence. The main ‘solution’ to the crisis has been quantitative easing, which consists of central banks buying up assets from private banks; this was supposed to increase money supply and stimulate investment and economic growth. But this ‘solution’ has done nothing to address the underlying causes of the crisis. In fact, as a partial consequence of quantitative easing, total world debt (public and private) has increased dramatically since 2008. Then it stood at 174% of world GDP. Now it stands at 212% (1).
Neoliberal economic policy has not delivered the goods. So how do critics of neoliberalism explain its continuing vitality? In a recent article in the Guardian, Cambridge economist Ha-Joon Chang argues that Conservative Party austerity policies have failed to re-boot the British economy, and have contributed to ongoing stagnation and financial instability. He argues for a new economic vision, with the state playing a central role in generating productive and well-paying jobs (2).
Similar arguments have been made for years on both sides of the Atlantic, by commentators such as Paul Krugman, Joseph Stiglitz and other critics of neoliberalism. They argue that neoliberalism, nationally and internationally, represents a failed approach to economic management. In 2007 and early 2008, when the global economy teetered on the edge of collapse, many commentators on the left hoped for, and predicted, the end of neoliberalism.
Even neoliberal proponents recognize that it is a crisis-ridden system. In his popular book Why Globalisation Works, Financial Times columnist Martin Wolf writes: “Between 1945 and 1971, in what might be called the “age of financial repression”, there had been only thirty-eight crises in all…. Then, between 1973 and 1997, there were 139 crises. The age of financial liberation has, in short, been an age of financial crisis” (3).
Neoliberal policies have been implemented from 1973 in Pinochet’s Chile, in the UK and US under Thatcher and Reagan in the 1980s and then across increasing swathes of the world. These policies include, privatization, the de-regulation of the financial sector, increasing openness to foreign trade and investment, and cuts to public welfare spending. Supporters of neoliberal policies argue that these will increase economic efficiency as state regulation of the economy is replaced by more accurate
‘market signals’. These are held to be better at encouraging and allocating investment, which in turn leads to higher economic growth and greater benefits for the economy and population as a whole.
However, because economic growth rates since the introduction of neoliberal policies onwards have been lower, unemployment higher, and economic crises more prevalent than they were before, many commentators conclude that it represents a failed economic model. But if neoliberalism is so crisis ridden and such an ineffective system of economic management, why is it still with us? Why should intelligent individuals in banks, in state treasuries, throughout governments and across the media, continue supporting an obviously defective system? The critics of neoliberalism have a hard time answering this question. They assume that if only policy-makers would see sense, they would change course.
The problem for these commentators is that their economic analysis takes as its starting point the national economy, rather than class relations. From this vantage point state economic policy should be about generating economic growth and spreading it as widely as possible across the national population.
Can it be said that neoliberalism is a success? And why are crises and austerity policies part of this success? One clue was provided by Andy Haldane, chief economist at the Bank of England, in a speech in early October 2014 where he noted how real wages in the UK are around 10% lower than in 2007.
In his film Inequality for All, Robert Reich, who was Bill Clinton’s labour secretary between 1993 and 1997, documents the collapse of US wages over the last four decades. In the late 1970s the typical male US worker was earning $48,000 a year (inflation adjusted). By 2010, the average wage had fallen to $33,000 a year. Over the same period the average annual income of someone in the top 1% of US society rose from $390,000 to $1,100,000.
Neoliberal policies aim to reduce wages to the bare minimum and to maximize the returns to capital and management. They also aim to demobilise workers’ organisations and reduce workers to carriers of labour power — a commodity to be bought and sold on the market for its lowest price. Neoliberalism is about re-shaping society so that there is no input by workers’ organisations into democratic or economic decision-making. Crises and austerity may not be intentionally sought by most state leaders and central bank governors, but they do contribute significantly towards pursuing such ends. Consequently, these politicians and leaders of the economy do not strive to put in place new structures or policies that will reduce the recurrence of crisis.
Economic recessions and crises push firms to ‘rationalise’ their costs, through sacking workers and reducing their wages. They raise unemployment and increase competition between workers for increasing scarce work. They push trade unions to accept, and sometimes even bargain for pay cuts to protect their members’ jobs. They provide government’s with the rationale to make ‘tough choices’ about cutting back on welfare. This in turn increases worker’s dependency upon wages, as opposed to benefits, to meet their basic requirements.
In 2013 Lord Young, then David Cameron’s economic advisor on enterprise, let slip the benefits of economic crisis for businesses: “… a recession can be an excellent time to start a business…. Factors of production such as premises and labour can be cheaper and higher quality, meaning that return on investment can be greater.” Young was forced to resign from his advisory position, but was then quietly reinstated.
The rising levels of inequality associated with neoliberal policies are often decried by critics as weakening social ties and generating social conflict. But this is exactly what neoliberal policies are designed to do — to break apart social organisations such as trade unions, transform worker’s into individuals at the mercy of firms’ hiring and firing strategies, and transfer resources from workers to owners and managers of capital. In this regard neoliberalism uses crisis and austerity to great effect.
There is one downside for proponents of neoliberal policies however. Because they generate socio-economic crisis they erode public confidence in politics and economic policy. It is here that progressive political organisations can highlight the class basis of neoliberalism and propose a realistic alternative that favours the majority of the world’s population, not the minority.
Ben Selwyn is senior lecturer in international development at the School of Global Studies, University of Sussex and the author of The Global Development Crisis, Polity, Cambridge, 2014.
(1) Jeremy Warner, “Mass default looms as world sinks beneath a sea of debt”, The Daily Telegraph,29 September 2014.
(2) Ha-Joon Chang, “Why Did Britain’s Political Class Buy into the Tories’ Economic Fairytale”, The Guardian, 19 October 2014.
(3) Martin Wolf. Why Globalisation Works, Yale University Press, New Haven, CT, 2004.
This article appears in the excellent Le Monde Diplomatique, whose English language edition can be found at mondediplo.com. This full text appears by agreement with Le Monde Diplomatique. CounterPunch features two or three articles from LMD every month.