In this long read, Roger Brown, author of The Inequality Crisis: The Facts and What We Can Do About It, outlines causes of the Neoliberal turn and shows how it has created vastly increased and unjust social inequality. Crucially, he explains where we need to begin in order to reverse the tide.
In November 1984, at the age of 90, the former Prime Minister, the Earl of Stockton (previously, Mr Harold Macmillan), made his maiden speech in the House of Lords. Besides warning, somewhat presciently, about a growing division of comparative prosperity in the South and an ailing North and Midlands, he asked where the theories of monetarism had really come from:
“Was it America?” he inquired, “Or was it Tibet? It is quite true, many of your Lordships will remember it operating in the nursery. How do you treat a cold? One nanny said, “Feed a cold”; she was a neo-Keynesian. The other said “Starve a cold”; she was a monetarist.
For about thirty years after the end of the Second World War, the advanced economies of the West enjoyed unprecedented prosperity. There were big increases in growth and productivity; there was full or near-full employment; economic inequality fell; home ownership increased; there was a considerable degree of financial stability.
Since the mid-70s we have had much smaller increases in growth, productivity and investment; lower savings and higher debt; higher unemployment, with many leaving the workforce altogether; greater market concentration; greater inequality; falling social mobility; greater poverty; increased fraud and other forms of crime; reduced trust, especially in institutions; and recurrent financial crises. Even the growth in home-ownership has tailed off. Only on inflation has the performance of the major Western economies since the mid-1970s been better than before. So why did most Western countries abandon what, on nearly all economic and social criteria, was a successful model, in favour of one that has been so much less successful?
The Neoliberal turn
The conventional explanation for what David Harvey called the ‘Neoliberal turn’ is that the oil price rises of the early and mid-70s led to rampant inflation and lower growth (‘stagflation’) which the previously favoured interventionist Keynesian policies failed to deal with. Instead, Governments placed a new emphasis on monetary and fiscal discipline, as reflected in the speech of one of Macmillan’s successors (James Callaghan) to the 1976 Labour Party Conference:
We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. The ‘triumph of the market’ was rendered complete by the implosion of the USSR and the collapse of Communism in the West in 1989-91.
There is no universally accepted definition of Neoliberalism, but the fundamental idea is that the individual is essentially a piece of capital, to be developed and engrossed just like any other piece of capital: ‘commodification’. For this purpose, markets are much better than governments at generating and allocating resources; barriers to the free movement of goods, people and capital should be the minimum possible; the entities supplying goods and services should preferably be privately owned; the cost of public services should be met by those using them, so keeping taxes low; welfare programmes should provide only a very basic level of protection against unemployment, ill-health or penury in old age; and the management of the economy should aim at reducing inflation rather than unemployment.
From the late 70s on, policies based on these beliefs were adopted to a greater or lesser extent by nearly all the major Western countries (especially the Anglophone economies) as well as by the main intergovernmental organisations – the OECD, the IMF, the World Bank – and, through them, extended to many developing countries as well (the so-called ‘Washington Consensus’).
But just as there is no agreement on the exact meaning of Neoliberalism, there is no consensus on the reasons for the Neoliberal turn. The existing theories mostly divide into two categories: ‘structural’ theories emphasising underlying, long-term factors generally bound up with the nature of capitalism, and ‘institutional’ theories drawing attention to the role of specific political actors and institutions. There is a parallel, subsidiary, debate about how far those espousing Neoliberal beliefs and policies were genuinely driven by these ideas, rather than by economic and political circumstances at the time.
The crisis of capitalism
One of the commonest structural explanations is the ‘crisis of capitalism’. The German political economist Wolfgang Streeck has built on the argument, first advanced by the US sociologist Daniel Bell in the 1970s, that as a result of the additional responsibilities taken on by the state during the first half of the twentieth century – for the direction of the economy, support for research and innovation, the redressing of economic and social inequalities, etc – it faces an inescapable dilemma between (a) creating or maintaining the conditions in which the necessary capital accumulation can occur (including the suppression of consumption where necessary), and (b) maintaining the social harmony needed for the capital accumulation.
With the slowdown in growth in the late 60s/early 70s, and the demand of the wage-dependent (as in the 1968 strikes) that they should continue to enjoy job security and welfare protection, the profit-dependent owners and managers of capital took fright at the risk of a profits squeeze. The energy crisis of the early and mid-70s was another important factor. This was a crisis of legitimation but it was not the risk of the loss of worker support (that had traditionally concerned theorists) but the threat of capitalist withdrawal of support from a regime that they had had to endorse as part of post-war reconstruction.
The main form which this withdrawal of capitalist support took, and the main cause of lower growth and higher unemployment, was a withdrawal of investment. These owners also pushed for market deregulation (not only of labour markets and not only within domestic economies) and tax cuts. Their ‘weapons’ included temporarily laying idle the resources allocated to them by society as ‘property’, and completely moving these out of the country (for which the increased mobility of persons and capital through globalisation was helpful). At the same time, the state’s role was progressively reduced to providing for the functioning and regulation of markets.
Post-war capitalism and consumption was nevertheless sustained – and significant distributional conflicts avoided – through a number of mechanisms: inflation (allowing wages to rise faster than productivity); increases in public debt (after the monetary tightening in the early 80s); and increased private debt (through greater availability of credit). Now the only money left with which to secure continuing broad allegiance to the capitalist model, and at least the illusion of growth and prosperity, is the fiat money of the central banks (in purchasing public debt and bank liabilities: ‘quantitative easing’). But even this is hardly shifting the growth curve, whilst having serious distributional side effects as it increases the value of financial assets. Writers espousing similar theories include Colin Crouch, Greta Krippner, Mark Blyth, Andrew Gamble and Nancy Fraser.
The role of political leaders
In contrast, a number of ‘institutional’ scholars stress the key role of political leaders in exploiting the mid-70s economic crisis. Taking advantage of the tarnishing of existing centrist politicians – Nixon and liberal Republicans in the US, Heath and Callaghan in the UK – Reagan and Thatcher appealed to a clever mix of patriotism, family values and resentment: in both countries against the unions, in the US against blacks and minorities, in Britain against immigrants.
There are at least two sets of ironies here.
First, in spite of their pro-market rhetoric, neither leader (nor General Pinochet in Chile) shied away from deploying the full powers of the state. This was made somewhat easier by the fact that both were ‘outsiders’ better able to insulate themselves from the customary pressures from economic and political elites. As the American scholar Joel Krieger wrote in 1986:
Economic mismanagement (external deficits, failures of growth) does not derail the Reagan and Thatcher governments because their insularity from traditional pressures renders economic problems more amenable to political manipulation than is usually the case. No policy can lose, so long as they can make the victims pay for the Government’s mistakes.
This statement could also apply to recent British governments’ austerity policies.
Second, in neither case did these leaders’ policies solve their country’s longstanding economic problems, or the associated decline in geopolitical influence. There was no ‘Thatcher miracle’, and only the dollar’s status as the world’s reserve currency (at least for the moment) has prevented the US from having to make the painful adjustments that would be the lot of any developing country with such an unbalanced economy. As it is, both the US and the UK have record peacetime external (and internal) deficits, reflecting the triumph of debt-based consumption over productive investment.
Why were the US and UK so vulnerable to this kind of political exploitation? It is here that the work of the American sociologist Monica Prasad is of relevance.
In a series of books, Prasad identifies two different kinds of political economy: as nation building (Germany, France) or as justice (the US, UK).
In Germany and France, the post-war emphasis was on rebuilding through economic growth. Political decision making was subordinated to corporate governance (Germany) or academic experts (France). These institutions enabled the two countries’ governments to resist and transform the pressures arising from the oil crisis. It is also relevant that the Left was out of power for much of the post-war period in both countries. But in the US and UK, where governments alternated between Right and Left, ‘adversarial’ politics dominated. Decisions on tax, industrial policy and welfare often reflected the view that the goal of the political economy was justice: redistributing from rich to poor, protecting workers and consumers, lifting people out of poverty.
However in Germany and France, pro-growth policies and state structures meant that politicians were neither forced to make Neoliberal appeals to the electorate to stay in power, nor able to find issues that would appeal to a broad segment of the electorate. In the US and Britain, in the wake of the 1973 oil crisis, the adversarial structure of previous policies led to the potential popularity of Neoliberalism, and adversarial state structures led to a greater need for politicians to mobilize populist appeals to acquire or maintain power.
Incidentally, Prasad notes the ability of politicians in adversarial systems to exploit secondary issues, often falsely. ‘Demagoguery’ arises where a politician mobilises opinion on what most people would see as a secondary issue, and where the claims made are demonstrably false. The emphasis placed on immigration in the Brexit Leave (and Trump Mid-Term) campaigns would appear to be excellent examples of such demagoguery, and even Brexit itself: Simon Kuper noted in the Financial Times in January that according to polling by Ipsos Mori, in the decade to 2015, typically fewer than 10 per cent of Britons named the EU as ‘one of the most important issues facing the country’. Even in the 2015 election, with the Conservatives pledging a referendum if they won, only 6 per cent said the EU was the main issue. Taking these various theories together, it appears that the Neoliberal turn was the product of both structural and institutional factors. Maintaining any kind of equilibrium in a capitalist economy is always a balancing act between the interests of capital (including both financial and non-financial corporations), labour and the state. But deregulation undoubtedly adds to the sources of instability whilst globalisation clearly weakens the hands of national governments and states. And both deregulation and globalisation facilitate financialisation, as does computerisation (known in the trade as ‘skill-biased technological change’).
But periodic crises also have to be exploited, and here Reagan and Thatcher stand out as political entrepreneurs able and willing to do so in political economies that gave them incentives and scope to do so. Donald Trump and Nigel Farage would appear to be examples of the same phenomenon in relation to the 2008 crisis. In other words, the Neoliberal turn combined structure and agency, to use sociological terms for a moment.
The consequences of Neoliberalism
It is clear that the Western economy has performed much less well since the mid-1970s than it did after 1945, and continues to do so, with slower growth, higher unemployment, lower investment, high levels of both public and private debt, greater inequality and poverty, lower social mobility, and more financial crises. Some of these developments, notably the slowing of growth, were beginning to be apparent in the late 60s. But it has only been since the late 70s that the collective performance has been so much worse. This weaker performance reflects in large part the application in most Western economies over this period of the deregulatory, deflationary policies associated with Neoliberalism. This is yet another irony because Reagan and Thatcher (and their successors) sought to justify their policies in terms of their country’s basic economic performance: in effect, we have suffered enormous social and political dislocation for very little economic benefit
Whether or not they were the main progenitors, the undoubted beneficiaries of these policies have been the owners of capital, one of the principal pieces of evidence being the reduction in the share of wages in GDP in most Western countries, but especially the US and UK. Not only has economic growth been slower but most of the rewards have been captured by a tiny minority of the population. There has also been considerable damage to social cohesion: the gap between the very wealthy and everyone else has widened whilst many wage earners have for many years seen little or no improvement in their standard of living. More generally, there is a crisis of demand – what has been called ‘secular stagnation’ – as many households cannot afford to maintain their standard of living without resorting to credit/debt. This is the situation that Keynes diagnosed as ‘underconsumption’. Finally, these developments have undoubtedly contributed to the rise of populist parties and politicians in most Western countries including especially America and Britain.
It remains uncertain whether the Neoliberal turn was really driven by the power of its ideas, or whether these merely provided a justification for what the politicians would have done anyway. But there can be little doubt about the value of a readily available, accessible and plausible body of ideas to rally support for changes to the status quo (as first pointed out by Milton Friedman). It is the current absence of such an alternative – as well as the extent to which political power is now concentrated amongst the wealthy, especially in the US but also in Britain – that suggests that an early reversal is unlikely. And this in spite of the damage inflicted on all the Western (and many other) economies by the finance-led 2008 recession and the widespread popular disillusion with the injustices and inefficiencies of ‘predator capitalism’ vented in Brexit and Trumpery.
Reversing the tide
It is beyond the scope of this article to say in any detail what such a counter- discourse might involve. But a good start would be the wholesale rejection of the core Neoliberal belief that human beings only have value as profit-generating units of labour, i.e., as commodities. Creating wealth in a healthy society requires a combination of individual and collective enterprise, so that private and public efforts are complementary rather than competing or conflicting. So we have to be much more positive about the role of the state and the taxation that sustains it. We also have to find better and fairer ways to ensure that, through taxation, companies make an appropriate contribution to the costs of the collective security and infrastructure on which they rely.
We have to redress the power imbalance between capital and labour. This requires reversing some of the labour market flexibility that has come to be taken for granted in some countries, but which has contributed directly to the fall in the labour share and, indirectly, to the stagnation of demand that is the fundamental economic challenge facing our Western economies.
We have to be much tougher on market concentration and anti-competitive practices. We have to revisit the regulation of the financial markets and correct the bias in favour of debt-finance (‘expensing’). We have to review the principle of limited liability to see if it is still fit for purpose, but certainly find ways of ensuring that companies really do take account of a wider range of interests. If this requires more extensive regulation, so be it.
We have to somehow unwind the connections that have developed between private and corporate wealth and political power (including the power that comes from media ownership). A first step here would be full public disclosure of individual and corporate contributions to political activities. There is otherwise a very clear danger that both America and Britain will resemble those Latin American countries where money and personal connections matter more than anything else (to the extent that this is not already the case through elite private education and the like).
Last but not least, the management of the economy needs to be reoriented away from inflation and the money supply towards growth and employment, using the full range of instruments: not only monetary policy but also fiscal policy and structural reforms.
In the wake of Trump and Brexit there have been signs that some of the more thoughtful business leaders have begun to realise that the continuation of existing Neoliberal policies could be unhelpful for future capital accumulation. For instance, The Guardian recently (20th August) reported that the bosses of nearly 200 of the US’s top companies have changed the official definition of ‘the purpose of a corporation’ from making the most money possible for shareholders to ‘improving our society’ by also looking out for employees, caring for the environment and dealing ethically. It remains to be seen how many businesses will follow these leads, or what the eventual impact will be. There is a plenty of ground to make up.
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