Neoliberalism – dead or only sleeping?

"Neoliberalism", sometimes called "market fundamentalism", i.e. the policy of non-intervention by the state in the economy, has been the dominant ideology of the bourgeoisie for close to three decades, involving widespread privatisation and all the other policies that go with it. The present economic meltdown, however, is forcing governments to intervene, regulate, and even nationalise firms because they have no choice. So is "neoliberalism" dead?

Neoliberalism, the dominant ideology of modern capitalism, is under sustained challenge. For the past quarter of a century neoliberalism, sometimes called market fundamentalism, the policy of non-intervention in the economy, has been the ideology, and the set of policies that go with it, which has adamantly opposed the rights and attempted to drive down the living standards of the working class all over the world. Now the economic crisis is forcing the authorities to intervene, regulate, and even nationalise firms. Is neoliberalism dead?

It seems the neoliberal rulebook has been torn up. Martin Wolf, economic guru of the Financial Times, dates the change from the collapse of Bear Stearns last March. “Remember Friday March 14th: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackerman, chief executive of Deutsche Bank that, ‘I no longer believe in the market’s self-healing power.’ Deregulation has reached its limits.”

As the crisis bit into the popular consciousness, the popular press recorded the same thought, on a lower intellectual level. The hard right Daily Express headline screamed, “Don’t let the spivs destroy Britain (17.09.08).” The article began, “Millions of British families are facing the destruction of their livelihoods as the nation’s economy teeters on the brink of catastrophe, brought low by the greed and stupidity of spivs in high finance.” Suddenly the Masters of the Universe, the wealth creators in the City and Canary Wharf, had become “spivs and speculators,” to use Alec Salmond’s phrase.

The Archbishop’s of Canterbury and York have chipped in their three penn’orth. Rowan Williams denounced the speculation, which had, “Been the motor of astronomical financial gain for many in recent years”. He went on that the crisis shows, “The truth that almost unimaginable wealth has been generated by equally unimaginable levels of fiction, paper transactions with no concrete outcome beyond profit for traders”. 

John Sentamu told the bankers straight, “To a bystander like me, those who made £190m deliberately underselling the shares of HBOS, in spite of a very strong capital base, and drove it into the arms of Lloyds TSB, are clearly bank robbers and asset strippers.” 

He makes an unassailable point, “One of the ironies about this financial crisis is that it makes action on poverty look utterly achievable. It would cost $5bn (£2.7bn) to save six million children's lives. World leaders could find 140 times that amount for the banking system in a week. How can they tell us that action for the poorest is too expensive?” 

These people are worried sick about the financial crisis. What, in form, is a financial crisis is, in fact, a crisis of capitalism. In an unplanned economy, money is the sole nexus between people. As Marx explains, “As long as the social character of labour appears as the monetary existence of the commodity and hence as a thing outside actual production, monetary crises, independent of real crises or as an intensification of them, are unavoidable.” (Capital Vol. 3 p. 649)

Emergence of neoliberalism

Neoliberal ideology emerged as a result of the economic thunderstorm that brought the great postwar boom to an end. In 1973-74 we saw the first generalised crisis of world capitalism. The preceding period from 1948 to 1973 had proved to be a golden age for world capitalism. Production went up year after year, as did living standards. In this situation of full employment the capitalist could afford to make concessions to keep the wheels turning and the profits rolling in. After all, the working class, at least in the advanced capitalist countries, had a very favourable bargaining position.

The ideology associated with the golden age was Keynesian economics. Now it is not true that Keynesian remedies caused or prolonged the great boom. This was explained at the time by Ted Grant (see Will there be a Slump? 1960). However the era was such a contrast with the interwar period of mass unemployment and struggle that the perception of all classes of the population was that capitalism had changed fundamentally. Booms and slumps, it was generally believed, had been banished to the history books.

Clearly the 1973-74 recession came as an enormous political shock. The working class internationally mobilised to defend the gains of the postwar period. The ruling class, for their part, was determined to drive down living standards and restore the rate of profit. As a result of this clash, a revolutionary wave swept across the capitalist world. All the earlier certainties were thrown up in the air and called into question. In addition to rapidly rising unemployment the world economy experienced spiraling prices. The immediate trigger for inflation was the oil price crises of 1973 and 1979.  Never before had we experienced inflation together with recession. This was called stagflation. This was the crucible that produced neoliberalism.

Milton Friedman - dead? Photo by juicyray on Flickr.A handful of right-wing economists, of whom Milton Friedman was the most well known, had never swallowed the Keynesian myth that capitalism has been tamed. They received more and more ruling class backing as Keynesian economics went into crisis. By the end of the 1970s they dominated economics faculties in the universities. Their ideas were widely received, including by Labour Prime Minister James Callaghan, who told Labour Party Conference in 1976, “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.”

This represented a rejection of any attempt at reflationary policies in the face of growing unemployment. It was an acceptance of monetarist economics and of capitalist ascendancy. Monetarism, which is part of the canon of neoliberalism, is not just a dry economic theory. It is a calculated assault weapon on the working class. The monetarists harked back to the time before Keynes when economists admonished governments not to interfere in the economy, but just keep a tight grip on the money supply. If, as they sneered, the Keynesians were ‘yesterday’s men’, then they were ‘the day before yesterday’s men.’

Neoliberalism triumphant

Why should the government not interfere in the economy? Because the doctrinaires believed the market (capitalism), left to itself, would produce ‘optimal’ results. Markets get it right! This smug revival of nineteenth century laisser faire ideology was a weapon against the nationalised industries fought for by the working class, against the mixed economy that gave workers some protection against the rigours of the market, against the welfare state and all the gains made by the workers in nearly a century of struggle against unfettered capitalism. According to neoliberal principles even an attempt at redistribution should be abandoned as an attack on the ‘natural’ outcome of market forces since the existing division of income and wealth is produced by the market. In effect the market was god. If there is unemployment, then wages must be too high. Cut them to restore full employment. This is madness, but madness that serves the ruling class well.

Associated with neoliberalism was talk of ‘globalisation.’ Tariff barriers were coming down all over the globe. Capital was expanding everywhere. Its proponents argued that ‘globalisation’ meant that resistance was futile. Because capital was endlessly mobile, nation states were becoming powerless. They had to reduce taxes on profits and obey the multinationals’ every wish or they would simply move their money elsewhere. Regulation had to be torn up. Workers would be blackmailed into accepting lower and lower wages or they would lose their jobs altogether. It was a race to the bottom. Resistance was futile! We have argued elsewhere that this was ruling class propaganda, a simplistic picture of reality.

Neoliberal triumphalism got an echo because of the collapse of the Soviet Union and the associated Stalinist regimes in Eastern Europe. Capitalism had won the Cold War! So it seemed there was no alternative to capitalism (or ‘the market,’ as apologists came to call it). This was the theme of Francis Fukuyama’s 1989 essay The end of History?

Neoliberalism was at first believed to be so obviously opposed to the working class interests that it could not be applied in a political democracy. The workers would vote against it. So they imposed it as an ‘experiment’ in Pinochet’s Chile, under conditions of military dictatorship. After the 1973 coup, the military felt itself strong itself to destroy free trade unions, sweep away the welfare safety net, privatise many industries, open up all the county’s resources to imperialist exploitation and massively impoverish the working class. Just what big capital wanted! Neoliberal policies were pushed through by means of torture and assassination.

The Chilean nightmare

The Chilean military Junta. Photo by National Library of Chile.Pinochet was persuaded by the ‘Chicago boys’, economic disciples of Friedman who infested the corridors of power after the coup to conduct a sweeping deregulation of the banks. This proved to be a disaster, leading to a devastating monetary crisis in 1982. Pinochet was then forced to re-regulate the banks in order to prevent a banking collapse.

The fact that neoliberal policies don’t work and can be shown to have never worked has never actually been a problem for their advocates. The only sense in which neoliberal policies ever ‘work’ is that they swing the balance of forces against the working class. That is what they are intended to do.

Next up as a proponent of neoliberalism was Margaret Thatcher. The British electoral system allowed Thatcher to have landslide victories in the elections with at most 43% of the electorate. Her government complacently presided over mass unemployment of over three million. Some of their economic policies, such as sky-high interest rates that choked off investment and caused sterling and British goods to become completely uncompetitive on world markets, seem deliberately intended to shed jobs and annihilate great swathes of manufacturing industry. The unemployed were used as a whip against employed workers in order to turn the tables against organised labour. Coal was stockpiled in huge quantities as part of an intended showdown with the miners, seen as the brigade of guards of the labour movement. A viable coal industry was destroyed out of political spite. None of this was ‘efficient’ in the normal sense of the word. It amounted to an immense squandering of resources that could have been used to benefit society. But then, capitalism does not have as its purpose social benefit. Private profit is its driving force. Thatcher’s mantra was ‘there is no alternative.’ Millions of workers hankered back for the secure full employment and rising living standards of the golden age. In one sense Thatcher was right. That era had gone for good. Neoliberalism intended to restore normal capitalist business as usual – and thoroughly nasty it was. The only way to defend living standards now was to change society.

In the USA Ronald Reagan also pursued the neoliberal agenda, which by the 1980s had become the dominant ideology of the capitalist world. The international economic institutions – the IMF, World Bank and now the World Trade Organisation – became fortresses of neoliberalism, pitilessly bullying the poor countries on behalf of imperialism to open up their services, industry and agriculture to the rich countries, privatise their industries and make their natural resources freely available to foreign looters. The councils of the European Union, especially the European Central Bank when it was founded, became increasingly influenced by market fundamentalism.

Reagan declared that “government was not the solution, but the problem”. As head of the government he strove to make that true for the working class. One of his first acts as President was to destroy the air traffic controllers’ union. When PATCO went on strike in August 1981 Reagan declared the strike illegal and sacked more than 11,000 strikers. Neoliberalism is a return to the economic liberalism of the nineteenth century. Socially it is not liberal, but necessarily authoritarian and repressive of the working class, as its central aim is to restore the unfettered hegemony of capital.

Even more important than the election of Reagan was the appointment of Paul Volcker as head of the Federal Reserve, the US central bank, in 1979. Volcker proceeded to ‘deal with’ inflation by yanking up interest rates and allowing mass unemployment to develop. Since the USA was the hegemonic capitalist power, this caused interest rates to rise all over the world. Financial shenanigans from the previous decade came back to haunt the world economy. In the two oil price crises of 1973 and 1979 the oil exporting countries had won a fistful of ‘petrodollars’ on the back of the oil price rises. They actually didn’t know what to do with all this money. The big western banks had been congratulating themselves at how they had recycled the petrodollars. They took this money and hurled it at less developed countries in the form of third world debt, twisting the arms of finance ministers in Latin America to take the cash. But the increase in interest rates in the 1980s made these less developed countries unable to keep up the payments.   

  Mexico was first to default in 1982. Throughout the decade the IMF moved pitilessly through Latin America demanding their pound of flesh on behalf of the imperialist powers. They demanded that the governments of Latin America stop trying to improve the living standards of their citizens and instead pump out natural resources to pay their debts. This was called export led industrialisation, all part of the neoliberal project.

The result was a catastrophe for Latin America, the ‘lost decade.’ From 1980-89 output and living standards fell throughout the continent. Latin America’s share of world output fell from 6% to 3% over the decade. Whereas output had gone up by 2.5% a year through the crisis decade of 1973-80, from 1980-89 it fell by 0.4% a year. Imperialism got its pound of flesh all right. As late as 2005 Latin America still had a debt burden of $2.94trn, most of it inherited from the 1980s. This was nearly two thirds of all ‘emerging market’ debt.

The scars still show. In 2003 a CEPR Briefing Paper (Another Lost Decade? by Mark Weisbrot and David Rosnick) predicted miserable growth of 0.2% from 2000-2004 - 1% for the whole period. They pointed out that over the previous 20 years 1980-99 the region grew by just 11%, a worse result than during the Great Depression. By contrast in 1960-79 Latin America grew by 80%. These figures paint a picture of the poverty, malnutrition and disease that are the achievements of neoliberalism.

Socialists and defenders of the common people are entitled to stuff these ugly realities down the throats of the proponents of neoliberalism and globalisation. The economic crisis is inevitably producing a crisis in the ruling ideas – which, as Marx explained, are the ideas of the ruling class.

All change

Now it’s all change. Laisser faire is all very well when the profits are rolling in and when it is only the poor and the working class who call for state intervention to protect them from the cruelties of market forces. It’s a different matter when the hides of the capitalist class are at risk. Then they behave like hapless victims who need all the state assistance they can get. And, as far as they are concerned, if ordinary working class people have to dip their hands into their pockets that’s the way it’s got to be.

Ruth Sutherland agreed with the great and the good quoted earlier (Observer 28.09.08), “In the US, hundreds of billions of dollars of banking risk will be transferred to the federal government, adding to America's huge burden of debt and increasing its reliance on foreign investors…Policymakers face formidable challenges: fighting the fire, then repairing the financial system while keeping a lid on inflation, then putting in place effective new regulation. The worst is still to come. The high drama over Hank Paulson's rescue plan has been so riveting it has relegated everything else to a sideshow - even the collapse of Washington Mutual, the biggest bank failure the US has ever seen. But deeper questions lie beyond the wrangling over the bail-out, as the Archbishops of Canterbury and York highlighted in their interventions in the debate about the future of capitalism. If there is a positive side to this terrible crisis, it is that it has given us a once-in-a-generation opportunity to slay the myth of the omnipotent market.

“People in the City have never particularly claimed moral justification for their activities, but they were able to assume a mantle of authority because of the sheer volume of money they made - or appeared to make. Almost everybody - politicians, regulators, journalists, voters, mortgage borrowers - accepted the City at its own valuation; whether we approved or not, cowboy capitalism was considered unassailable.

“Those who argued that enormous bonuses were bad for the fabric of society, because they heightened inequality and undermined people's perception of fairness, were looked upon as unspeakable lefties, or just jealous. Those who argued for stronger regulation were dismissed as meddlers, bureaucrats and stiflers of innovation. And those who were uneasy about certain activities were lectured on how the trickle-down of wealth would benefit everyone.”

She concludes, “This crisis should prompt us to reappraise our relationship with money and debt, and to think hard about how we can create a fairer and more inclusive version of capitalism. There should be no return to the market's false gods.”

On a less idealistic, but still urgent, note Christopher Cox, chair of the US Securities and Exchange Commission declared, “The last six months have made it abundantly clear that voluntary regulation does not work.”

Even more forcefully, David Rothkopf, a senior Commerce department official during the administration of President Bill Clinton, says the world is at a turning point. "This is a watershed," he says. "This is the end of 25 years of Reagan-Thatcherism, 'leave it to the market, less government is better government'. That is over - period."

And Ben Bernanke, head of the Fed, sums up the new mood, “There are no atheists in foxholes and no ideologues in financial crises.”

President Sarkozy agrees with this sea change in consciousness. “(The) idea of an all powerful market without any rules and any political intervention is mad.” So the unchallenged economic orthodoxy of yesterday is now mad! He goes on, “Self regulation is finished. Laisser faire is finished. The all-powerful market which is always right is finished.”

This is all trenchant criticism – unprecedented for a generation. None of these critics, of course, suggest an alternative to the capitalist system. They all sound as if they feel that they have been bamboozled by the hocus-pocus of neoliberalism. Their outrage is directed at financial ‘geniuses’ they now realise were simple charlatans, who have been helping themselves to the good things in life at our expense and landing us all in the mire in the process.

The New Deal

Their call is for regulation. Capitalism, we are told, would be a good system if only it were adequately regulated. What is the real relation between capitalism and regulation?

Franklin D. Roosevelt and his wife. Photo by the US goverment.Though we haven’t heard such implicitly anti-capitalist talk as this till recently, there have been comparable rhetorical thunderbolts hurled in history. “Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men....The money changers have fled from their high seats in the temple of our civilization.” This is Roosevelt launching the New Deal in the USA in the 1930s. His first act as President was to declare a bank holiday. This is similar to the ban on short selling imposed on both sides of the Atlantic recently. This is an anti-panic measure. It does nothing to deal with the causes of panic, which are real problems of the financial system, not mere psychological hysteria. Roosevelt was quite clear what he intended to do. He aimed to save capitalism from itself. “The voice of great events is calling,” he blustered. “Reform if you would preserve.”

Roosevelt went on to enact various banking reforms. These may or may not have been the ‘right’ thing to do, but they represented a drastic incursion into the powers of finance capital. The Glass-Steagall Act passed in 1933 separated investment and high street banking. This is unnecessary today since all five US investment banks have been destroyed by the financial crisis of the past twelve months. Other provisions of the 1933 Act have gradually been whittled away by the craze for deregulation since the 1980s. Deregulation is, of course, a fundamental axiom of neoliberalism.

To halt the wave of runs on banks and bank closures Roosevelt set up the Federal Deposit Insurance Corporation, which guaranteed bank deposits. Customers of Northern Rock may wish Gordon Brown had shown similar far-sightedness when he redesigned the architecture of financial regulation in 1997. Unfortunately he did not. Brown was and is an advocate of ‘light touch regulation’ and a saucer-eyed devotee of the neoliberal mythology. As a result of his miscalculation, this country saw the first run on a bank (for the Rock’s deposits were not safe) for 140 years in 2007.

Roosevelt also set up the Securities and Exchange Commission to regulate the banks and financial institutions. The SEC has correctly been accused of being asleep at the wheel in recent years. We find now that the whole financial system is as crooked as a barrel of poisonous snakes, and apparently the regulators hadn’t noticed!

This failure of the SEC points to a wider problem. It was difficult for the SEC to do their job probably in recent years as their task was seen as unnecessary (since markets are supposed to work perfectly on their own) and they were continually sniped at by the market fundamentalists.

This raises another issue. How much effect did Roosevelt’s reforms have? Very little, it seems. The financial froth that had been built up in the speculative boom had for the most part been blown away by the economic hurricane of 1929-33. There is a general principle at work here. Financial regulation is a matter of closing the stable door after the horse has bolted.

When there is a boom, the participants believe the boom will last for ever. Indeed for a time almost all shares are on the rise and almost all investments pay handsomely. That is precisely the air we were breathing from the beginning of the present boom in 2001 to its end in 2007. As the horse canters smoothly along, the reins are relaxed. When the capitalists get up from the crash with broken heads, they are much more cautious – perhaps more cautious than they need to be. So deregulation and re-regulation actually follow the boom-slump cycle, as part of the psychology of the capitalist class which becomes an objective factor in the cycle.

As we commented before, the proposed bail-out, “Sounds like a breathtaking break from neo-liberal philosophy. It’s not really. Neo-liberalism was always a giant lie. Homeless people don’t matter. People in danger of losing their jobs in a recession don’t matter. But, when it comes to banks and billionaires, self-reliance is for the birds. These people are hapless bums.”

As Michael Roberts put it, “Most of the money (for the Paulson plan) will go to help the fat cats of Wall Street get out of their mess.  You see, when it comes down to the impending collapse of capitalism, suddenly socialism is a good idea.  It’s just this is socialism for the rich, while the rest of us have to continue to live under capitalism.” Capitalists continue to oppose interventions in the markets in order to benefit workers.

Neoliberalism and capitalism

This gives us a clue to answering the question posed at the beginning of this article: neoliberalism is discredited. Is it dead? Neoliberalism is a weapon in the arsenal of the ruling class. Capitalism is our enemy, not just neoliberalism.  Neoliberalism will not cease to be a threat till the capitalist class is destroyed.

The capitalists stand before us as penitent sinners. They appear to have abandoned neoliberalism for the time being. But capitalists are motivated not by ideology but by material interests. They will use the ideology of neoliberalism when it suits their interests. They will discard it when it no longer suits their interests.

Their material interests have not changed. All that has changed is that the crisis has necessitated intervention to bail out the bosses. Once that temporary necessity has disappeared, they will hanker after business as usual. As long as they are able to make money without help, capitalists tend to oppose state intervention. And, come rain or shine, the capitalists know that their profits are the unpaid labour of the working class and that, by hook or crook, they have to drive down the workers’ living standards.

German finance minister Peer Steinbruck raises a related issue to neoliberalism, “When we look back 10 years from now we will see 2008 as a financial rupture.” He goes on to predict the end of the USA as a “finance superpower.” For even neoliberal capitalism has to run according to a set of rules. Those rules have been imposed as a result of US hegemony. The crisis of neoliberalism will mean that those rules will be up for renegotiation. No doubt Steinbruck is staking a claim on behalf of Germany for a say in the making of this new world order.

A new world order?

Banks in Hong Kong. Photo by Steve Webler on Flickr.Others are also conflating the crisis of neoliberalism with the crisis of its most enthusiastic champion – the USA. John Gray is a weather vane of modern capitalism. He writes in the Observer (28.09.08) under the dramatic headline, “A shattering moment in America’s fall from power.” He sarcastically notes that, “China’s success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic yesterday that Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.”(Paulson went down on one knee to Nancy Pelosi, Democratic Speaker of the House of Representatives, to try to get his rescue plan through.) Gray concludes, “It is America’s political class that, by embracing the dangerously simplistic ideology of deregulation, has responsibility for the present mess.”

In the same issue of the Observer, Richard Wachman writes under the headline, “This transforms the financial system. Forever.” He sums up his argument, “US power is ebbing away and free market fundamentalism is an outdated ideology.

Forever is a long time in politics. It is true that the USA is running a huge deficit with the countries it trades with. This is surely a sign of economic weakness. The country is up to its ears in debt to the rest of the world. The dollar is derided. US hegemony is weakening. Is it still the one, unassailable economic super-power?

The real question is: what other country can lead the capitalist world and impose the norms and principles without which it cannot function?

Capitalism will always go through cycles of boom and slump. But the 1929 Wall Street Crash led directly to the Great Depression, the worst capitalist slump so far. Economist Charles Kindleberger sought to answer the question why the Great Depression was so deep and so widespread in his book The World in Depression 1929-39. His explanation was that the slump was so severe and long-lasting because there was no international lender of last resort. We don’t believe this offers a complete explanation for the disastrous decade, but it is an important aspect of the truth. Before the First World War Britain was regarded as the hegemon and acted as the lender of last resort. The gold standard was really the sterling standard. The War showed British hegemony was under decisive challenge.

After the Second World War the USA asserted its supremacy under the Bretton Woods Agreement which determined the terms of world trade. It imposed the dollar as de facto world currency. And it had the power to act as international lender of last resort.

Between the Wars the USA was the most powerful capitalist nation, but it did not impose its power upon the world economy, remaining isolationist. This international anarchy led to ‘beggar-my neighbour’ devaluations and the virtual drying up of world trade. This impacted in turn on the economies of every nation on the globe. Now US hegemony is under challenge, but no clear alternative is in sight.

If Kindleberger’s analysis of the 1930s is right, and we are entering a similar era today, then we are in for stormy times.

See also:

Join us

If you want more information about joining the RCI, fill in this form. We will get back to you as soon as possible.