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Neoliberalism Bulletin 2009

Neoliberalism as a New Form of Corporatism

Neoliberalism Bulletin, 2017

Neoliberalism Bulletin, 2016 Neoliberalism Bulletin, 2015 Neoliberalism Bulletin, 2014 Neoliberalism Bulletin, 2013 Neoliberalism Bulletin, 2011 Neoliberalism Bulletin, 2010 Neoliberalism Bulletin 2009 Neoliberalism Bulletin 2008

One of the best finds of this month is The Global Financial Crisis by Kevin Rudd

Kevin Rudd is the Prime Minister of Australia. In this paper has argued in favour of return to some modified form of Keysianism under the rubrics of “saving capitalism from itself and its own excesses” and “balancing the private and the public, profit and wages, the market and the state.” While proposing a few reasonable global governance reforms, he too suspects that “when the financial system stabilises and the global recession eases, we can expect to see governments pulling back from direct involvement in the ownership and operation of the banking sector.”

Another important paper is  The Financial and Economic Crisis of 2008: A Systemic Crisis of Neoliberal Capitalism by David M. Kotz

4 May 2009 | uk.sagepub.com

Review of Radical Political Economics 2009 41: 305 originally published online

The evidence suggests that we are seeing more than just a severe financial crisis and a severe recession. We are witnessing a crisis of the neoliberal form of capitalism. The ability of that form of capitalism to promote expansion of output and profits appears to have reached its end. Another expansion, within the existing neoliberal model, would require a new asset bubble even more massive than the housing bubble, and it is difficult to imagine how this could arise. Further, the deregulated financial system of the neoliberal model, which would have to play a key role in any new asset bubble, has been unable to survive the collapse of the latest one. Most of the major U.S. financial institutions have needed large government bailouts, and the assets of the financial sector are undergoing a massive contraction. It is difficult to imagine the neoliberal model surviving intact at this time.

The SSA theory argues that, when a particular form of capitalism enters its crisis phase, this eventually gives rise either to a new form of capitalism or to a transition beyond capitalism. This suggests that we can expect to see more changes ahead than just a bailout of the financial system and a big government stimulus program. If a restructuring of capitalism rather than its replacement lies ahead, history suggests that we will see the emergence of a more state-regulated form of capitalism in the United States.18 However, there are various possible types of state-regulated capitalism, and exactly what form would come next depends on the outcome of struggles among various classes and groups.

A social-democratic form of capitalism based on capital-labor compromise is unlikely to emerge if the labor movement and other popular movements remain politically weak. However, if the currently developing recession is a long and severe one, this could create conditions for the revival of popular movements, which could in turn make possible a social-democratic type of restructuring of capitalism. A long and severe recession could also place more radical changes on the agenda. As people confront the loss of their homes, unemployment and the associated loss of health insurance, the disappearance of much of their life savings, and the growing threat of global climate change, the arguments for a socialist alternative to capitalism can potentially ring true for millions of people... 


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Neoliberalism - Wikipedia, the free encyclopedia

Neoliberalism is a market-driven[1] approach to economic and social policy based on neoclassical theories of economics that maximise the role of the private business sector in determining the political and economic priorities of the state.

The term "neoliberalism" has also come into wide use in cultural studies to describe an internationally prevailing ideological paradigm that leads to social, cultural, and political practices and policies that use the language of markets, efficiency, consumer choice, transactional thinking and individual autonomy to shift risk from governments and corporations onto individuals and to extend this kind of market logic into the realm of social and affective relationships.[2]

In the 1970s some Latin American economists began using "neoliberalismo" to designate their program of market-oriented reforms. By the 1990s, however, the term "neoliberalism" had become a pejorative to classical liberal critics, who dismissed it as a catchphrase invented by academic radicals to denigrate the ideas of Milton Friedman and Friedrich von Hayek.[3]

Neo-liberalism first took hold in Chile under Augusto Pinochet (from 1973) and spread, first to Great Britain under Margaret Thatcher (from 1979) and the United States under Ronald Reagan (from 1981).

Broadly speaking, neoliberalism seeks to transfer control of the economy from public to the private sector,[4] under the belief that it will produce a more efficient government and improve the economic health of the nation.[5] The definitive statement of the concrete policies advocated by neoliberalism is often taken to be John Williamson's[6] "Washington Consensus", a list of policy proposals that appeared to have gained consensus approval among the Washington-based international economic organizations (like the International Monetary Fund (IMF) and World Bank). Williamson's list included ten points:

Neoliberalism and the Global Financial Crisis by Heikki Patomaki

Royal Melbourne Institute of Technology, University of Helsinki

Let me start with a definition of neoliberalism.7 Neoliberalism is a programme of resolving problems of, and developing, human society by means of competitive markets.8 Things and processes can be identified as problems only within a framework, and neoliberal theories frame things and processes (for example, inflation that used to be high in the 1960s and 1970s, and competitiveness of states, emerge as key problems). Competitive markets are assumed to be efficient and just and to maximise freedom of choice. Competitive markets can be private and actual, or they can be simulated within organisations, whether private or public. Neoliberalism is comprised of in some ways contradictory theories, all of which can be developed in different directions; and yet all these theories posit competitive markets as superior in terms of efficiency, justice or freedom, or a combination of them.

... ... ...

Ideological Consequences of the Global Financial Crisis 2008–2009

Next, in order to determine the extent to which the economic crisis of 2008–2009 may be changing the political landscape, I need to outline the meaning of the term “Keynesian” and how it contrasts to neoliberalism, as defined above. The standard reading is that Keynesian economics advocates government intervention and demand-side management of the economy to get as close to full employment as possible. In Keynesian thinking, government deficit spending and fiscal stimulus are needed at the time of a downturn, because free markets do not lead automatically to optimal outcomes but may rather result in a spiral of downward developments. In 2008–2009, governments all over the world are engaging in fiscal stimulus and deficit spending and, with central banks, they are also acting as lenders of the last resort. Some failed banks have even been nationalised; many others rescued. Moreover, a further Keynesian notion seems to have gained ground:

Federal Reserve Chairman Ben Bernanke embraced the explicit Keynesian notion that the government should write checks to “low and moderate income people,” who will spend it quickly and thus lift consumer demand. In the academic literature, this is called having a higher “marginal propensity to consume” than the more affluent, who tend to save more.18
Clearly, these kinds of tenets deviate from the programme of developing society by means of introducing, liberalising and creating competitive markets, actual or simulated. Free financial markets have collapsed across the world, with far-reaching consequences to the world economy as a whole.19 Governmental responses seem in accordance with the basic tenets of Keynesian economic theory. Whether these constitute a move towards a post-neoliberal era depends on a number of things: According to the prevailing interpretation that has been expressed, for instance, in the G20 meetings, the crisis was caused by a lack of adequate governance and regulation of finance, not because of any inherent tendencies of financial markets, or capitalism more generally.

... ... ...

Even assuming that macroeconomic Keynesianism is back for good (it has never been entirely absent), does that mean that the neoliberal era is over and a new era is beginning? Neither neoliberalism nor Keynesianism is only about macroeconomic management. Keynes stressed that countercyclical policies and full employment are not the only aims:
The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. . . . [Moreover] under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets.21
Keynes’s General Theory was also about redistributive justice and the conditions for international peace, not only about macroeconomic management. The reason why it became so popular in the 1940s and 1950s was that it responded to a series of mid-20th century problems and catastrophes in a manner that was compatible with a variety of political ideologies, including those of the reformist labour movement. The Bretton Woods era (1944–1971) was dominated by socialdemocratic ideas that incorporated Keynesianism but involved also other ideas about developing society. Table 2. Social Democracy vs. Neoliberalism
Social Democracy Neoliberalism
Economic policy Demand management policies; stimulus by means of deficit and public projects, especially during downturns; high employment as the first priority; low inflation as a secondary target (some inflation good for growth, and money supply not the key issues); national finance. Balanced budgets and external accounts; low inflation as the first priority; consistent control of money supply as the key to low inflation; supply side incentives key to growth; free markets should not be distorted; if stimulus needed, tax cuts; global finance.
Definition and regulation of the public and the private Diversity of ownership of means of production (private capitalist, public state-owned, cooperatives); decommodified spaces (for example in health, education); public and corporatist regulation of the private sphere; private property is not absolute. Privatisation; uniformity of ownership of means of production; commodification of new areas of social and natural life; deregulation and flexibility of labour markets; rule of law means consolidations and extension of private property rights.
Redistribution Universal tax-and-transfer policies and public services to ensure Rawlsian principles of redistributive justice (equal real opportunities and remaining inequalities must benefit the least advantaged). Either: free competitive markets guarantee Lockean principles of justice (right-neoliberalism); or: also social safety nets, but no rights without duties and means-testing (left-neoliberalism).
Democracy Parliamentary liberal democracy; welfare state increases political capacities and possibilities for socialist mobilisation through parties; experiments with democracy in new areas of social life. Parliamentary liberal democracy; post-democratic political parties operating professionally through commercial media; limiting democracy to negative rights and municipal/state elections.
Public organisations Weberian model of rational bureaucracy, based on the ethics of civil servants; principles of democracy applied in some public organisations. Privatisation; outsourcing; new public management of simulated markets within organisations; linemanagement to replace elements of democracy.
EducationFree public education at all levels as a condition of equality and freedom; principles of collegiality, citizenship and democracy applied at seats of learning. Partly or fully privatised/ commercialised education; markets and corporate governance simulated in education; students are constituted as customers.

Likewise, some elements of Keynesian macroeconomic management can go well together with neoliberalisation in the domains of democratic politics, public organisations, and systems of education. While proponents of neoliberalism often contend that promoting free markets is nearly synonymous with promoting democracy, competitive markets operate on different principles than democracy. Freedom to use one’s money and property in whatever way one wishes is not the same as equal rights in collective decision-making. One dollar–one vote is a different principle from one citizen–one voice and vote.

The process of introducing, strengthening or simulating competitive markets undermines democracy in a number of ways. Existing property rights regimes, especially when based on the conception of absolute and exclusive rights, disenfranchise the have-nots.24 Simulation of markets and corporate governance within public organisations and systems of education tend to displace democratic principles of participation and representation. More generally, neoliberalisation reduces the scope of democracy: the domains of life and social relations under democratic control.25 It also affects the quality of liberal institutions by allowing money and commercial media an increasingly important role in determining the outcome of elections.26

Elements of Keynesian macroeconomic management are, moreover, also compatible with privatisation and outsourcing of public organisations and their activities; with implementing simulated competitive markets within public organisations; and with substituting elements of democracy for hierarchical linemanagement in those organisations. The same holds true for privatisation and commercialisation of education; for simulation of markets and corporate governance in the systems of education; and for envisaging students as (paying) customers.

The 2008–2009 economic crisis may, or may not, have changed the general principles of macroeconomic policy enduringly, but so far the crisis has not had a major impact on other dimensions of neoliberalisation.The nationalisation of a few banks is the only major counter-example. The redistributional effects of the fiscal stimulus packages remain to be seen. It is thus way too early to talk about a post-neoliberal era.

... ... ...

Compared to the social democratic programme of developing society by means of social cooperation, trust, and solidarity, it is clear that in most dimensions, the neoliberal project remains so far largely intact. Should the crisis deepen, neoliberalism will be revaluated more fundamentally.32

According to my concluding argument, although self-regarding national responses can easily become prevalent because of the crisis, a return to a full-scale national social democratic project is unlikely.33 If anything, neoliberalism can be replaced in a sustainable way by a green version of global Keynesianism, involving also new ideas and visions about global planning, redistribution, justice, and security. To paraphrase a Keynesian economist from the 1960s, this shift would constitute a step in “the long march of mankind toward its unity and better control of its own fate.”34 32

Economics as science? No chance.

Lifted directly from comments by cactus from the open thread:
Economics is not a science. Physics wouldn't be a science either if esteemed members of that profession who got prestigious jobs running the country were willing to make statements that contradict all known facts. But here's the thing - if the administration's position is that you can use gravel as fuel in a nuclear power plant (a convenient position give that gravel is so much cheaper than uranium), they're going to have a hard time finding eminent physicists willing to agree with that position, and any physicists that did agree would quickly cease to be eminent physicists.

But consider an equivalent economic position. In 2001 told us we were going to get tax cuts, resulting in a rapidly growing economy leading to debt falling to 7% of GDP in 2011. This is extremely similar to the promising you will get electricity from a pile of gravel. But, there was no shortage of well-known economists willing to explain why that plan was, indeed, going to work. And they explained it over and over. Since then, they have gone to explain to us why things haven't worked out as planned... and wouldn't you know it, it has nothing to do with the fact that they used gravel to try to run a nuclear power plant. Instead, the problem seems to be that some terrorists slammed some planes into the WTC.

Which brings us to, well us. See, its our fault that economics is not a science. The folks who peddled this line of bs to us, the folks who promised that gravel was going to produce electricity and have since been making all sorts of excuses and promises that it really will work the next time its tried, are still around, and still held in high esteem. The Harvard Professor, the governor, the ivy league business school dean, and the rest of that crowd don't feel a need to hide their faces in shame the way their counterparts in physics would.

No, they've been well rewarded for their actions, and still continue to be honored by others in the profession they so badly denigrated. So the lesson is clear - this is the most lucrative way to behave. By sending this message, we have dishonored ourselves, and we have paved the way for the next Harvard professor, the next governor, and the next business school dean.

----------------------
Lifted from comments by cactus

Read More on "Economics as science? No chance."

Posted by rdan at 6:06 AM

Angry Bear

6-53 AM

Soc Sec XVI: Democracy and Reaction Well this is even less of an economics post than XV and in thinking on this the last couple days I realized I didn't have a firm enough grip on the historical particulars to make it as definitive as I wanted. But still the concept is important and I could use some feedback so here goes.

When we talk about a Reactionary today we generally mean nothing more than 'very Conservative'. But the term has a specific historical reference, it describes those who lined up behind the forces of Reaction in the years on either side of the nineteenth century. This Reaction was to specific events, notably the American and French Revolutions which were perceived, and rightly, as being systemic risks to the political, economic, and religious structure of society as it existed, not just to crowned monarchs (though Louis XVI showed that had to be taken into consideration), but to the aristocracy, the merchant and industrial class, and to the landowners. The key point to understand is that for the original Reactionaries 'Democracy' was quite literally a dirty word, it was considered and called 'Mob Rule'. Then further consider that the forces of Reaction did not at all believe that 'All Men are Created Equal' and rejected all three parts of the French slogan 'Liberte, Egalite, Fraternite', at least as they pertained to the working class in relation to them. These Revolutions unleashed forces that put the whole concept of Privilege and Birth at risk, because once you start leveling things who knows where the stopping point is.

Which leads to the second point. In nineteenth century it was nearly impossible to draw any kind of clear lines between the drives for universal franchise, for the right to organize and bargain collectively, and for socialism. Indeed when the British Labour Party came into being at the end of the century it was organized specifically on all three lines.

Which leads to two questions. One was the classical economics stemming from Adam Smith shaped by the fact that its practitioners by and large lived in a society where exclusive privilege was a societal norm and where democracy was seen as an existential threat to that society? Two can the continued hostility to Social Security be explained as a simple continuation of a politics and an economics formed within a framework of Reaction?

Personally I think the answer to both questions is 'Yes'. Orthodox economists tend to look at the world through the lens of a discipline formed in days when democracy and hence pragmatic greatest good solutions could not be distinguished from socialism and class warfare. If we accept this frame much of the mystery behind the denials of income inequality, resistance to minimum wage, denial that wages are set by power relations to begin with, and yes opposition to Social Security all can be explained as stemming from the same source, that of Reaction pushing back on perceived Socialism.

Sea Change in Japan? Western Market Fundamentalism Denouncing Opposition PM Candidate Leads Polls

Yukio Hatoyama, leader of the opposition Democratic Party of Japan, appears slated to become Prime Minister next month. And, at least on paper, he is firmly renouncing "market fundamentalism" and placing higher priority on social values.
nakedcapitalism.com

Japan may be on the verge of some major shifts, The fact that what amounts to one-party rule in Japan appears at an end ought to be significant, but the proof will be in the pudding. The island nation has been ruled by the Liberal Democratic Party for virtually the entire postwar period, with politics consisting of fights among various party factions.

But Yukio Hatoyama, leader of the opposition Democratic Party of Japan, appears slated to become Prime Minister next month. And, at least on paper, he is firmly renouncing "market fundamentalism" and placing higher priority on social values.

Even more so than in English, it is possible to give speeches in Japanese that sound great but are devoid of content, so the lack of clarity on policies is not surprising. But one has to wonder if this might mean less willingness to accede to US demands. For instance, Japan has quietly playing both sided of the street, aligning with American or China on various issues while taking care not to alienate either party.

But US influence is waning. Japan wanted to sponsor Asian-led rescued during the 1997 Asian crisis, but the IMF and US Treasury aggressively beat back the measures. Some of the economies, South Korea in particular, were forced to remake themselves on Western lines. Plans are now moving forward to develop a fund to facilitate salvage operations in the region, If nothing else, if Hatoyama wins and can implement its vision, Japan may become more willing to distance itself from US initiatives and stand with its region.

But many Americans are not willing to see the US as a fading power.

From the Financial Times:

Yukio Hatoyama, the leader of Japan's opposition Democratic party who is strongly placed to become prime minister after elections this month, has condemned “US-led market fundamentalism"and vowed to shield his nation from the effects of untrammelled globalisation.

With the era of US unilateralism ending and worries about the dollar’s future role growing, Japan should also work towards regional currency union and political integration in an “East Asian Community", ...

Mr Hatoyama offered a robust defence of his political philosophy of yuai – fraternity – which critics have derided as wishy-washy wishful thinking, but which he declared a “strong, combative concept"and “banner of revolution"....

A poll released by the Kyodo news agency on Monday found nearly half the respondents thought Mr Hatoyama most suited to be prime minister, compared with 20 per cent for Taro Aso, the LDP incumbent.

In his essay, Mr Hatoyama said the global economy had “damaged traditional economic activities"while market fundamentalism had destroyed “local communities"...

“Under the principle of fraternity, we will not implement policies that leave economic activities in areas relating to human lives and safety, such as agriculture, the environment and medicine, at the mercy of the tides of globalism,"Mr Hatoyama wrote.

Analysts say that wide policy differences within the often fractious DPJ make it difficult to predict how such statements of principle might be put into practice. Mr Hatoyama highlighted the need for better welfare, more child support and wealth redistribution.

He made clear that while security ties with the US would remain a “diplomatic cornerstone", Japan must do much more to tighten links with Asian neighbours such as China and South Korea.

“As a result of the failure of the Iraq war and the financial crisis, the era of the US-led globalism is coming to an end and …we are moving away from a unipolar world led by the US towards an era of multipolarity,"the DPJ leader said, adding that fears about China's military rise were a big factor in “accelerating regional integration".

Japan should "aspire to the move towards regional currency integration" and "spare no effort" in building the security frameworks needed to make union possible, he wrote, adding that the example of European Union showed that integration itself could be the best way of defusing territorial disputes often seen as an impediment to closer ties.

[Jun 28, 2009] The crisis of neoliberalism and the future of international institutions: A comparison of the IMF and the WTO by Nitsan Chorev & Sarah Babb

At the meeting of the Group of 20 (G20) heads of state in the spring of 2009, British Prime Minister Gordon Brown announced the death of “the Washington Consensus”—the famous list of market-liberalizing policy prescriptions that guided the previous 20 years of economic policy (Painter 2009).

Jun 28, 2009 | Springer Science + Business Media B.V. 2009

Abstract

The current crisis of neoliberalism is calling into question the relevance of key international institutions. We analyze the origins, nature, and possible impacts of the crisis through comparing two such institutions: the International Monetary Fund (IMF) and the World Trade Organization (WTO). Both originated in the post-World War II U.S.-led hegemonic order and were transformed as part of the transition to global neoliberalism. We show that while the IMF and the WTO have been part of the same hegemonic project, their distinct institutional features have put them on significantly different trajectories. Historical differences in the two institutions’ systems of rules have placed the IMF in a more vulnerable position than the WTO, which provides clues to the future contours of global economic governance. Less than a decade ago, market-liberalizing ideas and policies reigned supreme. Today, however, the popularity of unfettered markets has declined dramatically. Latin America, once at the cutting edge of a global free-market revolution, is now dominated by left-wing governments elected on explicitly anti-neoliberal platforms. Around the world, economists and policymakers have opined that excessive reliance on unfettered markets was the root cause of the current worldwide financial crisis. At the meeting of the Group of 20 (G20) heads of state in the spring of 2009, British Prime Minister Gordon Brown announced the death of “the Washington Consensus”—the famous list of market-liberalizing policy prescriptions that guided the previous 20 years of economic policy (Painter 2009).

Yet if neoliberalism is dying, the institutions associated with its rise are not all equally moribund. For example, the global economic crisis has unexpectedly improved the fortunes of the International Monetary Fund (IMF), an organization long famous for the neoliberal policy conditions attached to its loans. In 2008, a cascade of financial crises in Eastern Europe and Iceland fattened the IMF’s dwindling loan portfolio. At the same G20 meeting in which the Washington Consensus was declared to be defunct, the IMF was given a leading role in a new multilateral strategy for tackling global economic problems, and promised a quadrupling of its resources by member governments (Weisbrot et al. 2009). The recent prominence of the IMF contrasts starkly with the current paralysis of the World Trade Organization (WTO), once an apparently unstoppable force for the lifting of barriers to trade and investment. Since 2001, the WTO has been stymied by the stalling of the Doha round of negotiations, mostly due to intractable disputes between developed and developing countries. Consequently, the current crisis of neoliberalism raises many important questions about the international institutions currently governing the global economy: How did such institutions come to play a central role in the neoliberal order? What role, if any, have they played in fostering the crisis? And what is the likely future of international economic governance?

This article addresses these questions through a comparative analysis of the WTO and the IMF. The two institutions have their origins in the post-World War II hegemonic order: the IMF was established as part of the 1944 Bretton Woods agreement, and the WTO originated in the General Agreement on Tariffs and Trade (GATT) in 1947. Yet, we show that during the 1980s and 1990s, both institutions contributed to the shift away from post-war “embedded liberalism” and became pillars of a global, neoliberal order. Led by the United States government, the two institutions’ dominant member, both the IMF and the GATT/WTO were transformed in ways that expanded their jurisdictions and their respective capacities to intrude into national economic policies, and to incorporate countries into a global system of market-liberalizing economic rules. These rules, which imposed far greater obligations than those of the postwar period, subsequently became a focal point for criticism and resistance.

Notwithstanding their common neoliberal agenda, we argue that the two institutions have historically-rooted differences in their systems of rules, which have strongly shaped their experiences of the current crisis. Concretely, distinct systems of rule-making, rule-applicability and rule-enforcement contribute to differences in the institutions’ mechanisms for responding to dissatisfaction among its members: whereas the IMF’s rules encourage disgruntled members to “exit” its rules by abstaining from IMF resources, the WTO provides effective incentives for remaining within the system. They also have created differences in the two organizations’ respective appeals to legitimation: whereas the IMF relies more heavily on its technocratic reputation, the WTO depends on procedural legitimacy. These contrasting characteristics, in turn, have generated very different criticisms of each institution and different strategies of resistance by disgruntled members. We conclude that in spite of the IMF’s recent reemergence, it is the WTO that is the more likely of the two institutions to remain a source of transnational rules for national economies, and that institutions resembling the WTO are likely to represent the future of global economic governance. 460 Theor Soc (2009) 38:459–484

World order, hegemony, and international institutions

Since the post-World War II period, multilateral institutions such as the IMF, World Bank, and GATT have played a role in governing the international economy. Although these institutions formally grant participation to multiple governments, many international relations theorists have noted their intimate connection to the hegemony of the state that has dominated the international arena since that time—the United States government (cf. Waltz 1979; Baldwin 1993; Wallerstein 1974; Gowan 1999; Shaw 2000; Cox 1987). In the classical Gramscian sense, hegemony is a form of domination that is maintained not simply through coercion or force, as neo-realists would argue, but also through consent, achieved by means of moral and intellectual leadership and material compromises (Gramsci 1971; Cox 1987; Burawoy 2003). For neo- Gramscian international relations scholars, a hegemonic world order relies partly on the material capabilities of a dominant state—including its military might and its economic power. However, hegemony also depends on dominant ideas and collective images, and on institutions, which “reflect the power relations prevailing at the point of origin and tend, at least initially, to encourage collective images consistent with these power relations” (Cox 1986, p. 218). In this view, institutions are essential for the construction and maintenance of hegemony because they help soften domination by diffusing legitimating ideas and granting concessions to subordinate forces.

International institutions were crucial for the consolidation of U.S. hegemony during the post-World War II period. Through judicious negotiation and the making of concessions at the United Nations Security Council, the IMF, the World Bank and GATT, powerful sectional interests could be presented as the general interest of all under a universal policy (Gale 1998, p. 273). This hegemonic world order was based on a Fordist-Keynesian model of national capitalism (Cox 1987; Gill 2003), and it rested on the ability of the IMF, GATT, and other international institutions to reconcile domestic policy aims, especially full employment, with gradual opening and liberalizing of the international economy (Ruggie 1982).

Following the world economic crisis of the 1970s, the United States reinvented its hegemony by transitioning from the post-war “embedded liberal” world order to the Reagan-Thatcher model of neoliberalism and global capitalism (Morton 2003, pp. 162–3; Harvey 2005). This involved a change in the identity and functions of international institutions, which transformed their mandates to accommodate these ideological changes. The World Bank and IMF’s loans and the GATT/WTO trade agreements played an especially important and visible role in the formulation of neoliberal prescriptions, to their legitimation, and in their enforcement worldwide

Is This Really the End of Neoliberalism by DAVID HARVEY

What happened in the US was that 8 men gave us a 3 page document which pointed a gun at everybody and said ‘give us $700 billion or else’. This to me was like a financial coup, against the government and the population of the US. Which means you’re not going to come out of this crisis with a crisis of the capitalist class; you’re going to come out of this with a far greater consolidation of the capitalist class than there has been in the past. We’re going to end up with four or five major banking institutions in the United States and nothing else. Many on Wall Street are thriving right now. Lazard’s, because it specialises in mergers and acquisitions, is making megabucks. Some people are going to be burned, but overall it’s a massive consolidation of financial power. There’s a great line from Andrew Mellon (US banker, Secretary of the Treasury 1921-32), who said that in a crisis, assets return to their rightful owners.
CounterPunch

Does this crisis signal the end of neo-liberalism? My answer is that it depends what you mean by neo-liberalism. My interpretation is that it’s a class project, masked by a lot of neo-liberal rhetoric about individual freedom, liberty, personal responsibility, privatisation and the free market. These were means, however, towards the restoration and consolidation of class power, and that neo-liberal project has been fairly successful.

One of the basic principles that was set up in the 1970s was that state power should protect financial institutions at all costs. This is the principle that was worked out in New York City crisis in the mid-1970s, and was first defined internationally when Mexico threatened to go bankrupt in 1982. This would have destroyed the New York investment banks, so the US Treasury and the IMF combined to bail Mexico out. But in so doing they mandated austerity for the Mexican population. In other words they protected the banks and destroyed the people, and this has been the standard practice in the IMF ever since. The current bailout is the same old story, one more time, except bigger.

What happened in the US was that 8 men gave us a 3 page document which pointed a gun at everybody and said ‘give us $700 billion or else’. This to me was like a financial coup, against the government and the population of the US. Which means you’re not going to come out of this crisis with a crisis of the capitalist class; you’re going to come out of this with a far greater consolidation of the capitalist class than there has been in the past. We’re going to end up with four or five major banking institutions in the United States and nothing else. Many on Wall Street are thriving right now. Lazard’s, because it specialises in mergers and acquisitions, is making megabucks. Some people are going to be burned, but overall it’s a massive consolidation of financial power. There’s a great line from Andrew Mellon (US banker, Secretary of the Treasury 1921-32), who said that in a crisis, assets return to their rightful owners.

A financial crisis is a way of rationalising what is irrational – for example the immense crash in Asia in 1997-8 resulted in a new model of capitalist development. Disruptions lead to a reconfiguration, a new form of class power. It could go wrong, politically. The bank bailout has been fought over in the US Senate and elsewhere, so the political class may not easily go along – they can put up roadblocks but so far they have caved in and not nationalised the banks.

But this can lead to a deeper political struggle: there is a strong sense of questioning why are we empowering all the people who got us into this mess. Questions are being asked about Obama’s choice of economic advisers – for example Larry Summers who was Secretary of the Treasury at the key moment when a lot of things started to go really wrong, at the end of the Clinton administration. Why would you now bring in so many of the characters who are pro-Wall Street, pro-finance capital, who did the bidding of finance capital back then? Which is not to say that they aren’t going to redesign the financial architecture because I think they know it’s got to be redesigned, but who are they going to redesign it for? People are really discontented about Obama’s economic team, even in the mainstream press.

A new state financial architecture is required. I don’t think that all existing institutions like the Bank of International Settlements and even the IMF should be abolished; I think we will need them but they have to be revolutionarily transformed. The big question is who will control them and what their architecture will be. We will need people, experts with some sort of understanding of how those institutions do work and can work. And this is very dangerous because, as we can see right now, when the state looks to see who can understand what is going on in Wall Street, they think only insiders can.

Disempowerment of labor: enough is enough

Whether we can get out of this crisis in a different way depends very much upon the balance of class forces. It depends upon the degree to which the entire population says ‘enough is enough, let’s change this system’. Right now, when you look at what’s been happening to workers over the last 50 years, they have got almost nothing out of this system. But they haven’t risen up in revolt. In the US over the last 7 or 8 years, the condition of the working classes in general has deteriorated, and there has been no mass movement against this. Finance capitalism can survive the crisis, but it depends entirely upon the degree in which there is going to be popular revolt against what is happening, and a real push to try and reconfigure how the economy works.

One of the major barriers to continuous capital accumulation back in the 1960s and early 70s was the labor question. There were scarcities of labor both in Europe and the US and labor was well organised, with political clout. So one of the big barriers to capital accumulation during that period was; how can capital get access to cheaper and more docile labor supplies? There were a number of answers. One was to encourage more immigration. In the United States there was a major revision of the immigration laws in 1965 that in effect allowed the US access to the global surplus population (before that only Europeans and Caucasians were privileged). In the late 1960s the French government was subsidising the import of Maghrebian labor, the Germans were bringing in the Turks, the Swedes were bringing in the Yugoslavs, the British were drawing upon their empire. So a pro-immigration policy emerged which was one attempt to deal with the labor problem.

The second thing you go for is rapid technological change which throws people out of work and if that failed then there were people like Reagan, Thatcher and Pinochet to crush organized labor. And finally capital goes to where the surplus labor is by off-shoring, and this was facilitated by two things. Firstly technical reorganisation of the transport systems: one of the biggest revolutions that happened during this period is containerisation which allowed you to make auto parts in Brazil and ship them for very low cost to Detroit or wherever. Secondly the new communications systems allowed the tight organization of commodity chain production across the global space.

All of these solved the labor problem for capital, so by 1985 capital has no labor problem any more. It may have specific problems in particular areas but globally it has plenty of labor available to it; the sudden collapse of the Soviet Union and the transformation of much of China added something like 2 billion people to the global proletariat in 20 years. So labor availability is no problem now and the result of that is that labor has been disempowered for the last 30 years. But when labor is disempowered it gets low wages, and if you engage in wage repression this limits markets. So capital was beginning to face problems with its market, and there were two things which happened.

The first was the gap between what labor was earning and what it was spending was covered by the rise of the credit card industry and increasing indebtedness of households. So in the US in 1980 you would find that the average household would owe around $40,000 in debts now it’s about $130,000 for every household, including mortgages. So household debt sky-rockets and that brings you to financialisation, and that was about getting the financial institutions to support the household debts of working class people whose earnings are not increasing. And you start with the respectable working class, but by the time you get to the year 2000 you start to find these sub-prime mortgages circulating. You are looking to create a market. And so finance starts to support the debt-financing of people who have almost no income. But if you hadn’t done that what would have happened to the property developers who are building the houses? So you try and stabilize the market by funding that indebtedness.

Crises of asset values

The second thing which happened was that from the 1980s onwards the rich are getting far richer because of that wage repression. The story we are told is that they will invest in new activity but they don’t; most of them start to invest in assets, i.e. they put money in the stock market, the stock market goes up so they think it is a good investment so they put more money in the stock market, so you get these stock market bubbles. It is a ponzi-like system without the Madoff’s organizing it. The rich bid up asset values, including stocks, property, and leisure property as well as the art market. These investments involve financialisation. But as you bid up asset values this carries over to the whole economy, so to live in Manhattan became all but impossible unless you went incredibly into debt, and everyone is caught in this inflation of asset values, including the working classes whose incomes are not rising. And now we’ve got a collapse of asset values; the housing market is down, the stock market is down.

There has always been the problem of the relationship between representation and reality. Debt is about the assumed future value of goods and services, so it assumes the economy is going to continue to grow over the next 20 or 30 years. It always involves a guess, which is then set by the interest rate, discounting into the future. This growth of the financial area after the 1970s has a lot to do with what I think is another key problem: what I would call the capitalist surplus absorption problem. As surplus theory tells us, capitalists produce a surplus, which they then have to take a part of, recapitalise it, and reinvest it in expansion. Which means they always have to find somewhere else to expand into. In an article I wrote for the New Left Review called ‘Right to the City’ I pointed out that in the last 30 years an immense amount of the capital surplus has been absorbed into urbanisation: urban restructuring, expansion and speculation. Every city I go to is a huge building site for capitalist surplus absorption. Now, of course, many of these projects stand unfinished.

This way of absorbing capital surpluses has got more and more problematic over time. In 1750 the value of the total output of goods and services was around $135 billion, in constant values. By 1950, it’s $4 trillion. By 2000, it’s $40 trillion. It’s now around $50 trillion. And if Gordon Brown is right it’s going to double over the next 20 years, to $100 trillion by 2030.

Throughout the history of capitalism, the general rate of growth has been close to 2.5% per annum, compound basis. That would mean that in 2030 you’d need to find profitable outlets for $2.5 trillion dollars. That’s a very tall order. I think there has been a serious problem, particularly since 1970, about how to absorb greater and greater amounts of surplus in real production. Less and less of it is going into real production, and more and more into speculation on asset values, which accounts for the increasing frequency and depth of the financial crises we’ve been having since 1975 or so; they are all crises of asset value.

My argument would be that if we come out of this crisis right now, and there’s going to be capital accumulation at 3% rate of growth, we’ve got a hell of a lot of problems on our hands. Capitalism is running into serious environmental constraints, as well as market constraints, profitability constraints. The recent turn to financialisation is a turn of necessity, as a way of dealing with the surplus absorption problem; but one that cannot possibly work without periodic devaluations. That’s what’s happening now, with the losses of several trillion dollars of asset value.

The term ‘national bailout’ is therefore inaccurate, because they’re not bailing out the whole of the existing financial system – they’re bailing out the banks, the capitalist class, forgiving them their debts, their transgressions, and only theirs. The money goes to the banks but not to the homeowners who’ve been foreclosed on, which is beginning to create anger. And the banks are using the money not to lend to anybody but to buy other banks. They are consolidating their class power.

The collapse of credit

The collapse of credit for the working class spells the end of financialisation as the solution for the crisis of the market. As a consequence of this we will see a major crisis of unemployment and the collapse of many industries unless there is effective action to change that. Now this is where you get the current discussion about returning to a Keynesian economic model, and Obama’s plan is to invest in a vast public works and investment in green technologies, in a sense going back to a New Deal type of solution. I am skeptical of his ability to do this.

To understand the current situation we need to go beyond what goes on in the labor process and production to the complex of relationships around the state and finance . We need to understand how the national debt and credit system have from the beginning been major vehicles for primitive accumulation, or what I now call accumulation by dispossession – as you can see from the building industry. In my ‘Right to the City’ article I looked at how capitalism was revived in second empire Paris because the state along with the bankers put together a new nexus of state-finance capital, to rebuild Paris. That provided full employment and the boulevards, the water systems and sewage systems, new transport systems, and it was through those types of mechanisms that the Suez Canal was built. A lot of this was debt financed. Now that state-finance nexus has undergone a massive transformation since the 1970s; it’s become far more international, it’s opened itself to all types of financial innovations including derivative markets and speculative markets etc. A new financial architecture has been designed.

What I think is happening at the moment is that they are now looking for a new financial set-up which can solve the problem not for working people but for the capitalist class. I think they are going to find a solution for the capitalist class and if the rest of us get screwed, too bad. The only thing they would care about is if we rose up in revolt. And until we rise up in revolt they are going to redesign the system according to their own class interests. I don’t know what this new financial architecture will look like. If we look closely at what happened during the New York fiscal crisis I don’t think the bankers or the financiers knew what to do at all, now what they did was bit by bit arrive at a ‘bricolage’; they pieced it together in a new way and eventually they come up with a new construction. But whatever solution they may arrive at, it will suit them unless we get in there and start saying that we want something that is suitable for us. There’s a crucial role for people like us to raise the questions and challenge the legitimacy of the decisions being made at present, and to have very clear analyses of what the nature of the problem has been, and what the possible exits are.

Alternatives

We need in fact to begin to exercise our right to the city. We have to ask the question which is more important, the value of the banks or the value of humanity. The banking system should serve the people, not live off the people. And the only way in which we are really going to be able to exert the right to the city is to take command of the capitalist surplus absorption problem. We have to socialize the capital surplus, and to get out of the problem of 3% accumulation forever. We are now at a point where 3% growth rate forever is going to exert such tremendous environmental costs, and such tremendous pressure on social situations that we are going to go from one financial crisis to another.

The core problem is how you are going to absorb capitalist surpluses in a productive and profitable way. My view is that social movement must coalesce around the idea that they want more control over the surplus product. And while I don’t support a return to the Keynesian model of the sort we had in the 1960s, I do think there was much greater social and political control over the production, utilisation and distribution of the surplus then. The circulating surplus was put into building schools, hospitals and infrastructure. This was what upset the capitalist class and caused a counter movement toward the end of the 1960s – that they were not getting enough control over the surplus. However, if you look at the data the proportion of the surplus which is being absorbed by the state has not shifted very much since 1970, so what the capitalist class did was to stop the further socialisation of the surplus. They also managed to transform the word government into the word ‘governance’, making governmental and corporate activities porous, which enables the situation we have in Iraq where private contractors milked the possibilities ruthlessly for easy profit..

I think we are headed into a legitimation crisis. Over the past thirty years we have been told, to quote Margaret Thatcher, “there is no alternative” to a neo-liberal free market, privatised world, and that if we didn’t succeed in that world it’s our own fault. I think it’s very difficult to say that when faced with a foreclosure crisis you support the banks but not the people who are being foreclosed upon. You can accuse the people being foreclosed upon of irresponsibility, and in the US there is a strong racist element in this argument. When the first wave of foreclosures hit places like Cleveland and Ohio they were devastating to the black communities there but some peoples’ response was ‘well what do you expect, black people are irresponsible. We are seeing right-wing explanations of the crisis which explain it in terms of personal greed, both in Wall Street and those who borrowed money to buy houses. So they attempt to blame the crisis on the victims. One of our tasks must be to say ‘no, you absolutely cannot do that’ and to try and create a consolidated explanation of this crisis as a class event in which a certain structure of exploitation broke down and is about to be displaced by an even deeper structure of exploitation. It’s very important this alternative explanation of the crisis is discussed and conveyed publicly.

One of the big ideological configurations we are going to have is what is going to be the role of home ownership in the future once we start saying things like you’ve got to socialize much more of the housing stock, as since the 1930s we have had huge pressures towards individualised home ownership as in a way of securing people’s rights and position.. We’ve got to socialize and recapitalise public education and health care long with housing provision. These sectors of the economy have to be socialized along with the banks.

Radical politics beyond class divides

There is another point we have to consider, which is that labor, and particularly organised labor, is only one small piece of this whole problem, and it’s only going to have a partial role in what is going on. And this is for a very simple reason, which goes back to Marx’s shortcomings in how he set up the problem. If you say to that the formation of the state-finance complex is absolutely crucial to the dynamics of capitalism (which it obviously is), and you ask yourself what social forces are at work in contesting or setting it up these institutional arrangements, labor has never been at the forefront of that struggle. Labor has been at the forefront in the labor market and over the labor process and these are vital moments in the circulation process, but most of the struggles which have gone on over the state-finance nexus are populist struggles in which labor has only been partially present.

For example in the US in the 1930s there were a lot of populists who supported the Bonnie and Clyde bank robbers. And currently many of the struggles going on in Latin America are more populist than labor led. Labor always has a very important role to play but I don’t think we are in a position right now where the conventional view of the proletariat being the vanguard of the struggle is very helpful when it is the architecture of the state-finance nexus (the central nervous system of capital accumulation) that is the fundamental issue. There may be times and places where proletarian movements may be highly significant, for example in China where I envisage them playing a critical part which I do not see them having in this country. What is interesting is that the car workers and automobile companies are in alliance right now in relation to the state-finance nexus, so in a way the grand dividing line of class struggle which has always been there in Detroit isn’t there anymore or at least not in the same way. We have a completely different kind of class politics going on and some of the conventional Marxist ways of viewing these things get in the way of a real radical politics.

There is also a big problem on the left that many think the capturing of state power has no role to play in political transformations and I think they’re crazy. Incredible power is located there and you can’t walk away from it as though it doesn’t matter. I am profoundly skeptical of the belief that NGOs and civil society organisations are going to change the world, not because NGOs can’t do anything at all, but it takes a different kind of political movement and conception if we are going to do anything about the main crisis which is going on. In the United States the political instinct is very anarchist, and while I am very sympathetic to a lot of anarchist views their perpetual complaints about and refusal to command the state also gets in the way.

I don’t think we are in a position to define who the agents of change will be in the present conjuncture and it plainly will vary from one part of the world to another. In the United States right now there are signs that elements of the managerial class, which has lived off the earnings of finance capital all these years, is getting annoyed and may turn a bit radical. A lot of people have been laid off in the financial services, in some instances they have even had their mortgages foreclosed. Cultural producers are waking up to the nature of the problems we face and in the same way that the 1960s art schools were centers of political radicalism, you might find something like that re-emerging. We may see the rise of cross-border organisations as the reductions in remittances spread the crisis to places like rural Mexico or Kerala.

Social movements have to define what strategies and policies they want to adopt. We academics should never view ourselves as having some missionary role in relation to social movements; what we should do is get into conversation and talk about how we see the nature of the problem.

Having said that I would want us to propose ideas. An interesting idea in the US right now is to get municipal governments to pass anti-eviction ordinances. I think there are a couple of places in France which have done that. Then we could set up a municipal housing corporation which would assume the mortgages, pay off the bank at so much on the dollar because the banks have been given a lot of money to supposedly deal with this, but they’re not.

Another key question is that of citizenship and rights. I think that rights to the city should be guaranteed by residency no matter what your citizenship is. Currently people are denied any political rights to the city unless they happen to be citizens. So if you’re an immigrant you don’t have any rights. I think there are struggles to be launched around the rights to the city. In the Brazilian constitution they have a ‘rights to the city’ clause which is about the right to consultation, participation and budgetary procedures. Again I think there is a politics which can come out of that.

A reconfiguration of urbanisation

In the US there is the capacity to act at a local level, with a lot going on about environmental questions, and over the past fifteen to twenty years municipal governments have often been more progressive than the federal government. There’s a crisis in municipal finance right now and there is likely to be significant agitation and pressure upon Obama to recapitalise a lot of municipal government (which is proposed in the stimulus package). He has said this is one of the things he is concerned about, especially since a lot of the issues which are happening are local ones, for instance the sub-prime mortgage crisis. As I have been arguing the foreclosure stuff must be understood as an urban crisis not just a financial crisis; it is a financial crisis of urbanisation.

Another important question is to think strategically about how the social economy in some alliance with labor and the municipal-based movements such as Right to the City could also be a component in a strategy. This relates to the question of technological development – for example I see no reason why you couldn’t have a municipal-based support system for the development of productive systems such as solar power, to create more decentralised employment apparatuses and possibilities.

If I could develop an idealised system now I would say in the US we should create a national redevelopment bank and take $500 billion out of that $700 billion they voted and the bank should work with municipalities to deal with neighbourhoods which have been hit by the foreclosure wave, because the foreclosure wave has been like a financial Katrina in many ways; it has wiped out whole communities, usually poor black or Hispanic communities. You go into those neighbourhoods and bring back the people who used to live in those communities and re-house them on a different basis of tenure, residency rights, and with a different kind of financing. And green those neighbourhoods, creating local employment opportunities in those fields.

So I could imagine a reconfiguration of urbanisation. To do anything on global warming we need to totally reconfigure how American cities work; to think about a completely new pattern of urbanisation, with new patterns of living and working. There are a lot of possibilities the left should be paying attention to – this is a real opportunity. But it is where I have a problem with some Marxists who seem to think, ‘yes! It’s a crisis; the contradictions of capitalism will now be solved somehow!’ This is not a moment for triumphalism, this is a moment for problematising. First of all I think there are problems with the way Marx set up those problems. Marxists are not very good at understanding the state financial complex or urbanisation – they are terrific at understanding some other things. But now we have to rethink our theoretical posture and political possibilities.

So there is a lot of theoretical re-thinking that is needed as well as practical action.

Transcribed by Kate Ferguson. Edited by Mary Livingstone.

DAVID HARVEY is a Distinguished Professor at the City University of New York (CUNY) and author of various books, articles, and lectures. He has been teaching Karl Marx’s Capital for nearly 40 years. He can be reached through his website, http://davidharvey.org

Neoliberalism and Higher Education - NYTimes.com

I’ve been asking colleagues in several departments and disciplines whether they’ve ever come across the term “neoliberalism” and whether they know what it means. A small number acknowledged having heard the word; a very much smaller number ventured a tentative definition.

I was asking because I had been reading essays in which the adjective neoliberal was routinely invoked as an accusation, and I had only a sketchy notion of what was intended by it. When one of these essays cited my recent writings on higher education as a prime example of “neoliberal ideology” (Sophia McClennen, “Neoliberalism and the Crisis of Intellectual Engagement,” in Works and Days, volumes 26-27, 2008-2009), I thought I’d better learn more.

What I’ve learned (and what some readers of this column no doubt already knew) is that neoliberalism is a pejorative way of referring to a set of economic/political policies based on a strong faith in the beneficent effects of free markets. Here is an often cited definition by Paul Treanor:

“Neoliberalism is a philosophy in which the existence and operation of a market are valued in themselves, separately from any previous relationship with the production of goods and services . . . and where the operation of a market or market-like structure is seen as an ethic in itself, capable of acting as a guide for all human action, and substituting for all previously existing ethical beliefs.” (“Neoliberalism: Origins, Theory, Definition.”)

In a neoliberal world, for example, tort questions — questions of negligence law — are thought of not as ethical questions of blame and restitution (who did the injury and how can the injured party be made whole?), but as economic questions about the value to someone of an injury-producing action relative to the cost to someone else adversely affected by that same action. It may be the case that run-off from my factory kills the fish in your stream; but rather than asking the government to stop my polluting activity (which would involve the loss of jobs and the diminishing of the number of market transactions), why don’t you and I sit down and figure out if more wealth is created by my factory’s operations than is lost as a consequence of their effects?

... ... ...

Short-term transactions-for-profit replace long-term planning designed to produce a more just and equitable society. Everyone is always running around doing and acquiring things, but the things done and acquired provide only momentary and empty pleasures (shopping, trophy houses, designer clothing and jewelry), which in the end amount to nothing. Neoliberalism, David Harvey explains, delivers a “world of pseudo-satisfactions that is superficially exciting but hollow at its core.” (“A Brief History of Neoliberalism.”)

Harvey and the other critics of neoliberalism explain that once neoliberal goals and priorities become embedded in a culture’s way of thinking, institutions that don’t regard themselves as neoliberal will nevertheless engage in practices that mime and extend neoliberal principles — privatization, untrammeled competition, the retreat from social engineering, the proliferation of markets. These are exactly the principles and practices these critics find in the 21st century university, where (according to Henry Giroux) the “historical legacy” of the university conceived “as a crucial public sphere” has given way to a university “that now narrates itself in terms that are more instrumental, commercial and practical.” (“Academic Unfreedom in America,” in Works and Days.)

This new narrative has been produced (and necessitated) by the withdrawal of the state from the funding of its so-called public universities. If the percentage of a state’s contribution to a college’s operating expenses falls from 80 to 10 and less (this has been the relentless trajectory of the past 40 years) and if, at the same time, demand for the “product” of higher education rises and the cost of delivering that product (the cost of supplies, personnel, information systems, maintenance, construction, insurance, security) skyrockets, a huge gap opens up that will have to be filled somehow.

Faced with this situation universities have responded by

  1. (1) raising tuition, in effect passing the burden of costs to the students who now become consumers and debt-holders rather than beneficiaries of enlightenment
  2. (2) entering into research partnerships with industry and thus courting the danger of turning the pursuit of truth into the pursuit of profits and
  3. (3) hiring a larger and larger number of short-term, part-time adjuncts who as members of a transient and disposable workforce are in no position to challenge the university’s practices or agitate for an academy more committed to the realization of democratic rather than monetary goals.

In short , universities have embraced neoliberalism.

Meanwhile, even those few faculty members with security of employment do their bit for neoliberalism when they retire to their professional enclaves and churn out reams of scholarship (their equivalent of capital) that is increasingly specialized and without a clear connection to the public interest: “[F]aculty have progressively . . . favored professionalism over social responsibility and have . . . refused to take positions on controversial issues”; as a result they have “become disconnected from political agency and thereby incapable of taking a political stand” (McClennen, Works and Days).

[Feb 1, 2009] The Global Financial Crisis by Kevin Rudd

Kevin Rudd is the Prime Minister of Australia. In this paper has argued in favour of return to some modified form of Keysianism under the rubrics of “saving capitalism from itself and its own excesses” and “balancing the private and the public, profit and wages, the market and the state.” While proposing a few reasonable global governance reforms, he too suspects that “when the financial system stabilises and the global recession eases, we can expect to see governments pulling back from direct involvement in the ownership and operation of the banking sector.”
The Monthly (Australia)

There is a sense that we are now living through just such a time: barely a decade into the new millennium, barely 20 years since the end of the Cold War and barely 30 years since the triumph of neo-liberalism - that particular brand of free-market fundamentalism, extreme capitalism and excessive greed which became the economic orthodoxy of our time.

The agent for this change is what we now call the global financial crisis. In the space of just 18 months, this crisis has become one of the greatest assaults on global economic stability to have occurred in three-quarters of a century. As others have written, it "reflects the greatest regulatory failure in modern history". It is not simply a crisis facing the world's largest private financial institutions - systemically serious as that is in its own right. It is more than a crisis in credit markets, debt markets, derivatives markets, property markets and equity markets - notwithstanding the importance of each of these.

This is a crisis spreading across a broad front: it is a financial crisis which has become a general economic crisis; which is becoming an employment crisis; and which has in many countries produced a social crisis and in turn a political crisis. Indeed, accounts are already beginning to emerge of the long-term geo-political implications of the implosion on Wall Street - its impact on the future strategic leverage of the West in general and the United States in particular.

The global financial crisis has demonstrated already that it is no respecter of persons, nor of particular industries, nor of national boundaries. It is a crisis which is simultaneously individual, national and global. It is a crisis of both the developed and the developing world. It is a crisis which is at once institutional, intellectual and ideological. It has called into question the prevailing neo-liberal economic orthodoxy of the past 30 years - the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us.

Not for the first time in history, the international challenge for social democrats is to save capitalism from itself: to recognise the great strengths of open, competitive markets while rejecting the extreme capitalism and unrestrained greed that have perverted so much of the global financial system in recent times. It fell to Franklin Delano Roosevelt to rebuild American capitalism after the Depression. It fell also to the American Democrats, strongly influenced by John Maynard Keynes, to rebuild postwar domestic demand, to engineer the Marshall Plan to rebuild Europe and to set in place the Bretton Woods system to govern international economic engagement. And so it now falls to President Obama's administration - and to those who will provide international support for his leadership - to support a global financial system that properly balances private incentive with public responsibility in response to the grave challenges presented by the current crisis. The common thread uniting all three of these episodes is a reliance on the agency of the state to reconstitute properly regulated markets and to rebuild domestic and global demand.

The second challenge for social democrats is not to throw the baby out with the bathwater. As the global financial crisis unfolds and the hard impact on jobs is felt by families across the world, the pressure will be great to retreat to some model of an all-providing state and to abandon altogether the cause of open, competitive markets both at home and abroad. Protectionism has already begun to make itself felt, albeit in softer and more subtle forms than the crudity of the Smoot-Hawley Tariff Act of 1930. Soft or hard, protectionism is a sure-fire way of turning recession into depression, as it exacerbates the collapse in global demand. The intellectual challenge for social democrats is not just to repudiate the neo-liberal extremism that has landed us in this mess, but to advance the case that the social-democratic state offers the best guarantee of preserving the productive capacity of properly regulated competitive markets, while ensuring that government is the regulator, that government is the funder or provider of public goods and that government offsets the inevitable inequalities of the market with a commitment to fairness for all. Social democracy's continuing philosophical claim to political legitimacy is its capacity to balance the private and the public, profit and wages, the market and the state. That philosophy once again speaks with clarity and cogency to the challenges of our time.

Social-democratic governments across the world must rise to the further challenge of developing a practical policy response to the crisis that rebuilds shattered economic growth, while also devising a new regulatory regime for the financial markets of the future. This is our immediate challenge. But if we fail, there is a grave danger that new political voices of the extreme Left and the nationalist Right will begin to achieve a legitimacy hitherto denied them. Again, history is replete with the most disturbing of precedents.

We therefore need a frank analysis of the central role of neo-liberalism in the underlying causes of the current economic crisis. We also need a robust analysis of the social-democratic approach to properly regulated markets and the proper role of the state, in a new contract for the future that eschews the extremism of both the Left and the Right. And we must integrate this analysis with the unprecedented imperative for global co-operation if governments are to prevail in their task.

*

Around the world today, there is understandable public bewilderment at the speed, severity and scope of the unfolding crisis. While the causes of the global financial crisis are complex, a small number of simple metrics are capable of conveying its magnitude and the havoc it has wrought in financial markets, the real economy and government finances.

Financial markets have suffered the greatest dislocation in our lifetime. Global equity markets have lost approximately US$32 trillion in value since their peak, which is equivalent to the combined GDP of the G7 countries in 2008. Credit markets have all but dried up, with credit growth at its lowest level since World War II. And, at the core of the crisis, house prices are plummeting in many countries, with American prices falling at their fastest rate since modern records began.

The real economy is facing one of its toughest periods on record, with the IMF predicting that advanced economies will contract for the first time in 60 years, causing the number of unemployed to rise by 8 million across the OECD. In developing countries, the International Labour Organization predicts that the financial and economic crisis could push more than 100 million people into poverty.

Furthermore, the crisis is producing unprecedented costs and debts for governments which will be felt for decades to come. It is estimated that the 2009 deficit in the United States will be as high as 12.5% of GDP. And estimates of the combined (actual and contingent) liabilities from the array of bank bailouts and guarantees run to more than $13 trillion - more than the cost of all the major wars the United States has ever fought. What this means for future American international borrowing is equally unprecedented.

Bewilderment, however, rapidly turns to anger when the economic crisis touches the lives of families through rising unemployment, reduced wage growth and collapsing asset values - while executive remuneration in the financial sector continues to go through the roof, apparently disconnected from the reality of recent events. In 2007, S&P 500 CEOs averaged $10.5 million (some 344 times the pay of typical American workers). The top 50 hedge-fund and private-equity fund managers averaged $588 million each (19,000 times the pay of typical workers). In 2007, the ?ve biggest Wall Street firms paid bonuses of a staggering $39 billion - huge payments to the executives whose investment banks have since been bailed out by American taxpayers.

These are epic numbers, generated by a greed of epic proportions. For a bewildered and increasingly enraged public, they raise the following questions: How was this allowed to happen? What ideology, what policy, what abuses made this possible? Were there any warnings? And if so, why were they ignored?

*

George Soros has said that "the salient feature of the current financial crisis is that it was not caused by some external shock ... the crisis was generated by the system itself". Soros is right. The current crisis is the culmination of a 30-year domination of economic policy by a free-market ideology that has been variously called neo-liberalism, economic liberalism, economic fundamentalism, Thatcherism or the Washington Consensus. The central thrust of this ideology has been that government activity should be constrained, and ultimately replaced, by market forces.

In the past year, we have seen how unchecked market forces have brought capitalism to the precipice. The banking systems of the Western world have come close to collapse. Almost overnight, policymakers and economists have torn up the neo-liberal playbook and governments have made unprecedented and extraordinary interventions to stop the panic and bring the global financial system back from the brink.

Even the great neo-liberal ideological standard-bearer, the long-serving chairman of the US Federal Reserve Alan Greenspan, recently conceded in testimony before Congress that his ideological viewpoint was flawed, and that the "whole intellectual edifice" of modern risk management had collapsed. Henry Waxman, the chairman of the Congressional Committee on Oversight and Government Reform, questioned Greenspan further: "In other words, you found that your view of the world, your ideology, was not right; it was not working?" Greenspan replied, "Absolutely, precisely." This mea culpa by the man once called ‘the Maestro' has reverberated around the world.

To understand the failure of neo-liberalism, it is necessary to consider its central elements. The ideology of the unrestrained free market, discredited by the Great Depression, re-emerged in the 1970s amid a widespread belief that the prevailing economic woes of high inflation and low growth were exclusively the result of excessive government intervention in the market. In the '80s, the Reagan and Thatcher governments gave political voice to this neo-liberal movement of anti-tax, anti-regulation, anti-government conservatives.

Neo-liberal policy prescriptions flow from the core theoretical belief in the superiority of unregulated markets - particularly unregulated financial markets. These claims ultimately rest on the "efficient-markets hypothesis", which, in its strongest form, claims that financial-market prices, like stock-market prices, incorporate all available information, and therefore represent the best possible estimate of asset prices. It follows, therefore, that if markets are fully efficient and prices fully informed, there is no reason to believe that asset-price bubbles are probable; and if these do occur, markets will self-correct; and that there is therefore no justification for government intervention to stop them occurring. Indeed, in the neo-liberal view, deviations from market efficiency must be attributable to external causes. Bubbles and other disruptions are caused by governments and other "imperfections", not by markets themselves. This theory justifies the belief that individual self-interest should be given free rein and that the income distribution generated by markets should be regarded as natural and inherently just. In the neo-liberal view, markets are spontaneous and self-regulating products of civil society, while governments are alien and coercive intruders.

Neo-liberal economic philosophy has its roots in the theories of Hayek and von Mises, who believed that society should be characterised by the "spontaneous order" which emerges when individuals pursue their own ends within a framework set by law and tradition. Ideally, the role of governments is simply to enforce contracts and protect the allocation of property rights. All other economic functions should be left to what Reagan called "the magic of the market". Hayek himself referred to the market as "a game" - specifically the game of "catallaxy", taken from the Greek word "to barter", which according to Hayek is "a contest played according to the rules and decided by superior skill, strength or good fortune". In Hayek's order, "the game" is the only proper determinant of the allocation of resources, in contrast to any "atavistic" concept of social justice alive in the social-democratic project.

The advocates of neo-liberalism have sought, wherever possible, to dismantle all aspects of the social-democratic state. The idea of social solidarity, reflected in the collective provision of social goods, is dismissed as statist nonsense. In the face of vigorous resistance to cuts in public services, the neo-liberal political project has followed a strategy of "starving the beast", cutting taxes in order to strangle the capacity of the government to invest in education, health and economic infrastructure. The end point: to provide maximal space in the economy for private markets.

Neo-liberalism progressively became the economic orthodoxy. It was reflected in wave after wave of tax cuts. Governments bragged about their success in reducing measured levels of debt, while refusing to acknowledge the long-term economic cost of non-investment in education, skills and training (which increase productivity), and repudiating an appropriate role for public debt in financing investment in the infrastructure that underpins long-term economic growth. Neo-liberals have also exhibited a passionate commitment to the total deregulation of the labour market. Labour is routinely regarded by neo-liberals as no different from any other economic commodity. In the ideal neo-liberal system, labour-market protections should be restricted to physical safety rather than appropriate remuneration or minimum negotiation standards. Again, contract law, rather than any wider concept of a social contract, should prevail. Neo-liberals in government also become notoriously reluctant to identify and respond to instances of market failure. Climate change is a potent example. What Sir Nicholas Stern legitimately describes as the greatest market failure in human history is dismissed by neo-liberals as a prescription for wanton interference in market forces.

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The neo-liberal deregulation mantra has been even more evident in the management of financial markets. In the United States, the pursuit of financial deregulation crossed the Rubicon with the repeal of the Glass-Steagall Act, which had been established in the wake of the Great Depression. In the heady bubble years of the 1920s, American commercial banks, whose traditional function was simply to take deposits and make loans, plunged into the roaring bull market, trading on their own account, underwriting new stock issues and participating in reckless speculation. When the stock-market bubble burst in 1929, it took commercial banks with it, causing a devastating chain reaction which affected the entire economy for a decade. President Roosevelt implemented Glass-Steagall in 1933 to prevent Main Street commercial banks from being exposed to the vagaries of Wall Street in the future. As Keynes, himself a successful speculator, observed: "When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."

After a $300-million lobbying effort by the financial-services industry, Glass-Steagall was effectively repealed in 1999, removing the prohibition on commercial banks owning investment banks. The door was now open for the creation of huge financial-services conglomerates. One of the first to take advantage of the new regime was Citigroup, formed from the regular bank Citicorp and Travelers Group, which had previously incorporated the investment bank Salomon Smith Barney. The problem was that such combined entities became too systemically important to fail, yet their investment-banking arms were allowed to engage in speculation on a massive scale - so great as to imperil the finances of any government that had to bail them out. Citigroup was in fact to become the recipient of a taxpayer-funded rescue package worth an estimated $249 billion. It is ironic and - given the anti-government orthodoxy of neo-liberals - grossly hypocritical that the massive exposure to risk of these private financial conglomerates has resulted in a parallel exposure of the government, given the scale of possible government intervention in the event of bank failure. During the bubble, however, no account was taken of this, as massive profits were privatised and prospective losses socialised through the operation of implicit banking guarantees.

At the international level, bank risk is regulated by the Basel Accord. Yet the Basel II guidelines, published in June 2004, have now been demonstrated to be inadequate because they left the determination of risk to flawed credit-ratings processes and the banks' own "self-regulated" internal assessment models. Even then, the Basel rules were easily circumvented using innovative financial structures: structured investment vehicles were deliberately employed to shift risk off bank balance sheets. As Joseph Stiglitz has argued, "many of America's big banks moved out of the ‘lending' business and into the ‘moving' business," focusing on originating loans, repackaging them and selling them on, with little emphasis on their traditional role of assessing risk and screening credit worthiness.

Instead, the crucial risk-assessment function was passed, in large part, to the ratings agencies. Dependent as they were on the banks for their revenue, the agencies were hopelessly conflicted by the lure of big profits in return for easy ratings. Jerome Fons, former managing director for credit q ies became too inclined to take a favourable view of the risks inherent in their clients' investments.

Financial liberalisation also gave rise to a plethora of new, unregulated financial institutions in what is now broadly defined as the bank-intermediation market: hedge funds, private-equity funds, mortgage brokers. Investment banks with debt-to-equity ratios of 30:1 were also propped up by weak and defective accounting standards, which encouraged listed companies to "mark to market" their assets: that is, to effectively revalue their assets at market prices as they soared during booms.

A series of major national and international financial crises over the past decade should have begun to give pause for reflection, intervention and action. The Asian financial crisis of 1997 caused large-scale economic and social devastation and led to a flurry of calls for a "new international financial architecture". But these calls were always smugly discounted by the advanced economies as being primarily for the benefit of the Asian and other developing economies that had been caught up in the crisis. It was easier to blame "crony capitalism" than to look at the fundamentals of the neo-liberal orthodoxy (including unrestrained hedge-fund assaults on national currencies) that continued to govern global financial markets. Further warning signs came, including the bailout of the hedge fund Long-Term Capital Management (LTCM) in 1998 and the spectacular dotcom bubble and bust of 2000-01.

Each time a crisis arose, the US Federal Reserve came to the rescue by significantly lowering the federal funds rate, in order to pump liquidity back into the market and avert any further deterioration. After the 1987 stock-market crash, the Gulf War, the 1994 Mexican crisis, the 1997-98 Asian financial crisis, the LTCM debacle of 1998 and the 2000-01 bursting of the internet bubble, the response was always the same.

Investors increasingly came to believe that when things went bad, they would be protected by monetary policy in what came to be known as the "Greenspan put" - low interest rates, high liquidity and the protection of asset prices. Easy monetary policy was seen as an elixir that could cure any market instability that arose. In fact, it added yet more fuel to the fire, in the form of cheap money available for lending.

Low interest rates brought forth a new class of borrowers in the US who were encouraged by mortgage brokers to buy their own home. As a result, a huge amount of capital rushed into the sub-prime mortgage market, where it was directed towards borrowers with weak credit histories. At the same time, the prevailing anti-regulation culture in financial markets fostered a new banking model - the so-called originate-and-distribute model. Mortgage brokers originated loans that were then sold on to others, including hedge funds and structured investment vehicles, thereby severing the link between the assessor of credit worthiness and the ultimate holder of the loan. This is where the two worlds met: the world of easy credit as the defining characteristic of Greenspan's neo-liberal financial order, and the other neo-liberal world of unregulated financial institutions with its new banking model that effectively atomised risk. The combination was toxic: it produced an asset bubble of unprecedented proportions and, most critically, with unprecedented reach across the global financial system through the bank-intermediation market. Were the bubble to burst, the links to the mainstream commercial-banking system, with its implicit government guarantees, meant that the state (not the market) would be left carrying the can. This is the essence of the neo-liberal legacy now left to taxpayers - both today and into the future.

The rest, of course, is history. The annual volume of US sub-prime and other securitised mortgages rose from approximately $160 billion in 2001 to over $600 billion in 2006. Low interest rates and high demand for housing caused house prices to soar. In comparison to the 1.4% average annual appreciation of American home values during the 30 years leading up to 2000, the values of homes increased at 7.6% annually from 2000 to 2006, with massive growth in the sub-prime market. Indications of financial instability slowly became apparent to all who cared to look. Business leader Warren Buffett had recognised the emerging risks of financial innovation, easy money and weak regulation in 2003 when he noted that many of the new financial instruments were akin to "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal".

The Bank for International Settlements, always more sceptical than most, was the first official institution to sound the alarm. In its 2007 annual report, the BIS warned that "years of loose monetary policy have fuelled a giant global credit bubble, leaving us vulnerable to another 1930s-style slump." Despite this, no systemic action was taken.

Despite three crises in a decade, despite the clear warnings that came with them and after them, the neo-liberals were so convinced of the ideological righteousness of their cause, and so blinded by their unquestioning belief that markets were inherently self-correcting, that they refused even to recognise the severity of the problems that emerged. The problems did not fit the model, so the evidence was simply discarded. Hardline neo-liberals were not interested, because they knew in their hearts they were right.

The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy. And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself.

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With the demise of neo-liberalism, the role of the state has once more been recognised as fundamental. The state has been the primary actor in responding to three clear areas of the current crisis: in rescuing the private financial system from collapse; in providing direct stimulus to the real economy because of the collapse in private demand; and in the design of a national and global regulatory regime in which government has ultimate responsibility to determine and enforce the rules of the system.

The challenge for social democrats today is to recast the role of the state and its associated political economy of social democracy as a comprehensive philosophical framework for the future - tempered both for times of crisis and for times of prosperity. In doing so, social democrats will draw in part on a long-standing Keynesian tradition. Social democrats will also need to reach beyond Keynes, given some of the new realities we face some 70 years after the publication of Keynes's General Theory.

Long before the term ‘Third Way' was popularised in the policy literature of the 1990s, social democrats viewed themselves as presenting a political economy of the middle way, which rejected both state socialism and free-market fundamentalism. Instead, social democrats maintain robust support for the market economy but posit that markets can only work in a mixed economy, with a role for the state as regulator and as a funder and provider of public goods. Transparency and competitive neutrality, ensured by a regime of competition and consumer-protection law, are essential.

Social justice is also viewed as an essential component of the social-democratic project. The social-democratic pursuit of social justice is founded on a belief in the self-evident value of equality, rather than, for example, an exclusively utilitarian argument that a particular investment in education is justified because it yields increases in productivity growth (although, happily, from the point of view of modern social democrats, both things happen to be true). Expressed more broadly, the pursuit of social justice is founded on the argument that all human beings have an intrinsic right to human dignity, equality of opportunity and the ability to lead a fulfilling life. In a similar vein, Amartya Sen writes of freedom as the means to achieve economic stability and growth, but also as an end in itself. Accordingly, government has a clear role in the provision of such public goods as universal education, health, unemployment insurance, disabilities insurance and retirement income. This contrasts with the Hayekian view that a person's worth should primarily, and unsentimentally, be determined by the market.

Social-democratic governments face the continuing challenge of harnessing the power of the market to increase innovation, investment and productivity growth - while combining this with an effective regulatory framework which manages risk, corrects market failures, funds and provides public goods, and pursues social equity. Examples of such a government are the Australian Labor governments of Bob Hawke and Paul Keating during the 1980s and early '90s. Hawke and Keating pursued an ambitious and unapologetic program of economic modernisation. Their reforms internationalised the Australian economy, removed protectionist barriers and opened it up to greater competition. They were able dramatically to improve the productivity of the Australian private economy, while simultaneously expanding the role of the state in the provision of equity-enhancing public services in health and education.

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In the current crisis, social democrats therefore have the great advantage of a consistent position on the central role of the state - in contrast to neo-liberals, who now find themselves tied in ideological knots, in being forced to rely on the state they fundamentally despise to save financial markets from collapse. This enables social-democratic governments to undertake such current practical tasks as credit-market regulation, intervention, and demand-side stimulus in the economy. The uncomfortable truth for neo-liberals is that they have not been able to turn to non-state actors or non-state mechanisms to defray risk and restore confidence, rebuild balance sheets and unlock global capital flows. This is only possible through the agency of the state.

In the early stages of the global financial collapse, the centrality of the state was reaffirmed by governments of both the classical Left and Right as they acted to guarantee the integrity of the banking system. Die-hard neo-liberals invoked "moral hazard" - akin to arguing about who should pay for the fire brigade while the house itself is burning down. The alternative to government intervention, as the global banking fraternity knows all too well, was systemic collapse. The first step towards preserving confidence and restoring liquidity in late 2008 was the provision of an explicit guarantee of deposits placed in mainstream financial institutions. The willingness of the public, as expressed through their respective governments, to accept the associated contingent liabilities reveals a widely held perception that the stability of banking systems is itself a public good. As Robert Skidelsky, Keynes's biographer, observed: "when the crunch came, we discovered that national taxpayers still stand behind banks, and national insolvency regimes matter."

Subsequently, governments have also demonstrated a willingness to undertake unprecedented interventions in private credit markets. Specifically, governments have involved themselves in the capitalisation of banks, the direct purchase of bank and corporate securities, the establishment of joint-purpose vehicles to share risk with private financial institutions, and in sovereign guarantees to underpin inter-bank lending. In the United States, the rescue of Citigroup and the Bank of America amounts to a de facto nationalisation. This followed the placing into conservatorship of Fannie Mae and Freddie Mac, and the effective nationalisation of AIG, the world's largest insurance company. Once again, the social-democratic state, not the unfettered forces of the market, was called to the rescue.

These measures have not been implemented on the basis of socialist ideology, nor are they a return to state ownership and control. When the financial system stabilises and the global recession eases, we can expect to see governments pulling back from direct involvement in the ownership and operation of the banking sector. The object of the current intervention is to secure private credit markets so that they can serve the needs of private businesses and consumers. But clearly the days of effective non-regulation and unconstrained financial innovation are gone, and must not be allowed to return. The consequences for the economy are too great.

Stabilising the financial system is a necessary first step towards preventing systemic collapse. But the collapse of the speculative bubble and the subsequent credit squeeze have already brought about a slowdown in economic growth, rising unemployment, and the possibility of a lengthy global recession. Neo-liberals such as Alan Moran, of the Australian Institute of Public Affairs, argue that the cost of the recession should be borne by employees, through wage cuts and retrenchment - exactly the position of US Treasury Secretary Andrew Mellon at the outset of the Great Depression. Social democrats, by contrast, stress the central role of the state in maintaining aggregate demand, both for consumption and investment spending, at a time of faltering growth. That is, the state must involve itself in direct demand-side stimulus to offset the large-scale contraction in private demand. The IMF revised its growth forecast for 2009 down four times, by a total of 3% of global GDP. This "growth gap" indicates the dimensions of the fiscal-stimulus task that now lies ahead for governments if the demand-side gap is to be met and massive unemployment avoided. This is classic Keynesianism, pure and simple.

Keynes argued that, in Stiglitz's words, "in a severe downturn, monetary policy was likely to be ineffective. Fiscal policy was required." He believed that in times of dramatically slowed economic growth, monetary authorities would find themselves in a liquidity trap, unable to "induce an increase in the supply of credit in order to raise the level of economic activity". Or, as others have described it, monetary policy becomes ineffective because it is just "pushing on a string". Indeed, as Paul Krugman suggests, "the failure of monetary policy in the current crisis shows that Keynes had it right the first time." The truth is, fiscal policy must reinforce monetary policy in aggregate demand. Neither by itself is sufficient.

Reasoning that the costs of failing to provide fiscal stimulus will outweigh the negative effect on budgets, Tony Blair implores current leaders to "do whatever it takes ... to get the blood pumping back round the financial system again". The challenge for new Keynesians is also to ensure that this stimulus is targeted, timely and temporary. As private consumption and business investment recover, fiscal stimulus should be reduced commensurately, so as not to push up inflation during the period of economic recovery.

In proposing active measures to stimulate demand, it is therefore important to emphasise the central tenet of Keynesian economic management: the need to balance budgets over the course of the economic cycle. Failure to do so, along with excessive tolerance for inflation, was a major contributor to the breakdown of Keynesian economic management in the early 1970s. Increases in public investment and direct transfers to households will stimulate the economy, but they will have to be paid for in the future, when strong economic growth has resumed.

Social democrats have always emphasised the potential for systemic shocks arising from speculative bubbles and busts driven by what Keynes referred to as the unpredictable "animal spirits" of investors. Financial regulation must allow banks and other financial institutions to be intermediaries between household savings and business investment, without themselves becoming a source of systemic instability. This requires prudential regulation beyond simply ensuring that individual institutions adhere to standards designed to guard against their insolvency under normal economic conditions. The sector as a whole should be constrained from actions that promote systemic risk, such as excessive expansion of derivatives markets. Equally important in light of the recent crisis is that a social-democratic framework recognises the effect of incentive structures within firms on the level of risk-taking by individuals. For social democrats, systemic stability and integrity represent public goods in their own right - public goods which will always take precedence over individual opportunities for profit maximisation.

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A further challenge for social democrats in dealing with the current crisis is its almost unprecedented global dimensions. This has two aspects: the integration and interdependence of financial markets, which has brought about a rapid spread of the contagion; and the consequences for the real economy as collapsing demand in one country affects exports from another.

Instead of distributing risk throughout the world, the global financial system has intensified it. Neo-liberal orthodoxy held that global financial markets would ultimately self-correct - the invisible hand of unfettered market forces finding their own equilibrium. But as Stiglitz has caustically observed: "the reason that the invisible hand often seems invisible is that it is not there." Financial markets have not self-corrected. Global financial innovation has compounded the problem of asset bubbles, not reduced it. Neo-liberalism's anti-regulation agenda rapidly converted a problem in American mortgage markets into a full-blown global financial and economic crisis that now threatens the future of open global markets - yet another example of capitalism cannibalising itself, but this time on a frightening, global scale.

Three cardinal principles emerge: first, national financial markets require effective national regulation; second, global financial markets require effective global regulation, if for no other reason than that the quantum of global financial transactions is now capable of overwhelming most single national economies standing alone; and third, the means for achieving effective regulation in both can only be delivered by national governments operating together. There has been no private financial-market solution on offer to deal with the scale and complexity of global systemic instability we now face.

That is why the world has turned to co-ordinated governmental action through the G20: to help provide immediate liquidity to the global financial system; to co-ordinate sufficient fiscal stimulus to respond to the growth gap arising from the global recession; to redesign global regulatory rules for the future, including a new Basel III; to reform the existing global public institutions - especially the IMF - to provide them with the powers and resources necessary for the demands of the twenty-first century. The tragedy is that after decades of neo-liberal ascendancy, the IMF, Keynes's child from Bretton Woods, for a time became the agency through which neo-liberal doctrines were spread around the world - to the detriment of the fund's long-term standing and with a real impact on its capacity to act effectively in the current crisis with the various national economies it has treated poorly in the past.

Governments must craft consistent global financial regulations to prevent a race to the bottom, where capital leaks out to the areas of the global economy with the weakest regulation. We must establish stronger global disclosure standards for systemically important financial institutions. We must also build stronger supervisory frameworks to provide incentives for more responsible corporate conduct, including executive remuneration.

Further, the IMF's authority to undertake prudential analysis must be expanded and its early-warning system for institutional vulnerabilities enhanced. And its governance arrangements must be reformed. It makes no sense for the governance structure of the global financial system today to reflect the balance of power in 1944. It is only reasonable that if we expect fast-growing developing economies like China to make a greater contribution to multilateral institutions such as the IMF, they should also gain a stronger decision-making voice in these forums.

The longer-term challenge for governments is to address the imbalances that have helped to destabilise the global economy in the past decade: in particular, the imbalances between large surplus economies such as China, Japan and the oil-exporting nations, and large debtor nations such as America. In the short term, these imbalances are likely to increase as America's budget deficit balloons. In the medium term, overcoming these imbalances and working towards a more stable global macroeconomic framework will demand new levels of global economic co-operation and co-ordination. Any sudden change in managing these global imbalances - for example, if China sharply reduced the purchase of US government bonds - would send tremors through foreign-exchange markets, with dire consequences both for the US dollar and for the prospects of global economic recovery. Again, this looms as a challenge for statecraft; we cannot simply hope that individual market participants somehow magically do the right thing.

There is one further dimension to the role of social democrats in dealing with the current global crisis. The impact of the crisis on poverty and political stability in the developing world has not fully registered in the global debate about policy responses to the crisis so far. World Bank intervention, bilateral official development assistance and the continued implementation of the Millennium Development Goals become essential elements in managing the effects of a crisis that will otherwise throw much of the developing world back into poverty. Social democrats, both by instinct and by tradition, are predisposed to engage in this, but it will become harder and harder as developed countries' budgets come under ever more stress from the unprecedented domestic demands now placed upon them by the crisis.

Neo-liberals, like neo-conservatives (their ideological bedfellows in the foreign-policy sphere), are intrinsically suspicious of all forms of multilateral governance. In fact, there is a parallel between neo-liberals' hostility to national governments intervening in national markets and their hostility to international governmental institutions intervening in global markets. Again, the contrast with social democrats is instructive, given social democrats' long tradition of internationalism - itself an accommodating attribute given the complexities of global market governance, co-operation and co-ordination we all now confront. The truth is that there are no credible unilateral solutions on offer, given the increasing dispersal of global economic power.

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The political home of neo-liberalism in Australia is, of course, the Liberal Party itself. Over the past decade, the Howard government reduced investment in key public goods, including education and health. It also refused to invest in national economic infrastructure, notwithstanding multiple warnings from the Reserve Bank of the impact of long-standing capacity constraints on economic growth. The Liberals in government also set about the comprehensive deregulation of the labour market - based on the argument that human labour was no different to any other commodity. Driven by a philosophy of minimal government intervention in the markets, the Liberals ignored both the 2003 Dawson Review and multiple reports from the ACCC calling for the criminalisation of cartel conduct. They refused to act to prevent the accumulation of market power through creeping acquisitions. They refused to effectively regulate consumer credit or credit-rating agencies. And they ignored calls - from the Financial Stability Forum in 2000, the Australian Prudential Regulatory Authority submission to the HIH Royal Commission in 2002, and the 2006 IMF Financial Sector Assessment Program - to implement a deposit-insurance scheme that would bring our deposit protection in line with almost all other OECD nations. Most critically, the Howard government oversaw an unprecedented increase in household and national debt. The average ratio of household debt to annual gross disposable income more than doubled to 114.5%, up from 49.8% under the Hawke-Keating governments; household net savings to net disposable income fell to an average of 1.1%, down from an average of 7.9% under the Hawke-Keating governments; and the level of Australia's net foreign debt increased to 55.5% of GDP, up from 37.9% of GDP under the Hawke-Keating governments.

The contrast between the competing political traditions within Australia on the role of governments and the market is clear. Labor, in the international tradition of social democracy, consistently argues for a central role for government in the regulation of markets and the provision of public goods.

Consistent with this tradition, the Labor government has acted decisively through state action to maintain the stability of the Australian financial systems in the face of the economic crisis. The government acted in October to guarantee all deposits. To support intra-bank lending by the Australian majors, it intervened to provide a facility for guaranteeing wholesale funding of financial institutions. To encourage liquidity, the government legislated to increase by $25 billion the maximum value of government bonds that can be issued at any one time. It also initiated a program to purchase residential mortgage-backed securities. To protect financial institutions from predatory speculators, a temporary ban on short selling was introduced. Labor has also acted to help the real economy, to stimulate economic activity by investing in targeted job creation; in the reform of services in health, education, disabilities and homelessness; and in roads, rail, ports and other critical infrastructure. All through decisive state action.

The Liberals, embracing the neo-liberal tradition of anti-regulation, seek to reduce the agency of the state in private markets as much as possible. The distinction is reflected in the previous prime minister's statements that "competitive capitalism within free markets remains the most effective economic paradigm, both domestically and internationally"; that "the right responses will be grounded in free-market orthodoxies"; and that "we should avoid the resort to re-regulation." This ideology has not served Australia well in preparing for the current crisis.

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To respond effectively to the global financial crisis in the future requires the resolution of profound questions from the past, principal among which is: What caused such a crisis to result in widespread economic and social devastation? The magnitude of the crisis and its impact across the world means that minor tweakings of long-established orthodoxies will not do. Two unassailable truths have already been established: that financial markets are not always self-correcting or self-regulating, and that government (nationally and internationally) can never abdicate responsibility for maintaining economic stability. These two truths in themselves destroy neo-liberalism's claims to any continuing ideological legitimacy, because they remove the foundations on which the entire neo-liberal system is constructed.

The extent to which social democracy responds effectively and sustainably to the challenges now left to us by the neo-liberals remains an open question. Tempering any tendencies towards ideological triumphalism from the centre-Left at neo-liberalism's demise is Robert Skidelsky's recent and reflective reminder of the cycles of history:

Societies are said to swing like pendulums between alternating phases of vigour and decay; progress and reaction; licentiousness and puritanism. Each outward movement produces a crisis of excess which leads to a reaction. The equilibrium position is hard to achieve and always unstable.

In his Cycles of American History (1986), Arthur Schlesinger Jr defined a political economy cycle as "a continuing shift in national involvement between public purpose and private interest" ...

Others have argued that we are seeing a more fundamental regime change: the third in postwar history, starting with the Keynesian model, from the 1940s to the '70s; the neo-liberal ascendancy, from 1978 to 2008; followed by a new regime, which is currently being shaped. Perhaps this new regime will come to be called ‘social capitalism' or ‘social-democratic capitalism', or simply the term ‘social democracy' itself. Whatever the nomenclature, the concept is clear: a system of open markets, unambiguously regulated by an activist state, and one in which the state intervenes to reduce the greater inequalities that competitive markets will inevitably generate.

Either way, seismic changes are underway, fault lines yielding to fractures which in time may yield to even deeper tectonic shifts. Neither governments nor the peoples they represent any longer have confidence in an unregulated system of extreme capitalism. As President Sarkozy put it: "Le laissez-faire, c'est fini." Or, as China's Vice Premier Wang Qishan reportedly said, somewhat more elliptically: "The teachers now have some problems."

For social democrats, it is critical that we get it right - not just to save the system of open markets from self-destruction, but also to rebuild confidence in properly regulated markets, so as to prevent extreme reactions from the far Left or the far Right taking hold. Social democrats must also get it right because the stakes are so high: there are the economic and social costs of long-term unemployment; poverty once again expanding its grim reach across the developing world; and the impact on long-term power structures within the existing international political and strategic order. Success is not optional. Too much now rides on our ability to prevail.

I believe that social democrats can chart an effective course that will see us through this crisis, and one that is also capable of building a fairer and more resilient order for the long term. This can only be achieved through the creative agency of government - and through governments acting together. How could it possibly now be argued that the minimalist state of which the neo-liberals have dreamt could somehow be of sufficient potency to respond to the maximalist challenge we have been left in the wake of this most spectacular failure of the entire neo-liberal orthodoxy? Government is not the intrinsic evil that neo-liberals have argued it is. Government, properly constituted and properly directed, is for the common good, embracing both individual freedom and fairness, a project designed for the many, not just the few.



Etc

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ABUSE: IPs or network segments from which we detect a stream of probes might be blocked for no less then 90 days. Multiple types of probes increase this period.  

Society

Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy

Quotes

War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


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Last modified: May, 01, 2017