The neo-liberal fiasco
International Viewpoint #245 May 1993
FUTURE historians will describe the neo-liberal decade of the 1980s as one of extreme conservatism - a decade of decline in culture, artistic creativity and political liberties. They will conclude that it failed to end capitalist crisis. On the contrary, they will note how the radicals who imposed the liberal economics merely created new problems. JESUS ALBARRACIN Madrid, March 29, 1993
M ANY factors deter-
mined the development of the economic crisis, but the most significant, and the factor that sums up all the others, was the decline in the rate of profit that began in the early years of the 1970s. Economists described this period as one of crisis of supply or, as Marx said, a crisis determined by the bourgeoisie's weakness.
For the moment, the strategy of capital was to create the conditions for a recovery in the rate of profit by means of austerity and adjustment policies — reducing wages and employment protection, withdrawing welfare provision, and the rest of the monetarist package. The cost of the crisis was to be borne, in its entirety, by the workers.
Faced with the internationalisation of capital and the extent of the crisis any proposed solution cannot be isolated to one country alone. This is what explains the generalization of austerity and adjustment policies and the super-exploitation of the Third World. The present situation of course has other economic dimensions: a crisis of the international monetary system, the decline in American hegemony, or the sharpening of inter-imperialist competition - fundamentally between three blocs - the USA, the European Community (EC) and Japan, fighting to open new markets in Eastern Europe following the crisis of really existing socialism.
Keynesianism, which inspired economic policy during the post-Second World War period of expansion, lost ground to neo-liberal thinking with the advent of the crisis since the ruling class considered neo-liberalism a far more effective framework for putting austerity policies into effect.
In the first place, liberalism tried to claim that the crisis was the result of a failure to allow the market free rein. The rise in oil prices was blamed for the onset of the crisis — defined as a "supply shock" that had adversely affected the conditions for production. However, so the argument went, the crisis would have been short-lived if the workers had accepted lower wages, short-term unemployment and a change in working conditions - that is to say allowed free play to the market. The theorists urged governments of the industrialized contries to deregulate the economy to and set the market free. The crisis was to be allowed to work itself out, permitting a restructuring of production and allow a restoration of the rate of profit through cutting the price of labour.
Secondly, capital needed to roll back the welfare state. Economic crisis meant an increase in the public deficit, a phenomenon that makes it all the more difficult to end the crisis. The growth in profits during the phase of capitalist expansion that followed the end of the Second World War made it possible for the State to create and extend welfare provision. But the rate of profit has now declined and recovery requires an increase in the rate of exploitation. This was to be achieved through a reduction in real wages, and all forms of social benefit and provision. At the same time, the restoration of the rate of profit requires tax cuts, which further aggravate the budget deficit.
The hydra of inflation There are also monetary reasons. The present phase of recession has been dominated by the issue of permanent inflation. Capitalism needs a certain level of price rises to facilitate the realization of surplus value, yet at the same time needs to cut inflation so that goods remain internationally competitive. Furthermore, if inflation gets out of control it threatens to dislocate the whole system. Lending and the money supply have to be limited but every rise in the public sector deficit narrows the margin for increasing lending to the pri-
The growth of the latter is a source of inflation but capital likes it since it mitigates the effects of the crisis and facilitates the realization of surplus value. On the other hand, a rise in the public sector deficit is seen as a bad option since it presents a further obstacle to restoring profits and is a source of permanent inflation.
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International Viewpoint #245 May 1993
Thirdly, the crisis of the international monetary system has given added impetus to the neo-liberal project. The functioning of the capitalist economy depends upon the solidity of the monetary system, which depends on the existence of a hegemonic power whose money can serve as a means of exchange and a store of value.
The United States and the dollar were able to perform this role in the period of expansion following the Second World War but from the start of the 1970s the tendency to large-scale falls in the value of the US dollar, due essentially to the problem of the US economy, put an end to the dollar's leading role and the previously existing type of exchange.
However, given the dominance of Keynesian ideas and of full employment as an objective of economic policy, fixed exchanges could only be adjusted when economies had first overcome structural balance of payments deficits
Monetary instability in Europe For the EC, the crisis of the system was a consequence of great instability in the price of money, which disturbed the functioning of the common market and conflicted with the aim of introducing a single market and a common currency — key objectives of European construction. The aim of establishing an acceptable level of stability among European currencies requires a certain level of convergence in terms of economic policy, but above all a levelling of the playing field so that a common currency that can be used as an instrument of economic policy can be created. Other objectives have been sacrificed to this primary objective and this has further reinforced the choice of strategy by the governments to meet the crisis and put a neo-liberal stamp on European construc-
Thus, neo-liberal economics — which should be distinguished from the liberalism that inspired the bourgeois revolutions of the nineteenth century (the modern version, in particular, requires measures of repression to get its way) - provide the ideology adopted by capitalism to resolve the economic crisis in its favour. However, it is not the only possible one; austerity and adjustment do not always have to have a neoliberal justification and can lose it quickly.
Until the onset of the crisis of 1930s, neo-classical economics, fundamental to 12 liberal economics, were dominant. Here the market was seen as the perfect institution guaranteeing the translation of a rise in production into a rise in demand. As von Mises and von Hayek said in 1929 there would have been no depression if the market had been allowed to work freely.
The neo-classical structure rests on the assumption that full employment is the norm and that any detour from this would be only temporary; the economy itself would spontaneously produce the remedy. Periodic crises occur but these perform the function of adapting productive capacity to existing purchasing power. Less productive and out-dated enterprises disappear, there is a rise in labour productivity and these create the conditions for a recovery. All that is needed is to set the market free.
The reality of the 1930s was nothing like this. Unemployment reached unprecedented levels, surplus productive capacity was the norm and there was no sign that the situation would correct itself spontaneously. The dangers to capitalism in such a situation seemed greater than the need for restructuring and strong money. Thus the the leading circles of capital decided on a change in economic policy to mitigate the effects
The so-called "Keynesian revolution" and the changes that it implied for the state's role in economic management were simply the conscious ideological expression of this change in priorities by a part of the ruling class. Since then, the state played a prominent role in the functioning of the capitalist economy, Keynesian ideology was dominant, and governments used his recipes in an attempt to avoid the crisis by maintaining effective demand by extending public spending. This is what became known as the "welfare state".
Back to the 1930s?
Two decades after the onset of economic crisis, neo-liberal policies have failed to create the conditions that capitalism needs to overcome it. While the rate of profit has recovered, it remains well below the pre-crisis levels and which would be needed to usher in a new phase of sustained expansion. On the contrary, the neo-liberal policy has introduced a demand element into the
For the neo-liberals, the crisis was provoked by a "supply shock" that lowered the rate of value and, therefore, investment, output and employment.
This situation cannot be reversed by the use of Keynesian politics of demand, since there will be no rise in production without a rise in prices; it is thus necessary to work on the supply side.
On the one hand, by measures to reduce wage costs and raise profits — redistributing income away from the workers. The belief was that if the employers had more profits they would invest more, generating a rise in productivity and of employment.
On the other, cutting taxes on enterprises and high incomes would also have beneficial effects on investment and employment. The assumption here is that there is no way out of the crisis because the rich are not rich enough because the poor do not allow themselves to be adequately exploited by them. But in reality such policies plunge the economy into recession.
In capitalist economies, wages play a contradictory role: as a part of the costs of employers their reduction has a positive impact on profits. But wages are also one of the most important components of the overall demand, so that a cut in wages can have a negative effect on profits. The capitalist economy sits on a knife edge: wages cannot be too high, because profits are very low, nor too low, because demand would be insufficient.
### Supply-side crisis
Figures for the European Community illustrate what has really happened The nature of the "supply-side crisis" manifested itself in a fall in the rate of productivity growth from 4.5% per year in the 1970s to 2.5% in the 1980s. The exit from from a crisis of this long duration requires a revival in the rate of productivity growth and this requires a rise in profits that can induce sustained accumulation.
To obtain this, neo-liberalism has provoked a fall in real wages greater than that in productivity growth, but this is a vicious circle, because in the medium term it cuts a part of demand. During the second half of the 1980s, income from speculation created nonwage demand as a substitute, but this is not something that can be sustained for
If the neo-liberals want to raise profits at the cost of wages, they must find another substitute demand. Social spending cannot play this role because of the desire to reduce the public deficit and the role of the State in the economy. This leaves investment. The hope was
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Internationa/ Viewpoint #245 May 1993 that this would grow as a result of the growth of profits and interest rate cuts resulting in tax cuts. A vain hope.
On the one hand, because the regressive tax policy did not produce any significant fall in real interest rates, which are those which affect investment. Such policies can produce an increase in personal saving, insofar as high personal income may lead to saving but this is not a very important part of total saving. Therefore the effects of tax cuts on interest rates — which might fall if there was a big increase in saving — are quite small.
In 1992, according to European Economy, short-term interest rates were 6.1% above deflation in the EC (over and above inflation rates), 3.3% in the United States and 5.5% in Japan. Compare this situation to 1972, just before the oil crisis, when real interest rates were negative: -1% in the EC, -0.5% in the United States and -0.5% in Japan. This rise in real interest rates has to be seen in the light of restrictive monetary policies, as well as the fiasco of supplyside policies.
On the other hand, even where a rise in profits and a reduction in interest rates has been secured, investment depends on many other factors: a rise in aggregate demand, employer's expectations, and so on. A rise in profits or a reduction in interest rates may not lead to a rise in investment and have certainly not done so in the present case. As the Keynesians say "you can lead a horse to water but you cannot make it drink".
The monetary restrictions that the neo-liberals propose have worked in the same direction. Essentially, monetarism holds that expanding the money supply has practically no positive effect on production, because this depends on "real" factors, never monetary ones. On the contrary, since labour costs are the main determinant of prices, monetary expansion can only facilitate the conditions under which enterprises can pass on price and wage rises with strongly inflationary consequences. What is needed therefore is a restrictive monetary policy that imposes "discipline" on production and employment since this is the only way to control production costs.
However, monetary restraint can strangle the economy, because it provokes a rise in interest rates with negative effects on investment, and produces a collapse of confidence. As Galbraith has said, with a rope it is possible to drag a piece of furniture, but not to push it. The result is that monetarism, in its determination to secure the stability of prices at all costs, has created a general crisis of
Thus, redistributing the tax burden away from the rich and reducing wages in favour of profits can make the rich live better (a not unimportant consideration for the neo-liberals) but it cannot get the industrial countries out of their longlasting recession.
### Spectre of recession
In the 1980s, the Western economy registered a certain cyclical expansion which petered out recently. The first were the United States and Britain which went into recession more than two years ago while in Japan and the rest of Europe, economic activity slowed down markedly. But now, the negative rate of growth of the GDP has reached Japan and Germany and the spectre of recession stalks Europe.
In 1988, the high point of the recent cyclical expansion the joint GDP of the EC countries was growing at more than 4% a year; the rise in 1991 was 1.1% and no official body foresaw a rise in 1992. Britain continues to be unable to escape from the recession in spite of the efforts of the government since abandoning the European Exchange Rate Mechanism (ERM) last September.
Germany, whose GDP fell by 0.5% in the third quarter of 1992 is now clearly in recession and economic activity is very weak throughout the rest of the EC. Economic and social problems are worsening with rises in unemployment everywhere and the outlook is gloomy.
Unemployment has now reached levels that may prove intolerable. Currently, the rate of unemployment in the OECD countries is 7.5% of the active population, meaning more than 30 million people in the industrialized contries, according to the OECD's own figures which are certainly an underestimate. The majority of international organizations recognize that the official unemployment statistics leave out so-called hidden unemployment, that is people who are not registered as unemployed because they are not convinced they would find any work, but who would re-enter the labour market in the event of an economic recovery.
In the case of the EC, unemployment currently stands at 9.6% of the active population, equivalent to 15 million people. It has increased especially sharply in the past two years with the loss of more than a million and a half jobs, but there is worse to come and the Maastricht Treaty impedes an effective political struggle against unemployment. It is predicted that in 1993 unemployment will rise to 10.8%.
Behind the present recession lies an important crisis of demand provoked by over ten years of neo-liberal politics. The most fervently liberal governments continue to insist on the necessity of strangling the economy, but this can only add fuel to the flames of a recession that could be terrifying, since nothing can stop it. The gravity of the recession combined with the international financial instability are beginning to look reminiscent of the 1930s. In these circumstances it is hardly surprising that neo-liberalism is beginning to retreat.
In none of the industrialized coun tries has the rate of profit recovered sufficiently, and capital continues to consider austerity policies necessary. But neo-liberalism has failed because it has not solved the structural problems and may considerably worsen current trends - financial instability and a sharpening of the crisis by weakening demand.
However, the failure of neo-liberalism does not mean that the economic policies of the Western governments are going to change at once. The situation is much more contradictory. On the one hand, the victory of Clinton foreshadows a more expansionary policy in the United States and it can be expected that pro-demand policies will be continued in Japan and Britain. This will be contradictory, but it indicates that significant sectors of capital are abandoning a belief that pushing market policies to their
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International Viewpoint #245 May 1993 conclusion can resolve the crisis.
On the other hand, Europe is incapable of any struggle against recession because of Maastricht; the imperatives of convergence as a prerequisite for monetary union work in favour of recession. The struggle against inflation demands restrictive policies — high interest rates, tight monetary policies and so on - and the reduction of the public deficit. This, in turn, implies a reduction in public spending and an increase in tax revenue, which will have a negative impact on aggregate demand. The Edinburgh summit showed that the EC was firmly under the economic thumb of the ultracombines the supply-side crisis, characteristic of the present long phase of recession, with a crisis of demand produced by more than a decade of neoliberal politics. Coupled with world financial instability we have the makings of a situation similar to the 1930s.
Despite the obvious fiasco, neo-liberalism remains the dominant ideology for the majority of European governments and the idea of expansionary policies will meet much resistance. But the resistance cannot last long since stubborn persistence with neo-liberal polithen be put back in his grave as soon as the present recession is overcome.
The long night of neo-liberalism is coming to an end, but the left is not contemplating sunny prospects. In the context of the current economic crisis, any genuine leftwing economic policy, that is one which benefits the working class, reduces social inequality will run up against the resolute resistance of capital and, thereby, requires a change in the balance of forces to be implemented. This will not be easy, because the left has been much weakened by the effects of the economic crisis, of the neo-liberal offensive, of the crisis of "really existing socialism" and its
19176 liberal German Bundesbank. This means that the recession will be terrible because the effort to counter it will come very late and the attacks on the "Welfare State" will continue.
Maastricht is an obstacle to resolving the economic crisis and this is key to an understan ding of the disputes within the EC. Germany is applying a policy of high interest rates to finance unification. It is obsessed with monetary stability and wants to impose this criterion on the whole of Europe. But the social effects of the recession have started to alarm the whole continent, and each country is searching for individual solutions. This inevitably calls into question the ultraliberal project, and sharpens differences over the European unity process.
Neo-liberalism has failed despite having dominated international economic policy-making for most of the decade. On the one hand, in the major industrial countries, neo-liberalism has managed to obtain a certain reduction in the wages and conditions of workers, alongside some restructuring of production. But its results are not sufficient to allow capital to overcome the long-lasting recession.
Capital has run a few hundred yards in an attempt to get out of the crisis, but debt has run miles in the same time. To put it another way, neo-liberalism has no solution to the supply-side crisis that appeared in the first years of the 1970s.
On the other hand, neo-liberalism has created new problems. The major industrialized countries have been plunged into a generalized recession that 14 cies guarantees that the crisis reaches socially dangerous limits.
Keynes without welfare
Will there, therefore, be a resurgence of the Keynesian policies that led to the development of the welfare state in the pre-crisis epoch? Certainly, sooner or later, governments will have to apply Keynesian-type policies if they are to counter the crisis of demand and stop the crisis getting worse. But, we should not expect a new rise in welfarism because this would run counter to solutions to the supply-side crisis, that is, in current circumstances it would result in a new negative impact over the rate of profit.
There are various solutions. A special type of Keynesianism combining pro-demand policies to cushioning the crisis, and of supply-side measures to increase the rate of profit - which would show that economic liberals do not have a monopoly on austerity programmes.
Or, as some Keynesians such as Lester Thurow propose, Keynes could be dug up for two or three years, until the economy is growing by 4%, and own mistakes.
As an urgent necessity the left needs to rebuild its identity, something which has been much diluted of late.
On the one hand, this requires the defence of the immediate interests of the workers - wages, working conditions, jobs, social benefits and the rest. In contrast to the recent past this defence must be much more aggressive to counter the inroads of neo-liberal ideology. From this point of view the left cannot give up its demand for expansionary policies and for the development of the welfare state.
On the other, the left also has to sharpen its profile as a force for radical change, putting forward a series of measures that challenge the roots of the system. Such measures will encounter determined opposition from the ruling class and its governments.
Among these we can mention:
• A change in the role of the state as a factor that corrects the perverse effects of the market — it must control key sectors of the economy, combat regional inequalities, be an instrument for the satisfaction of collective needs and creator of jobs;
• Opposition to extreme neo-liberalism on the world scale which is trying to make competitiveness the supreme norm of social regulation;
• Restriction of capital movements and the elimination of exchange rates as the over-riding objective;
• And the struggle for a Europe built on different foundations to that promised by the Maastricht Treaty. *
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